Search found 5 matches
- Fri Feb 08, 2013 7:19 pm
- Forum: Canada / United States Tax & Accounting
- Topic: TFSA in spouse's name?
- Replies: 5
- Views: 3602
Why do you say that TFSAs are not that great? Tax free growth for life, contribution room accumulates, you can take it out at any time without penalty... sounds like a pretty great deal to me. What do you think are the drawbacks? (For a Canadian). I can understand that if money is tight, there might...
- Tue Feb 05, 2013 11:35 pm
- Forum: Canada / United States Tax & Accounting
- Topic: TFSA in spouse's name?
- Replies: 5
- Views: 3602
TFSA in spouse's name?
I'm a US Citizen living in Canada. I've avoided a TFSA due to the reporting issues. I'm in a serious long-term relationship with a Canadian and I imagine marriage is on the horizon. My girlfriend is a full-time student and is not currently investing. I was wondering if I could give some money to her...
- Mon Jan 30, 2012 3:44 pm
- Forum: Canada / United States Tax & Accounting
- Topic: Taxes for US Citizens in Canada - quick reference guide
- Replies: 6
- Views: 7651
- Mon Jan 30, 2012 3:41 pm
- Forum: Canada / United States Tax & Accounting
- Topic: Taxes for US Citizens in Canada - quick reference guide
- Replies: 6
- Views: 7651
Thank you Nelson, as always you are incredibly helpful. I understand it a lot better now thanks to the reply, but I'm still confused about a couple of things: 1) Effective tax rate = tax owed after deducting 2555 income but before taking 1116 credits, divided by total income including 2555 income. C...
- Sun Jan 29, 2012 10:58 pm
- Forum: Canada / United States Tax & Accounting
- Topic: Taxes for US Citizens in Canada - quick reference guide
- Replies: 6
- Views: 7651
Taxes for US Citizens in Canada - quick reference guide
I’m a US citizen in Canada, and as I prepare to do my taxes this year, I thought I’d like to write down a summary of the basics on how to deal with several common forms of personal (i.e. non-business) income. I’ve gotten a lot of good information on this forum and elsewhere on line, but it would be nice to have it all in one place. Plus, I’m not entirely sure that I’ve got my facts straight. So I’m going to write down what I think I know, and I’d like to invite you all to correct any mistakes. So, future reader – please do not use this original post as a definitive guide! I’m hoping that this will generate a thread of corrections, and I can post a revised summary at the end that will serve as a useful reference. Keep in mind I’m no pro, I’ve just been trying to work this stuff out on my own. Read at your own risk.
I’m going to describe my situation, although I will add a few extra complications that aren’t true but are situations that I wonder about. I think these facts are fairly typical for a USC working in Canada. Feel free to add more situations to the “guide.â€
- US citizen, full-time employed in Canada on a work permit. Planning to stay indefinitely and get PR status.
- Chequing and savings accounts in US$ with an American bank, and also chequing and savings accounts in Can$ with a Canadian bank, as well as a $US chequing account with the Canadian bank.
- Mutual fund investments in the US with an American company. Can no longer buy into these because of Canadian residence (I could always use a relative’s address but let’s not go there).
- Non-registered investment account in Canada. Due to the PFIC rules, I hold no Canadian mutual funds (who would want those expensive funds anyway), no Canadian-domiciled ETFs, no packaged investment product of any kind from Canada really. Any money I want to invest, I convert to $USD and buy US-domiciled ETFs from my Canadian broker (who happens to also be my bank). However, let’s say I’m going to buy a few individual Canadian stocks for the fun of it.
- Considering contributing to an RRSP. Have no traditional IRA. Hold a Roth IRA in the states, but I consider it “frozen,†won’t touch it until I retire, since any contributions to it while living in Canada would be taxable in Canada and create a bookkeeping nightmare.
So, on to the list of income items:
1. Canadian wages. I deduct these on IRS form 2555 to subtract them from my income for the US return. I pay normal Canadian tax on them, mainly via paycheque withholding. I understand that I could either use 2555 to exclude the income, or instead 1116 to take a tax credit for foreign taxes paid to Canada. The main reason for me to go the 2555 route is if I want to contribute to an RRSP, the same income is “deducted†both in Canada and the US. Otherwise it would be confusing to deduct it “pre-tax†in Canada but not in the US.
2. Interest from Canadian bank account (yes, all five bucks or so). This is ordinary Canadian source income. I pay taxes on it in Canada, and would also owe tax on it in the states, but I get full credit for tax paid on it via form 1116. Leftover credit can be applied to future years.
3. Interest on US bank account. This is considered “US source,†but I can re-source exactly enough of it to Canada to cancel out any US tax owed. So I pay full tax on it in Canada, but I am allowed to deduct the US tax owed on it via line 256 of the CRA return. This deduction is kind of a bonus, since I don’t actually pay any tax to the US on the income. In the US, I use form 1116 to re-source exactly what I owe and claim credit for it, as long as I’ve paid that much to Canada. This is much like the dividend procedure (item 9 below) but without the 15% part – Canada credits 0% tax on US-source interest, so I get to re-source it all to Canada on form 1116.
4. Capital gains from sale of US mutual funds or stocks. These are considered Canadian source. So I treat them as capital gains on my Canadian return, paying at my marginal rate X 50%. I also have to include them in my US income, owing tax at US capital gains rates (15% for long term, etc), but getting credit via 1116 should cancel this out.
5. Capital gains from sale of Canadian stocks. Treated EXACTLY the same as the capital gains from US investments in #4 above.
6. Capital gains from sale of US-domiciled ETFs held with Canadian broker: again, treated exactly the same as #4.
7. Capital gains from US mutual fund growth that are automatically reinvested. I’ve heard that these are not supposed to be treated the same as capital gains from sales, but I’m not sure. Input requested!
8. Dividends on Canadian stocks. Paid on Canadian return, and I would mostly get the dividend tax credit if it’s a Canadian company. However, I also owe tax in the US at standard non-qualified dividend rates for these, so the dividend tax credit in Canada may not help me that much; I could end up owing some money to the IRS unless I have other 1116 credit to cancel it out. I do get credit for tax paid in Canada, but the US tax on the same income could be higher. Is this correct? I’m confused about this part.
9. Dividends on US mutual funds and US-domiciled ETFs. Here’s the headache! These apparently are still considered “US-sourced,†and the IRS expects to get a cut of tax on them even if I’m a Canadian resident. It’s kind of like interest, but Canada only lets me deduct the US tax over 15%. (Still, that’s kind of a bonus). So I think the steps are:
1) Do US tax return, excluding wages on 2555 but not taking 1116 credits yet.
2) Figure out what percentage of total income was the dividend. Multiply total tax by that percentage, and that’s the US tax attributable to the dividends (effective rate, not marginal).
3) Figure out what that tax rate was – tax on dividend divided by amount of dividend.
4) Any of that tax owed to US up to 15% is not deductible on Canada’s form 256, but the rest is.
5) Work out Canadian return owing full tax on the dividend (minus the deduction in step 4), but take foreign tax credit in Canada for the 15% still owed to US.
6) On the US return, get tax credit for exactly the tax paid to Canada on the dividend, having taken all the above into account.
God that’s so complicated! Is it right? So it seems like due to this part, you end up owing a little bit to the IRS – 15% of your US-based dividends, even if you owe nothing else.
US Forms to file:
1040
TDF 90-22.1. Report what’s in your Canadian accounts and mail to Treasury Dept.
2555 – exclusion of Canadian wage income.
1116 – foreign tax credit
8891 – Deferment of tax on RRSP if you have one.
Pub 514 – worksheet for the crazy dividend procedure.
Re-sourced income – separate 1116 from Canadian source income.
Special considerations for the first year:
Foreign income exclusion (form 2555) – technically you need to be living abroad for a whole year BEFORE you can use this, so you can’t use it your first year… unless you take advantage of this weird loophole. You can file form 2350, which requests an extension of your time to file until you have lived abroad for a whole calendar year. So in my case, I arrived in Canada in October 2010 but didn’t file 2010 tax return until January 2012. Weird but that’s how you’re supposed to do it. However you still have to pay your taxes when they’re due, (June 2011 for me). So you have to fill out your 1040 on your own and figure out what you owe, pay it, but don’t actually send in the 1040 until the extended time.
Things to avoid in Canada:
TFSA – taxable in the US and requires form 3520, crazy paperwork, not worth it.
RESP – no way to get deduction for this, the US will tax the income in it.
Canadian mutual funds (unless in RRSP) – subject to PFIC tax treatment, probably not worth it.
Canadian ETFs – same reason.
I’m going to describe my situation, although I will add a few extra complications that aren’t true but are situations that I wonder about. I think these facts are fairly typical for a USC working in Canada. Feel free to add more situations to the “guide.â€
- US citizen, full-time employed in Canada on a work permit. Planning to stay indefinitely and get PR status.
- Chequing and savings accounts in US$ with an American bank, and also chequing and savings accounts in Can$ with a Canadian bank, as well as a $US chequing account with the Canadian bank.
- Mutual fund investments in the US with an American company. Can no longer buy into these because of Canadian residence (I could always use a relative’s address but let’s not go there).
- Non-registered investment account in Canada. Due to the PFIC rules, I hold no Canadian mutual funds (who would want those expensive funds anyway), no Canadian-domiciled ETFs, no packaged investment product of any kind from Canada really. Any money I want to invest, I convert to $USD and buy US-domiciled ETFs from my Canadian broker (who happens to also be my bank). However, let’s say I’m going to buy a few individual Canadian stocks for the fun of it.
- Considering contributing to an RRSP. Have no traditional IRA. Hold a Roth IRA in the states, but I consider it “frozen,†won’t touch it until I retire, since any contributions to it while living in Canada would be taxable in Canada and create a bookkeeping nightmare.
So, on to the list of income items:
1. Canadian wages. I deduct these on IRS form 2555 to subtract them from my income for the US return. I pay normal Canadian tax on them, mainly via paycheque withholding. I understand that I could either use 2555 to exclude the income, or instead 1116 to take a tax credit for foreign taxes paid to Canada. The main reason for me to go the 2555 route is if I want to contribute to an RRSP, the same income is “deducted†both in Canada and the US. Otherwise it would be confusing to deduct it “pre-tax†in Canada but not in the US.
2. Interest from Canadian bank account (yes, all five bucks or so). This is ordinary Canadian source income. I pay taxes on it in Canada, and would also owe tax on it in the states, but I get full credit for tax paid on it via form 1116. Leftover credit can be applied to future years.
3. Interest on US bank account. This is considered “US source,†but I can re-source exactly enough of it to Canada to cancel out any US tax owed. So I pay full tax on it in Canada, but I am allowed to deduct the US tax owed on it via line 256 of the CRA return. This deduction is kind of a bonus, since I don’t actually pay any tax to the US on the income. In the US, I use form 1116 to re-source exactly what I owe and claim credit for it, as long as I’ve paid that much to Canada. This is much like the dividend procedure (item 9 below) but without the 15% part – Canada credits 0% tax on US-source interest, so I get to re-source it all to Canada on form 1116.
4. Capital gains from sale of US mutual funds or stocks. These are considered Canadian source. So I treat them as capital gains on my Canadian return, paying at my marginal rate X 50%. I also have to include them in my US income, owing tax at US capital gains rates (15% for long term, etc), but getting credit via 1116 should cancel this out.
5. Capital gains from sale of Canadian stocks. Treated EXACTLY the same as the capital gains from US investments in #4 above.
6. Capital gains from sale of US-domiciled ETFs held with Canadian broker: again, treated exactly the same as #4.
7. Capital gains from US mutual fund growth that are automatically reinvested. I’ve heard that these are not supposed to be treated the same as capital gains from sales, but I’m not sure. Input requested!
8. Dividends on Canadian stocks. Paid on Canadian return, and I would mostly get the dividend tax credit if it’s a Canadian company. However, I also owe tax in the US at standard non-qualified dividend rates for these, so the dividend tax credit in Canada may not help me that much; I could end up owing some money to the IRS unless I have other 1116 credit to cancel it out. I do get credit for tax paid in Canada, but the US tax on the same income could be higher. Is this correct? I’m confused about this part.
9. Dividends on US mutual funds and US-domiciled ETFs. Here’s the headache! These apparently are still considered “US-sourced,†and the IRS expects to get a cut of tax on them even if I’m a Canadian resident. It’s kind of like interest, but Canada only lets me deduct the US tax over 15%. (Still, that’s kind of a bonus). So I think the steps are:
1) Do US tax return, excluding wages on 2555 but not taking 1116 credits yet.
2) Figure out what percentage of total income was the dividend. Multiply total tax by that percentage, and that’s the US tax attributable to the dividends (effective rate, not marginal).
3) Figure out what that tax rate was – tax on dividend divided by amount of dividend.
4) Any of that tax owed to US up to 15% is not deductible on Canada’s form 256, but the rest is.
5) Work out Canadian return owing full tax on the dividend (minus the deduction in step 4), but take foreign tax credit in Canada for the 15% still owed to US.
6) On the US return, get tax credit for exactly the tax paid to Canada on the dividend, having taken all the above into account.
God that’s so complicated! Is it right? So it seems like due to this part, you end up owing a little bit to the IRS – 15% of your US-based dividends, even if you owe nothing else.
US Forms to file:
1040
TDF 90-22.1. Report what’s in your Canadian accounts and mail to Treasury Dept.
2555 – exclusion of Canadian wage income.
1116 – foreign tax credit
8891 – Deferment of tax on RRSP if you have one.
Pub 514 – worksheet for the crazy dividend procedure.
Re-sourced income – separate 1116 from Canadian source income.
Special considerations for the first year:
Foreign income exclusion (form 2555) – technically you need to be living abroad for a whole year BEFORE you can use this, so you can’t use it your first year… unless you take advantage of this weird loophole. You can file form 2350, which requests an extension of your time to file until you have lived abroad for a whole calendar year. So in my case, I arrived in Canada in October 2010 but didn’t file 2010 tax return until January 2012. Weird but that’s how you’re supposed to do it. However you still have to pay your taxes when they’re due, (June 2011 for me). So you have to fill out your 1040 on your own and figure out what you owe, pay it, but don’t actually send in the 1040 until the extended time.
Things to avoid in Canada:
TFSA – taxable in the US and requires form 3520, crazy paperwork, not worth it.
RESP – no way to get deduction for this, the US will tax the income in it.
Canadian mutual funds (unless in RRSP) – subject to PFIC tax treatment, probably not worth it.
Canadian ETFs – same reason.