Hello,
I have encountered an strange situation and am looking for some guidance. Am am a dual citizen living in Canada and my question relates to how FTCs should be handled on a US-based ETF that invests in foreign stocks.
I think I have a pretty good understanding of how to do FTC's between the US and Canada (thanks to this forum!); however, this situation seems somewhat different. The odd thing about the dividend income is that it in the eyes of CRA, the income is US-sourced (due to the trust structure); however, in the eyes of the IRS, it is foreign income (i.e. European and not from Canada). Can I use the foreign tax paid to Europe at all?
I'll try this with a super-simplified example (since I don't want to confuse things with re-sourcing income, etc). Assume my average US tax rate is 10% and my average Canadian tax rate is 15%. Let's say I earn $70k and I use the FEIE to exclude all of it. My only other income is $10k from Cdn-sourced dividends and $10k from this US-based foreign stock ETF. The $10k for foreign income had $500 of foreign tax withheld (per the US tax treaties with various European countries). I take the standard deduction and 1 exemption (filing single) for a total ~$10k.
How do I handle this $500 in foreign tax on the ETF? Is there any benefit to them? If 'yes', do I apply it my my US return during the first pass or at the same time as I apply Cdn credits during the second pass?
Thanks,
-Bruce
U.S. ETF FTC's
Moderator: Mark T Serbinski CA CPA
For US, the tax must be claimed in a separate columns (per country) of your passive income 1116, not lumped with the canada column. If you ahd no ther foreign income (like most US taxpayers) your foreign taxed would simply be claimed without 1116 (since the investment firm issued you a receipt), but you cannot do this, since your Cdn firms don't issue such receipt.
For canada, only those foreign ETFs are considerd foreign, so the FTC calc is straight forward.
For canada, only those foreign ETFs are considerd foreign, so the FTC calc is straight forward.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Hi Nelsona:
What you said makes sense to me (although I think an American would still have to file 1116 if they have FTCs >$300 single or >$600 married). Unfortunately, I'm not sure if really answers my question. Let me try a different tact...
As I understand it, before using any Cdn or US FTCs, I need to calculate my tax in both countries (without FTCs). Once I have my average tax rate in each country, then I can apply 1) US FTC to my Cdn return, and then 2) Cdn FTC to my US return. So the question is when to apply the "other" FTCs (based on holding a foreign stock ETF) to my US return?
It may seem like this should not matter, but I think it does. If I apply them during the first pass of my US return, I may very well have $0 owed to the US and, therefore, no FTC's to apply to my Cdn return. (Recall that I am excluding all my earned income via 2555 and have a relatively small amount of passive income, so the FTC on the ETF brings me down to $0 owed.)
On the other hand, If I do the initial US tax calculation (first pass) without the FTC on the ETF, I now owe tax to the US. So I use a portion of this amount as an FTC on my Cdn return. Then I go back to my US return and apply both the FTC from Cdn taxes and the FTC from the ETF. This brings the amount of US tax owed to $0. How can I have $0 owed to the US and still have a FTC claimed on my Cdn return for taxes paid to the USA??? Remember that the FTC for US taxes is already claimed on my Cdn return, but now through the ETF's FTC's the US tax is down to $0!!! Aren't I now claiming a FTC in Canada for tax never paid to the USA?
What you said makes sense to me (although I think an American would still have to file 1116 if they have FTCs >$300 single or >$600 married). Unfortunately, I'm not sure if really answers my question. Let me try a different tact...
As I understand it, before using any Cdn or US FTCs, I need to calculate my tax in both countries (without FTCs). Once I have my average tax rate in each country, then I can apply 1) US FTC to my Cdn return, and then 2) Cdn FTC to my US return. So the question is when to apply the "other" FTCs (based on holding a foreign stock ETF) to my US return?
It may seem like this should not matter, but I think it does. If I apply them during the first pass of my US return, I may very well have $0 owed to the US and, therefore, no FTC's to apply to my Cdn return. (Recall that I am excluding all my earned income via 2555 and have a relatively small amount of passive income, so the FTC on the ETF brings me down to $0 owed.)
On the other hand, If I do the initial US tax calculation (first pass) without the FTC on the ETF, I now owe tax to the US. So I use a portion of this amount as an FTC on my Cdn return. Then I go back to my US return and apply both the FTC from Cdn taxes and the FTC from the ETF. This brings the amount of US tax owed to $0. How can I have $0 owed to the US and still have a FTC claimed on my Cdn return for taxes paid to the USA??? Remember that the FTC for US taxes is already claimed on my Cdn return, but now through the ETF's FTC's the US tax is down to $0!!! Aren't I now claiming a FTC in Canada for tax never paid to the USA?
Frankly, I'm not inclined to get into third country tax. there is a very detailed discussion of third country taxation in the technical expalantion of article XXIV which I invite your to read.
I'll just give you these reminders:
In general, you always detrmine your FTC limits BEFORE taking into account your FTC.
Then finish your Cdn return first:
Once that is determined, remember too, the only US tax that you can take credit for on your Cdn return is the US tax on the US-sourced dividends you got. No other US tax is eligible for FTC, since it all arose due to your US citizenship. Any tax on US-sourced cap gains or interest becomes a deduction on line 256.
The other foreign tax can be claimed as normal.
Your US retunr FTC can be calculated using the methodoalogy described in the technical expalnation. look for canatech.pdf on the IRS site.
I'll just give you these reminders:
In general, you always detrmine your FTC limits BEFORE taking into account your FTC.
Then finish your Cdn return first:
Once that is determined, remember too, the only US tax that you can take credit for on your Cdn return is the US tax on the US-sourced dividends you got. No other US tax is eligible for FTC, since it all arose due to your US citizenship. Any tax on US-sourced cap gains or interest becomes a deduction on line 256.
The other foreign tax can be claimed as normal.
Your US retunr FTC can be calculated using the methodoalogy described in the technical expalnation. look for canatech.pdf on the IRS site.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Okay, thanks for pointing me to the correct technical explanation. I'll have a look.
In the meantime, perhaps I can ask this much more narrow question: If I submit a CRA tax return that claims a credit for US taxes, I will attach my 1040 as "proof". However, if that 1040 shows the actual amount paid to the IRS as $0 (due to 3rd country FTCs), won't the CRA reject the FTCs?
Thank you.
In the meantime, perhaps I can ask this much more narrow question: If I submit a CRA tax return that claims a credit for US taxes, I will attach my 1040 as "proof". However, if that 1040 shows the actual amount paid to the IRS as $0 (due to 3rd country FTCs), won't the CRA reject the FTCs?
Thank you.
As I said, since the only US tax you can claim on your Cdn return is US tax on your US-source investments, then I guess, from what you say, there should be NO US tax to report on your Cdn return. Otherwise, the 3rd country FTCs would not be able to wipe it out. the only time you would have US tax eligible for Cdn FTC, and not have any US tax liability is where you use the re-source method.
In other words, 3rd country tax can't wipe out US tax on income that was also taxable in canada. Only Cdn tax can do that, or re-sourcing that Cdn income.
When you take a look at the technical explanation, I think you will see that.
In other words, 3rd country tax can't wipe out US tax on income that was also taxable in canada. Only Cdn tax can do that, or re-sourcing that Cdn income.
When you take a look at the technical explanation, I think you will see that.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best