Foreign Tax Credits

nelsona · Post by **nelsona** » Wed Apr 20, 2011 9:37 am

Unfortunately, the Canada-US treaty doesn't help you, because, by treaty Article IV(5), you are considered deemed resident of canada, because you work for canada. Its a notwitstanding clause. In fact, by this clause, you could file a 1040NR and report only US-sourced income, which would basically be US-dividends and real estate income.

So, the deemed resident rules established by CRA, are not challenged by any wording in the treaty.

That is why there is a distinction made by CRA between those who were previously non-resident and those who were previously resident (like you), and why non-residnts still need a special waiver to avoid Cdn tax: if either the Income tax act or the treaty made them not taxable in canada, they would not need a waiver.

tgraham628 · Post by **tgraham628** » Wed Apr 20, 2011 11:33 am

It looks like I am running out of options and the "leaving well enough alone" approach seems to be the best strategy. If that fails, is there anything I can do to address my situation? Can the Competent Authority Services provided assistance in this case?

nelsona · Post by **nelsona** » Wed Apr 20, 2011 12:31 pm

I don't see what your concern is.

You are an employee of the Cdn government, having left canada to perform this function, and so by CRA and by treaty you are deemed resident.

So, you are allowed to file as US non-resident (1040NR) and only report your US-sourced income. The fact that you choose to do otherwise (either by your own choice or by virtue of the fact that you are married and wish to file jointly with your spouse) is just that -- your choice if it benefits you.

Your only beef is with California, which by their rules claims you as a resident, and since they are not party to the treaty, there is no competent authority. Besides, CRA lets you take credit for Cali tax paid, so this lowers your Cdn tax.

So, how are you harmed? Am I missing something?

If you wished to be declared non-resident (i do not know how), you would put yourself in the same position as those others you mention, paying Cdn fed tax, fed surtax and cali, with no relief.

tgraham628 · Post by **tgraham628** » Wed Apr 20, 2011 1:32 pm

There is really no concern, IF the CRA lets me take credit for the taxes paid to Cali, but like you said, I am probably not entitled to it because the income is Canada-sourced. If they continue to allow me to take the credit, great. If they don't, then I'm paying Canada fed tax, plus fed surtax, plus Cali tax, which is not great. Would I prefer to get a waiver from paying tax to Canada and only have to pay state tax? Yes, but I will leave well enough alone and not jeopardize my tax credit by asking for a waiver.

I guess what I am trying to determine is what options will I have if the CRA doesn't allow the tax credit, and from what I understand (and thank you for your help), I probably don't have any.

nelsona · Post by **nelsona** » Wed Apr 20, 2011 2:45 pm

California is allowed to tax its residents, the way it sees fit.

You will not be granted a waiver by CRA.

The ones who should be going for a waiver are non-residents hired on after leaving canada. They have nothing to lose, as they are being over-taxed right now.

I think that's about the size of it.

tgraham628 · Post by **tgraham628** » Wed Apr 20, 2011 4:12 pm

I think you have sized it up correctly. One last question... You mentioned I'm allowed to file a 1040NR and report US-sourced income including US-dividends and real estate income. I have done this in the past, but was told it was possible and beneficial from a US tax liability perspective to file a 1040 jointly. Aside from figuring out what my state tax liability is so that I can include a foreign tax credit on my Canadian return, are there other considerations to not filing a 1040NR?

nelsona · Post by **nelsona** » Wed Apr 20, 2011 5:10 pm

The benefit of filing 1040 would be for your spouse, as they would benefit from joint filing rates as well as standard deduction etc.

None of the extra US tax -- if any -- that you might incur on a 1040 would be creditable in canada of course, but this would no doubt lower your spouses tax, otherwise she is filing married filing separately.