1. Complex rules that even CRA misunderstands

The area is widely misunderstood by practitioners and by CRA alike. The calculation formula is mechanical but involves multiple moving parts that CRA reviewers often misapply.

2. Difficult to verify from the tax return alone

CRA can't easily determine from Form T2209 which income is foreign-source, how expenses were allocated, or whether calculations follow the rules.

3. Default verification checklist

Foreign tax credits appear to trigger automatic review scripts. CRA sends the same generic requests repeatedly.

4. Revenue protection mentality

CRA auditors are measured on dollars assessed. Disallowing credits is an easy win.

Reason #1: "We Don't Have Documentation"

This is the most common and most infuriating reason. CRA claims they need verification of foreign tax paid, but:

• You included foreign tax slips (1099s, etc.) with the return
• You reported amounts from official documents
• CRA "lost" or didn't review the documentation you sent

What's Really Happening: CRA's systems don't always capture attachments properly. Or the reviewer didn't look carefully. Or there's a policy requiring original documents (which is unreasonable for withholding tax).

Reason #2: "Calculation Is Incorrect"

CRA recalculates the foreign tax credit and arrives at a different amount. Often they're wrong because:

• They don't identify which income is foreign-source
• They misclassify business vs non-business income
• They fail to account for expense allocations you properly made
• They apply the formula incorrectly

The Reality: In the majority of cases where there's a disagreement, the error is on CRA's part.

Reason #3: "Income Isn't Foreign Source"

CRA might claim income isn't actually foreign-source or is treaty-exempt (and therefore doesn't qualify for the credit). Sometimes they're right (treaty-exempt income doesn't qualify), but often they misapply treaty provisions.

Reason #4: "You Didn't Source Expenses Properly"

CRA identifies expenses they claim should be deducted against foreign income, reducing the net foreign income and therefore the credit. Sometimes they're right. Sometimes they're wrong and trying to source expenses that shouldn't be sourced.

Reason #5: Timing Mismatches

Foreign tax paid in one year but reported in another, or foreign income inclusion timing differences. These are legitimate issues but often fixable through documentation.

Myth #1: Tax Is Calculated Item-by-Item

What CRA Says: "You need to show the foreign tax for each specific income item and calculate the credit separately for each."

The Truth: The tax is calculated on a pooling basis subject to the country by country business, non-business classification. It is NOT calculated on an item-by-item basis.

The formula pools all foreign income from a country (by type) and all foreign tax from that country. CRA's insistence on item-by-item breakdown is incorrect, though T1 software does this as a convenience and verification check.

Myth #2: There's a "Reasonableness" Test

What CRA Says: "This foreign tax credit claim seems unreasonable given the income."

The Truth: There is no reasonableness test. There are some exotic anti-avoidance rules in the foreign tax credit provisions, but there is no reasonableness test.

The formula is mechanical. If your calculation follows the formula and the inputs are factual, reasonableness is irrelevant.

Myth #3: CRA's Calculation Is Usually Right

What CRA Implies: "We've recalculated your credit and here's the correct amount."

The Truth: Don't just accept what CRA does. Quite often it's wrong.

CRA has difficulty identifying inputs from the return. They can't easily see which capital gains are foreign, which dividends are US vs Canadian, how expenses were allocated. Their reassessments are often based on incorrect assumptions.

Myth #4: It's Not Worth Objecting

What Some CPAs Think: "It's only a few thousand dollars. Not worth the fight."

The Counter-Argument: There's a principle here. When the foreign tax credit is disallowed for no reason, experienced practitioners have filed objections for amounts as small as $100 on principle alone.

If the reassessment is wrong, object. Otherwise, the same incorrect assessment repeats every year for that client and others.

Tier 1: Essential Documentation (Always Required)

1. Foreign Tax Slips

• US: Form 1099-DIV, 1099-INT, 1099-MISC
• Other countries: Official withholding tax receipts
• If corporate income: Foreign tax return showing tax paid

2. Investment Statements

• Statements showing foreign income earned
• Year-end summaries showing withholding tax
• Custodian-prepared tax summaries

3. T5008 Slips

• Show purchase/sale of foreign securities
• Support capital gains/losses reported

4. Loan Documentation (if claiming interest expense)

• Loan agreement showing purpose
• Evidence loan proceeds purchased foreign investments
• Interest payment statements

Tier 2: Supporting Calculations (Often Decisive)

5. Detailed FTC Calculation Working Paper

Create a document showing:

• Gross foreign income by country and type
• Expenses allocated (with methodology explained)
• Net foreign income calculation
• Component A (foreign tax paid)
• Component B (limitation formula with all inputs)
• Lesser-of calculation
• Final credit claimed

This single document often resolves disputes because it shows CRA exactly how you calculated the credit and where their calculation went wrong.

Tier 3: Advanced Documentation (For Complex Cases)

6. Treaty Analysis (if treaty provisions apply)

• Relevant treaty article citations
• Explanation of why income qualifies or doesn't qualify
• CRA's published treaty interpretations if supportive

7. Prior Year Acceptance Documentation

• Prior years' returns with same treatment
• Evidence CRA accepted methodology before
• Correspondence showing CRA approval of approach

Opening Paragraph: State the Issue Clearly

"We are filing this Notice of Objection regarding the reassessment dated [DATE] for the [YEAR] taxation year. CRA disallowed the foreign tax credit of $[AMOUNT], claiming [STATE CRA'S REASON]. This reassessment is incorrect because [BRIEF STATEMENT OF YOUR POSITION]."

Facts Section: Establish What Happened

Present objective facts without argument:

• What foreign income was earned
• What foreign tax was paid
• How you calculated the credit
• What documentation was provided

Position Section: What Should Happen

"The taxpayer is entitled to a foreign tax credit of $[AMOUNT] calculated as follows: [SHOW CALCULATION]."

Analysis Section: Why CRA Is Wrong

This is where you win or lose. Address each CRA concern specifically:

• If CRA says documentation is missing: "Documentation was included with original return [list items]. Copies are attached."
• If CRA's calculation is wrong: "CRA's calculation fails to account for [SPECIFIC ERROR]. The correct calculation is [SHOW WORK]."
• If CRA questions classification: "Income is properly classified as [BUSINESS/NON-BUSINESS] per [ITA PROVISION/FOLIO/CASE]."

Legal Support Section: Cite Authority

Reference relevant provisions:

• Income Tax Act sections (s. 126(1) for non-business, s. 126(2) for business)
• CRA Folios (S5-F2-C1 on Foreign Tax Credits)
• Relevant case law if applicable
• Tax treaty provisions if relevant

Request Section: What You Want

"We request that CRA reassess the [YEAR] taxation year to allow a foreign tax credit of $[AMOUNT] as originally filed, or in the alternative, $[ALTERNATIVE AMOUNT] based on [ALTERNATIVE CALCULATION]."

Step 1: Review the Reassessment Immediately

When a reassessment arrives:

• Read CRA's explanation carefully
• Identify their specific concern
• Pull your file to review original calculation
• Determine if their reassessment is correct or incorrect

Step 2: Gather Documentation

Compile everything from the documentation tiers above, plus:

• Copy of filed return and T2209
• Your working papers showing calculation
• Any prior correspondence with CRA

Step 3: File Notice of Objection

Submit Form T400A with:

1. Cover letter explaining the issue

2. Written argument addressing:

• Facts (what income, what tax paid, what you calculated)
• Your position (what the credit should be)
• Why CRA is wrong (specific errors in their calculation)
• Law and policy (cite ITA sections, folios, cases if applicable)
• Request (specific adjustment sought)

3. All supporting documents

• Everything from documentation tiers above
• Any correspondence with CRA already sent

Experienced practitioners often file objections for the same clients year after year because the same verification issues arise. It's invariably a question of deadlines and verification of foreign tax.

Step 4: Follow Up

Objections can take 6-18 months to resolve. Follow up:

• Every 90 days, call for status update
• Ask to speak with the appeals officer assigned
• Offer to provide additional information
• Keep detailed notes of all calls

Step 5: Escalate If Necessary

If the objection is denied:

Option A: File service complaint

If CRA process was unreasonable, file a formal service complaint separate from the appeal.

Option B: Appeal to Tax Court

You have 90 days from the objection decision to file Tax Court appeal. For large amounts, this may be worthwhile.

Option C: Treaty mutual agreement procedure

For treaty-related disputes, this is available but expensive and lengthy. Use as last resort.

When Multiple Years Are Affected

Often if CRA reassesses one year's FTC, they'll reassess prior years too. Your objection strategy:

• File separate objections for each year – Each reassessment is independent
• Use consistent arguments – Show CRA's approach has been previously accepted
• Request grouped handling – Ask appeals to assign same officer for efficiency

When the Amount Is Small

Even objections for amounts as small as $100 have been filed on principle, because if you don't take a stand on this, it's always going to be the same.

Consider:

• Principle matters – Wrong reassessments shouldn't stand
• Future years – If not corrected, repeats annually
• Precedent – CRA will continue similar reassessments for this client and others
• Client relationship – Clients lose confidence if you don't fight

When To Involve Specialists

Consider referring to foreign tax credit specialists when:

• Amount exceeds $25,000
• Complex treaty interpretation required
• FAPI calculations involved
• Multiple foreign jurisdictions
• Previous objections have failed
• Tax Court appeal is contemplated

Mitigation Strategy:

• Ensure the entire return is defensible before objecting
• Anticipate related issues CRA might raise
• Include explanations that head off predictable questions

Best Practices:

1. Prepare Clients in Advance

"The foreign tax credit is a problematic area, especially for larger claims. CRA will likely verify this, and it may take several months to resolve."

2. Explain It's Not Your Error

"This is a known CRA verification issue. We calculated correctly, but CRA's system flagged it. We'll handle the response."

3. Set Realistic Timelines

"Resolution typically takes 90-180 days, sometimes longer if we need to file an objection."

4. Document Everything

"We're keeping detailed records of all our communications with CRA. If needed, we can show we followed proper procedures."

5. Don't Let Clients Handle It

Don't let people handle CRA communication themselves. They usually make a mess of it and are usually unsuccessful.

Insist on controlling CRA communication. Clients who call CRA directly often make statements that complicate resolution.