I have seen this topic partly addressed, but either the responses are not entirely complete or I haven’t been able to understand them (most likely the latter.)
Here are my facts: U.S. citizen living in Canada (long term). I have earned interest in a U.S. bank account. What are the tax consequences both in US and Canada for that interest? I keep hearing the treaty says it is non taxable, but that can be right? I also have heard about this 3-bite rule, but I haven’t been able to understand the concept. Please help. Thanks in advance.
(Also, would result be different (and how) if the individual was a Canadian citizen and U.S. citizen?)
U.S. Citizen in Canada and taxation of U.S. source interest
Moderator: Mark T Serbinski CA CPA
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J.kaminsky
- Posts: 2
- Joined: Thu Jan 04, 2018 2:49 pm
Short answer: it is taxable in both countries (US because you are a US citizen, Canada because you are a Cdn resident).
Longer answer: Although it is US-sourced, you cannot claim a tax credit on your Cdn tax return for the US tax you owe on the interest because Cdn residents who are NOT US citizens wouldn't be taxed on this income by US.
So, the remedy is to claim a foreign tax credit on your US return, by "re-sourcing by treaty" the US interest as foreign income, to the extent that you lower the US tax to zero on that income.
It doesn't matter what citizenship you have except for US. It applies equally to all Cdn residents with US citizenship.
I don't know anything about a 3-bite rule. Maybe some use it to describe the process I outlined above.
Longer answer: Although it is US-sourced, you cannot claim a tax credit on your Cdn tax return for the US tax you owe on the interest because Cdn residents who are NOT US citizens wouldn't be taxed on this income by US.
So, the remedy is to claim a foreign tax credit on your US return, by "re-sourcing by treaty" the US interest as foreign income, to the extent that you lower the US tax to zero on that income.
It doesn't matter what citizenship you have except for US. It applies equally to all Cdn residents with US citizenship.
I don't know anything about a 3-bite rule. Maybe some use it to describe the process I outlined above.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
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J.kaminsky
- Posts: 2
- Joined: Thu Jan 04, 2018 2:49 pm
I'll make it simple:
First, tax realated to specific income is always based on the effective (average) taxrate, not marginal.
Once you do both taxes first time (include all your world income on both returns), then you will be calculate the the US and Cdn tax related to this US interest income.
For example, you earned US$100 bank interest in US. This yields, say, $8 of IRS tax. That same US based interest, yields $12 of CRA tax. (these are all in USD)
So, you are allowed, by treaty, to claim up tp $8 of tax credit, using form 1116, under the re-sourced by treaty category. Your software should be able to handle this. The result is you pay $12 CRA tax and 0 IRS tax, which ends up to be exactly what a non-US citizen living in Canada would pay.
If by some quirk, your taxrate in Canada was lower than US, say, $8 CRA tax and $10 IRS tax, then you would be allowed to claim a credit of upto $8.
If your income figures are realistic, likely you use the foreign earned income exclusion on your 1040 (form 2555) and so the tax on your interst will be very small.
First, tax realated to specific income is always based on the effective (average) taxrate, not marginal.
Once you do both taxes first time (include all your world income on both returns), then you will be calculate the the US and Cdn tax related to this US interest income.
For example, you earned US$100 bank interest in US. This yields, say, $8 of IRS tax. That same US based interest, yields $12 of CRA tax. (these are all in USD)
So, you are allowed, by treaty, to claim up tp $8 of tax credit, using form 1116, under the re-sourced by treaty category. Your software should be able to handle this. The result is you pay $12 CRA tax and 0 IRS tax, which ends up to be exactly what a non-US citizen living in Canada would pay.
If by some quirk, your taxrate in Canada was lower than US, say, $8 CRA tax and $10 IRS tax, then you would be allowed to claim a credit of upto $8.
If your income figures are realistic, likely you use the foreign earned income exclusion on your 1040 (form 2555) and so the tax on your interst will be very small.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
[quote="nelsona"]Short answer: it is taxable in both countries (US because you are a US citizen, Canada because you are a Cdn resident).
Longer answer: Although it is US-sourced, you cannot claim a tax credit on your Cdn tax return for the US tax you owe on the interest because Cdn residents who are NOT US citizens wouldn't be taxed on this income by US.
So, the remedy is to claim a foreign tax credit on your US return, by "re-sourcing by treaty" the US interest as foreign income, to the extent that you lower the US tax to zero on that income.
It doesn't matter what citizenship you have except for US. It applies equally to all Cdn residents with US citizenship.
I don't know anything about a 3-bite rule. Maybe some use it to describe the process I outlined above.[/quote]
Sorry to bump an old thread, but I figured it was less intrusive than starting a new one on an old topic. This "re-sourcing by treaty" you reference, this is what allows you to use the interest (or in my case, capital gains distribution) on line 1a of part 1g of form 1116? I have been hesitant to proceed with the form as the income is supposed to be of a "foreign" source. Like the original poster, I'm an American living in Canada with the assets being US based, but of course taxed in Canada as well.
Thanks.
Longer answer: Although it is US-sourced, you cannot claim a tax credit on your Cdn tax return for the US tax you owe on the interest because Cdn residents who are NOT US citizens wouldn't be taxed on this income by US.
So, the remedy is to claim a foreign tax credit on your US return, by "re-sourcing by treaty" the US interest as foreign income, to the extent that you lower the US tax to zero on that income.
It doesn't matter what citizenship you have except for US. It applies equally to all Cdn residents with US citizenship.
I don't know anything about a 3-bite rule. Maybe some use it to describe the process I outlined above.[/quote]
Sorry to bump an old thread, but I figured it was less intrusive than starting a new one on an old topic. This "re-sourcing by treaty" you reference, this is what allows you to use the interest (or in my case, capital gains distribution) on line 1a of part 1g of form 1116? I have been hesitant to proceed with the form as the income is supposed to be of a "foreign" source. Like the original poster, I'm an American living in Canada with the assets being US based, but of course taxed in Canada as well.
Thanks.