As was stated previously:
"You are correct about US taxes on CGs (non-realestate) and interest yeilding no FTC on the Cdn return, and are thus put on line 256 (in the second pass of Cdn return)
My understanding is that CG's are sourced to the country of residence, so CG's from US stocks for a Cdn resident would be considered Cdn sourced income and you would be able to use the Cdn tax as a FTC on the US return. Also US bank interest would re-sourced to Canada and thus the Cdn tax paid could be used as FTC on the US return.
I am confused about line 256 on the Cdn return. By utilizing the above FTC's, my US tax is reduced to zero (at least on my non-US income-I do have some US tax on an IRA distribution, which I claim on line 431 of form T2209). What goes on line 256? Or am I doing this incorrectly.
15% Foreign Interest Credit limit
Moderator: Mark T Serbinski CA CPA
This goes back to the method on how these foreign credits are calculated. You calculate them without regard for foreign tax credits first.
The result should be that no US tax is paid, as it is all supposed to be paid in Canada.
The result should be that no US tax is paid, as it is all supposed to be paid in Canada.
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
There is one thing that I still don't think makes sense here. Let's walk through the process that you've outlined:
Step #1) Do both US and Cdn returns without regards to FTCs. Let's assume you come up with an average US tax rate of 12%.
Step #2) Apply US tax on US dividends to the Cdn return for an FTC. If you had $1000 in US-sourced dividends, you would get a credit of $120 on your Cdn return.
Step #3) Deduct US tax on US-sourced interest on line 256.
Step #4) Canadian return is now complete.
Step #5) Use Cdn tax from final return to add FTCs to US return (earned income, passive income, and resourced). This should get US tax to $0.
What I don't get is that now you're in a situation where you're taking a $120 tax credit for US tax; however, you never ended up paying any US taxes!!!!
Is there some kind of process or provision that forces you to either pay that $120 tax on US dividends to the IRS or delete it from your Cdn return?
Step #1) Do both US and Cdn returns without regards to FTCs. Let's assume you come up with an average US tax rate of 12%.
Step #2) Apply US tax on US dividends to the Cdn return for an FTC. If you had $1000 in US-sourced dividends, you would get a credit of $120 on your Cdn return.
Step #3) Deduct US tax on US-sourced interest on line 256.
Step #4) Canadian return is now complete.
Step #5) Use Cdn tax from final return to add FTCs to US return (earned income, passive income, and resourced). This should get US tax to $0.
What I don't get is that now you're in a situation where you're taking a $120 tax credit for US tax; however, you never ended up paying any US taxes!!!!
Is there some kind of process or provision that forces you to either pay that $120 tax on US dividends to the IRS or delete it from your Cdn return?
2. You only get $100 credit, since 10% is the limit for Cdns who are not US citizens.
3. You deduct $20 (the leftover) on 256.
I don't see how you pay NO US tax on that dividend. Since it is US income, it can't benefit from 1116 as passive. Moreover, you only get to re-source enough dividend to reduce your total tax on that income to 10%, not 0%.
Using your example. You originally owed 12% US tax on dividends and say 22% Cdn tax. We're talking US-sourced dividends here.
You only are allowed 10% on your Cdn return thru FTC, so you are allowed to re-source sufficient US dividends to get back an additional 2%. The only bonus you got was the 2% extra deduction on your Cdn line 256 (and that is by treaty). You don't get to re-source the entire dividend, just enough to bring you back to 10%.
You may be thinking of the cap gains or interst cases, where canada gives NO credit, and this you reduce your uS tax to zero by re-sourcing. Not so for dividends.
This is all in the technical explanation of the treaty, available on IRS website.
look for canatech.pdf
3. You deduct $20 (the leftover) on 256.
I don't see how you pay NO US tax on that dividend. Since it is US income, it can't benefit from 1116 as passive. Moreover, you only get to re-source enough dividend to reduce your total tax on that income to 10%, not 0%.
Using your example. You originally owed 12% US tax on dividends and say 22% Cdn tax. We're talking US-sourced dividends here.
You only are allowed 10% on your Cdn return thru FTC, so you are allowed to re-source sufficient US dividends to get back an additional 2%. The only bonus you got was the 2% extra deduction on your Cdn line 256 (and that is by treaty). You don't get to re-source the entire dividend, just enough to bring you back to 10%.
You may be thinking of the cap gains or interst cases, where canada gives NO credit, and this you reduce your uS tax to zero by re-sourcing. Not so for dividends.
This is all in the technical explanation of the treaty, available on IRS website.
look for canatech.pdf
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
Sorry, I should have re-iterated, this is for a US CITIZEN living in Canada. In this case, I thought the limit to the FTC (on Cdn return) for US dividends was 15%?
When I go back and apply the Cdn FTCs (on US return), I get an overall tax owed of $0 (even on the US dividends). My guesses as to possible reasons why this could be:
1) I have a deduction of $3000 in Capital losses in US that I do not have in Canada. Perhaps this amount coupled with my personal exemption in US simply eliminates the tax owed?
Or,
2) The US source dividends are from a Vanguard ETF that hold foreign stocks, so I have additional FTCs in the US which I can't use in Canada.
With regards to #2, assume that the $1000 of US dividends had $80 of tax withheld by vanguard to accommodate various other counties withholding taxes (per their agreements with the US). I have been assuming that I can use the average US tax on the first pass (e.g. $120) on my Cdn return. Do I need to net out the $80 of taxes withheld by Vanguard (e.g. $120 - $80 = $40 FTC on Cdn return)? Perhaps that will give the desired result?
When I go back and apply the Cdn FTCs (on US return), I get an overall tax owed of $0 (even on the US dividends). My guesses as to possible reasons why this could be:
1) I have a deduction of $3000 in Capital losses in US that I do not have in Canada. Perhaps this amount coupled with my personal exemption in US simply eliminates the tax owed?
Or,
2) The US source dividends are from a Vanguard ETF that hold foreign stocks, so I have additional FTCs in the US which I can't use in Canada.
With regards to #2, assume that the $1000 of US dividends had $80 of tax withheld by vanguard to accommodate various other counties withholding taxes (per their agreements with the US). I have been assuming that I can use the average US tax on the first pass (e.g. $120) on my Cdn return. Do I need to net out the $80 of taxes withheld by Vanguard (e.g. $120 - $80 = $40 FTC on Cdn return)? Perhaps that will give the desired result?
You are correct that the limit is 15%. But since you said the US tax you calculated was 12%, whyc are we having this discussion. No limit was applied to your FTC in canada, thus, no fancy footwork is needed. You report the dividends and the portion of US tax related to the FTC lines and that's that.
Now, what;s troubling mne is how you are coming up with ZERO tax in US, since you have those US dividends.
This is how you do you US return. All these figures are in USD You have 64K in Cdn wages and $1K in US dividends. You do your return COMPLETELY, using all your deductions and losses etc, and come up witha tax. Say its $6500. That becomes $6400 related to the wages, and $100 related to the US dividends. That's an effective taxrate of 10% btw.
Now you do your Cdn taxes, you DO NOT use the $100 on your FTC line, and you come up with Cdn income tax figure, say $9750. $9600 is related to your Cdn wages, and $150 is related to your US dividends. You then complete your Cdn return by taking the FTC, which reduces your tax by $100. Finished.
Now, back to your 1040. You now have $64K of foreign income and $9600 of foreign income tax (plus you can use your CPP and EI). But the most you can reduce your US tax by is $6400. You can reduce the $100 you paid in US tax on the dividends because its not foreign , and isn't part of your 1116. So, when you calculate 1116 for your Cdn wages, the rsult will be a credit of $6400 against your US tax of $6500. You pay $100 of US tax on the dividends.
And the way 1116 works, you probably only get $6398 credit, so you pay $102 on the US dividends.
Just to illustrate the case when you have more US tax than you can deduct, I'll do another example:...
Now, what;s troubling mne is how you are coming up with ZERO tax in US, since you have those US dividends.
This is how you do you US return. All these figures are in USD You have 64K in Cdn wages and $1K in US dividends. You do your return COMPLETELY, using all your deductions and losses etc, and come up witha tax. Say its $6500. That becomes $6400 related to the wages, and $100 related to the US dividends. That's an effective taxrate of 10% btw.
Now you do your Cdn taxes, you DO NOT use the $100 on your FTC line, and you come up with Cdn income tax figure, say $9750. $9600 is related to your Cdn wages, and $150 is related to your US dividends. You then complete your Cdn return by taking the FTC, which reduces your tax by $100. Finished.
Now, back to your 1040. You now have $64K of foreign income and $9600 of foreign income tax (plus you can use your CPP and EI). But the most you can reduce your US tax by is $6400. You can reduce the $100 you paid in US tax on the dividends because its not foreign , and isn't part of your 1116. So, when you calculate 1116 for your Cdn wages, the rsult will be a credit of $6400 against your US tax of $6500. You pay $100 of US tax on the dividends.
And the way 1116 works, you probably only get $6398 credit, so you pay $102 on the US dividends.
Just to illustrate the case when you have more US tax than you can deduct, I'll do another example:...
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
Change the overall US tax when you first calculated the US tax to $13000. Thta is an effective rate of 20%, which exceeds the tax that a non-US citizen living in Canada would pay on dividends, which is 15%. So, of the $13000 of US tax, $12800 is related to your Cdn wages and $200 is related to your US dividends.
You do your Cdn tax as above with the Cd tax becoming $15000. You now come to the FTC. You have $1000 of US dividends and $200 of US tax. However, by treaty you are limited to only $15 of credit. So you put the $5 on line 256. You then finish your Cdn taxes.
Now, you do your FIST 1116, for Cdn wages. The mosdt you can get credit for is $12800, regardless of how much Cdn tax you actully paid. That leaves you with $200 US tax from your US dividends.
So, you've paid $20 in US dividend tax and about $23 in Cdn tax. But only got credit for $15 on your Cdn return. THIS is were the resourcing gets diome. On a NEW 1116, you now re-source enough US dividend income until the credit comes to $5.
The end result will be a 1040 with a US tax iof 5 or 6 dollars.
It cannot be zero. If you get zero you are ither doing the math wrong on your 1116 or you are incorrectly treating all your income as foreign, which it is not.
You do your Cdn tax as above with the Cd tax becoming $15000. You now come to the FTC. You have $1000 of US dividends and $200 of US tax. However, by treaty you are limited to only $15 of credit. So you put the $5 on line 256. You then finish your Cdn taxes.
Now, you do your FIST 1116, for Cdn wages. The mosdt you can get credit for is $12800, regardless of how much Cdn tax you actully paid. That leaves you with $200 US tax from your US dividends.
So, you've paid $20 in US dividend tax and about $23 in Cdn tax. But only got credit for $15 on your Cdn return. THIS is were the resourcing gets diome. On a NEW 1116, you now re-source enough US dividend income until the credit comes to $5.
The end result will be a 1040 with a US tax iof 5 or 6 dollars.
It cannot be zero. If you get zero you are ither doing the math wrong on your 1116 or you are incorrectly treating all your income as foreign, which it is not.
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
wanted to correct typo 2 posts up:
"Now, back to your 1040. You now have $64K of foreign income and $9600 of foreign income tax (plus you can use your CPP and EI). But the most you can reduce your US tax by is $6400.
You [b]CANNOT [/b]reduce the $100 you paid in US tax on the dividends because its not foreign ,
and isn't part of your 1116. So, when you calculate 1116 for your Cdn wages, the rsult will be a credit of $6400 against your US tax of $6500. You pay $100 of US tax on the dividends.
"Now, back to your 1040. You now have $64K of foreign income and $9600 of foreign income tax (plus you can use your CPP and EI). But the most you can reduce your US tax by is $6400.
You [b]CANNOT [/b]reduce the $100 you paid in US tax on the dividends because its not foreign ,
and isn't part of your 1116. So, when you calculate 1116 for your Cdn wages, the rsult will be a credit of $6400 against your US tax of $6500. You pay $100 of US tax on the dividends.
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
Wow, thank you for such a comprehensive example! I will try re-working my numbers.
Before I get too deep into it, how do I handle the the Vanguard foreign stock ETF? Even though it is US domiciled, it spits out foreign income (Europe & Asia) and has foreign tax credits (in the eyes of the IRS). When I do my first pass of my 1040 "without regards to FTCs", should I include those Vanguard FTCs? After all, they have nothing to do with Canada. (I suppose the other possibility is to leave all FTCs (even Vanguard) off in the first pass net out the Vanguard FTCs from the US tax owed before transferring the US credit to the Canadian return.)
Also, I have different "total income" number for the 2 countries primarily because I have $0 capital gains in Canada but $3000 in losses in the U.S. Should I use the Canadian definition of income for allocating the US taxes to the Canadian return and the US definition for allocating back?
Thank you very much.
Before I get too deep into it, how do I handle the the Vanguard foreign stock ETF? Even though it is US domiciled, it spits out foreign income (Europe & Asia) and has foreign tax credits (in the eyes of the IRS). When I do my first pass of my 1040 "without regards to FTCs", should I include those Vanguard FTCs? After all, they have nothing to do with Canada. (I suppose the other possibility is to leave all FTCs (even Vanguard) off in the first pass net out the Vanguard FTCs from the US tax owed before transferring the US credit to the Canadian return.)
Also, I have different "total income" number for the 2 countries primarily because I have $0 capital gains in Canada but $3000 in losses in the U.S. Should I use the Canadian definition of income for allocating the US taxes to the Canadian return and the US definition for allocating back?
Thank you very much.
These other taxes are from other countries, not US or Canada, so need to be treated separately.
Of course you have different total income, but you will have a portion that is wages and a paortion that is dividends, your cap losses are a deduction, not income.
Of course you have different total income, but you will have a portion that is wages and a paortion that is dividends, your cap losses are a deduction, not income.
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
Hi Nelsona,
Good news and bad news (maybe)....
I am now showing US taxes on my US-sourced dividends that are close to the FTC that I have on my Canadian return. That seems to make sense!
The strange part is that the "Recovery Rebate Credit" is applied after calculating the tax owed and that largely eliminates all my US tax due (even though I already have taken the credit on my Cdn return).
For example (using rounding), I owe the US roughly $1,000 tax on ~$10,000 US-source dividends. I took that FTC on Cdn return. When I return to my US return, I owe ~$1,000 but then a $600 Recovery Rebate largely eliminates that tax. So, in effect, I have a $1,000 credit (in Canada) on a net tax bill of only ~$400 in the US.
Does this make sense or do I now have to go back to the Canadian return (3rd pass) and lower the FTC on my Canadian return to the actual tax (post Recovery Rebate) owed the USA?
Thank you!
Good news and bad news (maybe)....
I am now showing US taxes on my US-sourced dividends that are close to the FTC that I have on my Canadian return. That seems to make sense!
The strange part is that the "Recovery Rebate Credit" is applied after calculating the tax owed and that largely eliminates all my US tax due (even though I already have taken the credit on my Cdn return).
For example (using rounding), I owe the US roughly $1,000 tax on ~$10,000 US-source dividends. I took that FTC on Cdn return. When I return to my US return, I owe ~$1,000 but then a $600 Recovery Rebate largely eliminates that tax. So, in effect, I have a $1,000 credit (in Canada) on a net tax bill of only ~$400 in the US.
Does this make sense or do I now have to go back to the Canadian return (3rd pass) and lower the FTC on my Canadian return to the actual tax (post Recovery Rebate) owed the USA?
Thank you!
Look back at my instructions: I told you that you fill your uS tax tax return COMPLETELY (except for foreign tax credit) to determin your US rate. You should have already taken the rebate, and it is effectively dplit between your wages and dividends.
why did you think that the rebate came after all these calcs. I didn't tell you that.
why did you think that the rebate came after all these calcs. I didn't tell you that.
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
Actually, I DID take the rebate before doing the FTC calculations so that reduced the FTC on my Cdn return slightly.
The strange aspect of the Recovery Rebate is that it is calculated "below the line" AFTER CALCULATING US TAX. So on the second pass of the US return (with FTCs), the Recovery Rebate is not reduced at all. It remains at $600 and comes right off the bottom line!!!!
I was so shocked by the result that I tried calculating my US return using the 2555 and ignoring all FTCs. (I have been trying to avoid the 2555 because of difficulties in ever revoking the election.) Final tax owed WITHOUT ANY FTCs is $0 and a refundable rebate of $300 from the Recovery Credit. It appears that I must be under some kind of taxpaying threshold??? I didn't think that was possible with the new stacking provisions of the 2555???
The strange aspect of the Recovery Rebate is that it is calculated "below the line" AFTER CALCULATING US TAX. So on the second pass of the US return (with FTCs), the Recovery Rebate is not reduced at all. It remains at $600 and comes right off the bottom line!!!!
I was so shocked by the result that I tried calculating my US return using the 2555 and ignoring all FTCs. (I have been trying to avoid the 2555 because of difficulties in ever revoking the election.) Final tax owed WITHOUT ANY FTCs is $0 and a refundable rebate of $300 from the Recovery Credit. It appears that I must be under some kind of taxpaying threshold??? I didn't think that was possible with the new stacking provisions of the 2555???
http://www.howlandtax.com/articles/doubletax.htm
I ran across this article today which seems to say that US interest will be double-taxed now that the withholding rules have changed and Canada doesn't issue a credit. Is this true?
From the discussion in this link I thought the remedy was to take the amount of tax paid in the US as a deduction on the Canadian tax return and then resource the remaining amount. Does this stop the double taxation on interest and dividends from US sources?
Note: I'm not looking to advertize another tax firm by putting this link up. Feel free to remove it. I just thought -- as the author mentions -- that the no withholding was going to be good thing not a penalty.
Thanks.
Otto
I ran across this article today which seems to say that US interest will be double-taxed now that the withholding rules have changed and Canada doesn't issue a credit. Is this true?
From the discussion in this link I thought the remedy was to take the amount of tax paid in the US as a deduction on the Canadian tax return and then resource the remaining amount. Does this stop the double taxation on interest and dividends from US sources?
Note: I'm not looking to advertize another tax firm by putting this link up. Feel free to remove it. I just thought -- as the author mentions -- that the no withholding was going to be good thing not a penalty.
Thanks.
Otto
Howland is getting excited for nothing.
The situation where US citizens living in canada has ALWAYS existed (the article even says this) whereby some of the US tax US-sourced income is not eligible for the Cdn foreign tax credit.
The IRS knows this and that is why they have the "re-sourced by treaty"category for Form 1116.
The way of eliminating double taxation is to use the "re-source" the US-sourced interest and therby reduce the US tax to zero. You end up paying only Cdn tax on the interest, as intended.
This is already what is done for dividends, cap gains, royalties, etc that Canada limits the foreign tax credit.
You'd be amazed at how many so-called cross-border experts have no idea about the re-sourcing provision.
The situation where US citizens living in canada has ALWAYS existed (the article even says this) whereby some of the US tax US-sourced income is not eligible for the Cdn foreign tax credit.
The IRS knows this and that is why they have the "re-sourced by treaty"category for Form 1116.
The way of eliminating double taxation is to use the "re-source" the US-sourced interest and therby reduce the US tax to zero. You end up paying only Cdn tax on the interest, as intended.
This is already what is done for dividends, cap gains, royalties, etc that Canada limits the foreign tax credit.
You'd be amazed at how many so-called cross-border experts have no idea about the re-sourcing provision.
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