Foreign Tax Credit on 1040

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suedor
Posts: 14
Joined: Thu Mar 03, 2005 11:26 pm

Foreign Tax Credit on 1040

Post by suedor »

There was recently some discussion about foreign tax credits on the U.S. 1040. I believe it was stated that CPP premiums could not be used as a foreign tax credit. I am confused by this assertion. Let me give an example, U.S. resident commutes to work each day in Canada, pays Canadian fed and prov taxes as well as EI and CPP taxes. It is my understanding that all of these (fed tax, prov tax, CPP, EI taxes) can be used on form 1116 to calculate foreign tax credit. I say this based on knowing that a cross border accountant (if you follow the cross border tax community then you would likely recognise his name if I gave it, just adding this to let you know that this accountant does indeed know what he is doing) routinely uses all these taxes (including EI and CPP) when calculating the FTC on form 1116.

Also, when checking David Ingram's site (he is not the accountant to whom I was referring above) the following was his reply a couple of months ago to a scenario like the one I mentioned above: "You will file a Canadian Tax return first.  After having a final figure for the tax you paid to Canada, convert the tax, EI and CPP figures you calculated to US dollars and claim them as a foreign tax credit on US form 1116 which you will attach to your 1040"

Sorry if I misinterpreted the previous discussions about this and maybe the scenario above is different from what was being discussed. It appears to me that (at least in the scenario above) both EI and CPP taxes are used to calculate FTC on form 1116.

Am I misunderstanding something?
nelsona
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Post by nelsona »

I used to think CPP was creditable too.

In fact I have claimed it on a couple of 1116s.

However, the IRS has specific intructions on this.

I will dig it up later.

By the way, I usually have to correct Ingram about once a week on one of his posts.

Here is the info from Pub 514

http://www.irs.gov/publications/p514/ar02.html



<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">Pension, unemployment, and disability fund payments. A foreign tax imposed on an individual to pay for retirement, old-age, death, survivor, unemployment, illness, or disability benefits, or for similar purposes, is not payment for a specific economic benefit if the amount of the tax does not depend on the age, life expectancy, or similar characteristics of that individual.

No deduction or credit is allowed, however, for social security taxes paid or accrued to a foreign country with which the United States has a social security agreement. For more information about these agreements, see Publication 54. <hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

<i>nelsona non grata</i>
suedor
Posts: 14
Joined: Thu Mar 03, 2005 11:26 pm

Post by suedor »

Thanks for the feedback Nelson. I understand the point you referenced in publication 514 and at first glance would agree. It seems that this would make sense (i.e no credit) mainly if one took advantage of the temporary 5 year posting thing to avoid paying FICA and instead paid CPP while temporarily in the U.S. But it would hardly seem fair that no credit could be taken for CPP if one resided in the U.S. and worked in Canada but yet a person living in Canada and working in the U.S. could take a foreign tax credit for FICA on the Canadian return (I know that this is only due to the U.S-Canada tax treaty now that Canada has generally stopped giving credit for foreign social security taxes, other than the U.S. basically).

I find it curious that cross border accountants (the two I mentioned above anyway; and it would be interesting to get the input of other specialists on this) still seem to be using CPP as a foreign tax credit on the form 1116. I wondered if the tax treaty provides for this and it appears that it may upon doing further research.

From the IRS site the technical explanation (tax treaty; technical explanation) is as follows:

From the 3rd protocol of 1995:
"New paragraph 2(a) of Article II describes the Canadian taxes covered by the Convention. As amended by the Protocol, the Convention will apply to all taxes imposed by the Government of Canada under the Income Tax Act. "

and:

From the technical explanation of taxes covered by the convention:
"The convention has the effect of covering the Canadian social security tax in certain respects because under Canadian domestic tax law no such tax is due if there is no income subject to tax under the Income Tax Act of Canada. Taxes imposed by the states of the United States, and by the provinces of Canada, are not generally covered by the Convention. However, if such taxes are imposed in accordance with the provisions of the Convention, a foreign tax credit is ensured by paragraph 7 of Article XXIV (Elimination of Double Taxation)."

I wonder if the above references to the treaty make CPP premiums creditable?
nelsona
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Post by nelsona »

Like I said, I have always included it as a foreign tax, having only read this provision last year.

Based on your reading I would agree that CPP is included, however I'm puzzled by the expression "covering the Canadian social security tax <i>in certain respects</i>".

What certain respects? Either it is or it isn't.

And remember that the technical expalantion pre-dates these protocols.

But, whatever the interpretation of the treaty, it would take precedence over any IRS publication.

As with many things cross-border, I would make the claim, but be prepared to amend if rejected.


Has as been stated in another place, 'fairness' is not really a credible argument as to why something should or should not be taxed.

<i>nelsona non grata</i>
suedor
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Joined: Thu Mar 03, 2005 11:26 pm

Post by suedor »

rhollan,
From what I remember of your posts on this topic it sounded like you directed your cpa to these conclusions, rather than the other way around, and that he agreed with your conclusions. Is this the case?

As Nelson said, the tax treaty overrides what is stated in publication 514. The technical explanation to the tax treaty states, as I posted, that Canadian social security taxes are covered by the treaty. The technical explanation to the 3rd protocol of 1995 makes no change to the interpretation that Canadian social security taxes are covered so the original interpretation would remain.

I also find the statement "covering the Canadian social security tax in certain respects" to be odd but it seems to be saying that "oh well, I guess it is covered, not specifically, but there could be a good enough argument for it so we'll cover it".

rhollan, in your case the FTC may not have mattered but for some people who have ongoing cross border situations (eg. work in Canada, live in the U.S.), CPP and EI credits would be almost a credit of $2000 U.S. per year on the 1040 (from form 1116).

I agree with not being overly aggressive, who wants to get burned with being incorrect during an audit. But if you are also not claiming those things to which you are entitled, you are giving a large donation to the government, and it appears that one is indeed entitled to claim CPP as a foreign tax credit.

Also why would EI be allowed as a credit and not CPP from the interpretation of publication 514? Are they not both social security taxes? I would think that pub 514 also disallows EI as a credit. Just wondering since pub 514 says (as Nelson posted):

<i> "Pension, <b>unemployment</b>, and disability fund payments.   A foreign tax imposed on an individual to pay for retirement, old-age, death, survivor, <b>unemployment</b>, illness, or disability benefits, or for similar purposes, is not payment for a specific economic benefit if the amount of the tax does not depend on the age, life expectancy, or similar characteristics of that individual.

   No deduction or credit is allowed, however, for social security taxes paid or accrued to a foreign country with which the United States has a social security agreement. For more information about these agreements, see Publication 54. </i>
suedor
Posts: 14
Joined: Thu Mar 03, 2005 11:26 pm

Post by suedor »

Hi rhollan,
I agree in your case that the credits were irrelevant, What I meant was the following: <i>No deduction or credit is allowed, however, for social security taxes paid or accrued to a foreign country with which the United States has a social security agreement. </i>.

In other words, because CPP and EI are social security taxes then pub 514 appears to exclude either from being claimed as a credit as I see it.

However, the point is that the tax treaty (technical interpretation) overrides pub 514 and makes it, I believe, so that both CPP and EI ( i.e social security taxes) can be claimed as foreign tax credits as quoted in an above post. I am certainly not an expert though and am just trying to understand all this

Your CPA must have been familiarwith pub 514 but not the technical interpretation of the tax treaty. Out of curiosity, is your CPA located in Canada or the U.S.?
nelsona
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Post by nelsona »

The eligibility of EI as a foreign tax credit has nothing to do with any treaty, as suedor pointed out.

The IRS' own rules on what constitutes a tax, alows that EI is an eligible tax.

IRS does not by its own rules allow for CPP to be credited, so one must rely on the treaty for such a case.

So, rhollan's cpa had it in reverse, thinking that he needed the treay to claim EI. which is false.

Remember, just because a treaty mentions a benefit doesn't mean that one needs to use the treaty, if current regs already allow it.

What the treaty does is protect against a <i>change</i> that might come along that takes away a benefit.

Suedor used a good example in SS as a tax credit. CRA decided that foreign SS payments are no longer creditable. But the treaty makes sure that SS is still creditable, even if the 'SS' of other foreign countries is not.


<i>nelsona non grata</i>
suedor
Posts: 14
Joined: Thu Mar 03, 2005 11:26 pm

Post by suedor »

So it seems that to claim CPP as a credit on the 1040 (form 1116) one must use the tax treaty. Would one use form 8833 for this? I doubt that cross border accountants bother to do this. At least in my experience they don't and Ingram's response on his forum would seem to indicate that he also does not do this. Has anybody here had a cross border accountant use the tax treaty to claim credit for CPP or did they just go ahead and claim it on 1116 lumped in with the other tax? Just curious.
suedor
Posts: 14
Joined: Thu Mar 03, 2005 11:26 pm

Post by suedor »

rhollan,

Go to http://www.irs.gov/businesses/internati ... 39,00.html and read the technical explanation of the treaty (not the treaty itself). The section I referenced on Canadian social security taxes is near the beginning.

Not to pound this further but I still think pub 514 treats CPP and EI the same (because they are social security taxes) and excludes both as a credit thus leading to the need to use the treaty to claim these as a credit. Anyway.....
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