Use of Foreign Tax Credit Carryover

[wdngtt]

I am a US citizen and worked in Canada for several years before returning to the US about 4 years ago. I now take CPP and will be taking proceeds from my Canadian company sponsored RRSP when I turn 70 years old. I have studied the helpful forum and have some insight on two of three questions related to taking some of the foreign take carryover on my US return.

1. Due to the US / Canada Tax Treaty, I only pay US taxes on my CPP as if it is US social security. Canada does not take out taxes from my payment. I assume from this I could not take any FTC on my US tax return.

2. As I understand it, I can instruct the custodian of my Canadian RRSP to not withhold Canadian taxes from the distributions due to terms of the US / Canada tax treaty. I understand that the US IRS treats it as pension income, not passive income. I assume taxes would only be due in the US and the custodian is to adhere to my request as per the treaty terms. Note: I read somewhere in the forum where a custodian did not agree bu took Canadian taxes thus the person had to file a Canadian return to get a refund. I obviously do not want to go that route. Is my thinking correct?

3. Since moving from Canada to the US 4 years ago, my account has continued to fill out form 1116 and I have been able to get some tax offsets on my US return from the FTC although I don't pay any Canadian taxes. The only foreign taxes I pay are related to foreign stock dividends where 15% tax is automatically taken. As my FTC is very significant, I am hoping to be able to continue to use some of the FTC to offset taxes. So....is the continued use of form 1116 still applicable?

Thanks in advance for the help.

[nelsona]

1, Yes, You CAN use past foreign tax under the general limitation category, carried forward from previous years.
2. No, CDn payor MUST withhold 25% of the RRSP withdrawal . Only a RRIf can be withheld at 15%, and even then only if you are taking relatively small ammounts (ie. less than 10% per year). There is no treaty provison for 0 Cdn tax on pensions, unlike CPP). You cannot have the payor withhold nothing. You can use this tax against your US income tax on the pension (even on your CPP income) as it is general limitation income.
3. That tax can only be used on CDn passive income (so, not your CPP or RRSP)

[wdngtt]

Thank you kindly for the responses. I do, however, have clarification requests.

A. In your responses to questions 1 and 3, on the surface it appears to conflict; probably more my ignorance than anything. (I.e. question 1 says a carryover can be used on general limitation income whereas question 3 says it can only be used on passive Cdn income. Were you referring to foreign tax carryover in both instances or something different?

B. I understand your response to question 2. Given the tax by Canada from the RRSP will be significantly more than my US tax, can I carryover excess and add it to the foreign tax carryover balance? Probably pointless as I have several hundred thousand of carryover already that I will likely never use up.

C. The last three years since I’ve been outside of Canada, the accountant has continued to use a small portion of the foreign tax carryover credit to help offset my US taxes, despite not having Canadian income (passive or otherwise), except my CPP. (In the US, I have Social Security and roll over IRA distributions.) The main point of all my questions really is whether I continue to take some of the foreign tax credit on my US return.

Thanks for your expertise and time!

[nelsona]

A. The Cdn tax on dividends can only be used on passive income. Any past or current tax on RRSPs or other general income can be used towards your US tax obligations on your RRSP and CPP income.

B. You can. A better option would be to reduce your RRSP tax, by converting to a RRIF.

C. From what you describe, without current FOREIGN PASSIVE income, you cannot use credits that were carried over from previous FOREIGN PASSIVE tax that you paid in Canada. You can only use what I (re)described in point A above. Each "pot" of foreign tax can only be used against its own type of foreign income.


If you have "several hundred thousand" of CDn tax already carried forward, I suggest you pay a cross-border accountant who can do FTC correctly.

[wdngtt]

OK, thanks this helps and explains why my returns were done the way they were done. I have a lot of general limitation carryover and very little on passive. Good advice on the RRSP conversion.

Yes I use Serbinski since 2013.