Dual tax return filers: Which tax return to file first, and which tax return to claim foreign tax credits?

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Bumble
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Joined: Tue Apr 23, 2019 1:07 am

Dual tax return filers: Which tax return to file first, and which tax return to claim foreign tax credits?

Post by Bumble » Mon May 20, 2019 10:18 pm

I'm a U.S. person who is moving to Canada with my wife this summer. Following our move, we expect to have both U.S.-source income and Canada-source income. A question arises regarding how we should sequence our tax return filings and claims for foreign tax credit (FTC) following our move. We've spoken with a few tax accountants and were given different advices:

(1) One cross-border tax accountant told us that we should coordinate the tax return filings such that we would (1) pay U.S. tax for U.S.-source income in our U.S. tax return then claim FTC in our Canadian tax returns, and (2) pay Canadian tax for Canada-source income in our Canadian tax return then claim FTC in our U.S. tax return.

(2) One cross-border tax accountant told us that since we'll have closer ties to Canada, we must pay Canadian tax for both U.S. and Canada-source income in our Canadian tax return then claim all FTCs in our U.S. tax return.

(3) One tax accountant suggests that, since we'll have more U.S.-source income (e.g., from rental income and higher-interest bank accounts, etc.), we should pay U.S. tax for both U.S. and Canada-source income in our U.S. tax return then claim all FTCs in our Canadian tax return.

(4) One view I'm getting from reading a book is that it doesn't matter, but we should pay taxes and claim FTCs for any income based on whichever gives us a better financial advantage.

Which one of the above is correct?

nelsona
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Re: Dual tax return filers: Which tax return to file first, and which tax return to claim foreign tax credits?

Post by nelsona » Mon May 20, 2019 10:39 pm

None are correct as your describe them, although (1) is closest. (2) and (3) are completely out to lunch. (4) is wrong. There are rules for sourcing.

The correct process is to prepare BOTH returns simultaneously, reporting ALL income on both returns, but WITHOUT FTC's. Then as (1) says, you will claim US tax as an FTC on the US income reported on your Cdn return, and FTC on CDn tax on CDn income reported on your US return. For this year of course there will be nothing to report in Canada from before your move, but in future years, both returns will report the same world income.

There will be one major exception, and that is tax that you pay on your US return that you would not otherwise pay but for the fact that you are a US citizen, such as tax on bank interest, cap gains, and some others. There is a process for this that you need not concern your self with at this point.

Tax on US rentals will lead to an FTC on your Cdn return.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

Bumble
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Joined: Tue Apr 23, 2019 1:07 am

Re: Dual tax return filers: Which tax return to file first, and which tax return to claim foreign tax credits?

Post by Bumble » Mon May 20, 2019 11:13 pm

Thanks @nelsona for your quick response.

I think the tax accountant that gave advice (1) was suggesting what you wrote, but I didn't relay it as accurately as you did.

Regarding the one major exception you noted, I promise I won't get into the details regarding the process, but do you mind elaborating a little please? I believe we have to report/pay taxes on any bank interest income and capital gains (U.S.-source or Canada-source) on our U.S. and Canadian tax returns. These will probably be some of our primary sources of income following our retirement down the road. What's so special about them that we need to know?

Thanks much again!

nelsona
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Re: Dual tax return filers: Which tax return to file first, and which tax return to claim foreign tax credits?

Post by nelsona » Tue May 21, 2019 12:53 am

As I said, any US tax that you pay solely because you are a US citizen, will not be credited on your Cdn return. You will need to claim these on your US return, by re-sourcing the income. Non real-estate cap gains are sourced as Cdn in any event, and US bank interest is not taxable in US to non-US Citizens living in Canada.
google "re-sourced" on this site for more info if needed at this time.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

Bumble
Posts: 14
Joined: Tue Apr 23, 2019 1:07 am

Re: Dual tax return filers: Which tax return to file first, and which tax return to claim foreign tax credits?

Post by Bumble » Tue May 21, 2019 1:46 am

nelsona wrote:
> As I said, any US tax that you pay solely because you are a US citizen,
> will not be credited on your Cdn return. You will need to claim these on
> your US return, by re-sourcing the income. Non real-estate cap gains are
> sourced as Cdn in any event, and US bank interest is not taxable in US to
> non-US Citizens living in Canada.
> google "re-sourced" on this site for more info if needed at this
> time.

Thanks, @nelsona. Very helpful!

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