Claiming Canada credit for tax paid to US/Cal on Cal rental

[richarooca]

Dual citizen, living in Canada whole year.

Rental of house in Calif results in $200 tax to Calif (and this is the ONLY income as far as California is concerned since I'm non-resident entire year), and lets say $600 to US.

Can I use the $800 tax owed in US/Calif against my Canadian return, and if so, where?

Does this go on the T2209(Federal Foreign Tax Credits)? Or somewhere on the T776 (Statement of Real Estate Rentals)?

I'm using UFILE on the Canadian side and the T2209 only is getting my foreign tax paid on interest, dividends, and inherited IRA. So if it needs to go on T2209 I probably have to make some manual entries.

[richarooca]

I THINK I have it right. I entered all my information on the T776, and then under the Foreign income and property setup of UFILE there was a section to add Foreign Rental. I then inputted the Net Foreign Business Income or Loss and Foreign Business Income reported as Business income as my net rental income, and then entered my foreign tax paid, and voila, the T2209 was updated to also reflect the foreign tax paid on my rental and reduce my Canadian liability.

This is the first year I made income (after depreciation) so hadn't done this extra step previously.

[lanman2000]

i am using quicktax and there is no "foreign rental" section... arrgghh..

[lanman2000]

Wait a sec. You are doing a T776 for your US rental property for your canadian return which calculates rental income and you are ALSO entering the calculated rental income and taxes from your 1040/540 as foreign income/taxes?? Are you sure you're supposed to do that? It doesn't sound right to me for some reason...

FYI I am in the same situation as you... rental property in california, now living in canada and trying to figure this all out...

My T776 (CAN) calculated a completely different net rental income than the Schedule E (US).

[richarooca]

I had tax prep done by a major accounting firm for many years while I was on foreign assignment until I just transferred into the Canadian subsidiary. They always did the T776 on Canada and Schedule E on US side.

However, this is the first year that I've made any significant money after depreciation, so that's why I need to reduce my Canada tax with credit for taxes in US.

Yes, the net income on schedule E and T776 will be different, not only due to exchange but I think different depreciation rules. I used the Canada net amount (after depreciation) as the foreign business amount.

For the amount of foreign tax paid, I used the entire CA tax (because my CA rental is the only reason I have CA tax). And then I also added in the amount of US tax attributable to the rental (I noted the tax due with the rental and without it). I added the CA and US tax attributable to the rental and converted to CD$ and used that as foreign tax paid.

As far as the "foreign rental" section on UFILE, I think it's the mechanics of UFILE allowing the software to recognize the rental as foreign and apply my foreign taxes onto the T2209. I'm surprised there wasn't a tick box in the software when I was filling out the rental information to mark it as foreign. There is probably something similar for quick tax.


I'm hoping Nelson weighs in regarding this being correct (taking credit for the US/CA tax paid on the rental)

[lanman2000]

you would only need to worry about taking that credit if you declared the "net rental income" from schedule E on your canadian return. What I am saying is I don't think you're supposed to declare it... because you're running all the numbers on T776. I may be 100% wrong.

Need nelsona to weigh in and set us straight.

[nelsona]

Doesn't seem too complex.


You do your US 1040 and schedule E.
If in US your schedule E has no income or a loss, you have no foreign credit in canada obviously.

If your SchedE in US gives, say $100, then you potentially have a credit.
The US tax on that $100 will be determined by all the rest of your 1040 income ,and your final tax that you pay to IRS/Cali. Say its $10 Fed and $5 Cali.

Rich, your method of determining the US tax attributable to rent is incorrect. It is a weighted 'effective' approach described above not a "last dollar" marginal approach that you took.

Now you do your Cdn return, and you do your T776. The results may be completely different to the Sched E value. If that results in no income or a loss, then you aren't reporting any US income in canada anyways, so no credit. If you are reporting income, then, all the net income you report in US-sourced. You put that figure on the FTC line, and along with the $15 US and cali tax that you paid, do the federal ftc calculation. If you have leftover of the $15, you put it on the provincial line. Remember that rental income is NOT business income in canada.


Now, as to whether the software you use gets this to work or not, I can't be looking into that.

[lanman2000]

thanks for clarifying. I was getting confused because I thought he was saying we have to bring over BOTH the net rental income from Schedule E AND and the total US effective tax on that to the canadian return.

It sounds like you're saying we just bring the total US effective tax on that and put it as a FTC on the canadian return. That makes more sense. That is, we do not enter net rental income from schedule E ANYWHERE on the canadian return.

Interestingly though ,in my case, US return shows net rental income of ~$2000USD and canadian shows only $480CAD. Yes I know its b/c t776 is different from sch E in its calculation. Its just strange how i will apply US tax paid on $2000 to reduce candian tax owed on only $480.... know what i mean?

[nelsona]

Remember that you are only responsible for Cdn tax on the portion after your arrival in canada. so only the income from that time (and thus the US tax attributible to that time) is eligible for the credit. So not the entire SchedE income has been included on your Cdn T776.

Another thing to remember is that CCA is always optional in canada, and can be used partially if you wish. You are never required to use all or any of the CCA you calculate.

Next year, in a full Cdn year, I'm sure your 2 reports will coincide better.

[lanman2000]

actually 100% of the rental income was after arrival in canada....

weird that the two nets are that far off eh?

[nelsona]

I would question that.
Your income and expenses should be identical. And you propbaly should not be using CCA in canada, so your net should be less in US by definiton.

Sounds like you made a mistake.

Like I said, if you are using CCA in canada, then don't, as you are merely setting yourself up for regular tax later instead of cap gains.

[richarooca]

Thanks for the response nelsona.

1) Regarding me using weighted effective rates rather marginal--ok I'll recompute that for US portion of tax, but can't I automatically take 100% of my CAlif tax liability, since the rental is the only thing CA is taxing me for? (Or maybe my CA tax rate is 100% effective?)

2) Also your response to lanman about not using CCA in Canada--I guess that should apply to me too? What if my long-term plan is to eventually winter in my rental house and summer up here in Canada (after I retire, in about 10-15 years). Are you saying to avoid CCA only in the situation where you intend to sell the rental?

[nelsona]

1. Ypour cali was correct. it was your US that was wrong, as I said.

[lanman2000]

i will check the income/expenses again to make sure they mirror each other.

As for your comment on CCA I guess I'm very confused now because previously you said that if i depreciate in the US (not optional) then i should depreciate in Canada. Isn't the CCA the canadian mechanism for depreciation??? How else can i offset all that rental income?

and if i don't depreciate in canada then the rental income is going to be much higher and i'm gonna have to pony up a ton more for canada tax on it no?

[nelsona]

My comment was based on you seeming to have WAY more US net rental income than Cdn.

Again, CCA is optional, and should be used judiciously.

But, in genral if you depreciate in US to the extent that you have little US tax to report, there is definite advantage to CCA in Canada. And even if you use it, you should use just enough to balance your 2 taxes, otherwise you are building up depreciaition in Canada for nothing.