Subject: Vicious circle in tax returns?
Expert: taxman at centa.com
Date: Monday June 26, 2006
Time: 09:16 AM -0700
QUESTION:
I am a US citizen now living and working for a Canadian firm in
Toronto, with some additional income from US investments. I know
I must file both a US return and a Canadian return, but there
seems to be a "vicious circle".
Each country wants me to report all worldwide income and then get
a tax credit for taxes paid to the other country. But I can't
compute the US tax until I know the Canadian tax and vice versa.
There must be a way out of this, yes?
---------------------------------------------
david ingram replies:
Your dilemma is what keeps us in business.
Compute the Canadian tax first because that is where you live.
Figure out the Canadian Tax per item - i.e. the tax you paid on
interest, the tax you paid on salary, the tax you paid on rents,
etc BEFORE you claim any US foreign tax credits. This is the
pure tax and is the way that the US automatically shows the
figures because the foreign tax credits come off very visually
after the tax is calculated.
Then figure out the US tax that you owe.
Note that the US tax is limited to 10% on interest and 15% on
dividends and royalties and pensions, etc. If your calculated
tax exceeds these numbers you claim the excess back on US form
1116 as a foreign tax credit because of income "resourced by
treaty".
Now you can claim the foreign tax credit on the US 1040 by using
form 1116 top claim a foreign tax credit for taxes paid to Canada
for wages, etc. Form 1116 has a nice breakdown for rents,
interest, dividends and other.
I have designed my own form to do the same thing for Canada and
the US together. (Took me over three weeks of programming to
make it work and I still end up with handwritten additions to
half of the clients because their situation exceed the limits of
my 4GL form.
You now figure out the FTC for Canada for each item
individually - i.e rent, interest, dividends, royalties, alimony,
pensions, etc.
And again, Canada will only allow you a 15% credit on Pensions
(Art XVIII), 10% on interest (Art XI), 15% on dividends (Art X)
and so on. You put the tax paid to the US on line 431 and the
net income from the US on line 433 of Canadian schedule 1. If it
is not all used up, you can claim the excess on the equivalent
lines of the Provincial 428 by filling in Canadian Provincial
form T2036.
W A R N I N G
After this is all done, you may find out that you have claimed a
foreign tax credit in Canada for more than you actually paid the
US or vice versa. If so, just reduce the amounts accordingly.
And, last but not least, if you give up, you know where to find
me.
=======================================
Phone consultations are $400 for 15 minutes to 50 minutes
(professional hour).
This is not intended to be definitive but in general I am quoting
$800 to $2,000 for a dual country tax return.
$800 would be one T4 slip one W2 slip one or two interest slips
and you lived in one country only - no self employment or rentals
or capital gains - you did not move into or out of the country in
this year.
$1,000 would be the same with one rental
$1,200 would be the same with one business no rental
$1,200 would be the minimum with a move in or out of the country.
These are complicated because of the back and forth foreign tax
credits. - The IRS says a foreign tax credit takes 1 hour and 53
minutes.
$1,500 would be the minimum with a rental or two in the country
you do not live in or a rental and a business and foreign tax
credits no move in or out
$2,000 would be all of the above and you moved in and out of the
country.
This is just a guideline for US / Canadian returns
We will still prepare Canadian only (lives in Canada, no US
connection period) with a three or four slips and no capital
gains, etc. for $125.00 up.
With a Rental for $300
A Business for $300 - Rental and business likely $400
And an American only (lives in the US with no Canadian income or
filing period) with about the same things in the same range with
a little bit more if there is a state return.
Moving in or out of the country or part year earnings in the US
will ALWAYS be $400 and up.
TDF 90-22.1 forms are $25 for the first and $10.00 each after
that when part of a tax return.
8891 forms are generally $50.00 to $100.00 each.
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
Capital gains *sales) are likely $50.00 for the first and $20.00
each after that.
--
David Ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa
Specialists
US / Canada Real Estate Specialists
My Home office is at:
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325
Calls welcomed from 10 AM to 10 PM 7 days a week Vancouver (LA)
time - (please do not fax or phone outside of those hours as
this is a home office)
email to taxman at centa.com
www.centa.com www.david-ingram.com
Disclaimer: This question has been answered without detailed
information or consultation and is to be regarded only as general
comment. Nothing in this message is or should be construed as
advice in any particular circumstances. No contract exists
between the reader and the author and any and all non-contractual
duties are expressly denied. All readers should obtain formal
advice from a competent and appropriately qualified legal
practitioner or tax specialist for expert help, assistance,
preparation, or consultation in connection with personal or
business affairs such as at www.centa.com. If you forward this
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