# USA/Canada IRS Foreign Tax Credit Form 1116: Correct figuring of income allocation when one revenue agency taxes certain income while other does not



## zephyr707 (Oct 1, 2021)

Hello,

I am a dual US/Canadian citizen residing in Canada and working on my 1040 with form 1116 for the foreign tax credit. I don't believe I need to take the credit to offset taxes since my US taxable income will be 0, but if I wanted to carry forward any FTC it would be beneficial.

I'm trying to figure out how to correctly apportion/allocate taxes paid to the Canadian Revenue Agency (CRA) to report on my IRS f1116. For my specific situation the majority of my income comes from capital gains that are taxed by the CRA, but not by the IRS. What remains are some US-sourced dividends (FTC does not apply) and some Canadian sourced interest income, the latter of which does not have a specific tax amount that can be easily referenced.

It seems fairly straightforward if it involves multiple sources of income categories addressed by the f1116. I have found the following document helpful:



> "If the foreign tax you paid or accrued relates to more than one category of income, apportion the tax among the categories. The apportionment is based on the ratio of net foreign taxable income in each category to the total net income *subject to the foreign tax*. See _Allocation of Foreign Taxes_ in Pub. 514 for an example."


Pub.514 with section "Allocation of Foreign Taxes" has a very helpful breakdown with an example of wages (general) and interest (passive) categories of income and also includes the following:



> "*Solely for purposes of allocating foreign taxes to separate limit income categories*, those separate limit categories include any U.S. source income that is taxed by the foreign country or U.S. possession."


I can't seem to find any information about same category apportionment or how to properly deal with foreign taxed income that is not taxed by the IRS. 

After reading through some of these documents I feel like I should treat the income not taxed by the IRS as a separate category of income for calculation purposes, apportion the deductions and taxes, and then derive the final foreign tax on the interest income. Otherwise I am not sure how to correctly split up the tax paid to the CRA to determine what I can claim on the f1116. Any help, insight, or relevant documentation would be greatly appreciated.

Additionally, it is mentioned in the same document that:



> "If the foreign law does not provide for apportionment, use the principles covered in the U.S. Internal Revenue Code."


Does anyone know or have a link to how Canada apportions income? I have thought about contacting the CRA's Competent Authority in order to obtain an official interpretation on how this should be handled.

many thanks!
z


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