Question Regarding U.S. Foreign Tax Credit

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DavidM93
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Question Regarding U.S. Foreign Tax Credit

Post by DavidM93 » Mon Oct 07, 2019 11:59 pm

I had a question regarding Canadian income I earned before I moved to the U.S. and how I can avoid double taxation. After calling the IRS and CRA both are citing different rules. IRS is saying I received it after I moved to U.S. so its taxable in U.S. While CRA is saying it is Canadian sourced income, so I should pay tax on it for Canada.

Details:
- I moved to the U.S. on Jan 20th 2018 and established residency here (based on the substantial presence test).
- I have severed residential ties to Canada and the CRA has agreed that I am a non resident after Jan 20th based on NR73 determination.
- I will be filling a dual-status alien return for 2018 in the US. 1040 NR (until Jan 19th) and 1040 from Jan 20th to Dec 31st 2018.
- Before I moved to the U.S. I worked for a Canadian employer until Jan 15th 2018.
- However, I received two paychecks after I moved to the U.S. Jan 30th(final pay) and April 30th (bonus for 2017). My employer already withheld taxes on it (Income tax, Ontario tax, CPP, EI).

Questions:
1) To my understand all the Canadian income I received before Jan 20th is not taxable at the federal level. Is it taxable in California? (even though I both earned and received it before I moved there)
2) For the two paychecks I received after Jan 20th. Is it taxable in the U.S.? Even though I earned it before I moved to the U.S.?
3) Which country should I be paying this tax to?
4) Am I eligible in this case for a U.S. Foreign Tax Credit? (I went over the instructions and it said it is only for taxes I legally owe to the foreign country. Not sure if I legally owe Canada these taxes.)

Thanks!

nelsona
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Re: Question Regarding U.S. Foreign Tax Credit

Post by nelsona » Tue Oct 08, 2019 7:45 pm

You will probably find it MUCH simpler to file a simple 1040 for 2018, rather than dual status, so that you can use the standard deduction, but putting that aside, there are many case where money is taxed in BOTH countries, and the money you earned in 2018 is a good example. Anything sourced in Canada will be taxed there fisrt. If you happen to also be taxable due to residence, then it is taxed there "second" meaning that you can apply tax paid to the forst country as a credit against tax arising in the second country.

1. Incorrect. The income received after 1/20 is taxable in both (CRA/Ontario, and IRS/California)
2. Yes
3. Both, see my explanation above.
4. Yes.

since this is the case, you might as well report all income for the year on a normal 1040.
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DavidM93
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Joined: Mon Oct 07, 2019 11:32 pm

Re: Question Regarding U.S. Foreign Tax Credit

Post by DavidM93 » Tue Oct 08, 2019 8:23 pm

Thanks for your response nelsona!

To clarify, since I earned that income in Canada.
1) Would I pay taxes on that income there first? Then based on what I actually end up paying to the Canadian and Ontario government, take a credit on my U.S. tax return?

2) If it haven't filed yet in Canada, do I need to wait to file there first and determine the actual tax liability before I can file in the U.S.? Can I assume the tax that was deducted by my employer and reported on the T4 is what I will owe?

3) Is there a way I can just pay the tax in both countries for 2018, and then take the credit in the U.S. in 2019? I'm concerned that I will not be able to meet the October 15th IRS deadline if I do my Canadian taxes as well before then.

I completely agree with your point regarding filing the 1040 for the full year to keep things simple. However, I cannot make that choice because I am my filing status is single and based on the rules(see below), I'm forced to file as a dual status. If you know of another rule that allow's me to file as a resident for the full year. That would be really helpful.

I found this in Publication 519 from the IRS website.

"Choosing Resident Alien Status
If you are a dual-status alien, you can choose to be treated as a U.S. resident for the entire year if all of the following apply.

1) You were a nonresident alien at the beginning of the year.
2) You are a resident alien or U.S. citizen at the end of the year.
3) You are married to a U.S. citizen or resident alien at the end of the year.
4) Your spouse joins you in making the choice.

This includes situations in which both you and your spouse were nonresident aliens at the beginning of the tax year and both of you are resident aliens at the end of the tax year.

Note.
If you are single at the end of the year, you cannot make this choice. "

nelsona
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Re: Question Regarding U.S. Foreign Tax Credit

Post by nelsona » Wed Oct 09, 2019 8:18 am

You aren't using the criteria in Pub 519 to file full year, you are using the tax treaty non-discrimination clause which allows you to file as any other US citizen in the same circumstances as you, which is moving to US mid-year.

to you questions:
1. As I said, source country gets first kick.
2. You need to calculate the tax on your CDn return. You cannot use the withholding, since it is not the correct amount.
3. You need to take the credit in the year the income was reported. You can always amend your returns later. You are coming to thios awfully late in the year. You should have filed months ago.
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DavidM93
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Re: Question Regarding U.S. Foreign Tax Credit

Post by DavidM93 » Fri Oct 11, 2019 4:38 pm

Thanks Nelsona!! I went through the treaty in more detail. I think paragraph 2 (a). of Article XV (Dependent Personal Services) in the tax treaty also applies in my situation. Because I am considered a resident of U.S. after Jan 20th 2018 and I received the Canadian sourced income after that (and it was less than $10K). Therefore, I believe I can pay the tax in the U.S. for the Canadian sourced income I received after I became a resident of the U.S. and exclude it in Canada under the treaty.

Secondly, for taking the non-discrimination position on my U.S. tax return, do I need to fill out a special form or inform the IRS that I am taking this position? Specifically, is it paragraph 1 of the non-discrimination clause, that would allow me to fill as a full year resident?

Paragraph 2 of Article XV for your reference:

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:
(a) such remuneration does not exceed ten thousand dollars ($10,000) in the currency of that other State; or
(b) the recipient is present in that other State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, and the remuneration is not paid by, or on behalf of, a person who is a resident of that other State and is not borne by a permanent establishment in that other State.

nelsona
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Re: Question Regarding U.S. Foreign Tax Credit

Post by nelsona » Fri Oct 11, 2019 5:14 pm

Incorrect on the application of that treaty part, since you WERE a resident of Canada when it was earned in that year. You could try, but it would be denied by Canada. Better off just paying the little Cdn tax and applying it as a credit on your US return. You could try that technique is a future year when you are non-resident of Canada for entire year.

The clause you are looking for, for filing full year 1040 is XXV.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

DavidM93
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Joined: Mon Oct 07, 2019 11:32 pm

Re: Question Regarding U.S. Foreign Tax Credit

Post by DavidM93 » Sat Oct 12, 2019 6:58 pm

Ok I will keep that in mind. I was trying to see if this technique would work because due to credits I have accumulated from prior years (tuition, education, textbooks), my Canadian tax was effectively becoming zero and I was getting a refund on the taxes I already paid. On the U.S. side that would mean I couldn't claim any foreign tax credit on it and end up paying the full tax on it (even though the reason my Canadian taxes are effectively zero is because of credits I accumulated from prior years).

Would I have to reference somewhere in the 1040 that I have taking the XXV clause from the treaty to be treated as a full year?

nelsona
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Re: Question Regarding U.S. Foreign Tax Credit

Post by nelsona » Tue Oct 15, 2019 8:58 am

You don't really need to, but you could file an 8833 treaty claim just to explain, but I would not bother.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

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