GC Holder returning to Canada. Is Foreign Employment income pro-rated or calculated?

[pencileveryone]

Hello Nelson,

I am a Cdn citizen and became a GC holder since 2017. I've been working in the States the past 10 years and I haven't filed Cdn taxes during this time.

I got married to my Cdn financee in August (in Canada), and I closed on a property in Canada also in August. My wife lived at this property in Canada since August. I returned to the US in August and was still employed by a US company until end of October, then I physically moved to Canada in November. I am unemployed in Canada right now.

I stayed in the states until October because of a hefty bonus that was to be paid-out mid October, so I wanted to stay until I received it. Also, knowing that I was going to move back to Canada later in the year (and I won't have any RRSP room to deduct against my 401K contributions), I max'ed out my 401K contribution between Jan-June of this year. I didn't contribute anything to my 401K after June 2020.

Since I established significant residential ties to Canada in August, I will be taxed in Canada on my world-wide income starting August. I did some research online and I believe I will need to declare my US-sourced income on line 10400 of my T1, then claim the foreign tax credit paid on this amount on the T2209. Since Canada has a higher tax rate, I will top off any unpaid amount in Canada.

My question is, how is my world-wide income determined for the period I am a Canadian resident?
Do I..
1.) Take my W2 and pro-rate the time I was in Canada while employed? (i.e. W2 is for the entire 2020. I was a Cdn resident between August-November [4 months], do I take the ratio of 4/12 * W2 Gross Amt Paid)?
2.) Or do I need to add my paystubs between August-November to determine the total employment income to be reported on my Cdn resident? As mention earlier, I did receive a large annual bonus in October, so the amt I received between August-November will be a much larger portion of my W2 compared to Option 1. My bonus is for my work throughout the year so it seems "unfair" that if the entire amount is taxed just because I established residency since August.
3.) Similarly for my 401K, do I have to declare my 401K contributions on my Canadian return if my contributions were made prior to becoming a Canadian resident? I believe that HAD I made any contributions as a Cdn resident, then it's not tax-deductible (unless I have RRSP room, which I don't) and I would need to add that amount as my employment income. But at the same time, this seems like a loophole to me..

Hope my questions make sense. Appreciate your help!

[pencileveryone]

Just to clarify for #3.. I guess it's not really a 'loophole' because my deductible amt is capped at my RRSP room, so even if I had contributed to the 401k while I am a cdn resident, I need to add that amount back to the total income. However, my "foreign tax paid" during August - November is higher because I ran out of 401k contribution room for the year already, so more tax was withehld in the States during those months. So it SEEMS like I have to top off less in Canada. Not sure if I am thinking about this correctly..

[nelsona]

The amount of tax that is withheld from your wages, etc, is MEANINGLESS, when it comes to foreign tax credit. Only what is calculated on your tax returns matters.

[pencileveryone]

Thanks Nelson. This makes sense.

If I understand this correctly, I should first:
1. Take my employment income on my W2 and figure out how much US taxes I paid on it
2. Take the portion of the income I earned between August-October
3. Take the same portion of US taxes paid and use it on my Cdn return.

Concrete example: If I gross'ed100K USD, put 19K in 401K, and I paid 20K in income taxes.

If I earned 80K of the 100K between August-October, then I can claim 0.8 * 20K = 16K as my foreign taxes paid.

On my canadian return, the 100K USD will be my foreign employment income. Since I don't have any RRSP contribution room, I will be taxed in Canada on the entire amount, and I will claim 16K as my foreign taxes paid.

[nelsona]

Whatever US income you report in canada, you will include the PROPORTION of the overall tax on yoru 1040, as a credit in Canada.

If you earned $100K and you report $40K. Your credit will be 40% of the total tax calculated on your 1040, 40% of your state tax return, and a similar proportion of your FICA (depending on how much of your income is wages vs other income).

The amount of wages you report in Canada will be the entire annual amount MIUNS the Year-to-date- figures on the last paystub received before becoming a resident of Canada.

[nelsona]

If you had no RRSP room in 2020, none of your 401(K) contributions can be deducted in canada.

[nelsona]

Remember for Cdn purposes to add back your 401(k) contribution to your wages.

[nelsona]

From what you say, since you became resisnt in august, the bonus will be taxable in Canada as well.

[nelsona]

Since m=none of your 401(K) contribution were made while a Cdn resident, there is nothing to deduct in any event on your Cdn return. The earlier contributions will simply appear on your US return, making your US tax lower, ultimately reducing the foreign tax credit you will get on your CDn return.

[pencileveryone]

Makes sense now. Thank you so much Nelson!

[pencileveryone]

Hello Nelson,

One follow up question on this. Since my total US tax is a combination of employment, dividends, and cap gains, wouldn't the proportion of FTC that I get be wrong if I use the proportion of employment income of my taxable income? (Since divs/caps are taxed at 15%, but employment income is taxed higher)

Example:
200K US Employment Income
40K Long term Cap gains
5K Qualified Dividends

Total Taxable Income: 245K
Total Tax Paid: 60K

Let's say I determine that 50K of the US Employment Income should be on my Canadian return. If I proportionally take (50K / 200K) * ( 200K/245K) * 60K Paid ~= 12.2K, it under-represents the amt I paid in the states.

Or should I prepare a dummy return with ONLY my US Employment Income, then see what would be the tax paid in the US and get the right proportion from there?

[nelsona]

To calculate any portion you must have a complete return. You can allocate the tax to wages and other items if you wish. You would determine the tax you paid on cap gains and dividends, since they are at a flat rate, and the rest would be for wages. Then prorate the wages you are reprting.
I'm sure you must also be repirting dsome of that passive income in canada too. Allocate that the same way.