Written on behalf of Feigenbaum Consulting
People who work or do business on both sides of the Canada-United States border often have tax obligations to both governments as well. A failure to employ a tax plan that takes these considerations into account can leave an individual with a larger tax bill than they might expect. In an interesting case from a bankruptcy court in the United States, a taxpayer had entered into bankruptcy. With the IRS as a secured creditor due to the bankrupt’s tax debts, the IRS had a priority over other creditors. One of these creditors attempted to intervene to help lower the taxpayer’s tax bill, which would then free up the taxpayer to pay his other creditors.
Taxpayer Owes IRS; Other Creditors Offer Assistance
The story revolves around a taxpayer who owed the IRS just over $12,000 based on his 2016 tax return. His return was self-reported and did not stem from an IRS audit. By 2019 the taxpayer had declared bankruptcy. The IRS responded by filing a proof of claim seeking the $12,000 that had been owed for three years. It was at this time that two creditors, referred to in the decision as the “Morris Creditors “sought to intervene in the proceedings.
Creditors Claim Taxpayer’s Failure to Claim Canadian Tax Credit Increased His U.S. Tax Bill
The Morris Creditors stated that the taxpayer had lived in Canada for part of 2016 but failed to claim a foreign tax credit that would have seen his tax liabilities lowered in the United States. Their hope was that once the taxpayer’s 2016 tax bill was lowered, the money saved would enable the taxpayer to pay the Morris Creditors in addition to the IRS. However, unfortunately for the Morris Creditors, there were a couple of reasons why their attempts would ultimately fail.
Foreign Tax Credit Available to US Taxpayers
According to the IRS, foreign tax credits are available to US taxpayers who earn income and subsequently pay taxes on that income, in a foreign jurisdiction. The tax paid in the other jurisdiction can then be claimed as a deduction on the taxpayer’s US tax filings, reducing their US tax obligations for that specific year. In order to qualify for the credit in the US, there are certain requirements that must be met with respect to the foreign taxes paid:
- The tax must be imposed on the taxpayer by the foreign country
- The imposed tax must have been paid by the taxpayer
- The imposed tax must be a legal tax liability
- The imposed tax must be an income-related tax
Creditors Have no Standing to Intervene in Tax Reporting
Without even determining whether the taxpayer was entitled to foreign tax credits, the court stated that the Morris Creditors, while having standing in the matter at hand, were not able to change the tax obligations of the taxpayer. The court wrote there was an “inescapable conclusion that the objection of the Morris Creditors is without merit. Specifically, the IRS presented evidence at trial which established the prima facie validity of its claim (i.e., the 2016 tax return filed by (the taxpayer) and the IRS Form 4340 Certificate of Assessment). By way of contrast, the Morris Creditors presented no admissible evidence, let alone substantial evidence, supporting the Morris Creditors’ theory that (the taxpayer) was entitled to some unknown and unclaimed foreign tax credit with respect to his 2016 federal income taxes.”
The court went on to state that even if they were able to change the taxpayer’s taxes owing, the taxpayer in this situation did not earn any income while in Canada, and did not qualify for any tax credits while there.
Contact Feigenbaum Law for a custom solution to your personal tax planning needs. Our unparalleled knowledge of US and Canadian tax makes us leaders in this field. Contact us about making your transition across the border as smooth as possible. Our team of experienced accountants and lawyers offers services to clients in the US, Canada and around the world. Contact us to learn more about how we can help or call us at (905) 695-1269 or toll-free at (877) 275-4792.