Correct amounts for form 1116 FTC with exchange rate and CCA impact

[redbeer]

Hi all,

I am a US resident with Canadian rental properties sold in 2023 and filing Sec 216, Sec 116 T1-NR and 1040 with Foreign Tax Credit (FTC) claim on form 1116.

I have claimed CCA over the years (including before moving to the U.S) that resulted in a larger recapture on the Section 216 return than I have on 1040. Also the exchange rate between the property acquisition time and sale time went from USD/CAD of around 1.10 to 1.35.

These appear to result in a much higher net income (and taxes) on Sec 216 and T1-NR compared to 1040, after all rental income and expenses, and capital gain and sale expenses are included. CCA recapture is on Sec 216 on Canadian return and depreciation is on Form 4797 Part III on the US 1040.

I have two questions:
1. What are the correct amounts to put on Form 1116 Lines 1a and Line 2 given the discrepancy in income amounts? Should I use only the gross income and expense amounts reported on 1040 (as calculated by TaxAct that kept track of depreciation over time), or the amounts from Canadian returns converted to USD? I tried both and the allowed FTC is much higher when using amounts from CDN returns, but I can't use CDN amounts on 1040 Sch E and Form 4797, since each is computed differently due to differences in CCA/depreciation and exchange rates.

2. Am I correct that Canadian tax paid that is reported on Form 1116 Part II.A should always be the actual tax paid in Canada, calculated on the tax base from Sec 216 and T1-NR?

I tried to find the answer to this by searching the forum but I wasn't able to find this situation covered. I apologize if I missed it.

Regards,

Redbeer

[nelsona]

1. You report on 1116 the net amount of your rental income -- as reported on your 1040. The term gross is in reference to your overall gross income. Your net rental income contributes to your gross income.
2. It is the actual tax owed on your return; the term used is accrued tax.

[redbeer]

Thank you very much for these responses.