Earned income exclusion/tax credit for dual citizen in CAD

[cmacre]

Hi,

I'm a US citizen in the process of obtaining CAD permanent residency with the aim of moving to Canada for good next year. I'm hoping someone can clarify how the foreign earned income exclusion and/or foreign tax credits will affect my dual tax returns (US and CAD) in the future. Basically, I will be working in a profession where I expect to be earning a good deal more than the cutoff for the FEIC (which is around 80,000 if I remember correctly). My understanding is that the foreign tax credit is designed to make it so that you only wind up paying tax to one country (the country with the higher tax rate, which in this case would be Canada). Is that the case? Or is there an upper limit on the tax credit beyond which I will be taxed twice on the same income?

I'm hoping the answer is no, because if not, since I intend to settle in Canada permanently, the only option for avoiding double taxation that I see would be to renounce US citizenship- and from what I've seen on this board, that's probably not a great option to take.

Any help appreciated, thanks!

[nelsona]

Generally, US citizens living and working in Canada pay NO tax to US. There are some instances where some US-sourced income (like a US property) might result is some minor extra tax in US, but these cases are rare.

It is rare that using either FTC or combination of FEIE and FTC does not alleviate all US tax.

Renouncing US citizenship for any reason is all sound and fury IMO, and for someone already paying Cdn tax, is downright foolish.

[bruce]

"It is rare that using either FTC or combination of FEIE and FTC does not alleviate all US tax. "

I hope you're only referring to earned income with this statement, right? Any US citizen in Canada that has any dividends from US stocks will owe tax to the USA. Of course they can get credit back on the Cdn return, but it's really not at all "rare" to owe tax to the USA.

[nelsona]

I already mentionned that US-souece income might result in US tax.

And, really bruce, US-source dividends will NOT yield US tax, since the resourcing rules will reduce tax to zero. Haven't I expalined that sufficiently? Whatrever does not get credited in canada is automatically credited in US

Only US-source cap gains or rent from real property will result in US tax.

[nelsona]

And we are always talking EXTRA, UNCREDITED US tax.

If you would owe $100 in tax if you lived in Canada, and you end up paying $98 to canada and $2 to US, I don't consider that "extra US tax"

[bruce]

Isn't there a difference between owing tax and owing "extra, uncredited tax"?

If a USC's average US tax rate on the first pass (before credits) is 12% and you had $1000 in US-source stock dividends, wouldn't you owe the US $120 in tax?

Then, assume your average Cdn tax rate (before credits) is 25%. On that $1000 in US-sourced dividends, you would get a $120 tax credit on your Cdn return. This means you owe Canada $130 (i.e. $1000*0.25 - $120)

Unless you have an average US tax rate higher than the 15% maximum credit, I'm not sure why there is any need for re-sourcing.

[nelsona]

If your rate is above 15%. Remember dividends have one of the highest treaty rates. Thereare other types of income that get NO tax credit in canada, and thus need to be resourced.

Then there are other forms of income which are taxed in US anyways. There are alowances for resourcing to eliminate double tax in some cases as well.

You need to loo ka tthe tech explanation for details.