FTCs on 8621

jenfin · Post by **jenfin** » Tue Apr 17, 2012 11:25 am

I am unsure of the calculation of FTCs for the form 8621 in cases where I have sold a mutual fund (1291 treatment).

My effective Cdn Tax Rate on income (all passive) is 22%.
When determining the FTC for the gain on sale of a 1291 fund....do I use the 22% effective rate times the gain for the FTC or must I look into the detail of Canadian taxation of the various types of passive income. For example only 50% of capital gains are taxable in Canada but are taxable at regular rates and qualified Canadian dividends are grossed up for tax purposes and a credit given.

Any assistance would be appreciated. .

nelsona · Post by **nelsona** » Tue Apr 17, 2012 4:05 pm

Without getting into the details of the 8621, the general rule on FTCs is that regardless of the mechanism that creates the tax, Form 1116 simply looks at the foreign income you report on 1040 and the foreign tax. It prorates the income over your entire income to come up with a limit, and then credits you the lesser of this limit and the foreign tax you paid/accrued.

If your Cdn-reported passive income was 20% of your total Cdn-reported income (after halving your cap gains, and grossing up your dividends), then you use 20% of your Cdn-calculated tax as your foreign tax.

jenfin · Post by **jenfin** » Tue Apr 17, 2012 4:49 pm

Apologies for my continued confusion. I'm retired and 100% of my income is passive so my passive income remains 100% whether or not I halve the capital gain. I have no problem generally with the 1116....but a bit with the 8621.

If I understand correctily I guess what I am supposed to do to determine the FTC on an individual sale is take:

(1/2 of the actual cap. gain on the sale divided by total (passive) income)
times my total cdn taxes(all passive) to arrive at the FTC for that sale.

Make sense? It would in effect be calculating the credit at an 11% rate vs. my overall effective rate of 22%. I would still report the entire gain (not the halved gain) on the 8621 and allocate it across the holding period.

nelsona · Post by **nelsona** » Thu Apr 19, 2012 4:18 am

You don't determine FTC on individula sales, you determine FTC on the "
basket" of passive income that you report and accrue tax on your 1040.

And the Cdn tax that is eligible for FTC is that portion that can be attributed (prorated) to that income on your Cdn return.

jenfin · Post by **jenfin** » Thu Apr 19, 2012 5:14 pm

Thank you for the replies. I guess I was not explaining myself well. It was the 8621 that was forcing me to allocate an FTC to a particular sale to partially offset the 35% additional tax I was being charged. I was not having trouble determining my overall FTC (for simplicity 100% of my income is Canadian and passive . Consequently 100% of my Canadian Tax is foreign and passive.) The capital gains amount on my Canadian tax return is a net number made up of a series of gains and losses on individual sales. I am concluding that I will take the portion of that net number that is due to the reported gain on the specific sale (half of the actual gain) divided by my total income to arrive at the factor (%) I will use to calculate the FTC for the 8621. I will then deduct the FTC utilized on the 8621 from my total Canadian tax to arrive at the FTC for my 1116 so that I am not double counting the foreign tax.

Hope this doesn't add to the confusion. I am selling anything that I can identify as a PFIC so that I don't have to go thru this in the future.

nelsona · Post by **nelsona** » Thu Apr 19, 2012 10:03 pm

I did not realize there was FTC calc on 8621.