Foreign Tax Credits

tgraham628 · Post by **tgraham628** » Tue Apr 12, 2011 3:36 pm

Deemed Resident of Canada and Permanent Residence (Green Card) of the United States working for the Government of Canada in California. Pay taxes to Canada, U.S. fed tax exempt, pay California State tax filing married - joint. How do I calculate what state tax I pay if we file joint (California adjusted income) so I can claim a foreign tax credit on my Canadian taxes? Thank you.

nelsona · Post by **nelsona** » Tue Apr 12, 2011 4:06 pm

The assigning of tax is always done on pro-rated basis, so if you reported 80% of the income, then 80% of the tax is yours, 20% your spouse.

Have you determined that your Cdn Govt wages are taxable in cali?

remember that if Cali does tax you on your Govt wages, the tax will likely not be eligible for foreign tax credit in Canada, since I'm pretty sure the Cdn govt considers this Cdn-sourced income.

What you can get credit for is taxes for some of the other income your were taxed on in california, like interest, dividends, cap gains related to real estate, etc.

So, if 5% of your cali-reported income is as above, then only 5% of your Cali tax is creditable.

tgraham628 · Post by **tgraham628** » Tue Apr 19, 2011 11:22 am

Thanks for your reply. I wrote to the FTB and this is what they said... I received two replies, "California is not affected by U.S. treaties with foreign countries unless they specifically apply to state income taxes. If a treaty does not specifically exempt income from state income tax, California requires the reporting of adjusted gross income from all sources."

"California does not allow foreign income exclusion, a foreign housing allowance, or a foreign tax credit. If foreign income is excluded from federal adjusted gross income, an addition adjustment is made on Schedule CA (540) or Schedule CA (540NR), Other Income, line to include the income for California."

I have been able to claim a foreign tax credit for income taxes paid to California in the past when I filed Single. I think there are a few states which don't follow the tax treaty.

nelsona · Post by **nelsona** » Tue Apr 19, 2011 12:05 pm

So, you have already paid Cali tax on your Cdn Govt wages, and canada has accepted this tax as a credit on your Cdn return. Thanks for clearing that up. The issue was not so much if cali would exclude the income (I said the would not exclude it) it was whether canada would accept that this was eligible for ftc on your Cdn retunr (since this is money paid by the Cdn govt, the ultimate in Cdn-sourced income). But you say they have accepted this in the past -- i'm suprised -- but good for you, this makes it easier. So, this is not an issue.

Your question was how to divvy up the tax: as I said, your portion of the Cali tax is the prorated of total Cali tax divided of all income reported.

So if on your joint cali return you reported $120K, of which $20K was your spouse's income and $100 was your income (inlcuding your Govt wages), and the cali tax was, say $12K. You would use $10K on your Cdn return towrds the ftc and your spouse (if filing in Canada) would use $2K.

tgraham628 · Post by **tgraham628** » Tue Apr 19, 2011 1:12 pm

Thanks for showing me how to divvy up the tax. Yes.. they have accepted it in the past. I just hope they continue to do so. I am fortunate in that I am a Deemed Resident. I have colleagues who are Non-Residents of Canada and therefore can't claim a foreign tax credit. In effect, they are double-taxed and can't find a resolution to this problem.

nelsona · Post by **nelsona** » Tue Apr 19, 2011 1:22 pm

Not sure I understand.

They work for the Cdn govt and are considered non-residnets of canada? I thought that was impossible.

If that is the case, why do you say they are double taxed? Surely they are not taxed in both countries if they are non-residents of canada. Either they are exempt form tax where they live (foreign service exemption) or they are not taxed in canada.

Sounds like they need some professional advice.

tgraham628 · Post by **tgraham628** » Tue Apr 19, 2011 1:38 pm

Sorry.. I should have provided more info. I'm not sure what the foreign service exemption is, but these people are not foreign service. They are local hires who are Canadian citizens. Some are dual Canada-U.S. citizens and others a Canadians with Green Cards. They are considered non-residents of Canada and pay Canadian tax including the federal surtax. They don't pay U.S. fed tax, but have to pay state tax and they state doesn't allow foreign tax credits. Hense the double tax. You're right... It sounds like they are in need of professional advice. Do you think you can help?

nelsona · Post by **nelsona** » Tue Apr 19, 2011 1:54 pm

So there only double tax is california tax. Well that is OK. Blame that on cali.

Foreign service exemption is exactly what you have from the IRS. Most countries allow those who work for freign governments to be tax-free.

BUT, Do you see why I'm surpised that you get credit for cali tax? If these others are non-residents of canada, then why else would they have to pay Cdn tax on their govt service wages other than the fact that canada considers this money Cdn-sourced. If it is Cdn-sourced, then CRA is not under any obligation to give any foreign tax credit, which seems to be the position they are taking with these other folks.

That would tell me that, rather than tinking that they are being over-taxed, you might be the one being under-taxed, by canada giving you a tax credit for cali tax which you technically don't deserve.

The return for a deemed resident and a non-resident has the same rules: Cdn-sourced income is taxed on both of these, and foreign tax credit is given on neither of these for Cdn-source income.

My guess is that you are getting away with a credit you aren't entitled to. Deemed residents are allowed to take a foreign tax credit, but only on foreign income, not their govt service income.

tgraham628 · Post by **tgraham628** » Tue Apr 19, 2011 2:18 pm

I see what you are saying. I called the International Tax Services Office of Revenue Canada and explained my situation. They said I was entitled to the foreign tax credit. If what you say is true then I may need professional advice as well. It doesn't seem right that "we" have to pay full Canadian tax and State tax. I thought the treaty was intended to avoid double taxation. BTW, California is not the only state that does this. I think this may also be the case in Virginia and New York.

nelsona · Post by **nelsona** » Tue Apr 19, 2011 2:45 pm

As I said, states are not part of treaties, and they can tax any income they wish for their residents.

btw, the same problem is faced by those who live in US and commute to work into canada. They pay Cdn and provincial tax (or surtax) on their wages, as well as state tax (IRS gives credit, but most states do not).

The provinces don't have that same option as they follow the feds, with the caveat that the feds need to give credit first, and the provs only need to credit whats left over. Even QC follows the feds on this.

nelsona · Post by **nelsona** » Tue Apr 19, 2011 2:51 pm

I would leave well enough alone, as you are benefitting. Consider it as one of your perks.

CRA telephlunkies (no offense to your bretheren) are notorious at giving wrong and divergent answers on anything but the simplest question -- and even then ......

But I don't see why canada would give credit for any taxes paid on Cdn-source income. Even the deemed resident guide specifically states this for line 405:

"This credit is for foreign income or profits taxes you paid on income you received from outside Canada and reported on your Canadian tax return."

Canada does not consider your govt wages as coming from outside canada. If they did, then all your non-ressident friends should not be reporting their income to CRA at all.

tgraham628 · Post by **tgraham628** » Tue Apr 19, 2011 5:31 pm

On the CRA website, http://www.cra-arc.gc.ca/tx/nnrsdnts/ntcs/cndn-eng.html, it indicates "if you are a former Canadian resident who is hired locally to work at a Canadian embassy, and if you are considered a non-resident of Canada for tax purposes, you may be exempt from income tax in Canada on your employment income from the Canadian embassy." This may alleviate the double taxation problem faced by some non-residents. Do you agree? Unfortunately (for me) it also indicates "if you were a resident of Canada before accepting employment at a Canadian embassy, you are considered either a factual resident or deemed resident of Canada" and therefore are subject to income tax in Canada... and also subject to state tax if the state doesn't follow the treaty.

While it is true I began my employment with the consulate while I was a resident of Canada and therefore determined to be a Deemed Resident, I have not been posted, nor will I be obligated to return to Canada if I cease my employment as I am a Lawful Permanent Resident of the United States. Is it possible to be determined as a Non-Resident or will I always be viewed as a Deemed Resident? While I would like to leave well enough alone, I am cognitive of the fact that the CRA may eventually realize I am not eligible to receive a foreign tax credit and I will have to pony up for years past. I'm thinking it would be better to obtain a waiver from paying tax to Canada if that is possible.

nelsona · Post by **nelsona** » Tue Apr 19, 2011 5:58 pm

There is no question that you are deemed resident, and will be subject to Cdn taxation. The otherexamples show that being "pisted" is not a factor, merely your residence status before being sent abroad.

The other information may indicate that your pals are paying tax to canada unnecessarily. It also clearly indicates that Canada views this income as Cdn-sourced, thus requiring a special waiver for non-residents.

I wouldn't press this issue. In my opinion you are not entitled to such a waiver. You have called CRA and asked (record this information for future use) and keep filing as you have in the past.

nelsona · Post by **nelsona** » Tue Apr 19, 2011 6:06 pm

For non-residents (not you) the treaty clause becomes paramount. The Cdn_US treaty forbids the IRS (not the states) from taxing Cdn goverment employees carrying out governmental work.

So, your non-resident friends, if they ask for and recieve the waiver, should only have to pay Cali tax, not US fed nor Cdn tax.

This would be sweet -- for them.

tgraham628 · Post by **tgraham628** » Wed Apr 20, 2011 2:40 am

I read IT-221R3 and references to the tax treaty and I wonder if I am a deemed resident of Canada? P24 Deemed Non-Residents - Application Subsection 250(5) of the Act suggests I may be deemed not to be a resident in Canada if I am resident of another country for purposes of a tax treaty between Canada and that country. What does "resident of another country for purposes of a tax treaty" mean? Am I a resident of the US for purposes of a tax treaty if, I am liable for tax to a the Government of that State or a political subdivision or local authority, aka California? If tie-breaker rules apply, will residency be given to where I have a permanent home, center of vital interests, which is in the United States?

If this is the case, I should be treated as a non-resident. Does this make any sense?