Calculation of IRS tax credit on RRIF distribution

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pyt
Posts: 4
Joined: Fri Sep 08, 2017 5:17 pm

Calculation of IRS tax credit on RRIF distribution

Post by pyt » Sun Oct 06, 2019 11:21 pm

Hello,

I have started to take periodic RRIF distributions this year. As expected, there is a 15% CRA withholding tax on the total amount. I have also computed the book value of the RRIF at the date I became a US resident so only the prorated amount of the distribution will be taxable by the IRS. My question is about the IRS foreign tax credit amount to use: is it the 15% on the whole distribution or just on the distribution amount that is taxable by the IRS?

For example, RRSP book value at entry in the US was $50,000. Value of RRIF on Jan 1st, 2019 was $100,000. Taking a $20,000 distribution this year. CRA withholds $3,000. Amount of distribution taxable by IRS $10,000. IRS Foreign Tax Credit to use : $3,000 or $1,500?

Thanks in advance

nelsona
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Re: Calculation of IRS tax credit on RRIF distribution

Post by nelsona » Mon Oct 07, 2019 10:43 am

For Form 1116, you use the entire tax, and the form will calculate what you can use. In your example It will likely be much less than $3000 -- parhaps as little as $500!! and you get to carryforward year-after-year, all these extra tax credits, for upto 10 years, and will not likely use them.
This is unfortunately how FTC's work. If you have other deductions on your 1040, which would make it possible for you to itemize your deductions rather than take the standard deduction, you could instead take the $3000 as a tax deduction.

If you have little other world income, you could try reducing your Cdn tax by a section 217 election, which may reduce the CDn tax you need to pay, thus making the carryforward less.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

pyt
Posts: 4
Joined: Fri Sep 08, 2017 5:17 pm

Re: Calculation of IRS tax credit on RRIF distribution

Post by pyt » Thu Oct 10, 2019 5:37 pm

Thank you, I will certainly take a look at Section 217.

Another question if I may: If I report accrued interest from OID (STRIP) securities held in Canada, on which there is no Canadian tax withheld, would these increase the FTC portion?

Thanks again for your valuable insight!

nelsona
Posts: 16014
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Calculation of IRS tax credit on RRIF distribution

Post by nelsona » Fri Oct 11, 2019 5:09 pm

Yes, but it goes on a different 1116, passive income. Your RRIF is general limitation income. They don't mix. So unless you have other foreign passive income, you won't get any credit.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

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