Question 1: Canadian citizen sells real estate in the US. I understand that she will be subject to long term capital gains in the US, but how do these taxes get applied to any Canadian tax that is due. i.e. is there a credit, and if so, what percentage can be applied?
Question 2: To complicate the matter, what if the Canadian does not file a 2005 US return, but discloses the income to the CRA as 2005 income, than hears from the US IRS say 2 years from now asking for the back taxes?
i.e. that assuming there is a tax credit that could be applied from the US taxes to the Canadian taxes, do you somehow lose that credit if you fail to disclose the income properly in the same year to both authorities?
Thanks.
Rick
Tax Credit Question
Moderator: Mark T Serbinski CA CPA
The credit as it stands now is given this way:
You sell a US property and make $100K in profit, you pay, say 15% in US tax, and 6% state tax, so $21,000. I will be using US dollars throuhgout. You report in CDn dollars on your Cdn return.
In Canada, you report the $100K as cap gains as part of your income.
Since cap gains have only a 50% inclusion rate, when determining the foreign source income you only include $50 on the FTC line. This is logical.
However, for a reason known only to CRA, they then decise that not th full $21K is eligible for FTC, but only HALF, since that is the inclusion rate for cap gains. So Only $11.5K is available to be credited. Then thee 2 figures, $50K and $11.5K are plugged in to the FTC calculation (first fed and then prov), to come up with your final tax crdit based on your overall tax rate.
What effectively ends up happening is that the credit wipes out fed tax but not provincial tax. So you end up paying US fed, US state, and Cdn prov income tax on the proceeds.
This is being fought as illogical; The calculation should be done like any other foreign source income: You report the $50K and the $22K and let the FTC calculation limit the credit. Not limit the credit first, then do the calculation. we'll see how this goes...
Q 2 is moot. In order to collect any US tax credit in Canada, a copy of your US tax return has to be included with your Cdn return. One could I guess produce a fake return, but let's not go there.
<i>nelsona non grata... and non pro</i>
You sell a US property and make $100K in profit, you pay, say 15% in US tax, and 6% state tax, so $21,000. I will be using US dollars throuhgout. You report in CDn dollars on your Cdn return.
In Canada, you report the $100K as cap gains as part of your income.
Since cap gains have only a 50% inclusion rate, when determining the foreign source income you only include $50 on the FTC line. This is logical.
However, for a reason known only to CRA, they then decise that not th full $21K is eligible for FTC, but only HALF, since that is the inclusion rate for cap gains. So Only $11.5K is available to be credited. Then thee 2 figures, $50K and $11.5K are plugged in to the FTC calculation (first fed and then prov), to come up with your final tax crdit based on your overall tax rate.
What effectively ends up happening is that the credit wipes out fed tax but not provincial tax. So you end up paying US fed, US state, and Cdn prov income tax on the proceeds.
This is being fought as illogical; The calculation should be done like any other foreign source income: You report the $50K and the $22K and let the FTC calculation limit the credit. Not limit the credit first, then do the calculation. we'll see how this goes...
Q 2 is moot. In order to collect any US tax credit in Canada, a copy of your US tax return has to be included with your Cdn return. One could I guess produce a fake return, but let's not go there.
<i>nelsona non grata... and non pro</i>