Confused About Green Card Test and Treaty Protection
Moderator: Mark T Serbinski CA CPA
Confused About Green Card Test and Treaty Protection
While residents of Canada, my spouse was a US green card holder so we filed jointly in the US. In this situation, can we use the 'income re-sourced by treaty" to avoid double taxation of interest earned in the US and taxed in both the US and Canada?
Yes.
As you know, interest paid in US is not taxed by IRS for non-residents, but it is for US citizens and GC holders.
The treaty does not require canada to credit any US tax paid on such interest, so none can be claimed on your Cdn return.
The treaty-specified remedy at that point is as follows:
a) determine the US tax on this interest. Do this before applying any other foreign tax credit (but after using form 2555 if applicable). Lets say, $100 interest, 5$ of tax (remember the US tax is prorated over your entire income, notadded to the top)
b) use the $5 as a deduction on your Cdn return, line 256.
c) Now re-source sufficient US interest (upto $100) on your re-sourced by treaty 1116 to give you a $5 credit.
You actually come out a litte ahead because of the extra deduction you get in canad on tax you really didn't pay in the end.
As you know, interest paid in US is not taxed by IRS for non-residents, but it is for US citizens and GC holders.
The treaty does not require canada to credit any US tax paid on such interest, so none can be claimed on your Cdn return.
The treaty-specified remedy at that point is as follows:
a) determine the US tax on this interest. Do this before applying any other foreign tax credit (but after using form 2555 if applicable). Lets say, $100 interest, 5$ of tax (remember the US tax is prorated over your entire income, notadded to the top)
b) use the $5 as a deduction on your Cdn return, line 256.
c) Now re-source sufficient US interest (upto $100) on your re-sourced by treaty 1116 to give you a $5 credit.
You actually come out a litte ahead because of the extra deduction you get in canad on tax you really didn't pay in the end.
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