Question about calculating the "Effective Tax Rate"

lanman2000 · Post by **lanman2000** » Thu Mar 01, 2012 3:45 pm

Hi there,

There have been several threads about the order of filing CAN/US returns and it has been suggested by nelsona that on the first pass we need to calculate the "Effective tax rate" on the canadian return in order to carry over to the US return.

When calculating the effective tax rate is the denominator the Total Income (line 150 on T1) or the Net Income (line 236 on T1) or the Taxable Income (line 260 on T1)??

I believe it's Total Income (line 150) but would like to know for sure before I shoot myself in the foot...

nelsona · Post by **nelsona** » Thu Mar 01, 2012 3:58 pm

Since you are reporting your Cdn income as gross income, it is the gross income (line 150) that determines your taxrate.

lanman2000 · Post by **lanman2000** » Thu Mar 01, 2012 10:17 pm

thanks so much nelsona!

lanman2000 · Post by **lanman2000** » Mon Mar 05, 2012 5:36 pm

woops... one more quick question. Do I need to recalculate the effective tax rate for Canada after the foreign tax credits from US income has been applied to the Canadian return? That is .. for the final US return, does the Canadian tax paid reflect the effective tax rate before or after applying US sourced income tax credit on the canadian return?

Or is it just the effective rate as calculated from the "naked" (no foreign tax credits) return from the very first pass?

nelsona · Post by **nelsona** » Mon Mar 05, 2012 5:39 pm

"naked"

lanman2000 · Post by **lanman2000** » Mon Mar 05, 2012 6:03 pm

beautiful thanks!

lanman2000 · Post by **lanman2000** » Sat Mar 10, 2012 12:33 pm

OK I'm all done with both us and Canadian returns but I see one possible issue. The final taxes paid to the US are lower than the amount of foreign tax credit on the Canadian return for my us source wages. Its only off a bit...150 bucks. Is that correct? Its bcause the naked effective tax rate for the us was higher than the final effective tax rate after foreign tax credits were applied to the us return for my Canadian source income.

lanman2000 · Post by **lanman2000** » Sat Oct 27, 2012 10:12 pm

Well here we are months later and I got a notice from the CRA stating this method of calculation is incorrect. My concern about using the effective rate from the "naked" returns was well founded. The amount of tax calculated using the naked return is higher than the actual final rate so the numbers on the Canadian return don't come even close to the numbers in the FTC spot on the US return and the same vice versa.

nelsona can you please comment on this further? If I don't use your 3 step method of doing the back and forth between US and Canada tax returns to claim FTCs back and forth so as not to get into an endless iteration loop I don't know how else to do it to make the numbers match right... I don't know how anyone does this???

nelsona · Post by **nelsona** » Sat Oct 27, 2012 11:37 pm

You'd need to tell moe what CRA said

MGeorge · Post by **MGeorge** » Mon Oct 29, 2012 9:03 am

Hi Ianman2000,

This is an interesting one. Could you clarify what your filing situation is? From what I have read in this thread, it seems that you are a US citizen living in Canada with both Canadian and US source income. Is this correct?

Regarding the US source income - doesn't the treaty kick in here? Ie. your US tax liability is limited to the amount of tax a non-US citizen would have to pay on US source income. This US rate would be much lower since it doesn't include the Cdn source income on the return. Could the 3-step process be:

1. Figure the tax liability of a non-US citizen by starting to fill out a 1040NR
2. Complete your Cdn return and take a FTC from the US liability calculated in (1).
3. Complete your US tax return, take a FTC for the Cdn portion only. Then adjust the 1116 lines 12, and 30 from the instructions at the end of publication 514 in order to limit your US tax liability to that of a non-US person. Attach the 514 worksheet for "additional foreign tax credit" to your US return.

Am I correct about your situation? I will be in this situation next year, so I am very interested.

Best Regards,

MGeorge.

lanman2000 · Post by **lanman2000** » Mon Oct 29, 2012 9:33 am

They said that the amount of taxes paid on the US returns don't match the amount claimed as foreign tax credit on the Canadian return.

nelsona · Post by **nelsona** » Mon Oct 29, 2012 10:04 am

I'm in aggreement with MG on this (I would skip the 1040NR part, but it does make things simpler).

A US taxpayer living in Canada has VERY LITTLE US source income to base aforeign tax credit request on: (US dividends, US real property, and US wages), and is limited on 2 of those by treaty as to what can be claimed.

If youy do indeed have 'denied' US tax on your Cdn return, there are steps to get this credited on your US return.

nelsona · Post by **nelsona** » Mon Oct 29, 2012 12:51 pm

lanman, CRA no doubt assesed what they thought the correct tax was. What was it? the ammount on your 1040?

rlb · Post by **rlb** » Fri Nov 02, 2012 7:45 pm

nelsona, you said:

"A US taxpayer living in Canada has VERY LITTLE US source income to base aforeign tax credit request on: (US dividends, US real property, and US wages), and is limited on 2 of those by treaty as to what can be claimed. "

I am a US/Canada dual citizen now living in Canada. Most of my income is from a US company pension (from working in the US before retirement) and IRA withdrawals.

1. I have treated these as US source income, am I correct?

2. Are there any treaty limitations on the tax that I owe the US on this income?

I filed my 2011 returns assuming that the US got its full cut on the income from these sources, and Canada+NB got a much smaller cut since the US gets theirs first.

nelsona · Post by **nelsona** » Sat Nov 03, 2012 12:34 pm

1. Correct
2. There are treaty limitations on the tax Canada will credit (20%), but since you are below those limits, you are fine.

US always gets full cut of its own source income, UNLESS it is more than what a Cdn non-US citzoen would pay, trhen there is the re-sourcing mechanism to make sure canada gets everything bove that amount, and US only gets that ammount.