Claim all Canadian income tax as FTC?

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Diskdoctor
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Claim all Canadian income tax as FTC?

Post by Diskdoctor » Sun May 29, 2016 12:27 am

Can all income tax paid in Canada be claimed as a Foreign Tax Credit in form 1116? Searching this forum I've seen some vague references to this but no clear information.

My question relates specifically to income of a US citizen resident in Canada that is not taxable in the U.S. - i.e. OAS, CPP and SS. Do I reduce the foreign taxes paid amount in part II of form 1116 by the amount of Canadian tax that would be attributable to OAS/CPP/SS?

I am helping my father-in-law file U.S. taxes for 2015. The accounting firm that did his taxes previously simply claimed the full amount of Canadian taxes paid.

nelsona
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Post by nelsona » Sun May 29, 2016 4:28 am

You should only claim the taxes realted to the income that he reports on his 1040. If he does not report the SS/OAS/CPP, then he should not claim the tax on 1116.

It shouldn't make a difference since he does not pay any US tax.
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nelsona
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Post by nelsona » Sun May 29, 2016 4:29 am

.. on any income he earns in Canada. At most he will oay US tax on any US pension he might have.
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Diskdoctor
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Post by Diskdoctor » Sun May 29, 2016 10:50 am

Thanks for the info!

That's what makes sense to me but I was confused by what the accounting firm had done and looking through the instructions I only found references to categories of income not whether any specific income was taxable in the US.

He will be OK for this year (not owing US taxes) due to his carryover amounts but he takes advantage of pension splitting in Canada and I realize we should have done that differently in order to maximize the FTC. I wonder if it's worth refiling their Canadian taxes at this point?

nelsona
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Post by nelsona » Sun May 29, 2016 2:03 pm

The difference is if he REPORTED the CPP/OAS on line 20(a).

Income that is reported (even if it is not taxed) can still have the CDn tax put on 1116. It simply may not give any tax credit back. This would be useful if he had other Cdn-sourced income, and would be building up his foreign tax carry forward.

This is much like RRSP money that is reported (on 16(a), but almost all of it is not taxed (on 16(b). All the CDn tax can be put on 1116 for future use.
Note this does NOT apply to foreign earned income that is excluded using 2555. Cdn tax cannot be accounted for for these funds on 1116.

If, on the other hand, the firm chose to simply IGNORE CPP/OAS for 1040 purposes, then the Cdn tax should noy be included on a 1116 for that year or carried forward.

The key is reporting the income on 20(a).
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Diskdoctor
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Post by Diskdoctor » Sun May 29, 2016 8:05 pm

OK. CPP/OAS were reported in the past (on line 16a) and I plan to continue reporting them.

I'm not sure what you mean by "It simply may not give any tax credit back." Can that credit only be applied against CPP/OAS income in the future (for instance if the taxpayer moved back to the US), or can it be applied against any general category income? Or do you mean the credit just can't produce a tax refund situation?

nelsona
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Post by nelsona » Sun May 29, 2016 9:54 pm

any general category income, whether he moves back or not.

I may not give any credit back IN THAT YEAR
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Diskdoctor
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Post by Diskdoctor » Mon May 30, 2016 2:19 pm

Thanks for the clarification nelsona!

Diskdoctor
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Post by Diskdoctor » Fri Jun 03, 2016 11:05 am

nelsona,

I understand from your explanation that the Canadian tax due to CPP/OAS/SS can produce a FTC but it can't be applied against the current year's tax. Is it possible to do this in a year where the entire FTC is needed to offset US taxes?

Would this be the process:
- Full amount of the FTC for current year (including amt due to CPP/OAS/SS) goes on f1116 line 9.
- In the carryback/carryover detailed calculation the utilized tax for current year is set to the amount not due to CPP/OAS/SS leaving a carryover for the current year. Previous carryover from the oldest eligible year is utilized to offset the difference.

If this is correct would an explanation as to why the full credit amount from the current year is not being utilized be necessary?

Any insight is greatly appreciated.

nelsona
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Post by nelsona » Fri Jun 03, 2016 6:14 pm

You might be confused about how 1116 works.

You report the gross income (which in this cases means the income which contributes to the adjusted gross income on 1040 not the gross CPP/OAS/SS).

So, if there is no other Cdn general limit income, you report ZERO on 1a, and you report the CDn tax related to general income on Part II line 8. That is all.

and if you input previous years incorrectly in your software, will any further calcs be dome, otherwise, the entire portion of line 8 will be carried forward.

Most people never use the carryover, since you must first use the current year. It just gets tabulated for maybe future use.

If the person moves to US and has Cdn source income that is not taxed or very low taxed in Canada, then the carryforward will be available.

Your software takes care of it.
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Diskdoctor
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Post by Diskdoctor » Sat Jun 04, 2016 10:48 am

I'm sure you're right about me having some confusion :)

I think I follow what you're saying. My question has to do with a situation where in the current tax year the taxpayer has enough other Canadian sourced income (RRIFs) that they need to use the full credit amount in the current year.

The taxpayer enters:
1) adjusted gross income amount (from 1040 line 37) from Canadian sources on 1a - this does not include CPP/OAS/SS so it's just the income from the RRIFS.

2) Canadian taxes due to general category income - this does include taxes attributable to CPP/OAS/SS.

Now I run into the problem. The taxpayer used pension splitting on their Canadian taxes so the current year's Canadian taxes are less than the U.S. taxes so they need more than the full amount from 1116 line 8.

The automatic calculation takes from the current year's Canadian tax credit first and then from previous carryovers to make the total credit equal to the US taxes. This means that the full amount from 1116 line 8 (including taxes attributable to CPP/OAS/SS) gets applied to this year's taxes. I understood from your explanation that this is problematic.

Diskdoctor
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Post by Diskdoctor » Sat Jun 04, 2016 10:52 am

sorry, the amount from 2) is entered on 1116 line 8

nelsona
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Post by nelsona » Sat Jun 04, 2016 12:56 pm

We were not talking about pension splitting. Pension splitting does not work well for couples where one is a USC and the other not, since they are not reporting joint income -- especially if the USC is the one earning the pension, since they report ALL pension, but can only report the tax THEY actually owed.

I'm not going to go through every possible scenario on this topic, which is building up FTC credits for when one is later in US, by reporting CCP/OAS on 20(a) every year they live in Canada.
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nelsona
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Post by nelsona » Sat Jun 04, 2016 1:00 pm

Using all the tax is NOT problematic, It is what you want to do.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

Diskdoctor
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Post by Diskdoctor » Sat Jun 04, 2016 1:16 pm

Thanks. I appreciate your responses.

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