US Citizen / Can Resident with US source income

[Diskdoctor]

I'm working on income taxes for my retired father-in-law who is a US citizen but Canadian resident.

In 2018 he cashed in a life insurance policy held in the US so he received a 1099-R which indicated the distribution amount and the taxable portion. I assume the taxable portion from the 1099-R is also the taxable portion in Canada so I've included that amount as income on his T1. The taxable portion for US taxes is clear from the 1099-R. In past years he has had only Canadian-source income (except for Social Security) so I have been able to use the Foreign Tax Credit to reduce his US income tax to zero. For 2018 I guess he will have to pay US income taxes on that US-source amount.

My questions:
1) Am I right that US citizen Canadian residents end up paying US income tax on US-source income or is there something I'm missing?
2) If he is claiming the distribution as income on T1 should he claim a foreign tax credit on his Canadian taxes for the US income tax paid?

Any insight is appreciated.

[Diskdoctor]

After some further research this might be simplest if the income can be resourced by treaty and included in a 1116. Is there a reference somewhere to what types of income are eligible to be resourced?

[nelsona]

Yes, they pay US taxes, at no higher rate than treaty allows.

[nelsona]

It cannot be resourced by treaty, because Canada accepts the US tax. It would be taxable to a Cdn living in Canada, so eligble for tax credit in Canada, not US.

[Diskdoctor]

Thanks for the help on that. 'guess I'll be learning how to do the foreign tax credit from the Canadian side.

[Diskdoctor]

What is your interpretation of this income? It's on a 1099-R so it's clear where it gets reported for US income tax. From my reading of the treaty this is not a pension. It is also not an annuity since it is a one time distribution and "not a periodic payment" (Article XIII-4a). Therefore the 15% tax limitation does not seem to apply.

[nelsona]

It is not periodic, so the full tax will be credited in Canada, thus no worry about limitation -- assuming hos effective US taxrate is >15%.
If Canada rejects this, then you simply amend your US return and claim the extra on a re-sourced 1116.

[nelsona]

It is a pension, it is just not periodic, same as taking out 1/2 your RRIF. It is taxed at 25% not 15%, because it isn't periodic.