Multiple Tax returns

[Laura]

I can't seem to find someone on this board with my situation, so pardon me in advance if it has been discussed. I earned US income from Jan 2006 until Apr. 2006 and lived in the US. I returned to Canada in mid April 2006 and took a job in Canada. I received a lump-sum pension distribution from my former US employer in July 2006. Is it possible to file a 1040 for the time I was in the US up to April and then a 1040NR for afterwards to declare the pension income? Tax was withheld on it initially. And, file a Cdn return for the period of April onwards, declaring the US pension income and the Cdn income? Or, is there another route that I may pursue?

[nelsona]

Since you left US in 2006, you have a choice as to file a dual-status return in US, or a full-year 1040. You chose based on the US tax you would pay.

If you file dual, you report world income upto April and US income after that. The tax will be calculated on the 1040NR. you would not get the standard deduction.

If you file full-year, you report ALL income from all sources, but are allowed to exclude your Cdn wages with form 2555, once you meet the PPT.

I would think that filing full-year is your best bet, since the deductions are usually better, and your Cdn income won't come into play. Don't forgaet that your pension lump-sum will have 10% penalty tax as well as normal US income tax.
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In canada, you are a 'newcomer' with an arribval date on page 1, which will pro-rate your credits. You will report all income earned after that return date. Unfortunately your pension payout is fully taxable in canada. You will get credit for the US income tax you pay on the pension, but not the penalty tax.

It would have been preferable to take the pension money BEFORE returning to canada.

[Laura]

Thanks for your reply. So, I could file a 1040 for the full year and exclude the Cdn wages with the 2555? Is it correct that the 2555 is only for US residents and therefore a 1040NR couldn't be filed? I just wondered if the 1042-S pension distribution which is for aliens might mean I ought to file a 1040NR.

[nelsona]

The broker was correct to issue you a form for non-resident, because you were out of the country and not a US citizen. However, as departing resident, you are entitled to file full-year, and as a Cdn you are ALWAYS entitked to file a full-year 1040 if you wish, even if you never set foot in US.

2555 is for 1040-filers.

[Laura]

One more clarification: If I returned to Canada on April 11, 2006, I will be able to file the 2555 to exclude the Cdn income now? Or do I need to file an extension? I was unsure if the PPT covered a consecutive 330 day period within 2006 and 2007 years.

[nelsona]

PPT is met when you meet the 330 out of any 365 period. The 330 days don't need to be consecutive.

You should meet this any day now, no?

[Laura]

If we mean a full calendar year, then only prior to June 2004, before I moved to the US. If the 365 day period can be from April 2006 until April 2007, then yes. If I tried to satisfy the PPT only within 2006 and not include 2007 months, then I'd say no. So, if they don't care about a full year being from January to December, then I would be fine. Since I returned in April 2006, then I would fullfill the PPT by the first week of March 2007. I just don't want to file the 2552 and then have to pay Cdn tax and I could have filed a 1040NR and excluded it.

[nelsona]

Rules for PPT are pretty clear, any period of 365 days in which you were in Canada for 330 counts. You meet the test on the 330th day. You can't count days outside Canada

Now, if that occurs over the span of 2 caladar years, one prorates the max exemption: in your case roughly 3/4ths of the max for 2006.

[Laura]

I just noticed that the instructions for the 2555 (foreign income exclusion) form state that you can only file this if you don't have moving expenses. I am unclear about this. The 1040 permits a deduction of moving expenses. Does this mean that I cannot claim this deduction from the 1040 if I am filing the 2555?

[nelsona]

Look at it the other way: If you claim moving expenses TO the foreign country, and then exclude the wages earned in that foreign country, you cannot then claim those moving expenses as a deduction. If you could not exclude all your wages, then your moving expenses could be partially deducted.

The restriction you speak about is for 2555-EZ. 2555-EZ rules don't allow ANY moving expenses to be claimed, because it can't be used if you can't exclude all your foreign wages. In any event, don't use 2555-EZ.

So, you can't claim moving expenses because you excludedd the wages, not the other way round.

[Badger]

To follow up on this as it relates to the Form 2555 and Part VIII - in addition to excluding the moving expense back to Canada (eg reducing the FTC available) does one also need to exclude on Form 2555 mortgage interest and property taxes for a canadian property where mortgage interest and property taxes were previously claimed as they related to the Canadian income or does this just flow through to the 1116 in the deduction and losses section when one completes this for any amounts not captured by Form 2555?

When doing multiple 1116's for passive income and general limitation income do these expenses need to be captured on each 1116 or just one of the 1116s?

Also would US earned investment income for which no US tax is withheld but tax is paid in Canada still be considered Passive Income or is there another category for this (eg TurboTax stresses "earned in Canada" when in fact it is earned in the US but the tax for it is paid in Canada)

Thanks

[nelsona]

Mortgage and property tax are not related to your Cdn WAGES, so have nothing to do with 2555.

1116 calculations require you to reduce the foreign income first by any dedcutions that are directly related to the incoem, and then by a proportion of whatever is left.

When claiming ftc on different types of income, the expenses would be reported on the form which reported the income in was claimed against. If your passive income had connected expenses, report these ther. If your gen limit income had expenses, include them there. If your deductions are not related to the income, then it will be proportioned to each category.

Any US tax you owe on US-sourced investments will be claimed on your Cdn tax return, asa foreign tax credit on it. If Canada taxes you more than your US tax, that is it. If you owe nothing in US, then you don't get or neeed any credit for it in US either. You *could* get a deduction, but only if you were not using 1116 at all, which is not your case.

The only time you would re-source US income for 1116 purposes, is if Canada did not give you full credit for the US tax you paid on a certain class of income. This is not your case, as Canada will give you credit on any US tax you pay on this income.