I am commuting to Canada daily (Detroit to Windsor) and completing my first 1116 form. I was planning on using CPP as part of my tax credit (or course in addition to Canadian Federal and Provincial Taxes and EI) but read this from the IRS (publication 514 page 7):
. . . No deduction or credit is allowed, however, for social security taxes pain or accrued to a foreign country with which the United States has a social security agreement. . .
I believe that Canada does have a social security agreement with the US. Does this mean I can't use CPP paid as part of my credit?
Is CPP deductible as a foreign tax credit on Form 1116?
Moderator: Mark T Serbinski CA CPA
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xbordercommuter
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I have always advised using it.
The issue comes not so much to the toatlaization agreem net (yes US/Canada have one), but to the TAX treaty.
Canadians are allowed to claim all FICA as foreign tax because the treaty specifically states that social security taxes are part of the treaty. But for Canada its says that only taxes imposed by canada under the Income TAX Act. Technically CPP and EI are not imposed by the ITA.
But the technical explanation of the treaty, which the Treasury department wrote and which the IRS adheres to, states:
"the Convention has the effect of covering the Canadian social security tax in certain respects because under Canadian domestic tax law no such tax is due if there is no income subject to tax under the Income Tax Act of Canada."
the "in certain respects" is taken to mean the provisions of article XXIV (elimination of double taxation). Same for provincial tax and EI>
So, while every couple of years someone digs out this nugget from the IRS, the treasury department has already addressed this years ago.
I'd be curious however, if you correctly do 1116, i'm thinking that the CPP you paid won't be credited anyways, as your fed and provincial tax will be more than you can use anyways. Let me know if this is your case.
But, I'm comfortable claiming CPP, even if it just adds to the carryforward.
The issue comes not so much to the toatlaization agreem net (yes US/Canada have one), but to the TAX treaty.
Canadians are allowed to claim all FICA as foreign tax because the treaty specifically states that social security taxes are part of the treaty. But for Canada its says that only taxes imposed by canada under the Income TAX Act. Technically CPP and EI are not imposed by the ITA.
But the technical explanation of the treaty, which the Treasury department wrote and which the IRS adheres to, states:
"the Convention has the effect of covering the Canadian social security tax in certain respects because under Canadian domestic tax law no such tax is due if there is no income subject to tax under the Income Tax Act of Canada."
the "in certain respects" is taken to mean the provisions of article XXIV (elimination of double taxation). Same for provincial tax and EI>
So, while every couple of years someone digs out this nugget from the IRS, the treasury department has already addressed this years ago.
I'd be curious however, if you correctly do 1116, i'm thinking that the CPP you paid won't be credited anyways, as your fed and provincial tax will be more than you can use anyways. Let me know if this is your case.
But, I'm comfortable claiming CPP, even if it just adds to the carryforward.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
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xbordercommuter
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- Joined: Tue Apr 07, 2009 6:55 am
Thanks nelsona.
I actually would be able to benefit from it. My Canadian tax rate is lower than my marginal US rate (only worked 1/2 year in Canada and my wife's income puts us into a high US bracket).
My CPA nixed it at our meeting today, but doesn't really deal with these cross border issues. It's not a huge amount of money this year, but if I keep crossing the border to work in Canada I might need to investigate further. At least CPP is lower than FICA taxes.
In theory, it kind of make sense to me that it shouldn't be deducted: I'm not paying FICA, and I will eventually be able to earn CPP income. If it was still employed in the US, I couldn't "credit" FICA payments from my income tax, so why should I be able to do this with CPP?
I actually would be able to benefit from it. My Canadian tax rate is lower than my marginal US rate (only worked 1/2 year in Canada and my wife's income puts us into a high US bracket).
My CPA nixed it at our meeting today, but doesn't really deal with these cross border issues. It's not a huge amount of money this year, but if I keep crossing the border to work in Canada I might need to investigate further. At least CPP is lower than FICA taxes.
In theory, it kind of make sense to me that it shouldn't be deducted: I'm not paying FICA, and I will eventually be able to earn CPP income. If it was still employed in the US, I couldn't "credit" FICA payments from my income tax, so why should I be able to do this with CPP?
Remember that 1116 looks at your EFFECTIVE tax rate, not marginal. So while yor foreign income may push you into a higher marginal bracket, the tax will only be credited back to you at your effective rate. I suspect that very little of your Cdn 'tax' will end up being credited.
It will work better in future years when you work only in canada. But you may have to look into filing separately at that point to get best credit. You'll see: you won't like the way IRS and michigan treat your Cdn income. I hope the commute is worth it.
I suspect that since you are using a pro, you are not using tax software yourself. Be aware that 1116 is best done by software as there are many limits that kick in that may not be evident when doing it by hand.
Well, using that logic, your state tax shouldn;t be deductible on your 1040, since provincail tax isn't deductible on your cdn federal return.
And many states allow do allow fica as a deduction. So really, IRS is saying that taxes not charged buy them can be deducted or credited, which is the same treament for ste tax, city tax, real estae tax, etc, that are paid by you but not charged by Uncle Sam.
But best to leave logic out of this.
It will work better in future years when you work only in canada. But you may have to look into filing separately at that point to get best credit. You'll see: you won't like the way IRS and michigan treat your Cdn income. I hope the commute is worth it.
I suspect that since you are using a pro, you are not using tax software yourself. Be aware that 1116 is best done by software as there are many limits that kick in that may not be evident when doing it by hand.
Well, using that logic, your state tax shouldn;t be deductible on your 1040, since provincail tax isn't deductible on your cdn federal return.
And many states allow do allow fica as a deduction. So really, IRS is saying that taxes not charged buy them can be deducted or credited, which is the same treament for ste tax, city tax, real estae tax, etc, that are paid by you but not charged by Uncle Sam.
But best to leave logic out of this.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
see other thread
This discussion repeats matter from http://forums.serbinski.com/viewtopic.p ... sc&start=0
I've responded to nelsona over there. (I don't think he's correct about taking a US credit for the Canadian CPP contributions, but I hope that I'm the one that is wrong.)
I've responded to nelsona over there. (I don't think he's correct about taking a US credit for the Canadian CPP contributions, but I hope that I'm the one that is wrong.)
Again, I believe your error is in not realizing that some treaty provisions EXPLICITLY SUBORDINATE THEMSELVES TO US LAWS.
In particular, Article XXIV (elimination of double taxation) paragraph 1 (which is used in many circumstances to claim a US tax credit) explicitly states that it is "In accordance with and subject to the limitations of the law of the US".
If you know of a paragraph of the treaty besides XXIV(1) which would allow taking a US credit for Canadian CPP tax, then by all means say so. Simply saying "you're wrong" does not resolve the issue, and in fact it merely changes the subject.
In particular, Article XXIV (elimination of double taxation) paragraph 1 (which is used in many circumstances to claim a US tax credit) explicitly states that it is "In accordance with and subject to the limitations of the law of the US".
If you know of a paragraph of the treaty besides XXIV(1) which would allow taking a US credit for Canadian CPP tax, then by all means say so. Simply saying "you're wrong" does not resolve the issue, and in fact it merely changes the subject.
Nelsona-
I indeed read that treasury technical explanation before posting!
However, I was NOT the one who said that the treaty was subject to US laws. It is the TREATY ITSELF which subordinated itself to the laws of the US!
Again, Article XXIV (1) states: (emphasis added)
"In the case of the United States, subject to the provisions of paragraphs 4, 5, and 6, double taxation shall be avoided as follows: **IN ACCORDANCE WITH THE PROVISIONS AND SUBJECT TO THE LIMITIATIONS OF THE LAW OF THE UNITED STATES** (as may be amended from time to time without changing the general principle thereof), the United States shall allws to a citizen or resident of the United States, or to a company electing to be treated as a domestic corporation, as a **credit against the United States tax on income the appropriate amount of income tax paid or accrued to Canada;..."
The treasury technical explanation is not contradicted, the CPP contributions are indeed taxes but they are NOT subject to a US tax credit under XXIV(1).
If you have another part of the treaty besides XXIV(1) that generates a credit then by all means cite it. I would very happy to be wrong. But stop trying to turn this into a personal argument by making irrelevant ad hominem attacks.
Note that I have wasted two days stuyding this issue closely, in part because your errant and now intentionally rude posts sent me on a wild goose chase. I do not appreciate your remarks about the flatness of the earth, ect.
I indeed read that treasury technical explanation before posting!
However, I was NOT the one who said that the treaty was subject to US laws. It is the TREATY ITSELF which subordinated itself to the laws of the US!
Again, Article XXIV (1) states: (emphasis added)
"In the case of the United States, subject to the provisions of paragraphs 4, 5, and 6, double taxation shall be avoided as follows: **IN ACCORDANCE WITH THE PROVISIONS AND SUBJECT TO THE LIMITIATIONS OF THE LAW OF THE UNITED STATES** (as may be amended from time to time without changing the general principle thereof), the United States shall allws to a citizen or resident of the United States, or to a company electing to be treated as a domestic corporation, as a **credit against the United States tax on income the appropriate amount of income tax paid or accrued to Canada;..."
The treasury technical explanation is not contradicted, the CPP contributions are indeed taxes but they are NOT subject to a US tax credit under XXIV(1).
If you have another part of the treaty besides XXIV(1) that generates a credit then by all means cite it. I would very happy to be wrong. But stop trying to turn this into a personal argument by making irrelevant ad hominem attacks.
Note that I have wasted two days stuyding this issue closely, in part because your errant and now intentionally rude posts sent me on a wild goose chase. I do not appreciate your remarks about the flatness of the earth, ect.
Again, article II ("taxes covered") of the tax treaty does not use the word "credit". It simply states what is considered a tax. Article II, by itself, does not give any tax credits.
It is article XXIV lets you take US credits for Canadian taxes.
Indeed, if you eliminated article XXIV from the US-Canada tax treaty then you would be subject to double-taxation.
That's why the title of article XXIV is "Elimination of double taxation"!
Again, if anyone has a specific paragraph of the tax treaty which provides for a US tax **credit** for Canadian CPP taxes then by all means point it out.
It is article XXIV lets you take US credits for Canadian taxes.
Indeed, if you eliminated article XXIV from the US-Canada tax treaty then you would be subject to double-taxation.
That's why the title of article XXIV is "Elimination of double taxation"!
Again, if anyone has a specific paragraph of the tax treaty which provides for a US tax **credit** for Canadian CPP taxes then by all means point it out.