Where to enter Canadian income on Form 1040?

[borderguy]

At this late date, I'm trying to submit tax forms myself rather than go through a pro, tho I realize I could file for an extension.

I understand from this board that CPP can be treated just like US Social Security and entered on lines 20a and 20b of Form 1040. Just like to confirm an understanding here tho: Can I take the Canadian statement, convert to US currency using the annual average rate of 1.1341 for 2006 and report that amount on line 20a (Social Security Bennefits). Then on line 20b (Taxable amount), I report 85% of line 20a. Correct?

Secondly, I also get a very modest defined benefit pension from Canadian government, called superannuation. I'm not sure where I report that, but it looks like it could go into either line 16a (Pensions and annuities) or line 21 (Other income). I was planning to convert the statement to US bucks again using the annual average monthly exchange rate of 1.1341 and then report that number on line 16a. Correct?

Thirdly, the hard part: There was 15% withholding by Canada on the superannuation. I gather from this board that I can try to recoup by either claiming it as a deduction if I itemize using Schedule A, OR, try to get a foreign tax credit using Form 1116. To use the foreign tax credit, would the superannuation be considered "general limitation" income and I can use it to offset any potential US tax on the CPP revenue (which was not subject to any Canadian withholding tax). Is it common practice to calculate it both as a credit and an expense and go the route that yields the best result (because it is never possible to claim withholding as both an itemizable expense AND a foreign tax credit)?

And finally, this is the first year I've considered using Itemization vs. standard deduction for married, filing jointly. Looks like it pays to itemize if the sum of itemized expenses (mtg interest + property tax + foreign tax payments) exceeds the standard 2006 married deduction of $10,300. Correct?

Wow. If I can get answers to these questions, I can actually get this thing out the door. Any assistance appreciated.

[nelsona]

Believe it or not, the answer to every single question your asked is "yes".

The fact that your CPP was not taxed in canada (by treaty) does not alter that it is Cdn-sourced. It can and should be lumped with any other Cdn 'general limitation' income.

This will no doubt have the effect of using up all of your Cdn tax, which is the ideal situation.

[borderguy]

Thanks for a reply on the detailed mechanical question. I appreciate it.

This return came out pretty ugly in terms of paying tax to both countries. I ended up taking the expense deduction, rather than a tax credit. As you know, that only gets me a percentage offset rather than the dollar-for-dollar offset that comes with a tax credit.

The tax planning issue going forward is to invest in foreign securities that generate more of an offset for the withholding I get on the superannuation ESPECIALLY when I start making withdrawals from RRSPs.

On another matter entirely, I think I'm going to get smacked with a penalty for not ponying up an installment payment on a long-term capital gain I took in 2006. I thought I would just pay a 15% capital gains tax at the end of the year, but it appears, (and I hope I'm wrong) that if I owed tax that exceeds a modest amt by year-end, I'll have to pay a penalty.

[nelsona]

Your investment income idea (passive) not help in using up RRSP NR tax (gen limit) since it will not be coming from the same category of income (Keats is wrong on this one). And, only interest and dividends are considered foreign source in any event. You could consider rental income.


The IRS is compressing the categories next year, which may help you, but passive will stay passive. Review the categories when further guidance is published. This may help you decide on what sort of income you should generate.


And yes, if you owe more than a certain ammount of tax at year-end you are penalized back to the time that you should have made the installment.

[borderguy]

>>>(Keats is wrong on this one)<<<

Har Har! How did you know? :wink: There was an article in the Chicago Tribune last week bemoaning the 67,000 page tax code that nobody can ever master. It went on to say that 5 different CPAs came up with 5 different ways to treat a certain not uncommon situation that the Trib presented.

It made me wonder, after reading your post, Nelson, whether all of Keats clients get away with doing things the "wrong" way. Kind of confirms the view that you push the boundaries in this game till you get challenged....then you negotiate. Seems like a bizarro world, but I believe aggressive tax planning outfits probably consciously pursue that strategy.

>>>The IRS is compressing the categories next year, which may help you,<<<
Wow! a tax change that could actually help!! That would be an unexpected first! Nevertheless, I had not known about the plan to compress categories. Can you imagine the IRS doing this if it meant lost revenue?

Rental income as offset. Omigod. The hoops we have to jump through (tho I had a friend who bought some unseen cattle in TX for a tax break a few years ago). I was a landlord once. I tell people I started out as a landlord and ended up as a zookeeper. An unforgetable experience.

[nelsona]

Keats strategy of declaring RRSP income as "passive" for foreign tax purposes, relies on having NEVER used any treaty exemptions, thus paying yearly tax on int/div/capgains.

This is fine.

Trouble is, most now use the treaty, since it has become very easy with Form 8891. But once you use this, any income produced by the RRSP (upon withdrawal) is PENSION income, not passive investmnet income.

Remeber that keats is a proponent of immediate collapse of RRSPs once one leaves Canada. In such case there is no need for the treaty election, and your income is passive.

Even rental income is passive. for 12116 purposes, unless you have a rental business.