Foreign Tax Credit on Canadian Return

[dw]

I need help in understanding how the foreign tax credits on my US return effects my Canadian return. This is my situation:

IRA withdrawal - 32,588
US sourced interest - 2,957
Total US income 35,545

Tax before FTC 3,480
FTC for interest (357)
Tax paid 3,123

On Canadian return, in calculating my foreign tax credit, do I use the amount of tax paid before the FTC 3,480 or the amount after the FTC deduction 3,123?

Thanks for your help

[nelsona]

I assume you are a US citizen?

To answer yourquestion, they have no affect. FTC's are determined from the tax that is calculated BEFORE ftc's are applied.

But, unless you are over-simplifying your example, there is a problem with how you are determining what the US tax is on the US-source income.

To determine the US tax eleigible for Cdn return, you need to do your entire US tax return, including all income, not just US income.

You haven't given enough info to know how much US tax arose over your IRA and interest.. you need to know the amount of Cdn income you are reporting on your US return, and the total tax that results before FTC.

Then you apportion the US tax over all your income

You do the same on your Cdn return, and apportion the Cdn tax over all your income.

Then -- one time for each return -- you use the US tax on the US income on your CDn FTC lines (except for tax on US interest, which you can't recover in canada), and you use your Cdn tax on your Cdn income on your 1116's, including recovering your US tax on US interst on a re-source 1116 (which is what you are refering to as "FTC for interest"?).

[nelsona]

Just a note on how US interest affect Cdn FTC calc:

Say you have $5000 US-sourced income plus another $50 US-sourced interest.
While you cannot claim the US tax on the interest, you would still indicate $5050 as the US-sourced income. You would only apply the US tax on the $5000 as eligible US tax.

[dw]

Yes, I am a US citizen and I have simplified a bit. I had a small amount of Canadian interest and a small capital loss. These are my new numbers.

CND interest 787
CND Capital loss (182)
US IRA distribution 32,588
US interest 2957
Total inc. 36,150

My total US tax before any FTCs in 3480. If I apportion this, this is what I get:

Tax on:
Canadian interest 75.76
Capital loss (17.52)
IRA distribution 3,137.10
US interest 284.66
Total tax 3,480

I would apply the 3,137.10 as a foreign tax credit on my Canadian return.

On my US return, the foreign tax credit for re-sourced US interest is 357. The total tax actually paid is 3,123.

The reason I started this thread is because I have been audited by the CRA on the foreign tax credit in the past. They used a simple calculation as follows:

US income (without the US interest) / Total US income (incl US interest) x total tax X exchange rate

If I use the same calculation, this is what would result, ignoring the exchange rate.

(32588 / 35545 ) x 3,123 = 2,863

This is 273.90 less than the above method. I think the method you outlined is correct and their's is over simplified.

[nelsona]

The total tax has to be before any foreign tax credits.

that is FTC 101.

What they are doing is doubling the effect of your Cdn income.
Change thos nomers you have and add $100,000 of Cdn income. if you take the credits first. the equestion CRA gave you makes your US tax disappear completely.