Foreign tax credit

[mburnette]

Hi,

I'm a Canadian working in the US on a TN visa. I have a rental property and bank accounts in Canada so both the rental income and bank interest will be reported on my 1040 return.

- because of depreceiation, I will be reporting a net loss of 2,000 on Schedule E
- on 216 return in Canada, I will be reporting a net income of 4,000 because I dont think it make sense for me to take CCA in my situtation
- the interest income i received from Canaidan banks is about $1,000 - there is no withholding tax

My question is, can i use the Cdn tax i paid on the rental income to offset the US tax on the Cdn interest income using Form 1116 under passive income category?

Thank you,

[nelsona]

Indeed, rental income is considered passive income and can be lumped with other foreign passive income.

However, your rental property is reporting a LOSS in US, and the passive foreign loss must be included on that passive 1116, so will cancel out any foreign income, making your credit ZERO.

I think, with the numbers you are talking about, you need a pretty good reason not to CCA (other than change of use rules). Do you have one?

[mburnette]

Thank you Nelsona & sorry for the late reply!

Could you please help me to better understand the reason for including rental losses in 1116? On my 1040 return, I'm not qualified to use losses from rental to offset other income such as interest. As such, if i include rental losses in 1116 (gross income in 1a & total expenses in 2), i think the calculation would not properly relfect my US tax obligation on the foreign bank interest?

As for not to CCA, yes, having the option to move back to the property without triggering deemed dispostion is one of the reasons. But most importantly, I dont think i will sell the property while I'm in the US or become a GC holder/PR. I did some research on the forum and I believe this means no recapture of depreication on the US side when I leave. Please correct me if i'm wrong.

In terms of the cost of borrowing money from CRA - I'm looking at about 6% after tax anuual return with 15 year holding periods to breakeven. I expect net income before depreciation for the next few years to be around 10K-15K (the numbers are smaller this year because the property wasnt rented out for the entire year), so the tax rate is 22% now vs 35-40% later.

If, for some unfortunate reasons that I have to sell the property while in the US, then of course, the total tax obligation would be much more than if I CCA.

[nelsona]

If you report a loss on your 1040, and it is from foreign source, and is of the type you are processing for your 1116, it must be included.

You can write off the rental loss against interest and other passive income.

[nelsona]

Indeed, if you are not a US taxpayer when you sell the foreign property, there is no reporting (and this no recapture) to be made in US.

[mburnette]

I'm so sorry Nelsona, I just realized i might have miscommunicated.
Line 26 on my schedule E & Line 8 on 1040 is actually 0.
The 2000 loss i was referring to is the difference between Line 3 (gross income) and Line 20 (total expenses) on Schedule E (as a result of depreciation) and will be carried forward to next year under passive activity losses.

Does this change anything? Do I still need to include the "-2000" on 1116?

If not, will I be able to use Cdn tax paid on rental income aginst US tax on Cdn bank interest?
Main reason I'm confused about this one is because im under the impression that if i were to report my foreign tax paid on rental income in the first year, and foreign interest income in the second year, then I can use the tax credit carried over from previous year to offset the tax due because they are under the same income category. However, the instruction for foreign taxes paid says "Generally, you must enter in Part II the amount of foreign taxes... that relate to the category of income checked above Part I. Taxes are related to the income if the income is included in the foreign tax base on which the tax is imposed." But in my case, my rental income is not included in the base because its 0.

Thank you, again, for your time and help.

[nelsona]

In my opinion if you are not reporting a passive loss which reduces your gross income (like a net capital loss), then you are fine to not include it on 1116.

"the income included in the foreign tax base on which the tax is imposed" refers to the Cdn tax base, not the US, so the tax on rental income in canada is positive and is used to determine your Cdn tax, so can be used. Of course the income against which the tax is credited is zero. so no benefit.

The question becomes whether your Cdn interest income can be included on 1116, since it is not included in income anywhere in Canada (since you are US resident). However, I have not heard of any US resident having problems including CDn bank interest on their 1116, but technically, it could be denied. Cdn residents would of course include it since it is part of the tax base.

As to which year you do this in, I prefer using the accrued method rather than the tax paid method. So you would report the 2020 interest and 2020 rental tax and be done with it. Repeat every year. Avoids the complexity of Carryback.