Mid 2009, I became self-empoyed and took a consulting contract in Canada. I am US resident.
I believe I can open a self employed 401K and contribute 16500 plus 25% of self employment income and maybe another 5500 as age over 50. (Except that I will need to significantly reduce the 16500 by the amount I contributed to my employer's plan (from 1st half 2009 US employment)).
1. Is that more or less correct?
2. Since I will be paying tax in Canada as non-resident on my Canadian self employment income, I will be using 1116 to reduce my US tax. Would the 401K contributions lower my foreign income on the 1116? If so and this lowers my foriegn income by 1/3 or more, will I be in danger of the foreign tax credit being significantly reduced from what it would have been if no self-employment 401K had been made?
Self Employed 401K and possible reduction foreign tax credit
Moderator: Mark T Serbinski CA CPA
I'll let you figure out how much 401(K) you can put in; what you state should not be a problem.
On the isssue of foreign tax credit, you have to remember the following:
Your foreign tax credit is limited to the LOWER of the following 3 things:
1. Your overall effective taxrate caluclated on your 1040 (tax/gross).
2. The US tax you owe on that specific income.
3. The foreign tax you paid on that foreign income.
The ideal situation is when '3' is the limiting factor, as this means all your foreign tax is being used against your US tax burden.
Reducing 1, or 2, doesn't really help you, as it does not lower your overall tax.
So let's see what we can do to lower your Cdn tax, as this will make your 401(K) contributions mean something:
First off, are you taxable in canada at all?
If you still reside in US, AND your contract in Canada does not have a fixed base, AND you do not spend more than 183 days in any 12-month period in Canada, then you may not owe any Cdn tax (you may have tax withheld, but this will be returned to you at year-end).
On the isssue of foreign tax credit, you have to remember the following:
Your foreign tax credit is limited to the LOWER of the following 3 things:
1. Your overall effective taxrate caluclated on your 1040 (tax/gross).
2. The US tax you owe on that specific income.
3. The foreign tax you paid on that foreign income.
The ideal situation is when '3' is the limiting factor, as this means all your foreign tax is being used against your US tax burden.
Reducing 1, or 2, doesn't really help you, as it does not lower your overall tax.
So let's see what we can do to lower your Cdn tax, as this will make your 401(K) contributions mean something:
First off, are you taxable in canada at all?
If you still reside in US, AND your contract in Canada does not have a fixed base, AND you do not spend more than 183 days in any 12-month period in Canada, then you may not owe any Cdn tax (you may have tax withheld, but this will be returned to you at year-end).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Thank-you for the information. It will be very helpful.
1) The 183 days in any 12 month period will get me. My contract is for 9 months ending April and will surely exceed 183 in Febuary or March 2010 for the previous 12 months.
I believe I will be doing a non-resident tax return in Canada in April 2010 for the calendar year 2009. The fact that I will exceed 183 in 2010 will cause 2009 income to be taxable?
If so, I guess I will need use the foreign tax credit route.
2) "Fixed base" means where I am staying in Canada? If a hotel room, no fixed base? If a rented furnished apartment rented month to month, fixed base?
1) The 183 days in any 12 month period will get me. My contract is for 9 months ending April and will surely exceed 183 in Febuary or March 2010 for the previous 12 months.
I believe I will be doing a non-resident tax return in Canada in April 2010 for the calendar year 2009. The fact that I will exceed 183 in 2010 will cause 2009 income to be taxable?
If so, I guess I will need use the foreign tax credit route.
2) "Fixed base" means where I am staying in Canada? If a hotel room, no fixed base? If a rented furnished apartment rented month to month, fixed base?
joe
Fixed base applies to your work location, not your living arrangements.
If you have an office or shop in canada that is a fixed base. A desk in your clients office is borderline.
If you have a fixed base, then it doesn't matter how few days you spend in canada, the income would be taxable.
Only if you do not have a fixed base, does the number of days come into paly.Remember that the 183 days (nights, really) excludes all nights spent out of canada. if you weekend and vacation outside Canada, do not count these.
But, if you will exceed 183 days, then yes, you would fiel as non-resident reporting only the income from this contract. 2009 on the 2009 report, 2010 on the 2010 report.
In previous years, the 183 days was only calendar year, so youre situation would have beenfree of Cdn tax. The new treaty changed this to the rolling 12--month period.
If you have an office or shop in canada that is a fixed base. A desk in your clients office is borderline.
If you have a fixed base, then it doesn't matter how few days you spend in canada, the income would be taxable.
Only if you do not have a fixed base, does the number of days come into paly.Remember that the 183 days (nights, really) excludes all nights spent out of canada. if you weekend and vacation outside Canada, do not count these.
But, if you will exceed 183 days, then yes, you would fiel as non-resident reporting only the income from this contract. 2009 on the 2009 report, 2010 on the 2010 report.
In previous years, the 183 days was only calendar year, so youre situation would have beenfree of Cdn tax. The new treaty changed this to the rolling 12--month period.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing