QUESTION:
Hi,
I'm a US citizen living in Canada for the last few years. As a citizen of
the US I'm required to file a 1040 and declare my worldwide income. However,
being a resident of Canada and working in Canada I am also required to file
a T1 and TP1 (Quebec residents) on my worldwide income.
I declare my salary, interest and dividends and also claim the foreign
earned income exemption and foreign tax credit (taxes paid to Canada). I
declare the same salary, dividends and interest income in Canada. Everything
was Ok in the past but this year I had an additional $3,500USD to pay on the
US 1040.
I thought I could claim this $3,500USD as a foreign tax credit on the
Canadian side. I was wrong, CRA says I can't claim the amount as a foreign
tax credit because the tax is paid on income originating in Canada and is
not a foreign income.
That means I'm being taxed twice. Is there any way that this money can be
recovered? My salary has increased substantially so the foreign income
exemption does not offset my salary and the US foreign tax credit does not
fully offset my US tax liability.
I thought the tax treaty is supposed to avoid situations of double taxation.
I don't think my case is unique, there are plenty of Americans living and
working in Canada filing 1040's.
I would appreciate any ideas you may have in finding a solution.
Thanks
===============================
david ingram replies:
Your income for the year must have been over $260,000 US to end up with a
$3,500 US AMT (alternative Minimum Tax bill).
It is unusual that this would have been the first time that it ocurred.
Your income must have doubled this year in US dollars for that to happen. Of
course, because of the change in the exchange rate, there was a 35 to 40%
increase because of exchange alone.
One solution is for you to have US source investment income. Make your
investments in the US and they will create a US tax liability first which
will take away from the AMT amount and which WILL be deductible as a foreign
tax credit in Canada.
A second solution would be for you to perform some of the duties for your
company in the US. The US duties would be taxed in the US first, take away
from the AMT amount and be a tax credit in Canada.
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