How to Handle T3/T5 Foreign Non-Business Tax Paid on 1040

[Dalthien]

Dual citizen living in Canada.

I know how to handle Box 34 (T3) and Box 16 (T5) on my Canadian return, but how do I handle them on my U.S. Return?

Do I include the full amount of Foreign Non-Business Income (Box 25 on T3, Box 15 on T5) on Schedule B, and then include the Tax Paid (Box 34 on T3, Box 16 on T5) as foreign taxes paid on 1116?

I'm kind of stumped on how to account for the taxes that have already been paid on this income with respect to Form 1040. (Especially since some (if not all) of those taxes were undoubtedly paid to the USA, although the T3/T5 forms don't specifically break down the foreign taxes by country, so it is impossible to know exactly where those foreign taxes were paid.) Although maybe the USA treats all the taxes as Canadian sourced, since the mutual funds themselves are Canadian sourced?

[nelsona]

Any tax credit you claim is going to based on your WHOLE return, not any withholding tax.

You'll need to determine what this income actually is (gains, dividend, interst) and report itt as such on your US return,

Then you will apportion the tax based on the percentage of income each category. If interst is 3% of your total income, the tax is 3% of your entrire Cdn tax bill.

[Dalthien]

Thanks nelsona.

In my case, my personal business basically broke even last year, and my investment income falls under the $10,000 basic personal exemption in Canada. So these Foreign Non-Business Income Tax Paid amounts are the only taxes that I paid last year in Canada. And based on my income levels, I shouldn't even have paid them at all, but I can't get them back because the FTC in Canada only allows you to bring your taxes to zero, not to get back a refund.

AS for income categories, the T3/T5 don't separate the income (or taxes paid) types (dividends, gains, interest, etc.). But they are all mutual fund distributions, so the income (and taxes paid) would all fall under the Passive Income category as far as 1116 is concerned.

Is it okay to just lump it all under Passive Income when apportioning it (% of Passive Income taxes vs. General Income taxes, instead of breaking it up by dividends, interest, gains, etc.)?

[nelsona]

Its all passive.

But is it really foreign tax? If your income is so low in canada, what chance is there you owe any US tax?

Why would you assume that the tax paid is US tax?

[Dalthien]

It's definitely foreign taxes paid as far as Canada is concerned, because it is reported as Foreign Non-Business Income and Foreign Non-Business Income Tax Paid on the T3/T5 forms. And it qualifies for Foreign Tax Credits (T2209) in Canada (which doesn't do me any good in this particular case though).

But yeah, you're right - I really don't have any idea which countries the taxes were paid to. It is all just listed as 'Foreign Taxes Paid', and it could involve multiple countries, possibly including the USA.

As far as owing US tax, my wife works in the US, so she has already paid all the payroll taxes throughout the year. The FTC from her payroll taxes will reduce her Canada tax to zero, but she'll still have to pay the Ontario Health Tax portion of the Ontario Income Taxes. And she has some dividend income as well, so I'm already doing the 1116 for the small bit of taxes due to her dividends. So now I'm trying to figure out how to handle these 'Foreign Taxes Paid' on my own T3/T5 forms.

As an aside, the main reason for going through all this is for prior years. The 1116 FTC this year would be too small to bother with all the 1116 hassle normally, but I have some unused 1116 FTC from a few years ago, so even these small amounts this year will help us to recover some of that unused amount from prior years. Plus it would be nice to know how to handle these T3/T5 Foreign Taxes Paid in future years when the amounts may be more significant.

Thanks for all your help.

[nelsona]

You can always use foreign tax (non-US tax) as a deduction of schedule A.

But unless you can tie the tax to foreign income with respect to US, I don't see how you will claim it on 1116.

[Dalthien]

You make a good point about tying the tax to foreign income with respect to the US.

Breaking down my 'Foreign Tax Paid' T3/T5 slips,

- 2 of them are from Europe-focused mutual funds
- 1 of them is a local bank Monthly Income Fund
- the rest are from dividend distributions from US Stocks that I hold


1) Is it safe to assume that the Europe fund taxes paid are tied to foreign (European) income? (Although I still need to list the specific country on the 1116 - hmmm...)

2) The monthly income fund taxes paid are less than a dollar, so I don't think anyone would really care what I did with that.

3) The US stock dividends would have to be taxes that I already paid to the US. So that should be a direct credit on my 1040 of taxes already paid on that dividend income. Where would I take that credit?

[nelsona]

You would include it on tax paid to IRS.

Does your broker know that you are a US yaxpayer. They would issue you a 1099.