Like I said, I make all my statements publicly, and if someone wants to challenge/correct, like you did, that is fine.
But do note that we haven't found a categorical clear answer to your question elsewhere, so we have no more clarity on that issue.
All I can say for certain is that you can't claim a penny for US-sourced interst as an FTC.
Whether you can claim 0%, 2%, 15%, of 17% on line 232, I leave up to you. Perhaps, with more time and funding I will find the correct answer, or publish my own opinion (others of which you have already found).
Us Citizen FTC Investment Income
Moderator: Mark T Serbinski CA CPA
Also, what we never addressed is that when you do report a deduction on line 232 for foreign taxes for dividends, royalties and interest, , you must also reduce the foreign INCOME by that amount in the FTC calculation, since CRA considers these a deduction specifically against that foreign income.
There is a pretty good explanation (using royalties, but applies to interest) in the historical canatech.pdf document, upon which I base many of my OPINIONS. The shortcoming it has is that it usually only briefly touches on how Canada has to apply things, but it happens to do so in the case of the limit on FTC. have you looked at this?
Example B
- A U.S. citizen who is a resident of Canada has $100 of royalty income arising in the United States. The tentative U.S. tax before foreign tax credit is $40.
- Canada, under its law, allows a deduction for the U.S. tax in excess of 15 percent or, in this case, a deduction of $25 ($40 - $15). The Canadian taxable income is $75 and the Canadian tax on that amount is $35.
- Canada gives a credit of $15 (the maximum credit allowed is 15 percent of the gross royalty taken into Canadian income) and collects a net tax of $20.
- The United States allows a credit for the net Canadian tax against its tax in excess of 15 percent. Thus, the maximum credit is $25 ($40 - $15). But since the net Canadian tax paid was $20, the usable credit is $20.
- To be able to use a credit of $20 requires Canadian source taxable income of $50 (50% of the U.S. tentative tax of $40). Under paragraph 6, $50 of the U.S. royalty is resourced to be of Canadian source. The credit of $20 may then be offset against the U.S. tax of $40, leaving a net U.S. tax of $20.
- The combined tax paid to both countries is $40, $20 to Canada and $20 to the United States.
One can easily(?) extrapolate this to interest, remembering that the credit given in Canada will still be zero.
I would conclude using the above technical explanation that you can deduct the US tax that is over 15% (ie. 2% in our example), but that you then can only get credit for SLIGHTLY LESS than the full US tax on US side (re-sourced 1116), because you paid Cdn tax on 2% less US interest that originally determined.
There is a pretty good explanation (using royalties, but applies to interest) in the historical canatech.pdf document, upon which I base many of my OPINIONS. The shortcoming it has is that it usually only briefly touches on how Canada has to apply things, but it happens to do so in the case of the limit on FTC. have you looked at this?
Example B
- A U.S. citizen who is a resident of Canada has $100 of royalty income arising in the United States. The tentative U.S. tax before foreign tax credit is $40.
- Canada, under its law, allows a deduction for the U.S. tax in excess of 15 percent or, in this case, a deduction of $25 ($40 - $15). The Canadian taxable income is $75 and the Canadian tax on that amount is $35.
- Canada gives a credit of $15 (the maximum credit allowed is 15 percent of the gross royalty taken into Canadian income) and collects a net tax of $20.
- The United States allows a credit for the net Canadian tax against its tax in excess of 15 percent. Thus, the maximum credit is $25 ($40 - $15). But since the net Canadian tax paid was $20, the usable credit is $20.
- To be able to use a credit of $20 requires Canadian source taxable income of $50 (50% of the U.S. tentative tax of $40). Under paragraph 6, $50 of the U.S. royalty is resourced to be of Canadian source. The credit of $20 may then be offset against the U.S. tax of $40, leaving a net U.S. tax of $20.
- The combined tax paid to both countries is $40, $20 to Canada and $20 to the United States.
One can easily(?) extrapolate this to interest, remembering that the credit given in Canada will still be zero.
I would conclude using the above technical explanation that you can deduct the US tax that is over 15% (ie. 2% in our example), but that you then can only get credit for SLIGHTLY LESS than the full US tax on US side (re-sourced 1116), because you paid Cdn tax on 2% less US interest that originally determined.
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Thank you so much for the further follow-up on this.
I will have to see if my software automatically reduces the income by the deduction, or if I have to do this manually.
I have not read the canatech.pdf, thank you for pointing this out to me. I'm going to take a closer look at this. The google books link I previously posted touched on this briefly, but it was not nearly as detailed.
I tend to agree with your analysis that only the extra amount over and above 15% can be claimed on line 232. I did several more hours of research on this after my last post, and couldn't find anything definitive. This seems to be the closest thing we have to rely on.
I'm going to try and claim the amount over 15% on line 232 and see what CRA does. I'm also going to send in a cover letter explaining the position I'm taking to give them a chance to correct me.
I just came across the link below as well. The way I interpret this, is for the portion that can be deducted on line 232 (whatever amount that actually is), I would not actually consider that amount as a deduction under 20(11) and 20(12). Because of the unique circumstances with the Canada/US tax treaty, I would write something like “I'm relying on treaty article XVIV paragraph 5†instead.
I would only use 20(11) or 20(12) if I had more than 15% from a country that did not have a tax treaty with Canada or if the treaty rate was more than 15%. Does that make sense to you?
https://taxinterpretations.com/tags/113807
I will have to see if my software automatically reduces the income by the deduction, or if I have to do this manually.
I have not read the canatech.pdf, thank you for pointing this out to me. I'm going to take a closer look at this. The google books link I previously posted touched on this briefly, but it was not nearly as detailed.
I tend to agree with your analysis that only the extra amount over and above 15% can be claimed on line 232. I did several more hours of research on this after my last post, and couldn't find anything definitive. This seems to be the closest thing we have to rely on.
I'm going to try and claim the amount over 15% on line 232 and see what CRA does. I'm also going to send in a cover letter explaining the position I'm taking to give them a chance to correct me.
I just came across the link below as well. The way I interpret this, is for the portion that can be deducted on line 232 (whatever amount that actually is), I would not actually consider that amount as a deduction under 20(11) and 20(12). Because of the unique circumstances with the Canada/US tax treaty, I would write something like “I'm relying on treaty article XVIV paragraph 5†instead.
I would only use 20(11) or 20(12) if I had more than 15% from a country that did not have a tax treaty with Canada or if the treaty rate was more than 15%. Does that make sense to you?
https://taxinterpretations.com/tags/113807
Given that canatech specifically demonstrates how Canada determines how much it taxes US this type of income, and that is states that the foreign income is reduced by the amount, I would not claim that the treaty is somehow different than 20(11) or 201(12). In fact, the treaty guarantees the deduction, whether 20(11) 201(12) are abolished, as long as there Is the 15% limit.
In any event, which is probably why I haven't bothered much with this, the 232 deduction does not reduce taxation at all. It merely changes the distribution between Canada and US.
Whatever your software does I would simply stick with. Its like 1116 in the US. Each software does it slightly differently, but as long as you are consistent, IRS isn't going to complain.
In any event, which is probably why I haven't bothered much with this, the 232 deduction does not reduce taxation at all. It merely changes the distribution between Canada and US.
Whatever your software does I would simply stick with. Its like 1116 in the US. Each software does it slightly differently, but as long as you are consistent, IRS isn't going to complain.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing