I have a fairly simple financial situation and I thought I had a good handle on the federal non-business income foreign tax credit. However, after reading several posts on this forum, I am confused about the sourcing (and resourcing) of investment income.
I am a dual US Canadian citizen who works in the US but resides (based on the tiebreaker rules) in Canada. Other than earnings in tax sheltered accounts (RRSPs, traditional IRAs, and 401ks), my income sources are 1) employment income in US, 2) interest from US bank accounts, 3) interest from Canadian bank accounts.
I assumed that my US bank account interest would be sourced to the US. I would report the amount on my US return, pay US tax, report the interest on the Canadian return, and use the US tax (that was paid for the US bank interest) for the federal non-business foreign tax credit on the Canadian return. I know that the tax treaty allows US bank interest to be sourced to Canada for Canadian residents. However, my understanding is that US citizens cannot avail themselves of that treaty benefit.
Am I off?
US Bank Interest - Dual Citizen, Can Resident
Moderator: Mark T Serbinski CA CPA
Since US does not tax non-residents on bank interest, Canada does not grant any ftc on US yax arising on interest.
As you alluded to, the trwaty allows relief, in the following manner:
Without regard for any foreign tax credits on either return, figure the US tax on the US bank interest (A), and US tax on Cdn bank interest (B). And figure the CDn tax on your Cdn bank interest (C).
On your Cdn tax return, report the uncreditable US tax (B), on line 256 of your CDn return as a deduction.
Then prepare 2 form 1116: one passive income, reporting the Cdn interest and the CDn tax (C). And a "re-sourced by treaty" 1116 which reports the US bank interest, and the US tax on that income, such that that 1116 reduces your US tax to zero.
There is a table in the 1116 or FTC IRS publication, which goes through the calculation for re-sourced income.
On ypour Cdn return, only your US wages and the tax related to that (plus fica) are eligible for ftc consideration.
As you alluded to, the trwaty allows relief, in the following manner:
Without regard for any foreign tax credits on either return, figure the US tax on the US bank interest (A), and US tax on Cdn bank interest (B). And figure the CDn tax on your Cdn bank interest (C).
On your Cdn tax return, report the uncreditable US tax (B), on line 256 of your CDn return as a deduction.
Then prepare 2 form 1116: one passive income, reporting the Cdn interest and the CDn tax (C). And a "re-sourced by treaty" 1116 which reports the US bank interest, and the US tax on that income, such that that 1116 reduces your US tax to zero.
There is a table in the 1116 or FTC IRS publication, which goes through the calculation for re-sourced income.
On ypour Cdn return, only your US wages and the tax related to that (plus fica) are eligible for ftc consideration.
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