Sourcing income

jaaron · Post by **jaaron** » Mon Jun 10, 2013 12:46 pm

Hi,
A couple pretty basic questions this time.
I'm a US citizen living in Canada, self-employed with a client in the US and none in Canada. I also have some investments in the US.

1. I know that the work I do while physically in Canada is Canadian-sourced. As I understand it, I would pay Canadian taxes on it and then either exclude it on the US side using FEIE or offset it with foreign tax credits.

2. When I travel to my client in the US, is the income I generate there considered US sourced? On form 2555 it appears that the IRS wants to capture this income as US sourced. Would it also be US sourced for the purposes of foreign tax credits?

3. What are the rules for passive / investment income generated from my US accounts while I am residing in Canada - I would assume that it is considered US-sourced, though I haven't been able to confirm this.

Thanks!
Jon

nelsona · Post by **nelsona** » Mon Jun 10, 2013 3:06 pm

2. it is considered US-sourced. However unless you have afixed based in US, it is not taxable in US, by treaty. No US yax, not very useful for foreign tax credits, unles you have other US sourced income, which is unlikley.

3. again, source is by the firm that generates the income. Only US firm dividenfs are taxable in US.

jaaron · Post by **jaaron** » Mon Jun 10, 2013 4:29 pm

Thanks for #2 - looking into it, its clear to me that you're correct about the treaty exempting such income from taxation.

Here's what confuses me. Suppose I were to claim a FEIE. For Form 2555 line 14, the instructions are:

"If you were present in the United States or its possessions during the tax year, complete columns (a)â€“(d) below. Do not include the income from column (d) in Part IV, but report it on Form 1040."

In other words, they are explicitly asking me to treat the income as taxable.

What can I put on these forms to ensure that I get the benefit of the treaty?

nelsona · Post by **nelsona** » Mon Jun 10, 2013 5:06 pm

Sorry, as a US citizen, very litle of the treaty applies to you, (missed this on your opensing blurb) I was referring to the Cdn treatment for foreign tax not US.

You need to report all income anywys, ansd instead of using 2555, you will need to use 1116, and use the re-sourcing rules if you need to.