April 2021 Newsletter

Foreign source tax deductions do not reduce Canadian tax instalment requirements 

In the recent Bhachu case, the taxpayer was a resident of Canada who worked for a petroleum company in Egypt in the taxation year at issue. As a Canadian resident, he was liable to pay income tax on his worldwide employment income. He was also liable to pay tax to the government of Egypt for his employment income earned in Egypt.

The taxpayer was assessed by the CRA and charged interest for not making tax instalments in Canada. Generally, an individual must pay quarterly instalments in a taxation year if their non-withheld tax for the year and one of the two preceding years exceeds $3,000.

In the year in question, the Egyptian company withheld tax for Egyptian tax purposes but not for Canadian tax purposes, such that it seemed that Mr. Bhachu was liable to pay instalments in Canada. He did not, which is why the CRA charged instalment interest.

The taxpayer appealed the CRA assessment. The taxpayer argued that the withheld tax for Egyptian tax purposes should have relieved him from paying Canadian instalments. The Tax Court judge disagreed, and held that the Canadian tax rules do not take into account foreign withholding taxes in determining whether instalments are to be made in Canada.

Upon further appeal to the Federal Court of Appeal, that Court agreed with the Tax Court judge and dismissed the taxpayer’s appeal. The taxpayer had also argued that a provision in the Canada-Egypt income tax treaty absolved him from being required to pay the Canadian instalments. The Federal Court rejected this argument as being a misinterpretation of the Treaty provision.

Last modified on April 16, 2021 12:00 am
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