Canada FTC - allocation of tax paid

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

Post Reply
skobes
Posts: 21
Joined: Sat Mar 25, 2017 10:41 pm

Canada FTC - allocation of tax paid

Post by skobes » Sat Mar 09, 2019 7:45 pm

US citizen, moved to Canada, claiming FTC on CA return for US tax on US-source CA-taxable earned income (stock vesting from pre-move grants).

I understand that for T2209 line 431 foreign tax paid I report US tax allocable to the line 433 income at an effective rate.

Do I need to compute this effective rate based on total US tax, or can I use the effective rate of tax assessed on the portion of income that excludes favorably-taxed gains (line 24 of the Qualified Dividends and Capital Gains Worksheet)? The latter permits a substantially higher FTC.

Am I correct that social security, medicare (incl. 8959), and state tax would be allocated independently to that income (and then summed for line 431)?

nelsona
Posts: 15980
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Canada FTC - allocation of tax paid

Post by nelsona » Sun Mar 10, 2019 11:20 am

On the Cdn return, for the purposes of foreign INCOME, you report the net income that was reported on your Cdn tax return that is US-sourced. That is pretty straightforward.

The US tax that you report on the on the Cdn return is the fed and state tax that can be attributed to that income using effective taxrate. I am OK if you wish to exclude the income and tax related directly to qualified dividends and cap gains. I would think the 8959 tax would already be included in your fed tax at this point, since your 1040 would be complete except for any 1116 (which is when you determine FTC in any case). SS and Medicare would only be used if it was deducted from your stock-vesting income, otherwise it has nothing to do with Canada unless you are including US wages.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

skobes
Posts: 21
Joined: Sat Mar 25, 2017 10:41 pm

Re: Canada FTC - allocation of tax paid

Post by skobes » Sun Mar 10, 2019 12:02 pm

Makes sense. All the US-source earned income is subject to SS/medicare withholding. 8959 is included in 1040 line 15 total tax but my proposal is to account separately for medicare and SS with proportional allocations for each type of tax, thus:

Fed tax rate = (QDCG wks line 24) / (AGI minus QDCG wks line 4)
SS tax rate = (W2 line 4) / (all US-source earned income)
Medicare tax rate = (W2 line 6, which includes 8959) / (all US-source earned income)

Total tax paid for T2209 line 431 = (fed tax rate + SS tax rate + med tax rate) * (the US-source earned income taxable to Canada)

skobes
Posts: 21
Joined: Sat Mar 25, 2017 10:41 pm

Re: Canada FTC - allocation of tax paid

Post by skobes » Sun Mar 10, 2019 12:03 pm

... plus California :)

nelsona
Posts: 15980
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Canada FTC - allocation of tax paid

Post by nelsona » Sun Mar 10, 2019 12:06 pm

The 8959 tax should be included in fed tax. If you had other US income that was taxable in Canada your proposed method would be incorrect. It is not tied to wages
I assume this income is more than 10k Us
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

skobes
Posts: 21
Joined: Sat Mar 25, 2017 10:41 pm

Re: Canada FTC - allocation of tax paid

Post by skobes » Sun Mar 10, 2019 12:08 pm

So would you subtract it out from the W2 medicare withholding and have a separate allocation of only the 1.45% base?

skobes
Posts: 21
Joined: Sat Mar 25, 2017 10:41 pm

Re: Canada FTC - allocation of tax paid

Post by skobes » Sun Mar 10, 2019 12:20 pm

The regular US federal tax is assessed on both US and CA source wages, but SS and medicare (base + 8959) are only on US source wages. I'm not sure it makes sense to treat SS/medicare amounts as if they were paid evenly over all wages.

nelsona
Posts: 15980
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Canada FTC - allocation of tax paid

Post by nelsona » Sun Mar 10, 2019 12:43 pm

Sorry, I was not aware that this particular form included only wages. Why are you filing this? We’re you withheld incorrectly?
I thought you were referring to the Obamacare tax, which is based on income. My mistake.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

skobes
Posts: 21
Joined: Sat Mar 25, 2017 10:41 pm

Re: Canada FTC - allocation of tax paid

Post by skobes » Sun Mar 10, 2019 12:54 pm

8959 is filed even if the withholding is correct. The tax is added to 1040 line 15 total tax and the withholding (usually the same) is included in line 16 along with the regular W2 withholding.

There is also 8960 which is the NIIT. This is only on investment income and not wages. I believe both of these were added for Obamacare.

nelsona
Posts: 15980
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Canada FTC - allocation of tax paid

Post by nelsona » Sun Mar 10, 2019 6:22 pm

8959 is only filed if the withholding was incorrect, if, say, you had 2 jobs, or if you had one wage and self-employment income, that totaled more than the threshold. But if you had one payor, they would have withheld correctly, and no form is needed.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

skobes
Posts: 21
Joined: Sat Mar 25, 2017 10:41 pm

Re: Canada FTC - allocation of tax paid

Post by skobes » Sun Mar 10, 2019 8:18 pm

That's not what the instructions say.

"You must file Form 8959 if one or more of the following applies to you.
• Your Medicare wages and tips on any single Form W-2 (box 5) are greater than $200,000
• ..."

nelsona
Posts: 15980
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Canada FTC - allocation of tax paid

Post by nelsona » Sun Mar 10, 2019 9:26 pm

"Your employer must withhold Additional Medicare Tax on wages it pays to you in excess of $200,000 for the calendar year, regardless of your filing status and regardless of wages or compensation paid by another employer."
So, as I asked, did your employer not withhold the correct amount of Medicare tax? They should have, since this was your only wage income. Even if you have to file the form, it should be zero, no?
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

skobes
Posts: 21
Joined: Sat Mar 25, 2017 10:41 pm

Re: Canada FTC - allocation of tax paid

Post by skobes » Sun Mar 10, 2019 9:43 pm

The withholding is correct. Form 8959 is not 0, it computes the tax and withholding separately and adds them to 1040 lines 15 and 16 as I previously explained. The final result (refund / balance due) is the same as if 8959 were not filed, but the line 15 total tax is different.

Post Reply