Foreign Tax Credit

Badger · Post by **Badger** » Wed Mar 14, 2007 1:59 pm

I returned to Canada in June from the US. I am trying to determine what my foreign tax credit will be for our Canadian Return based on investment income that I had in the US for the period since I have been back in Canada (eg dividend, interest income). The amount is approx 10k Cdn so I assume it is worthwhile trying to sort through this.

I did not have any source deductions on these monies in the US but will file a 1040 MFJ and then a 2555 so this will get captured in the US.

I have tried to read through some of the IT bulletins but am getting bogged down as this seems especially technical. I suspect that I might need to do my US return and then try to prorate? I would appreciate any thoughts.

nelsona · Post by **nelsona** » Wed Mar 14, 2007 2:16 pm

The treaty specifies that tax US-sourced interest and dividends will only be credited at the rate that someone who was not filing a 1040 would pay: 10% for interest and 15% for dividends.

Any double taxation relief would have to come on your US tax return by the re-sourcing rules of articl XXIV.

Badger · Post by **Badger** » Wed Mar 14, 2007 3:09 pm

Nelson thanks for yet another insightful response. I few follow up questions.

The Canadian return seems fairly straight forward then as I assume that I merely apply these percentages to the different investment categories and plug the total in as my federal foreign tax credit?

Secondly, given that my spouse has no employment income in 2006 in either the US or Canada does it make sense to split this investment income with her in Canada or should I take it all (including the credit for her prorated basic personal amount)? What if any implications are there on my US return splitting this or is it just a question of submitting another Form 1116 for her?

Thanks

nelsona · Post by **nelsona** » Wed Mar 14, 2007 3:22 pm

I'm not sure what you mean by the option "should I take it all (including the credit for her prorated basic personal amount)".

In any case, CRA expects the person who contributed the money to report the interest.

Also, when filinga joint return in US, any foreign income is reported jointly, there would be one 1116 for thesame passive income regardless of how it was reported in canada. The foreign tax might be different, since reporting it in her name in canada would generate no Cdn tax, thus no foreign tax credit on either side of the border. If you take it all, you will pay tax in canada, less the foreign tax credit, and then *maybe* get some credit in US by complex XXIV.

But start with the premise that the contributor pays the tax in canada.

Badger · Post by **Badger** » Sat Mar 17, 2007 12:42 pm

How do I overcome the fact that CRA requires "proof" of payment when I dont have any deductions at source and wont be filing my US return until the expiration of the 330 day period (eg some time in June)?

Do I merely provide them with a copy of what I intend to file postdated?

Thanks

Carson · Post by **Carson** » Sat Mar 17, 2007 3:57 pm

Correct

maricami · Post by **maricami** » Wed Mar 21, 2007 6:13 am

[quote="Badger"]..... and wont be filing my US return until the expiration of the 330 day period (eg some time in June)? [/quote]

About the 330 days period ending in June (I am in the same situation), is there a need to file for an extention because this is passed the normal date ?

nelsona · Post by **nelsona** » Wed Mar 21, 2007 8:50 am

Whether you need to file extension depends on whether you owe tax or not (this applies to all extensions). If you determine that you will owe tax, you are supposed to file an extension and pay what you estimate you will owe.

If you determine that you will not owe any taxes, then you do not need to file extension, since you cannot be penalized for NOT owing taxes. You automatically have until August to file.