Credit on 1040 for 25 % flat rate tax paid to CRA on RRSP

NewCanadian · Post by **NewCanadian** » Sun Jan 02, 2011 8:09 pm

This year on 1040 I will report and pay income tax on increase in RRSP value since I became US tax resident, is there any credit for flat rate 25 % tax which I paid to CRA when I broke RRSP for cash in 2010.

If yes, please advise.

nelsona · Post by **nelsona** » Sun Jan 02, 2011 11:14 pm

You can either take credit on Form 1116, or deduction on schedule A.

It is unlikely that all of your tax will qualify for credit.

NewCanadian · Post by **NewCanadian** » Mon Jan 03, 2011 9:47 pm

Nelsona,
Thanks.

What decides how much credit ? Is it gross Canadian income or net income?

nelsona · Post by **nelsona** » Tue Jan 04, 2011 5:27 am

Its net income, and it is your overall effective tax rate, which is likely well under 10%.

That is why, on a typical collapse, of say, $50K, one might only get to use 1 or 2K of athe 12.5K Cdn tax.

In that case using the deduction is better, but one needs to watch for AMT.

NewCanadian · Post by **NewCanadian** » Tue Jan 04, 2011 11:54 pm

Nelsona,
Thanks.

I am sorry but I am not very good in finance so I have two questions on first sentence in your post.

1) How is Canadian net income calculated? Before or after depreciation on 1040?

2) Is effective tax rate same as marginal tax rate?

Thanks for prompt replies.

nelsona · Post by **nelsona** » Wed Jan 05, 2011 7:48 am

I think you are mixing up different types of income here. If you are talking rental income, then you will have a separate 1116 for your renatl income, and that will include depreciation.

But, this thread is on RRSP, and net income in this sense is the increase in its value since in US (line 16b), as opposed to gross income (16a -- the whole ammount of your RRSP cash-out, before any taxes withheld.

effective tax rate is your TOTAL tax divided by your total income. your marginal rate is the bracket your last dollar of income is taxed at.

Your effective rate, is MUCH lower than your marginal rate.

In any event, the software that calculates 1116 takes all this into account. What you need to input is the net pension income (16b) and the Cdn tax.

NewCanadian · Post by **NewCanadian** » Wed Jan 05, 2011 9:24 pm

Nelsona,
I apologize. Yes, I was mixing up.
It will be simpler to explain with assumed numbers. All in USD.

1) Canada Gross rental income- $ 20,000
2) Canada net rental income excluding depreciation- $ 10,000
3) Depreciation- $ 5,000
4) RRSP at cost when became US resident- $ 40,000
5) RRSP when sold this year- $ 50,000
6) Tax on collapsed RRSP paid to CRA- 10,000
7) US salary MFJ income- 100,000
8) US tax liability- 10,000
9) Tax liability to CRA at 22.2 %= $ 2,220

Earlier I thought that there is one 1116 for a country. You have clarified that I need two 1116- One for rental income and one for RRSP.

From above numbers, it is fair to assume that at average US tax rate of 10 %, I can get credit for only $ 500 for rental income and $1,000 from RRSP.

Having paid total tax of $12,220 and recovered only $ 1,500, is there a way to carry forward remaining $10,720 for future years?

nelsona · Post by **nelsona** » Thu Jan 06, 2011 5:55 am

I assume you are correctly having your Cdb rent income tax withheld monthly, and will file a 216 return at the end of the year? Since you must depreciate in US, it would be wise for you to start depeciating in canada as well. This will reduce your Cdn tax significantly, making it more in line with your US one.

I don't know where you are getting your CRA tax rate. Rent is taxed at 25% as is RRSP. This is a flat tax. You do not file a tax return to calculate the rate.

Its a little complicated in the year you move (I'm guessing you moved in 2010?) but otherwise, your Cdn tax situation is all flat tax.

Your assumption is correct about the amount of tax. So, for 2010, you should probably consider using all your Cdn tax as a deduction instead. The only time you might consider using a credit and carrying ovwer such a high ammount is if you plan to work SMALL jobs in canada in future. Otherwise, just use the deduction.

In a normal year, your rent will be handled on a passive income 1116. RRSP is considered general income for 1116 purposes.

NewCanadian · Post by **NewCanadian** » Thu Jan 06, 2011 8:38 pm

Nelsona,
Thanks. My clarifications.
a) Yes. That is correct. I am paying 25 % of the Gross income rent to CRA within 45 days of receiving and at the end of the year , I file 216 return which T1159-10e.pdf form (I am happy to see 2010 form available so early now)

b) Rent tax of 22.2 % I mentioned is from above tax form. 15 % tax on first $40,970 net income plus 48 % surcharge on it. Works out to be 22.2 %

c) I am hesitant to take depreciation on Canada property because if I or my kids return to stay there in next few years, I have refund the claimed money to CRA which won't like.

d) I cannot find 216 form where rent tax is flat 25 %. Earlier CRA rep informed me that if I pay 25 % gross rent tax then I donot need to file return. But with mortgage not paid off, I pay less tax if I file 216 return.

e) I am on the borderline of AMT on 1040. Therefore I will rather take credit on eligible amount instead of deduction and accumulate unused amount.

Are there any other options available to me which I donot know of?

nelsona · Post by **nelsona** » Thu Jan 06, 2011 11:44 pm

a) Good. Remember however that for the first part of the year, when you lived in canada, you report your income on a departure return. 216 only tok effect upon departure.

b) The rent tax is 22.2% as you say, but only on the portion that was durinf non-residency. You will need to add the incoem and tax from your deaprture return.

c) You are non-resident, thus you will be paying tax in canada on the gains at some point. You are giving up a LOT of tax if you don't depreciate. tax that you can't recover on your US return. your goalashould be to make the Cdn tax as low as possible while in US. You will never be able to use the Cdn tax if you don't depreciate.

d) They have adjusted the return to reflect lower Cdn taxrate. Remeber that the 22% is on net rate.

e)your will NEVER use this RRSP credit going forward, I guarantee it. You are throwing it away on 1116. you would be much better reducing your Cdn tax by taking depreciation, and using the RRSP and rent tax as a deduction. Use 1116 passive next year on your rent only.

nelsona · Post by **nelsona** » Thu Jan 06, 2011 11:46 pm

Remember, the RRSP tax money that you would carry forward cannot be used against rent, interest cap gains, etc. So you will never have Cdn income that you can use against this.

NewCanadian · Post by **NewCanadian** » Fri Jan 07, 2011 12:43 am

Nelsona,
Thanks for the advise. I will consider depreciation to reduce my Canada tax to near zero.

Once I opt for depreciation in Canada, can I selectively choose depreciation only when required to bring down my net income to near zero?

nelsona · Post by **nelsona** » Fri Jan 07, 2011 9:43 am

In canada, depreciation is always optional, and decided upon year-by-year.

NewCanadian · Post by **NewCanadian** » Fri Jan 07, 2011 10:30 pm

Nelsona.
My sincere thanks for your prompt and useful advice which is helping me learn complicated topics on taxation.

Based on your advise to use depriciation or CCA on 216 return, I have gone through T4036 and T776 which is useful.

I think I may need your advice on one item
I donot know how to find cost of land of my condo unit. I looked in property tax statement but it does not show. Since purchase price minus cost of land is the basis for CCA or depreciation, is there a way to know cost of land?

Alternatively, does separate cost of land exist for condo since it is a part of common elements.