Form 1116 and Canadian Tax Refund

jgoveas · Post by **jgoveas** » Sun Mar 15, 2009 6:35 pm

Hi Nelsona,

I've been reading the instructions of the 1116 form. Under Foreign Taxes Not Eligible for a Credit it states:
Taxes paid to a foreign country that you do not legally owe, including amounts eligible for refund by the foreign country.

Does this mean we would have to first file Canadian taxes and see what amount we get back and then reduce our taxes paid amount on the 1116 by that amount? It seems weird if that's true because the return we get from Canada would be spread over all our income and not broke up by dividends/wages/trust/capital etc like the 1116 is.

It does say that if we get refunds back we would have to file and amended 1116 which gives the same problem with spreading out the refund over all categories.

The other thing is, we're filing our departing Canadian return this year. However, there's a distinct possibility that we will return to canada this year (nothing is in stone yet) which runs the risk of Canada telling us to pay for US taxes upon our return. If that's the case, then we would have understated the taxes we paid to Canada on this 1116. It seems like a chicken and egg situation to me. Or am I over thinking again?

Thanks!

(Just a reminder, we moved to the US from Canada on June 24th and have elected to file as full year residents and declaring all world income on the 1040).

nelsona · Post by **nelsona** » Mon Mar 16, 2009 9:23 am

You need to PREPARE both returns together before figuring your credits.

Then, if after you submit your return, you get assesed MORE or LESS than you expected, you go back and amend your 1116.

Your departure return will be straighforward.

jgoveas · Post by **jgoveas** » Mon Mar 16, 2009 11:18 am

Hi Nelsona,

But again, the returns you get from Canada are not broken down by category. So when you fill out the 1116, how do you know which category (passive income, wages etc) you should reduce your credit by?

Thanks!

jgoveas · Post by **jgoveas** » Mon Mar 16, 2009 12:15 pm

Also, is it true that you cannot file your departure return in Canada jointly if you are married?

nelsona · Post by **nelsona** » Mon Mar 16, 2009 12:53 pm

There is no such thing as a joint return in Canada.

You prorate the categories with the tax. If you $200 of income on your Cdn return of which you are reporting $90 of general income and $10 of passive on your US return, then 45% of your overall tax can be used on the general 1116, 5% for the passive 1116.

jgoveas · Post by **jgoveas** » Mon Mar 16, 2009 5:54 pm

Hi Nelsona,

I completed my ufile departure tax for the Canadian side and both my husband and I are receiving refunds (about 1500 each). Does this mean I can't actually claim any tax credits on world wide income on form 1116 if I use the 1040 to report world income?

Thanks!

And if that's the case should I use form 2555 to exclude the wages (but not investments etc).

nelsona · Post by **nelsona** » Mon Mar 16, 2009 7:26 pm

Your tax crdit is on your TAX. Your refund is simply lowering your TAX. You still paid TAX.

jgoveas · Post by **jgoveas** » Mon Mar 16, 2009 7:27 pm

Gotcha! So I take my refund, subtract it from the total taxes and then prorate according to tax type for 1116?

jgoveas · Post by **jgoveas** » Fri Mar 20, 2009 6:50 pm

Hi Nelsona,

I just finished attempting to hack at form 1116 using turbo Tax. And I'm weeping with the results.

Just to give you the numbers:

My husband and I earned a total of around 50,000 in Canada in 2008.
46950 of it was in combined wages the rest in dividents/capital gains and interest.

We paid around 13371 in Income Tax and CPP, EI contributions.

We also paid 52.41 in taxes for dividend foreign income tax which I put in form 1116 as passive income (this was foreign to Canada though so I might leave it out).

Anyway, after entering the total gross wages earned and the 13371 in taxes paid, our foreign credit was only around 6700. Isn't that horribly low? I knew you don't get a dollar for dollar credit but half?!

Anyone else think this is typical?

Thanks again in advance! I tried excluding the wages on form 2225 just to see what would happen and my husbands was excluded but for some reason only 294 of mine was :S So I revert to the 1116 credit.

jgoveas · Post by **jgoveas** » Fri Mar 20, 2009 6:57 pm

Oh I should mention that that was before I enter in any canadian refunds (with RRSP contributions the total comes to 6000) which will severely reduce the credits on 1116 and we'll probably owe the IRS. How is that possible when the treaty is supposed to prevent double taxation?

nelsona · Post by **nelsona** » Sat Mar 21, 2009 6:28 am

As i told you from the beginning, the Cdn tax portion that you enter on 1116 is the one calculted ON THE Cdn RETURN, not what was withheld from paystubs, you never owed that tax anyways.

Also, was that foreign dividend tax from US stocks? If so, you should get a US tax receipt for it, nd you would use this on the 1040, not on the 1116.

nelsona · Post by **nelsona** » Sat Mar 21, 2009 12:14 pm

... and really, if you think about it, if reducing your Cdn tax reduces your 1116 tax credit, that means you are getting full credit for your Cdn tax on your US return, and have no carryforward. That is the best situation you can have.

jgoveas · Post by **jgoveas** » Sat Mar 21, 2009 1:30 pm

Hi Nelsona,

This is making more sense now. Your sentence "you never owed that tax anyways" turned on the light bulb. Thanks!

I wanted to try the 2555 form to see what numbers come up if we excluded our CDN wages. However, it seems that your tax home needs to be the foreign country and they ask for an address. I assume this form is good for citizens who are currently living abroad and not residents currently living the States?

Thanks again!

nelsona · Post by **nelsona** » Sat Mar 21, 2009 1:34 pm

2555 still works for citizens coming back to US (and for Cdns moving to US for the first time). If the software doesn't allow it, that's a software problem.

jgoveas · Post by **jgoveas** » Sat Mar 21, 2009 1:35 pm

Ah ok! The software does allow it but asks for your tax home address. This was weird since we don't live there anymore. Do we just put the address we used to live at?