Proving payment of US tax for Canadian credit

nelsona · Post by **nelsona** » Tue Jun 27, 2006 1:10 pm

As clearly indicated in the CRA guide, persons with US income must submit a copy of their 1040, and their W-2 if applicable.

The eligible taxes can be paid anytime: the important thing is that it is for 2005 income

I would point out that since you work and live in Canada, there is very little US tax that can be claimed, even if you do pay US tax. Very few income items are considered US-sourced, and the tax on those items will only be credited to the extent they would if you were NOT a US citizen.

So, when you say, "I am allowed to take a tax credit for taxes paid to the US", be careful that you are only claiming US taxes paid on US-source income (none of which would be from before you arrived in canada, since this would not be reported on your Cdn return), none of your cap gains or interest.

You will find that it is your US tax return that will be holding most if not all of the foreign tax credits.

andied · Post by **andied** » Fri Jul 21, 2006 7:00 pm

none of your cap gains or interest.

ISn't interest from a US financial institution considered US souce income.

nelsona · Post by **nelsona** » Sat Jul 22, 2006 6:53 am

The interest is considered US-sourced, but does not give rise to a tax credit in Canada

the tax credit that you would be alllowed would be 0%, since that is what you would owe US if you were not a US citizen.

So, CRA does not accept US interest as foreign sourced for the purposes of calculating the credit.

The remedy for this double taxation is on your 1040 by IRS allowing you to 're-source' your US interest as foreign to the extent that it reduces your US tax by the ammount of tax Canada charged on that interest

andied · Post by **andied** » Sat Jul 22, 2006 4:32 pm

The remedy for this double taxation is on your 1040 by IRS allowing you to 're-source' your US interest as foreign to the extent that it reduces your US tax by the ammount of tax Canada charged on that interest

Where on the 1040 is this interest re-sourced? Form 1116 has "Certain Income Re-sourced by Treaty" but this doesn't appear to be applicable to US bank interest. Perhaps interest is a special situation, as Pub 901 (US Tax Treaties) indicates bank interest for NRA's is exempt from US tax, although in the associated table, it indicates a 10% withholding for the US/Can treaty.

Does CRA allow the FTC on US dividends, pensions, royalties, cap gains, up to the treaty amount?

nelsona · Post by **nelsona** » Sun Jul 23, 2006 3:30 pm

Form 1116 has "Certain Income Re-sourced by Treaty" but this doesn't appear to be applicable to US bank interest

That is exactly what is it applicable to.

The treaty limits for these income applies to non-residents. and for dividends, pensions, and royalties, that would be the limit. But for interest and cap gains (other than on real property) IRS does not tax these, so CRA does not give credit.

Remember, the treaty merely LIMITS tax, it does not require the state to tax exactly at that rate.

andied · Post by **andied** » Sun Jul 23, 2006 5:08 pm

Thanks Nelson, always something to learn.

andied · Post by **andied** » Sun Jul 23, 2006 6:12 pm

When this interest income is resourced, should form 8833 {Treaty Based Position Disclosure) be filed, as well?

nelsona · Post by **nelsona** » Mon Jul 24, 2006 10:54 am

8833 is only absolutely needed in a very few instances, and not in this case.

However, attaching one would go a long way in explaining what your are doing and avoid any questions.

The article you would be availing yourself of is XXIV, Elimination of Double Taxation (you would be using several paragraphs, so simply cite the entire Article.