Apportioning FTC on 1040

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patti
Posts: 66
Joined: Sun Apr 24, 2011 7:28 pm

Apportioning FTC on 1040

Post by patti »

Hello,

What a wonderful forum! I have been reading extensively the various posts on how an American should use Canadian tax on their 1040 (using 1116).

The one thing that I'm still confused on is how to handle Canadian eligible dividends (i.e. gross-up amounts vs. actual) and how to handle capital gains with Canada's 50% inclusion rate (i.e. included amount vs.actual).

Here is a super simple example for a Canada/BC return (assume dollar at par):

+60,000 wages
+28,800 taxable (grossed up) Canadian dividends (actual divs = 20,000)
+3,000 capital gain (actual gain of 6,000 x 50% inclusion)
+2,200 dividends from a European stock
=94,000 Total TAXABLE Cdn Income (vs. 88,200 ACTUAL income)
=14,267 Total Cdn Income tax due

So doing some quick math gives us a couple choices on percentages to apportion the credits for the passive income:
15.18% Average Cdn Tax rate on TAXABLE Cdn income (=14,267/94,000)
16.18% Average Cdn Tax rate on ACTUAL Cdn income (=14,267/88,200)

Which rate should I use to apportion Canadian tax on passive income? And on which income numbers (taxable or actual)? I'm assuming I get no FTC for the European stock dividend (at least from Canada), so the two choices would be:

15.18% x (28,800 taxable divs + 3,000 taxable gain) = $4827, or
16.18% x (20,000 actual divs + 6,000 actual gain) = $4206.

I think a case can be made for both methods (at least in my head), but only one way can be correct!

I could not find a clear answer to this issue. Please help. Thank you!

Patti
nelsona
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Location: Nowhere, man

Post by nelsona »

The percentage of Cdn tax comes from the WHOLE basket of your income.

Do, on your 1040 you are reporting XX Cdn income, and you have paid YY Cdn taxes. You apportion them among the various types of foreign income that way. If 30% of the Cdn income you reported on 1040 was passive income, you report 30% of the Cdn tax on that 1116. A

And so on until you have reported all CDn inceome and sed all Cdn tax.

Remember of course, that there is no way your US marginal rate will come clise to the Cdn tax, so you will have lots of tax left over for carry forward.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
patti
Posts: 66
Joined: Sun Apr 24, 2011 7:28 pm

Post by patti »

Interesting. For some reason, I thought that Canada's 50% inclusion on capital gains meant that the credit needed to be scaled back by using the lower amount towards credit on 1040? Sounds like good news compared to what I thought!

Now using the method you outline, I see an interesting issue.

The capital gains were subject to a big move upwards in the Cdn dollar. So when I calculate the gains in $C, I get the $6,000 actual gain I noted. But when I calculate the gain in $US terms, it's actually around a $20,000 gain.

Including the $US gains from the 1040 ($20k US) instead of the $C gains ($6k) gives a much higher tax credit than I previously calculated. Am I really allowed to include all $20,000 US towards the tax credit?

If that's true, I guess the tax credit on passive would be:

($14,267 / 102,200) * 40,000 = $5,584

vs.

($14,267 / 88,200) * 26,000 = $4,206

Does that sound broadly correct? Thank you very much for your help!
nelsona
Posts: 18680
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

You have to report $20k, but you still only have the Cdn tax that you accrued for the year. You must still proarte that tax over what you report on your US tax, so you may now get to use more of your Cdn tax towrds your cap gains, but less towards your other types of income.

Again, you live in canada and are fully taxed there, so you will not be getting anywhere near the tax credit you are calculating.

Your software will make thta clear.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
patti
Posts: 66
Joined: Sun Apr 24, 2011 7:28 pm

Post by patti »

"Again, you live in canada and are fully taxed there, so you will not be getting anywhere near the tax credit you are calculating."

By this statement, do you mean FTC's in the US are limited by my average U.S. tax rate (which will be lower than average Cdn)? So I would only use enough to get US tax to $0. Even so, the excess Cdn tax on passive income would be eligible to carry forward up to 10 years, right?

This has been very helpful. Thank you!
nelsona
Posts: 18680
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Correct. You will never use it, but it wil be there, as will any other FTC categories you use.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
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