Confusion re: US FTC on resourced wages

[Canadian Newbie]

Hi all- I may have to amend my US and Canadian tax returns. I was a Canadian Resident beginning Sept 2014 and earned around 7,000 working in the US while I was a resident. I also earned a little interest income during my initial three months of residence. I did not realize that the 7K I earned should have only been taxable in Canada due to the treaty limit of 10k. I took a FTC on my Canadian return for the US income and SS tax. My question is, if I amend my US return and take the FTC on the 1040, what amount do I use for the Foreign tax paid? Would it be the little bit of Canadian income tax I paid before applying the credits against it? It almost does not seem worth it to amend if that is the credit. I was confused and thought the resourced 1116 would eliminate the US income tax completely. Is that the case? I had taxable income of around 70k on my US return for income earned in the US prior to landing so in fact I paid around $700 in US tax on the wages of 7K. I assume my credit would not be $700 though. Is that correct or do I credit enough so I pay no US tax on the 7K?

[nelsona]

From what you posted, if you used the re-sourced by treaty 1116, you would reduce the US tax, you could re-source upto $7000, or as much as you need to reduce the US tax to zero, or to reduce the Cdn tax to zero, which ever was LEAST.
The Cdn tax would be the portion attributable to the US wages.

I believe you also had US-sourced interest? You would add these to that 1116, along with the Cdn tax attributable to that.

So you probably would not eliminate all of your US tax on this US income, given the situation you describe.

These re-sourcing FTCs work better in a year when you spent the entire year abroad, and can use other deductions, credits, exemption on your foreign income, and are left only with the US tax on US income.

On your Cdn return, you should be able to include your US-sourced income (wages and interest) but you can only use the SS, since a non-US citizen would not pay tax on the wages nor the interest.

I think you have doen you taxes correctly.

[Canadian Newbie]

Thanks Nelsona. I need to decide whether to amend or not. I reported the 7k wages on the US return. The US return also had income earned prior to landing in Sept 2014 so the tax on it is higher than the tax resulting on the Canadian return. The US tax on the 7K is around 1K. The tax on the Canadian return was actually lower on the 7k due to the small amount of income on the Canadian return. However, I understand that I would use the Canadian tax that resulted as the credit on the US return since it is the lesser amount of tax as compared to the US tax. So I wind up paying some US tax on the 7K wages once I tax the tax credit for the Canadian tax. I thought that the purpose of resourcing was to eliminate the US tax on the income in question to 0. Therefore, I would have to take a credit of 1K on the US return to accomplish that. I realize that is not the case here. Most other times it woud get reduced to 0 as you said it works better to zero out the US tax in years where I am abroad for the entire year.

That will ocurr in 2015. I was present the entire year in Canada. I earned around 5K working in the states. The rest of the time I worked in Canada. Therefore, I would resource the 5K on the US return and take a tax credit for the Canada tax paid on the 5K wages.

One last question...will I need to report this resourced wage that was earned in the US on form 8833? Also, on my 2014 return I had some US interest earned while I was a Canadian resident. I took a US FTC for the Canada tax amount paid on the US interest as well as the Canadian interest income. This US interest that was resourced, should I have reported that on Form 8833 as well?

Thanks again for your expert help.

[nelsona]

Nopt sure what you are ssking. I already explained that, because you are not living in Canada for the entire year, and had sizeable US income, your credit would be limited to the US tax you paid on that portion of income (but it it will not be a full credit).

In any event, you only need to amend if you made an error.
You should hve on your US return:

ALL income reported from all sources.
A 1116 for Cdn passive income (Cdn-sourced interest)
A 1116 for US re-sourced income (US wages and interest combined)
Optional, but recommended to include an 8833 on this process.

Your Cdn return would report all income from all sources, received from the day you entered Canada, with the US wages and interest reported as foreign income, but only the SS used to calculate the credit.

[nelsona]

So your 1116 for US interest was not handled correctly, since it should have been included in your re-sourced 1116

[Canadian Newbie]

Thanks for responding. Sorry if I was confusing the matter. I paid around $400 Canadian tax on the 7K wage reported on the Canadian return. I paid around $1,000 of US tax on the 7K I reported on my 1040. I was hoping that I could somehow reduce the US tax to eliminate the 1,000 paid but as you said, and correct me if I am wrong, the credit will be limited to the $400 I paid on the 7k on the Canadian return. The US tax is higher because of the income reported for the entire year as opposed to income reported for three months since landing in Canada. In fact, my total taxable income on the Cdn return was 8,500 consisting of the wage and 1,500 of interest income from US and Cdn sources. My wife had a small income so the resulting tax after the credits on my return before the foreign tax credit was $420. I took a FTC on the Canadian return for the FICA and Income tax paid on the 7K wage.

Therefore based on your response, I made two mistakes on my 1040 FTC.
I in fact reported all of the interest (US and CDN) that was reported on the Canadian return on a single 1116. I took no credit for the wage.

I therefore made the mistake of not filing a separate 1116 for the US based interest and the wage of 7k. It appears, I overpaid the US tax by $400 by not taking the credit for the Canadian income tax paid.

Interesting thing is that the SS and Fica tax paid on the 7k wage is used as a FTC on the Canadian return and the income tax paid on the CDN return is used as a FTC on the US 1040. So, In cases like this where the wage earned in the US is resourced , I am actually taking a credit on the CDN and US return on the same income! That seems wrong to me because the actual tax paid on the CDN return is after the FTC of the US SS tax paid. However, I was under the idea that you use the amount of tax before any FTC to determine the actual tax paid for purposes of the FTC.

I guess it is just a function of the fact that Canada allows a FTC for the Fica tax paid on the wage earned that is under 10,000 per the treaty however it seems like a windfall of sorts.

Thanks again.

[nelsona]

No, you are not quite getting this.

Your re-sourced 1116 will have $7000 wages and $1000 interest, since the tax on this is zero in US, you will report all this income (using the form in the 1116 guide) and this will determine your US tax credit on this income. It is NOT limited to the Cdn tax (that is for normal 1116). The Cdn tax doesn't factor into it at all. It is limited due to the particular circumstances of your tax year.

Second, you need to also fix your cdn FTC since you can only claim the fica payment as eligible US tax.

[Canadian Newbie]

I am sorry but now I am more confused. I am a novice at this so I apologize.

This is how I understand how to amend. I will now prepare a 1116 for the wages and interest form US sources. The Form 1116 Line 1a will report 8,000 for the resourced income. My Gross income from all sources on the 1040 is 77,794 so this will result in a reduction of the 8,000 of around 10% of the standard deduction of 12,400 resulting in 6760 for purposes of the US FTC. My taxable income is 61516 and the tax before FTC is 7136 from line 44 of the 1040. Therefore, the[b] maximum[/b] amount of the credit will be 6760/61516 x 7136=783.
However, the CDN tax on the 8,000 calculates to federal of 1286 less non refundable credit of 865 and Ontario tax of 433 less non refundable credit of 188. The two amount to 245 and 420 for a total of 665. Since most of the income on the CDN return is the resourced income, we can say that the CDN tax paid on the resourced income is 665 for the sake of simplicity for now.

The 665 will be the CDN tax paid and therefore, since the CDN tax paid is less than the 783 amount on line 21 of Form 1116, line 22 will be 665......an amount less than the US tax amount.
Therefore, my US tax will not be zeroed out for the tax on the resourced income. Unless of course I am still confused on how to fill out the Form 1116 and it sounds like I am based on what you have said. I just don't know how to fill out the Form 1116 to make the credit come out to $783. I understand when you say it is not limited to the CDN tax but I just don't know how to fill the form out since it is different than what is normal for income that is not resourced.

Do I show an amount different than 665 for the foreign tax paid line 14? Do I report 783 instead? As I said, I don't know how to make the form result in $783 on line 22 of Form 1116.

I am only familiar with a normal 1116....income that is not resourced so this is unfamiliar territory. I read the instructions to Form 1116 but they were no help.

The same issue will arise this year since I also earned around 9,000 in the US while I was a full year resident in Canada.
As you said, the Canadian tax on the resourced income does not factor into it. I understand what you are saying but I just don't understand the mechanics of the Form 1116.
Thanks for your help so far and your patience. I understand if you don't want to respond in detail.

[nelsona]

Are you following the worksheet in Pub 514?

I'll grant that it is complicated, but I'm going to have to leave it at that. You are of course using tax software to do this. if you are not, then you should. they can all deal with this.

By the way, just to correct myself (and you would see this in the instructions for 1116 and in Pub 514) you need to create a separate 1116 for each type of income that you are re-sourcing (passive for interest and general limitation for wages).
Just remember, that while the expressed GOAL of foreign tax credits is to geive you full credit for foreign -- or in this case US -- tax paid, it rarely does. And never does when one has fully taxed income from two countries in the same year.

[Canadian Newbie]

I worked it out on the comp sheet in the Publication.
I understand the mechanics now at this point.


Thanks again!