Tax Type
Individual Income Tax
Description
Subtractions from federal adjusted gross income; Foreign source income
Topic
Taxable Income
Date Issued
09-09-1996
September 9, 1996
Re: § 58.1-1821 Application: Individual Income Tax
Dear*******
This will reply to the letter of February 12, 1996 written on your behalf by ******** regarding the adjustment made to your 1990 Virginia individual income tax return.
FACTS
You are a Virginia resident whose 1990 individual income tax return was the subject of an office audit. An adjustment was made to disallow a subtraction from federal adjusted gross income for taxes paid to the Canadian government on pension income from Canadian sources, and an assessment was issued. You protest the assessment and claim that the elimination of double taxation pursuant to the U.S. - Canadian income tax treaty is applicable to Virginia law.
DETERMINATION
Article II(2)(b) of the Convention Between the United States of America and Canada With Respect to Taxes on Income and on Capital (the "Convention"), prior to the Protocol signed March 17, 1995, stated in pertinent part:
-
- The existing taxes to which the Convention shall apply are . . . in the case of the United States, the Federal income taxes imposed by the Internal Revenue Code. (Emphasis added.)
Pursuant to this article, the Convention applies only to certain taxes imposed at the federal level by the U.S. and Canadian national governments. Taxes imposed by provincial and state governments, including Virginia, are unaffected by the Convention.
You feel, however, that since Virginia individual income taxation "conforms" to federal law, then Virginia is obligated to honor the elimination of double taxation provision in Article XXIV of the Convention by allowing the subtraction, on your Virginia return, of those taxes paid to Canada on Canadian source income.
Code of Virginia § 58.1-301, copy enclosed, provides that the terms used in Virginia law as it relates to Virginia individual income taxation shall have the same meaning as terms used in the Internal Revenue Code (IRC). This does not mean that Virginia individual income tax follows or "conforms" to federal individual income tax law in all respects. It means that when a term is used in both the IRC and the Code of Virginia the definition used in the IRC will also be the definition used for Virginia individual income tax purposes.
The computation of Virginia taxable income begins with federal adjusted gross income. Pursuant to Code of Virginia § 58.1-301, this means federal adjusted gross income as reported on your federal income tax return. Federal adjusted gross income is then modified by specific additions, subtractions, deductions, and exemptions, as set forth in Code of Virginia § 58.1-322, copy enclosed. There is no provision in this Code section to allow a subtraction from federal adjusted gross income for taxes paid to a foreign country or for pension income received from foreign sources.
In the instant case, you received a pension from Canadian sources. This income was taxed by the Canadian government. For U.S. federal tax purposes, this pension income was included in federal adjusted gross income, pursuant to IRC 61 and 62. Article XVIII(1) of the Convention provides that pensions and annuities arising in either the United States or Canada and paid to a resident of the other country may be taxed by that country, i.e., Canadian pensions paid to U.S. residents are included in U.S. taxable income. As such, the Canadian pension income was also subject to U.S. taxation. Article XXIV(1) of the Convention eliminated this double taxation by allowing a credit, which is provided in accordance with IRC § 901 et seq., against U.S. federal individual income tax liability.
Since the Canadian pension you received was properly included in federal adjusted gross income, it is also included in Virginia taxable income unless specifically exempted by Code of Virginia § 58.1-322. As noted above, however, Virginia law does not allow a subtraction for foreign taxes paid or for pensions received from foreign sources. Code of Virginia § 58.1-332 allows a credit only for income taxes paid to another state. Further, Virginia Regulation (VR) 630-2-332 specifically denies this credit for taxes paid to a foreign country.
In previous correspondence with this department, you stated that the department validated this practice by not disallowing similar subtractions on your 1991 through 1994 returns. The returns for 1991 through 1994, however, were not selected for examination. If they had been selected, subtractions for foreign taxes paid would have been disallowed.
While I sympathize with your concerns, as indicated in former Tax Commissioner Forst's letter dated January 27, 1994, and my letter to you dated August 31, 1994, there is no basis to allow a subtraction from federal adjusted gross income for taxes paid to a foreign government. Your 1990 Virginia individual income tax assessment is, therefore, correct.
If you still feel aggrieved, you have additional rights pursuant to Code of Virginia § 58.1-1825, copy enclosed. Please remit the balance due, *********within thirty days to prevent the further accrual of interest. You should send your payment to**************Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this determination, you may contact ******** at***********
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10909G
Rulings of the Tax Commissioner