Why can't I use all my US tax as a foreign tax credit?

[cdude]

I'm completing my Canadian tax and I have a question about the foreign tax credit on US income.

I worked the last few months of 2010 in the US and had about $14K in non-business income and $5K in total US tax. When I complete form T2209 it only allows me to use about $2200 as a foreign tax credit. On top of the $5K in US tax, I have to pay an additional $1400 in Canadian taxes (afer using T2209 and T2036).

I always thought I pay the higher of the two taxes (US or Canada). Without the foreign tax credit, I have to pay about $4500 in Canadian taxes. If I already pay $5K to US, why do I pay Canada another $1400? Aren't I already paying US the higher rate of $5K, making my Canadian tax on the income $0?

Hope the numbers make sense. Any help is appreciated. I've been reading various tax bulletins and I can't figure out if I'm missing something.

[nelsona]

It's the differnce between marginal taxrate and effective taxrate.

Your foreign INCOME is added on the TOP of your income pile, at your marginal rate.

However, the TAX is credited back to you at your effective rate (the avearge that you paid in tax for each dollar earned, not the last ones).

$5K in tax for $14 of income seems awfully high.

I'm thinking you have not filled in your 1040NR to determine your actual tax correctly. You do not use the tax that was withheld on your pay to determine US tax, you fill in a return.

You are probably due a refund from IRS and state. This isn't included when you report US tax for credit on your return.

[cdude]

Thanks for the response. I understand now what you say about marginal and effective rate and how T2209 is calculated.

So it seems like I won't be able to use the entire foreign tax as a credit against my Can tax right? My Can marginal rate is not that high... about 32.5% (22% Fed + 10.5% Prov). And I've already paid US about 36% taxes (assuming no refunds). Now as I can't use all my US tax as a credit, I'll be paying about 45% in total tax on this income, which is way above my marginal rate. It just doesn't seem right.

I was hoping to use line 232 "Other deductions" some how. Is this possible?

I think I am getting some refund on the US tax paid based on the 1040NR I completed. I didn't completely understand your last comments. Should I use the US tax I paid in my Canadian return or the US tax I expect to pay based on my US return? I used the US tax I paid because I'm not sure yet if I'll get a refund.

Thanks again for the help.

[nelsona]

You can't assume no refunds from US. In order to claim any US tax as a credit, you must include a copy of your 1040 or 1040NR. Only the tax calculated on this return (plus syate tax and fice) will be accepted towrds the credit.

Line 232 does not apply to you.

You reelly need to complete your 1040NR, you will likely get over 1/2 your US taxes back.