Foreign tax credit (form 1116)

qweryt · Post by **qweryt** » Sat Apr 07, 2012 12:06 pm

How do you proportion the taxes between passive and general income for the 1116 form if the total passive income is negative (a loss)?

Let's say the total wages are $10000, total investment income is -$2000 and the total taxes paid are $1500.
Portion of taxes attributed to general income: 10000 / (10000 + (-2000)) * 1500 = 1875; portion of taxes attributed to passive income: -2000 / (10000 +(-2000)) * 1500 = -375.

Which figure should be reported on form 1116: (-375) or zero?

nelsona · Post by **nelsona** » Sat Apr 07, 2012 12:34 pm

If you report no positive passive income on your 1040, then you cannot claim any passive income tax credit. and none of your Cdn tax is attributable to passive income either. So passive income is non-issue for 1116 for that year.

However, it does impact your general amount, the portion of the tax is the tax you paid: 1500. You can't create tax.

Losses are not 'helpful' in the FTC world.

qweryt · Post by **qweryt** » Sat Apr 07, 2012 5:18 pm

That's understandable. What if the total investement income reported on Cdn tax return is from multiple sources, one of which is foreign-sourced and positive? For example, $500 is interest from Cdn source and -$2500 from Us source.

nelsona · Post by **nelsona** » Mon Apr 09, 2012 9:48 am

By treaty, very little investment is considered US-sourced if you live in canada (basically only US real estate), so I won't evn bother trying to decipher where you are goping with that.

You report X positive Cdn income on your US return, you have Y Cdn tax associated with that income.

patti · Post by **patti** » Mon Apr 09, 2012 11:23 am

"very little investment is considered US-sourced if you live in canada (basically only US real estate)"

I think dividends on US stocks would also be considered US-sourced for a Cdn resident. (At least that's always been my understanding.)

More importantly, I think I see where qweryt is trying to go with this question (and indeed it's also a question of mine): when apportioning your Canadian taxes on your 1040/1116, how do you treat capital losses?

Let's use a slightly modified example and assume that all income is Cdn sourced. i.e. 10,000 earned income, 3000 Cdn dividends, and 2000 capital loss (from sale of shares) with total Cdn taxes paid of 1500. Which of the following is the correct way to determine FTC on passive income?

option 1: 1500*[(3000-2000)/(10,000+3000-2000)] =$136.36

option 2: 1500*[3000/(10,000+3000-2000)]=$409.09

option 3: 1500*[3000/(10,000+3000)]=$346.15

So I think the question is whether losses end up in the numerator and/or denominator? (And I understand that due to the effective rate limitation, some of the credit may need to be carried over to future years.)

Thanks!

-patti

nelsona · Post by **nelsona** » Mon Apr 09, 2012 11:55 am

yes dividends on US stock are US-sourced.

Cdn passive income reported on 1040: $1000
Cdn tax usable on 1116: 1/11th of $1500.

If you have more losses that gains:

Cdn passive income on 1040: 0 (or negative)
Cdn tax usuable on 1116: 0. AND you've reduced your general tax as well.

I thought I explained this already. foreign tax (when using a tax return to determine it) is always at effective rate and apportioned by income type and amount you report on 1040.

qweryt · Post by **qweryt** » Mon Apr 09, 2012 9:29 pm

Thanks, nelsona.

The correct way is to attribute all tax ($1500) to the general income ($10000) on form 1116 and zero to passive income ($500). In this case carryfoward tax from previous years will come handy. All three types of income (earned, Cdn-sourced and Us-sourced) are reported on 1040.

nelsona · Post by **nelsona** » Mon Apr 09, 2012 9:39 pm

Again, what are you considering US-sourced income?

qweryt · Post by **qweryt** » Tue Apr 10, 2012 12:06 am

US Real estate, interest from US banks and dividens from US stock.

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