I am a Canadian citizen and worked for Nortel for many years. They transferred me to the US. I have been in the US since 1999.
Last year, Nortel sold the division in which I worked to another company. They pensioned me off. The pension for my Canadian service was in two parts - a tax-protected amount, which went to a LIRA, and a cash amount.
The cash had 25% withholding tax applied by Canada. Now, I am advised to declare the cash amount on my US tax return as foreign earnings, pay the US tax and claim a tax credit on Form 1166 for the foreign tax paid. If I do this, then Form 1166 calculates a maximum amount of tax credit that can be claimed. This maximum is based on the relative sizes of my US earnings and foreign earnings. It is way less than the withholding tax levied in Canada.
Is there any way I can
- claim back the Canadian tax paid
- get a US tax credit for the full amount of Canadian tax paid
- find another way through this double taxation mess.
Thanks in advance - Henry
Lump sum pension in Canada, tax in US
Moderator: Mark T Serbinski CA CPA
Welcome to the world of Foreign tax credits.
Your situation is typical since, as you are finding out the foreign income is added to your account at your marginal rate, and your tax is credited only upto your 'effective' rate, with a whole chunk left to carry forward or backwards.
The maximum is not so much based on the relative sizes of the 2 incomes, but more that that your US income takes up the 'tax-free' portion of your income.
There is no way to get more credit this year.
You can only hope to somehow use up this credit by earning Cdn-source non-passive income that is very low taxed in the next 10 years. The only common ways that I know to do this is to earn Cdn contractor income, or less than 10K Cdn wages, or if not earning any other income, start drawing pension income and using 217 election to lower your Cdn tax below your US effective rate.
A more realistic tactic is to investigate whether all this foreign pension income is indeed taxable in US, since it is based on foreign service, and thus, until Oct 22, 2004 had a measure of tax exemption to the extent that YOU contributed to that pension.
If neither of these options pans out, you should look at taking the Cdn tax asa deduction, being careful not to trigger AMT.
But bottom line is that foreign tax credits are NOT designed to give dollar for dollar credit, unless the foreign taxrate is less than the effective US taxrate.
That is why I cringe whan some cross-border 'experts' merrily state "Oh don't worry about having to report the full ammount of Cdn income (like RRSP) in US, the foreign tax credit will get your Cdn tax back".
It doesn't work, as you are experiencing.
<i>nelsona non grata... and non pro</i>
Your situation is typical since, as you are finding out the foreign income is added to your account at your marginal rate, and your tax is credited only upto your 'effective' rate, with a whole chunk left to carry forward or backwards.
The maximum is not so much based on the relative sizes of the 2 incomes, but more that that your US income takes up the 'tax-free' portion of your income.
There is no way to get more credit this year.
You can only hope to somehow use up this credit by earning Cdn-source non-passive income that is very low taxed in the next 10 years. The only common ways that I know to do this is to earn Cdn contractor income, or less than 10K Cdn wages, or if not earning any other income, start drawing pension income and using 217 election to lower your Cdn tax below your US effective rate.
A more realistic tactic is to investigate whether all this foreign pension income is indeed taxable in US, since it is based on foreign service, and thus, until Oct 22, 2004 had a measure of tax exemption to the extent that YOU contributed to that pension.
If neither of these options pans out, you should look at taking the Cdn tax asa deduction, being careful not to trigger AMT.
But bottom line is that foreign tax credits are NOT designed to give dollar for dollar credit, unless the foreign taxrate is less than the effective US taxrate.
That is why I cringe whan some cross-border 'experts' merrily state "Oh don't worry about having to report the full ammount of Cdn income (like RRSP) in US, the foreign tax credit will get your Cdn tax back".
It doesn't work, as you are experiencing.
<i>nelsona non grata... and non pro</i>