In Marchan v. The Queen, 2008 TCC 158, the taxpayer received stock options from the U.S. parent of the Canadian subsidiary for which he worked in Canada. He exercised the options and sold the underlying securities, but the brokers handling the transactions withheld amounts from his proceeds, presumably on account of U.S. taxes. The taxpayer tried to claim a foreign tax credit.
The Crown argued as follows:
[11] The position of the Respondent in this case is that there was no liability to pay any amount to the US government as taxes in relation to this disposition of shares by the Appellant. The Appellant was neither a resident of the United States nor a citizen of the United States. The Appellant worked in Toronto and was a resident of Canada. He is also a Canadian citizen. The position of the Respondent was that any gain realized by the Appellant as a result of the disposition of the shares will be exempted from US tax as a result of the application of Article XIII of the Canada ‑ US Tax Convention.
The Court refused to allow the taxpayer to claim a foreign tax credit, and it quoted from the Tax Court’s decision in Meyer v. The Queen, 2004 TCC 199, at ¶22:
With that said, I wish to emphasize that it is always open to the taxpayer to bring evidence that the foreign tax paid was not gratuitously paid without basis under the laws of the foreign jurisdiction. That is a question this Court can determine but the onus is on the taxpayer. The Appellant chose to ignore that onus and simply wanted the CCRA to work it out with the U.S. Treasury or Internal Revenue Service and leave him out of it. This is not an acceptable position in my view. That is, while the language of section 126 does not ultimately permit the CCRA to deny a credit because it has reason to believe that the foreign tax has been erroneously calculated under the laws of that foreign jurisdiction or is limited by provisions of the tax Treaty between that jurisdiction and Canada, nothing prevents it from taking that position and putting the onus on the taxpayer to show that such belief is not well-founded. In any event Article XVIII, paragraph 2(a), expressly provides that the U.S. cannot charge a tax in excess of 15% in respect of pensions received from the U.S. by a Canadian resident. Article XXIX, paragraph 3, provides that this limitation applies to citizens of the U.S. An excess amount paid then is not a “tax”.
The Court in Marchan concluded:
[26] The Appellant has failed to establish that the amounts withheld by the brokerage firm were a tax paid to the United States as the Code Collection provision referred to above was incomplete (as the regulations referred to in this provision were not submitted) and as the Appellant has failed to take any action in relation to his right to claim an exemption under the Canada – US Tax Convention. Therefore the appeal is dismissed without costs. The Appellant had also raised the issue of a deduction under subsection 20(12) of the Act. However, since a deduction under this section would also be based on the non-business income tax paid by the Appellant, the failure of the Appellant to establish that the amounts withheld by the brokerage firm were a tax paid to the United States, also means that no deduction would be available to the Appellant in this case pursuant to subsection 20(12) of the Act.
