RRSP deduction

[dowager]

Nelsona,

Just confirming, I read somewhere on your site that the 5th protocol allows for the deduction of RRSP from the foreign income. Is it true that the contribution made in the year into a non-spousal RRSP is the only amount you can deduct? This quantum is therefore different from the RRSP deduction taken in the Canadian tax return. Thanks.

[nelsona]

Only EMPLOYER-sponsored RRSP deductions made thru work by and for the employee are deductible from ones wages on 1040.

Spousal amounts, and private RRSP contributions remain undeductible.

[dowager]

But it has to be made during the year, right? I cannot use the amount of c/f RRSP deduction?

[dowager]

What if my employer deducted the RRSP from payroll, and it is funnel to an Employer sponsored RRSP plan, but it allows you to split it into a spousal RRSP. Is that spousal RRSP not deductible?

[nelsona]

Yes, it must be made during the year. My interpretation of the treaty and technical explanation would seem to indicate that only contributions made into the employee's RRSP would be deductible.

I dont know what "c/f RRSP" means.

[dowager]

Sorry, c/f = carry forward. I am so used to the British shortforms used in accounting. LOL

[nelsona]

If you decide to carry forward unused RRSP contributions for Cdn purposes, you still must use them in the contribution year on your US return.

Again, if you use 2555 to exclude the wages from which these RRSP contributions were taken, this is all moot. Neither the wage nor the deduction will figure into your tax.

[dowager]

Okay, I did use the foreign income exclusion. So I cannot deduct. Thanks. But no thanks. LOL

[nelsona]

I thought we went thru this earlier, and found that since not all your foreign income was excludable, you would probably use 1116, on some if not all of your Cdn wages?

[dowager]

So if I have enough income leftover to use foreign tax credit, I can therefore deduct the RRSP?

[nelsona]

Well, you will reduce your wage amount by the contributions made by you to your account thru your employer-sponsored rrsp. Then you will apply 2555. To the extent that the deduction reduces your wages, you will have used the RRSP deduction. You said 2555 would not use up all your wages, but maybe with RRSP removed it will. That is how it will benefit.

Put it this way. You had $30K of Cdn wages, and $10K of qualified RRSP deductions. That means $20K of wages are reported/ Then by 2555, say 17K is ecludable. So you have 3K left to use on 1116. Of course, only a tiny slice of your Cdn tax can (like 10% of your tax and 10% of your CPP/EI) can be used on 1116 with regard to those wages.

[dowager]

If I understand this correctly, then I can deduct the RRSP contribution from the gross salary, and also add the payroll taxes to the total taxes paid as the total foreign tax credit. After entering these data in TurboTax, it will apply foreign income exclusion and foreign tax deduction, and whatever tax it calculate is what I pay.

Thanks.

[nelsona]

1). You report all your Cdn wages on the 1040 wage line MINUS eligible RRSP contributions. You file an 8833 to say how you reduced your wages by RRSP.
2) You use 2555 to calculate your exclusion.
3) if your exclusion is less than the wage you reported, you now put the remainder on a 1116 as foreign income. You CANNOT report all the Cdn tax related to your Cdn wages since you excluded some of it using 2555, you can only include a portion, proportional to what was NOT excluded.

Look at the example I gave.

[nelsona]

Note that even if your were allowed to use all the Cdn tax on your wages, form 1116 would severley limit the tax credit, as it only will credit you what you would have paid in US, which is hardly anything.