US Citizen / Can Resident with US source income

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Diskdoctor
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Location: Winnipeg

US Citizen / Can Resident with US source income

Post by Diskdoctor » Fri Apr 12, 2019 12:09 pm

I'm working on income taxes for my retired father-in-law who is a US citizen but Canadian resident.

In 2018 he cashed in a life insurance policy held in the US so he received a 1099-R which indicated the distribution amount and the taxable portion. I assume the taxable portion from the 1099-R is also the taxable portion in Canada so I've included that amount as income on his T1. The taxable portion for US taxes is clear from the 1099-R. In past years he has had only Canadian-source income (except for Social Security) so I have been able to use the Foreign Tax Credit to reduce his US income tax to zero. For 2018 I guess he will have to pay US income taxes on that US-source amount.

My questions:
1) Am I right that US citizen Canadian residents end up paying US income tax on US-source income or is there something I'm missing?
2) If he is claiming the distribution as income on T1 should he claim a foreign tax credit on his Canadian taxes for the US income tax paid?

Any insight is appreciated.

Diskdoctor
Posts: 73
Joined: Wed Apr 21, 2010 9:46 am
Location: Winnipeg

Re: US Citizen / Can Resident with US source income

Post by Diskdoctor » Fri Apr 12, 2019 12:52 pm

After some further research this might be simplest if the income can be resourced by treaty and included in a 1116. Is there a reference somewhere to what types of income are eligible to be resourced?

nelsona
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Re: US Citizen / Can Resident with US source income

Post by nelsona » Sun Apr 14, 2019 7:57 pm

Yes, they pay US taxes, at no higher rate than treaty allows.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

nelsona
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Re: US Citizen / Can Resident with US source income

Post by nelsona » Sun Apr 14, 2019 7:58 pm

It cannot be resourced by treaty, because Canada accepts the US tax. It would be taxable to a Cdn living in Canada, so eligble for tax credit in Canada, not US.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

Diskdoctor
Posts: 73
Joined: Wed Apr 21, 2010 9:46 am
Location: Winnipeg

Re: US Citizen / Can Resident with US source income

Post by Diskdoctor » Mon Apr 15, 2019 10:40 pm

Thanks for the help on that. 'guess I'll be learning how to do the foreign tax credit from the Canadian side.

Diskdoctor
Posts: 73
Joined: Wed Apr 21, 2010 9:46 am
Location: Winnipeg

Re: US Citizen / Can Resident with US source income

Post by Diskdoctor » Tue Apr 16, 2019 9:26 pm

What is your interpretation of this income? It's on a 1099-R so it's clear where it gets reported for US income tax. From my reading of the treaty this is not a pension. It is also not an annuity since it is a one time distribution and "not a periodic payment" (Article XIII-4a). Therefore the 15% tax limitation does not seem to apply.

nelsona
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Re: US Citizen / Can Resident with US source income

Post by nelsona » Tue Apr 16, 2019 9:41 pm

It is not periodic, so the full tax will be credited in Canada, thus no worry about limitation -- assuming hos effective US taxrate is >15%.
If Canada rejects this, then you simply amend your US return and claim the extra on a re-sourced 1116.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

nelsona
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Re: US Citizen / Can Resident with US source income

Post by nelsona » Tue Apr 16, 2019 9:43 pm

It is a pension, it is just not periodic, same as taking out 1/2 your RRIF. It is taxed at 25% not 15%, because it isn't periodic.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

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