Coordination of Foreign Tax Credits, Canada and U.S.

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Bnell40
Posts: 14
Joined: Tue Sep 01, 2015 9:19 pm

Coordination of Foreign Tax Credits, Canada and U.S.

Post by Bnell40 »

Hi, I'm a resident of Canada and a U.S. citizen. During 2015 I received a lump sum payout from the U.S. of a deceased relative's IRA. The U.S. withheld 10% of the taxable amount, which was the entire amount in the IRA. I also started to take some non-periodic withdrawals from some private annuities I inherited. For the annuities, the U.S. withheld 10% of the taxable amount, which was all the amounts earned since the original deposits my relative had made. On my Canadian and provincial returns, my tax preparer reported all the taxable income that had been shown on all the 1099-R slips. As well, he included all the tax withheld as a Foreign Tax Credit.
Turning now to work on my U.S. return, I am thinking that the entire income from the U.S. would perhaps be eligible to be resourced by treaty, using a separate Form 1116. This produces a FTC that more than offsets the U.S. tax of that basket, and it appears that I would receive a full refund from the IRS of all the amounts withheld. This surprises me a great deal, as I thought that since this income was from the U.S., that surely they would keep a good portion of it. Am I missing something and misinterpreting the rules about resourcing by treaty? Is it true that one's residency is more significant than the source of that income, and I end up paying the taxes on that income to Canada rather than to the U.S.?
Then my second question area involves the Foreign Tax Credit which should have been claimed to Canada. I am understanding now that the FTC claimed on my Canadian return should not have been the amounts withheld, but rather the tax payable. (And so we will need to amend the Canada return.) And looking on the Forum I see that it is said that it is the tentative tax, i.e: the "tax otherwise payable" that one uses. (And one does not need to continue to iterate infinitely in computing the FTC between the two countries.) Does this mean that we would take the tax computed on 1040 Line 47, and insert that into Line 431 of the Canadian Form T2209? Or perhaps compute a proportion of 1040 Line 47 (in the same proportion as that income to my total income), and insert that into Line 431 of Form T2209? Or, should the FTC I claim to Canada be zero, since given the full refund I expect from the U.S., I effectively will pay zero taxes to the U.S.?
Thank you for your clarifications !
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