I’m just about done my taxes, but I’m hung up on the foreign tax credits I can claim on my Canadian return. I’m a US citizen living in Canada and have both Canadian and US source income on each side.
I have US source Ordinary dividends and US source rental income that I need to take a credit for. These aren’t my real numbers but lets just use them for simplicity.
1040 looks like this. Total income on line 22 is $60,000, total tax on line 44 is $15,000, ordinary dividends is $5,000 and rental income is $10,000.
Dividends $5,000/$60,000 * $15,000 = $1250 (credit I can take in Canada?). I think I have this one figure out, yes?
Here’s my problem.
For various reasons, my rental income on the Canadian side is different then the US side. Accounting for currency exchange, I have $10,000 on my 1040 and in Canada I have $12,000. So what do I do here?
Rental income $10,000/$60,000 * $15,000 = $2500 (credit I can take in Canada?)
Do I just take credit in Canada for tax on $10,000 (the $2500)? or can I take credit on the full $12,000 some how?
And just for the future, in case this happens to me in reverse in another year, what happens then? For example, rental income on 1040 is $12,000 and in Canada it’s only $10,000.
Foreign Tax Trouble Dividend and Rental Income
Moderator: Mark T Serbinski CA CPA
US dividends are divided into qualified and non-qualified, and as such you cannoy use the gross Tax/Income, to come up with the US tax.
You need to actualy determine (just like your US return did) the tax on dividends and use that on your Cdn return.
Remember too, that FTC is based on source. On your Cdn return you reported a specific amount of rental income ($12K). This is the figure you would use for FTC. The tax would be the prorated amount you deteremined on your 1040 (adjusted of course for the calc you made for dividend income)
You might also think about depreciating in Canada as you MUST in US. Thtat would get your numbers closer.
Remember, the numbers you use for income are the ones you determined on your Cdn return. The tax is the portion of US tax you determined on your US return.
You need to actualy determine (just like your US return did) the tax on dividends and use that on your Cdn return.
Remember too, that FTC is based on source. On your Cdn return you reported a specific amount of rental income ($12K). This is the figure you would use for FTC. The tax would be the prorated amount you deteremined on your 1040 (adjusted of course for the calc you made for dividend income)
You might also think about depreciating in Canada as you MUST in US. Thtat would get your numbers closer.
Remember, the numbers you use for income are the ones you determined on your Cdn return. The tax is the portion of US tax you determined on your US return.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Thank you!
If all my dividends are non-qualified I could just use the calculation I have outlined above to come up with US tax right ($1250)? Non-qualified are taxed like all other income. But, if I have qualified dividends, I would need to calculate them separately because they will be at a lower tax rate.
My total income on line 22 is not the same as my adjusted gross income on line 37. Do I still use total income or change my calculations to adjusted income? I would think I would still use total income because the deduction I had that lowered my total income would be reflected in a lower amount of tax I ultimately paid as a result of the deduction.
John
If all my dividends are non-qualified I could just use the calculation I have outlined above to come up with US tax right ($1250)? Non-qualified are taxed like all other income. But, if I have qualified dividends, I would need to calculate them separately because they will be at a lower tax rate.
My total income on line 22 is not the same as my adjusted gross income on line 37. Do I still use total income or change my calculations to adjusted income? I would think I would still use total income because the deduction I had that lowered my total income would be reflected in a lower amount of tax I ultimately paid as a result of the deduction.
John
Ok great, thanks!
One more small clarification if you wouldn’t mind and then I think I should be good. Back to the rental income for a second. Using the example I provided, the income number (as determined on my Canadian return) would be $12K. Which means I would also use $12K in the US when determining the prorated amount of tax on the 1040 and not $10K? I think that’s what you were trying to tell me in your original reply but I'm not sure.
One more small clarification if you wouldn’t mind and then I think I should be good. Back to the rental income for a second. Using the example I provided, the income number (as determined on my Canadian return) would be $12K. Which means I would also use $12K in the US when determining the prorated amount of tax on the 1040 and not $10K? I think that’s what you were trying to tell me in your original reply but I'm not sure.
Wrong.
You would report the US tax that was incurred for the US income you are reporting, which is 10K. The fact that the nimbers are difffernt in Canada is reflected on the INCOME, not the US tax paid.
You would report the US tax that was incurred for the US income you are reporting, which is 10K. The fact that the nimbers are difffernt in Canada is reflected on the INCOME, not the US tax paid.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
I have a very similar situation to John except my rental income is very close to the same because I depreciate in Canada. I’m concerned about where you said AGI is used and not total income. Now I’m afraid I’ve been doing mine wrong the last couple of years. Let’s stick with his numbers, assume all non-qualified div’s, assume rental income same in CAN/US and assume the other $45K is Canadian source income and I will try to explain what I mean.
Total income = $60K
Non-Qualified Div’s = $5K
Rental income = $10K
Canadian source income = $45K
Adjusted gross income = $50K
Total tax $15K
This is how I’ve been doing it:
Div’s: $5K/$60K * $15K = $1250 (foreign tax on FTC worksheet in Canada)
Rental income: $10K/$60K * $15K = $2500 (foreign tax on FTC worksheet in Canada)
Canadian source income: $45K/$60K * $15K = $11,250 (Can’t claim anything because Canadian income)
Total tax for all three = $15K
The way I think you are suggesting:
Div’s: $5K/$50K * $15K = $1500 (foreign tax on FTC worksheet in Canada)
Rental income: $10K/$50K * $15K = $3000 (foreign tax on FTC worksheet in Canada)
Canadian source income: $45K/$50K * $15K = $13,500 (Can’t claim anything because Canadian income)
Total tax for all three = $18K
Doing it this way are you not overstating the amount of foreign tax you take in Canada???? How can you take a credit for more than what you actually paid?
Total income = $60K
Non-Qualified Div’s = $5K
Rental income = $10K
Canadian source income = $45K
Adjusted gross income = $50K
Total tax $15K
This is how I’ve been doing it:
Div’s: $5K/$60K * $15K = $1250 (foreign tax on FTC worksheet in Canada)
Rental income: $10K/$60K * $15K = $2500 (foreign tax on FTC worksheet in Canada)
Canadian source income: $45K/$60K * $15K = $11,250 (Can’t claim anything because Canadian income)
Total tax for all three = $15K
The way I think you are suggesting:
Div’s: $5K/$50K * $15K = $1500 (foreign tax on FTC worksheet in Canada)
Rental income: $10K/$50K * $15K = $3000 (foreign tax on FTC worksheet in Canada)
Canadian source income: $45K/$50K * $15K = $13,500 (Can’t claim anything because Canadian income)
Total tax for all three = $18K
Doing it this way are you not overstating the amount of foreign tax you take in Canada???? How can you take a credit for more than what you actually paid?
It's normally not, but this year and one time before it was not. This year I had an early redemption penalty from 1099-INT. I can't remember what it was for in the other previous year.
So would it be as I described and I should use total income in this case instead of Adjusted Gross Income? All other years it was the same so I should have been fine using total income.
Thanks.
JP
So would it be as I described and I should use total income in this case instead of Adjusted Gross Income? All other years it was the same so I should have been fine using total income.
Thanks.
JP
Be careful.
The foreign tax credit on T1 is based on NET income reported. As such, since your penalty would also be deducted in your net income on t1 (line 221, it should reduce your net US income as well.
In cases where it may be more difficult to apportion the deduction to a particular income category, using total income to come up with the proportions would be acceptable. Consistency is key.
In this case however, since you would deduct this from net income on both returns, and is clearly related to interest income, d be assigning it to interest income, effectively making your calculation based on AGI.
IRS applied this principle on 1116. If it can point to a specific deduction or expense as related to the particular type of income, it does, and then lumps all other deductions across the rest of the income. It ises a far more complex methos that Canada does, so there is no need to make it more complex than the net income methos I outlined.
The foreign tax credit on T1 is based on NET income reported. As such, since your penalty would also be deducted in your net income on t1 (line 221, it should reduce your net US income as well.
In cases where it may be more difficult to apportion the deduction to a particular income category, using total income to come up with the proportions would be acceptable. Consistency is key.
In this case however, since you would deduct this from net income on both returns, and is clearly related to interest income, d be assigning it to interest income, effectively making your calculation based on AGI.
IRS applied this principle on 1116. If it can point to a specific deduction or expense as related to the particular type of income, it does, and then lumps all other deductions across the rest of the income. It ises a far more complex methos that Canada does, so there is no need to make it more complex than the net income methos I outlined.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Eureka! You’re a savior. Thank you!!!
In my actual situation, I have qualified dividends. Can I just use the tax on the Qualified Dividends and Capital Gain worksheet to apportion the tax to the qualified dividends?
Keeping with the same example (except let’s change the deduction to a general one not specific to any source of income). Let’s say the qualified div’s are taxed at 15% (which is $750 of tax). That leaves $14,250 of tax to “attach†to the remaining $55K of total income ($45K net income).
If I have a general deduction not specific to any source of income, this deduction is not apportioned to the qualified dividends, just everything else right?
In other words, the tax on the qualified dividends is determined first as if it was on a “separate island†ignoring all deductions. Then whatever tax is left over after accounting for the tax on the dividends is apportioned to all the remaining sources of income (minus the general deduction)
Does this sound about right?
In my actual situation, I have qualified dividends. Can I just use the tax on the Qualified Dividends and Capital Gain worksheet to apportion the tax to the qualified dividends?
Keeping with the same example (except let’s change the deduction to a general one not specific to any source of income). Let’s say the qualified div’s are taxed at 15% (which is $750 of tax). That leaves $14,250 of tax to “attach†to the remaining $55K of total income ($45K net income).
If I have a general deduction not specific to any source of income, this deduction is not apportioned to the qualified dividends, just everything else right?
In other words, the tax on the qualified dividends is determined first as if it was on a “separate island†ignoring all deductions. Then whatever tax is left over after accounting for the tax on the dividends is apportioned to all the remaining sources of income (minus the general deduction)
Does this sound about right?