Calculating Canadian Dividend Tax Credit for Tax Paid on Form 1116

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

Post Reply
Posts: 6
Joined: Tue Jul 19, 2022 12:24 pm

Calculating Canadian Dividend Tax Credit for Tax Paid on Form 1116

Post by AvalonJeff »

Taxpayer is US/CDN duel national, resident in Canada, trying to calculate the Canadian tax paid on Dividend income for use with FTC on U.S. Form 1116. Taxpayer files MFS with NRA spouse who does not file in the U.S. Taxpayer splits his pension income with spouse on Canadian return. This causes the taxpayer's average tax rate to get quite low.

The issue is that when the average tax rate of a Canadian return gets low enough, the Canadian Dividend Tax Credit becomes greater than the product of the average tax rate times the grossed-up dividend. The taxes paid on that dividend becomes a negative number. Or perhaps I'm doing this calculation incorrectly? If not, what number does the taxpayer enter into his U.S. return as the foreign taxes paid on his dividend income? Incidentally, this dividend is the only passive income to be reported to the IRS. The taxpayer has no interest income nor capital gains.

Actual Canadian Qualified Dividends $10,000
Gross-up % = 38%
Grossed-up dividend amount: $13,800
Federal Tax Credit Gross-up % = 15.0198%
Federal Tax Credit amount = $2,072.73
Provincial Tax Credit Gross-up % = 6.5%
Provincial Tax Credit amount = $745.20
Total Dividend Tax Credit amount = $2,817.93
Avg tax rate for this return = 20%
Avg Tax Rate multiplied by Grossed-up Dividend = $2,760.00
Tax Credit exceeds the tax by $57.93
Post Reply