I-bond Interest payable in Canada

dw · Post by dw » Sun Oct 30, 2011 9:39 am

I am a US citizen, Canadian resident. I purchased i-bonds in the US from 2003-2005. I moved to Canada in 2006. In 2008, we bought a house by cashing in some of the i-bonds. We paid tax on the entire amount of accrued interest. Now I am wondering if we should have only paid taxes in Canada on the interest earned since moving to Canada. I also have found out that I should be paying the interest every year I have been in Canada. Can I just catch up this year or should I go back and re-file my Canadian taxes to 2006? Thanks.

JGCA · Post by **JGCA** » Sun Oct 30, 2011 10:04 am

Your a USC so you have to pay tax on this interest to both US and Canada and claim a foreign tax credit in Canada for teh tax you paid to the US.

You were suppose to accrue the interest I would refile the returns since you have to claim the intrest in US anyhow and claim the FTC in Canada for each respective year in question.

triunbad · Post by **triunbad** » Sun Oct 30, 2011 10:17 am

Although I am assuming he can only claim the foreign tax credit in the year that he paid US tax, unless there is some special rule with i-bonds. He can't transfer some of the foreign tax to match with the Canadian tax years.

JGCA · Post by **JGCA** » Sun Oct 30, 2011 10:48 am

He stated that he moved to Canada in 2006 but cashed in his bonds in 2008 and paid tax on accred interest at that time. No he has to back file in Canada for interst since 2006 and he had paid tax in 2008 so this is the FTC amount I was speaking of.

dw · Post by dw » Sun Oct 30, 2011 10:51 am

Thanks for the replies. The US doesn't require me to claim the i-bond interest until the i-bonds are cashed but in Canada, I am supposed to claim the interest earned every year. The way for me to fix this is to go back to 2006 and refile both my US and Canadian returns claiming just the interest earned that year. Now my outstanding question is in 2008, I had about $17,000 in interest that I paid taxes on when I cashed in a large sum of i-bonds. Some of this interest would have been earned in 2005, before I became a resident of Canada. Do I have to claim this interest in Canada on my 2008 return because I received the income that year?

nelsona · Post by **nelsona** » Sun Oct 30, 2011 10:56 am

Just a reminder to you both that US citizens living in canada CANNOT -- by treaty -- claim any foreign tax credit on their Cdn return for tax that is paid to US only because they are US citizens. Interst is one of those taxes.

The correct way to US tax is to calculate the tax on their US return, claim the tax as a deduction on their Cdn return (line 256), and then re-source the US interest on a 1116 and reduce the tax to zero in US.

I would be fixing my Cdn and US returns for 2008, adding the 2008 portion interest to my Cdn return, and re-sourcing sufficient US interest to reduce the US tax on that portion only.

2007 and 2006 are past.

nelsona · Post by **nelsona** » Sun Oct 30, 2011 10:57 am

JCGA is correct in one sense though, that USC s in canada should pay their US interst on an accrued basis, so that they can get the Cdn tax back (on their US retunr) every year.

JGCA · Post by **JGCA** » Sun Oct 30, 2011 11:17 am

Thanks Nelsona, this is the way to do it for 2008 as you say.

dw · Post by dw » Sun Oct 30, 2011 11:19 am

Thanks for the information. Since I still have i-bonds that are earning interest, it looks like I'll be refiling for 2008-2010. Regarding the ammended return. On my Canadian 2008 return, I had medical expenses that were disallowed. When I file my ammended return, will they just look at the part I changed (interest) or will I have to go through the whole medical expense audit again?

nelsona · Post by **nelsona** » Sun Oct 30, 2011 12:28 pm

Not sure what your question is, when they diallowed your medical expanese, they came off your return. That is it for them.

Now you will simply ad any interest (your medical decuution should already be gone.

nelsona · Post by **nelsona** » Sun Oct 30, 2011 9:58 pm

By the way, you would need to check IRS rules on switching your reporting method from cash to accrual. Not sure you can do this once you've chosen for particular investment.

dw · Post by dw » Mon Oct 31, 2011 8:33 am

Thanks for your help on this topic. After reading some other related posts, I have another question. When I cashed the i-bonds, most of them came from my wife's account but they were titled jointly. She is a Canadian and gave up her US green card in 2009. We filed the US taxes jointly in 2008 even though residents of Canada. It sounds like non-resident, non-US citizens would not have to pay US taxes on US government interest but because she still had a green card, she was still considered a US resident and it was appropriate to pay the tax on the interest, correct?

nelsona · Post by **nelsona** » Mon Oct 31, 2011 8:51 am

Regardless of her status, the fact that you filed jointly, makes all her income reportable in the US.

This goes for any future year that you may decide (or need to) file jointly.

worryfreeinvestor · Post by **worryfreeinvestor** » Thu Jan 23, 2014 10:47 pm

I don't understand what dw means when he uses the verb "claim". I think he means "report". Do I understand that if I am a US citizen resident in Canada and I own I Savings Bonds I pay Canada as the interest accrues?

Or does Canada follow the US? That is, I bought the I Bonds when I was a US resident and report taxes on cash basis (i.e. have not paid any tax yet.)

I moved to Canada in 2014. So, will Canada accept that the US taxes are due on a cash basis and not make me pay tax?

As nelsona suggeted, I do not believe that I can change the tax basis in the US. So, it is a catastrophe if I have to pay taxes in Canada as the interest accrues.

Any clarifications or suggestions?

nelsona · Post by **nelsona** » Fri Jan 24, 2014 4:34 pm

Canada does not allow reporting of interest on a cash basis. In is ALWAYS the accrual method. So you will pay tax each year in canada on your bond interest, regardless of how you choose to report and pay tax in US.

Realize that Canada taxes ALL income and US taxes ALL income. They don't accept that paying in one country absolves you of tax in the other.

You would need to take credit for the Cdn tax on your US return and vice versa.