f1116 Income Taxed by CRA but not by IRS (HTKO)

[rne]

Hello,

Had a chuckle while searching for info on the complexities of the f1116 when I got excited finding a post dealing with my exact situation only to realize it was a post from myself several years ago. Filing cross border taxes feels like cramming for a yearly exam only to forget everything post-results...

Hoping some folks can provide some help with regards to a fairly unique tax situation and the intricacies of high tax kick out (HTKO) on the IRS f1116. For TY2023 I have a large CRA tax burden compared to what I owe the IRS due to different cost basis handling mechanisms between the two tax regimes and also due to having income/gains that are taxed by the CRA, but not by the IRS (unrecognized/broken Roth IRA due to misguided contribution). This has put me in uncharted waters where I believe I may have to use HTKO on my f1116 and am not clear on how to proceed.

I know there is sometimes a sub-categorization within each f1116 category related to adjustments and apportioning and am wondering if income that is not taxed by the IRS gets this treatment. E.g. if the IRS never taxes Roth IRA gains/dividends, but I am taxed by the CRA due to my unique circumstances should only this income get kicked out to the general category (or even not be eligible for the FTC at all since maybe it is "taxes imposed by a foreign country only because you could claim a foreign tax credit against the U.S. tax liability for such foreign income taxes paid or accrued" ?). Should the foreign tax paid to the CRA on income not taxed by the IRS be apportioned and ignored for the HTKO test or all pooled together?

For the HTKO threshold test I've seen differing limits and calculations like >37%, >39.6%, >250% of what IRS would tax, all vs. excess, etc. and would like to clarify what the rules are as I have no General category income to use HTKO credit pushed to that category. From this link (https://tax.thomsonreuters.com/blog/for ... ax-kickout):

"If the foreign tax rate on a particular item of income exceeds 250% of the U.S. tax rate on the same income, the excess foreign taxes paid are not eligible for the FTC. This ensures that taxpayers do not receive an excessive credit for foreign taxes paid.

For example, if your client earns income in a foreign country where the tax rate is 50%, and the U.S. tax rate on the same income is 20%, the high tax kickout provision would come into play. In this case, only 20% of the foreign taxes paid would be eligible for the FTC, and the excess 30% would not qualify."

It sounds like you can take the credit in the passive income category but anything excess will be kicked out to the general category, is that correct or will all passive income be shifted to general if it exceeds the threshold in an all or nothing manner?

I really just want to avoid being double-taxed, but right now if HTKO applies to all my passive income I will have paid the CRA a big tax bill and have no relief from the IRS to take the FTC on anything that they feel I owe taxes on.

thanks in advance!