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My client is a US and Canadian citizens who resides in Canada and only has investment income from the US. My understanding is that I report all income on the US return, then take a credit for the foreign taxes paid on that income. Do I just enter this on Form 1116 Parts I and II as dividend and interest income and enter the foreign taxes paid on these amounts or do I use Part III. The amount of foreign taxes paid is greater than the US taxes due so my client now owes no taxes on the 1040. I am concerned I have done this wrong.
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It doesn't always work that way. We earn our keep by dealing with the difficult stuff.
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It is not as simple as that. You will need to refer to the US-Canadian income tax treaty, determine which country has the primary right to tax certain income, what rate apply to which type of income, whether saving clause or one of the exceptions apply, and then how foreign tax credit may be claimed on the US tax return based on these considerations.
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"In addition to the normal rules for the avoidance of double taxation, the Convention contains a rule
not found in either the model or the existing convention for eliminating double taxation of United States
citizens who are residents in Canada. Under Canadian law, the credit for foreign taxes on dividends,
interest, and royalties is limited to 15 percent. Though the United States withholding rates under the
Convention on these forms of income do not exceed 15 percent, United States citizens are subject to
United States tax at normal progressive rates. Under the new Convention the United States agrees to
give Canada the primary right to any tax on such income in excess of 15 percent, with the United States
retaining only a residual right to tax."
My client is going back to Canada so I have to finish this today. Any helpful advice you have would be greatly appreciated.
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There have been 5 protocols to the treaty and what you quoted is from an older one that has been superseded. Also, re-sourcing pursuant to Article XXIV(6) will be necessary when preparing F.1116 for FTC, in order to alleviate double taxation on that particular type of income to the extent stated in the relevant articles.
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I have a US only citizen who has received Canadian Royalties. We claim the worldwide income on the US 1040 and of course, take the FTC for the Canadian Part XIII withholdings, do we need to file in Canada to justify the income withheld is correct? There is no refund of Part XIII withholdings, I am told.
Thanks, Ben H.