Foreign Income Tax Credit US/CAN

[Burke]

US allows FITC for income taxed in Canada as well as US. (US citizen living in Canada) Problem is, Canada also allows FITC there on income taxed in US. Different tax rates here on regular income (not wages which are excluded via 2555) as well as dividend and capital gain income, make figuring out what the Canadian tax actually is pretty complicated. How to resolve when both countries allow FITC? Do I use the Canadian tax after their FITC is applied, or before?

[TaxGuyBill]

Wow, I can't wrap my head around that right now. I'll need to think about, but here are a few thoughts:

Is there income from both countries? If the ALL of the income is Canadian-sourced, the Foreign Tax Credit would only be on the US tax return, right?

A brief look at Publication 597 seems like it might have to do with if the taxpayer is considered a "resident" of the US or Canada.

https://www.irs.gov/pub/irs-pdf/p597.pdf

https://www.irs.gov/Businesses/International-Businesses/Canada---Tax-Treaty-Documents

[Uncle]

Each country/state/province gets to tax the income that originates in that country. Then on the other country's tax return you take the credit.

Christopher Mewhort, EA

[mastertaxguy]

Us citizen working in canada

Perhaps the preparer should consult (read) the US-Canada tax treaty and related material (IRS publications among others) available on the IRS web site.

[Burke]

I have everything the IRS publishes, including the US/Canada income tax treaty and have spent hours studying this. TP is US citizen living and working in Canada and has been so for 30+ years. Has income from US sources (inherited investments) and Canadian sources. Return used to be pretty simple (wages excluded via 2555-EZ) until he retired and starting receiving all sorts of IRA's (US and Canadian.) CPP and OAS benefits are not taxed in US. But apparently the Canadian IRA's are. (Bought with pre-tax dollars.) I think I have resolved every issue, except for the FITC. Canadian preparer and I consult every year, and he tells me whatever tax TP pays in the US is a credit on the Canadian return, as TP must report everything received in the US on the Canadian return too. I have never taken FITC on the US return, but now I am wondering if I should. Doesn't make sense, since the US tax reduces the Canadian tax. So bottom line, to me it is a wash for the TP. Normally when we deduct FITC -- say on mutual funds -- no return is filed in the other country. I'm going with my gut, and no FITC.

[Phil Hogan, CPA, CA]

US allows FITC for income taxed in Canada as well as US. (US citizen living in Canada) Problem is, Canada also allows FITC there on income taxed in US. Different tax rates here on regular income (not wages which are excluded via 2555) as well as dividend and capital gain income, make figuring out what the Canadian tax actually is pretty complicated. How to resolve when both countries allow FITC? Do I use the Canadian tax after their FITC is applied, or before?

Without lots of experience and a proper external calculation model this can be very difficult. We prepare hundreds of US/Canadian tax returns and we've developed a proprietary excel model to help with these calculations.

However if you have specific questions on how to treat 1116 FTC please let me know.

Cheers

Phil