# US tax & claiming Canada income tax (FTC)



## lilliem

Hi, this is my first time posting on the forum. I've been looking through the archives and have been learning a lot from everyone here.

I have a question about claiming Canada tax on my US income tax return. 

My situation:
- receive a monthly pension from a US state.
- have rental properties in Canada.
- residing in Canada, have dual citizenship.

I've been self-filing my taxes to both countries since I moved to Canada a couple years ago. Because of various losses in investments, I have only owed tax to Canada and owed no tax to the US for the past couple years.

However, this year my rental income has increased and expenses decreased, so when putting in the numbers I would owe US tax - that is I didn't claim the Foreign Tax Credit.

My question is in regards to form 1116 to claim the Foreign Tax Credit. When I pay Canadian income taxes the tax owed is derived from both my US pension and rental income in Canada and US. 

As an example, let's say 60% of my income is my US pension and 40% is from my rental income in Canada. If I paid $1000 in taxes to Canada - can I claim the full amount on form 1116, or am I only allowed to input a percentage based on how much of the income came from a Canadian source? If I can't claim it on form 1116, is there anyway I can claim the tax paid to Canada on my pension income? What happens if I am eligible for a GST/HST credit - would that mean I am unable to claim the Canada income tax?

I've read Publication 514 and others on the IRS website but still don't have a clear idea on how to proceed with these concerns. If anyone can provide some assistance or suggestions I would really appreciate it. I am very confused and would like to avoid double-taxation of my pension. Thank you for the help.


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## Bevdeforges

Given that you're supposed to be declaring your worldwide income on your US tax returns, I see no reason that you wouldn't claim 100% of any income tax you pay in Canada against your US tax obligation.

The pension, however, may be subject to US taxes (with some sort of credit against your Canadian taxes). It depends if this is a "state" pension (i.e. paid by the state government) or a private pension. Normally, a government paid pension (like US social security) is subject to tax in the country where it is issued. 
Cheers,
Bev


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## lilliem

Thanks for the response Bev! Yes - what you wrote all makes sense to me. I guess I've been tripping up that the FTC 1116 form only talks about tax on foreign income and my Canadian tax was on both US and Canadian-source income.

Reading over Publication 514 again, I came across this:



> Certain Income Re-Sourced By Treaty
> 
> If a sourcing rule in an applicable income tax treaty treats U.S. source income as foreign source, and you elect to apply the treaty, the income will be treated as foreign source.
> 
> You must compute a separate foreign tax credit limitation for any such income for which you claim benefits under a treaty, using a separate Form 1116 for each amount of re-sourced income from a treaty country. See sections 865(h), 904(d)(6), and 904(h)(10) and the regulations under those sections (including Regulation section 1.904-5(m)(7)) for any grouping rules and exceptions.
> 
> See Tax Treaties , later, for further information regarding income re-sourced by treaty.


I wonder if this is applicable to my situation and if I should fill out two 1116 forms then - one for my Canadian income rentals and one for the US pension then.

On 1040, I have input my pension income and it counts towards my total taxable income.


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## Bevdeforges

You'll need the two 1116's if you are claiming credit for Canadian taxes paid on your US pension. Depending on the source of the pension, though, if you received some sort of allowance or credit for the US source pension, then maybe not. (Ultimately, you often wind up paying the tax to the US for US sourced income, and to Canada for the Canadian sourced income - but pensions are tricky because they can vary.)
Cheers,
Bev


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## lilliem

Hi Bev,
I'm sorry I couldn't reply earlier as I have been ill, but I wanted to thank you for your prompt reply - it is much appreciated.

Also, I had one final question about credit on US pension on Canadian taxes. Let's say I had a Social Security pension of $1000 (which I don't but let's say I do for the sake of an exercise) which Canada allows me to take a credit of 15% ($150 in this case) when filing taxes to them. In Canada, I am still taxed on the remaining $850. From your explanation it seems that I would be unable to claim the portion of Canadian tax paid on the $850 when filling out form 1116?

Thanks again for the help!


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## Bevdeforges

Not sure I understand you question. But your Canadian and US taxes are completely separate. The only "relationship" they have to each other is that what you have paid to the Canadian tax authority is available as a tax credit against any liability for taxes that you may have to the IRS.

The tricky part is that this is all supposed to be done on a "cash basis" - so that it's the taxes you pay in 2012 that are your tax credit on your 2012 return, not the taxes due on the 2012 income (unless you actually paid them during the year).
Cheers,
Bev


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## lilliem

From what I understand I could choose to use the cash method or the accrual method for form 1116. I was originally considering using the accrual method so that my rental income reported on Schedule E would match up with the numbers for 1116 but after reading that if I elect the accrual method I would be unable to elect the cash method unless I can receive permission from the IRS I'm concerned about which method to choose. Do most people tend to choose the cash method when reporting?

I'm sorry if my earlier question was confusing. Let me see if I can rephrase it...

You mentioned in an earlier reply:



> You'll need the two 1116's if you are claiming credit for Canadian taxes paid on your US pension. Depending on the source of the pension, though, if you received some sort of allowance or credit for the US source pension, then maybe not. (Ultimately, you often wind up paying the tax to the US for US sourced income, and to Canada for the Canadian sourced income - but pensions are tricky because they can vary.)
> Cheers,
> Bev


If I had Social Security benefits, Canada tax gives me a foreign pension credit which allows me to deduct 15% of the Social Security income from the calculation of my taxable income. According to what you wrote above, despite having to pay foreign taxes on the remaining 85% of the benefits I would be unable to claim any foreign tax paid on form 1116. For example, if 50% of my income was a US Social Security pension and the other 50% was from foreign rental property - does that mean I would only be able to claim 50% of foreign taxes paid and not the full 100%?

I want to know if I can claim tax paid to Canada on the remaining 85% of the pension or not. I'm still trying to find out if my pension is eligible for this credit in Canada, but whether I am able to claim the foreign taxes paid on my US-based pension on form 1116 will make a difference as it is a considerable percentage of my income.

Thanks again for the help. I hope that my question made more sense this time.


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## Bevdeforges

OK, I see what you're getting at. But I think we may be talking apples and oranges here. US Social Security is a "government" pension and usually winds up being taxed only by the country that is paying it. A private pension is, well, a private pension - and that can (and often is) taxed by the government in your country of residence. 

But as far as I know, if you wind up paying income tax to Canada on any part of your pension, then the amount you pay should be creditable against any US income tax liability on that same income. It shouldn't matter if you've taken an allowance of 15% or however much on your Canadian taxes.

But maybe we have someone here who has a similar situation and can tell us how they do things.
Cheers,
Bev


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