CRA or IRS changed your return: amending the other country’s

The CRA changed or refunded my tax: do I have to tell the IRS?

A Canadian refund or reassessment can require IRS notification if it changes foreign income tax you claimed as a US credit. The IRS calls the qualifying change a foreign tax redetermination. IRS: Publication 514.

This page covers Canadian tax claimed as a credit. If you deducted it, or excluded the income under the foreign earned income exclusion (tax on excluded income is not creditable), this procedure does not apply; see Americans living in Canada and Foreign income on a US return.

Check what the notice changed:

• Canadian income tax was refunded or reduced: a foreign tax redetermination. Read on.
• Canadian income tax went up, including because the CRA cut the credit it gave you for US tax: on the paid basis this is generally not a redetermination; see “The CRA raised my Canadian tax” below.
• Your income was changed or added: the same income may need correcting on the other country’s return. That is an ordinary amendment, not a redetermination; see Form 1040-X instructions and CRA: Changing a tax return.
• Only interest, penalties or a CRA benefit changed: foreign interest and penalties are not creditable (IRS: Publication 514), and a CRA payment is not necessarily an income tax refund.

Review every US year affected, including years that used carried credits. If no year’s US tax changes, no Form 1040-X is needed, but you still attach Schedule C (Form 1116) to the change-year return. Schedule C instructions, Who Must File.

By when must I amend my US return, and what happens if I am late?

If a foreign tax redetermination increases US tax for an affected year, generally notify the IRS by the due date, including extensions, of the original US return for the year the redetermination occurs. 26 CFR 1.905-4(b)(1)(ii). For a calendar-year return, the regular due date is April 15. If you live outside the United States, an automatic extension generally runs to June 15, Form 4868 extends it to October 15, and the IRS may allow December 15 on a written request. IRS: Publication 54.

The clock can start before any money arrives: on the paid basis, a refund or a determination that your tax is lower than you paid and credited is a redetermination. 26 CFR 1.905-3(a). The rules run the deadline from the year the redetermination “occurs” but do not say whether, for a CRA reassessment, that is the notice year or the refund year. If they differ, ask a preparer which is the change year before either deadline passes.

Failure to notify without reasonable cause can cost 5% of the additional US tax for each month or part of a month, capped at 25%. The IRS can assess the additional tax even after its normal time limit to assess has passed. IRS: Publication 514. Interest on tax added by a foreign refund generally runs only from the day you receive it, except to the extent the CRA paid you interest for the earlier period. 26 CFR 1.905-4(e)(1).

If the change lowers US tax and produces an overpayment, file the refund claim within the ordinary refund period, generally the later of 3 years after filing or 2 years after paying the US tax. Form 1040-X instructions, When To File. A claim attributable to increased foreign tax credits generally has a special period of 10 years, measured from the regular US filing due date, without extensions, for the year the foreign taxes were actually paid or accrued. IRS: Publication 514, Time Limit on Refund Claims.

Which US year do I amend: the payment year or the change year?

For a refund or reduction, amend the earlier US year in which you claimed the tax as a credit, plus any year that used its carryover; the change year only sets the deadline and the year you attach Schedule C. Additional Canadian tax depends on whether your US credit uses taxes paid or accrued. IRS: Publication 514.

The regulation’s own examples show the split: a cash-basis individual who pays extra foreign tax claims it in the payment year, and one who receives a refund redetermines the year the tax was credited. 26 CFR 1.905-3, examples 6 and 7. The Canadian year on the reassessment may therefore differ from the US year you amend.

Check whether “Paid” or “Accrued” was selected in Part II of Form 1116; the accrued choice cannot be made on an amended return. IRS: Publication 514, Credit for Taxes Paid or Accrued.

What do I file: Form 1040-X, revised Form 1116 or only a statement?

When US tax changes in an earlier year, the usual filing is Form 1040-X with a revised Form 1116 and an explanatory statement for that year, plus Schedule C (Form 1116) with the original change-year return. Form 1116 is not required under the small-credit election: passive income only, all on payee statements, and qualified foreign taxes of no more than US$300 (US$600 jointly). 26 CFR 1.905-4(b)(1)(i), IRS: Publication 514. If the change increases US tax, the Form 1116 instructions ask you to write in the explanation of changes on Form 1040-X: “This amended return and Form 1116 are for a change in foreign tax credit that increases U.S. tax liability.” Form 1116 instructions.

If no year’s US tax changes, including when a carryover absorbs the extra tax, no Form 1040-X is needed. Attach Schedule C, one for each applicable income category, to the original change-year return by its due date, including extensions. A letter alone is not the ordinary procedure. Schedule C instructions, Who Must File, 26 CFR 1.905-4(b)(1)(v).

The supporting statement should identify the affected years, original and revised foreign tax, payment, accrual and refund dates, exchange rates and refund interest. IRS: Publication 514, Contents of statement. On Schedule C, a decrease in foreign tax goes in Part II and the change in US tax in Part IV. Schedule C instructions. On a joint return, both spouses sign and are each generally liable for the added tax, interest and penalties. Form 1040-X instructions.

The CRA raised my Canadian tax: can I claim more US credit?

More Canadian income tax may support more US credit, but the extra tax must qualify and fit within the US credit limit. On the paid basis, an unpaid reassessment is not an additional tax payment; additional tax paid generally belongs on Form 1116 for the payment year. If you are contesting the reassessment, a cash-basis filer generally cannot claim the credit until the contest is resolved, even for amounts already paid, unless a provisional credit is elected on Form 7204. IRS: Publication 514, Contesting your foreign tax liability.

On the accrued basis, a qualifying change can require revisiting the earlier year, and accrued tax not paid within 24 months after the close of the year it relates to is treated as refunded, so that year’s credit is reduced until you pay it. 26 CFR 1.905-3(a).

Canadian and Quebec tax were refunded: what happens to my US credit and carryovers?

A refund of Canadian income tax you credited generally means correcting the US credit for the year you claimed it, with Form 1040-X and a revised Form 1116, and checking each year that used a carryover. If the correction changes US tax in no year, Schedule C with the refund-year return is enough. Form 1116 instructions, 26 CFR 1.905-4(b)(1)(v).

The federal and Quebec refunds are separate notices, so check both. Include a Quebec refund when the refunded provincial tax was part of your US claim; income tax paid to a foreign province qualifies for the credit. IRS: Publication 514, What Foreign Taxes Qualify.

Recalculate the original credit, then follow the corrected unused credit into each carryback or carryforward year. A refund may reduce only unused credits, increase tax in the original year, or increase tax in the carryback or later carryforward year that used those credits. Review the chain before concluding that no amendment is needed. Schedule B (Form 1116) reconciles carryovers. IRS: Publication 514, Carryback and Carryover. For why unused Canadian tax arises, see Why you still owe the IRS after paying Canadian tax.

A refund is generally translated at the exchange rate originally used for the refunded tax; keep the refund-date rate too, because a currency gain or loss may need review. 26 CFR 1.905-3, example 7. Federal and Quebec changes affecting one year can sometimes be combined in one filing, but that does not postpone the deadline: if the combined result increases US tax, the first redetermination that would increase it sets the date. 26 CFR 1.905-4(b)(1)(iv).

The IRS changed or refunded my tax: must I amend Canada’s return, and by when?

An IRS change matters to Canada when it alters the US tax you used for your Canadian foreign tax credit. If it came as an IRS letter, answer that first; see Answering an IRS letter while living in Canada.

The CRA folio says the CRA should be notified of any increase or decrease in foreign tax paid that results from a later foreign assessment or reassessment, with proof of payment for additional tax, and that refunded or refundable foreign tax is not tax paid for the credit. CRA folio, paragraphs 1.33 and 1.45. The folio sets no notification deadline. The limits that apply are the CRA’s own time to reassess because of a foreign tax payment or refund, which generally runs 3 years after the normal individual reassessment period of three years ends (Income Tax Act, section 152(4)(b)(iv)), and the refund limit: an individual refund adjustment generally cannot be made beyond 10 calendar years after the tax year ends (CRA: Changing a tax return).

More IRS tax does not automatically raise the Canadian credit, which is capped by your income from sources in the foreign country. Income Tax Act, section 126(1). Quebec returns are corrected separately with Revenu Québec on Form TP-1.R-V. Revenu Québec may reassess within six years after the later of the original assessment and the return’s filing date because of a foreign tax payment or reimbursement. Quebec Taxation Act, section 1010(2). For T1-ADJ, acceptable proof, interest relief and objections, see Foreign tax credit review.

Who changed what: which return do I amend, and by when?

The other country’s filing depends on the tax effect, not on which authority sent the notice.

Does the change flow into my state return?

A US federal adjustment can require a separate state review, but state reporting duties and tax effects vary. Check every state return affected by changes to income, deductions or credits; a federal foreign tax credit correction alone does not establish the state result. If you still have an old-state return after moving to Canada, see State tax after moving to Canada.

California is one example, and its published rule covers changes made by the IRS. Additional California tax from an IRS change is reported within 6 months of the final federal determination. A California refund after an IRS change must be claimed by the latest of California’s ordinary refund deadlines and 2 years after that determination. California says no amendment is needed if the federal changes do not affect California tax. The FTB also lists an amended federal return as a reason to amend, but the cited pages give no deadline for that route. These are California rules, not national deadlines. California FTB, FTB Publication 1008, FTB: Amend an income tax return.

If neither country gives relief, is competent authority an option?

A competent authority is the tax office each country names to settle treaty disputes. A US citizen or resident can ask the US one for help when US or Canadian action potentially causes double taxation or taxation contrary to the treaty. The two offices can consult under Article XXVI, and binding arbitration may apply if they cannot agree; a request does not guarantee relief. IRS: Publication 597.

Raise the issue promptly. Publication 597 calls for a timely protective US refund claim and steps to preserve Canadian appeal rights; a treaty request should not be treated as extending an amendment, refund or objection deadline.

Under Article XXVI(2) of the treaty, an agreement the competent authorities reach is implemented despite domestic time limits, provided the other country’s competent authority has received notification that the case exists within six years of the end of the taxable year the case relates to. The CRA’s guidance asks for that notice in writing, with enough detail to identify the issue. The clock runs from the end of the tax year, not from the date of a reassessment notice. Canada–US tax convention, Article XXVI, CRA competent authority guidance, paragraphs 79–83.

Ordinary credit limits can also leave US tax payable without a treaty violation; see Why you still owe the IRS after paying Canadian tax.

When should I get professional help, and what should I gather?

Get a coordinated review when refunds touch several years, federal and Quebec notices differ, a foreign assessment is contested, or a deadline may have passed. A missed redetermination carries the failure-to-notify penalty and open-ended assessment. IRS: Publication 514.

Gather:

• Original and revised Canadian returns (Quebec too) and the assessment or reassessment notices.
• US returns, Forms 1116, Schedules B and C, prior amendments, any accrual election, and IRS adjustment notices.
• Proof and dates of payments and refunds, separating income tax, interest, penalties and benefits, with exchange rates.
• Carryover calculations, state returns and filing-extension records.

For a case needing decisions in both countries, use cross-border tax help.

Example

Illustrative only. Canadian tax and refunds are in Canadian dollars; US credits and tax are in US dollars. The exchange rate is assumed.

Year 1: an individual claims C$20,000 of Canadian income tax on the paid basis. At an assumed US$0.75 per C$1, that is US$15,000 of eligible foreign tax. The individual uses US$12,000 as a credit and has US$3,000 unused in the same income category; assume the prior year had no room for it, so it carries forward. Year 2: the return uses US$2,000 of that carryover. Year 3: the CRA refunds C$2,000 and Quebec refunds C$2,000 of the same tax, without interest.

At the original rate, the C$4,000 refund cuts eligible Year 1 tax by US$3,000, to US$12,000. Year 1’s US tax does not change, but its unused US$3,000 disappears. With no replacement credit, Year 2’s US tax rises by US$2,000.

The individual files Form 1040-X, a revised Form 1116 and a statement for Year 2, by the due date, including extensions, of the original Year 3 return, and attaches Schedule C to that Year 3 return. Checking only Year 1 would miss the additional tax. If no carryover had been used, no year’s US tax would change and Schedule C alone would generally suffice.

Different for you?

• The CRA denied the Canadian credit or requested proof: see Foreign tax credit review.
• You need the US credit calculation or a treaty claim: see Foreign income on a US return.
• You used the foreign earned income exclusion instead of the credit: see Americans living in Canada.
• You never filed the original US returns: see Catching up on missed US returns.
• The change came in an IRS letter: see Answering an IRS letter while living in Canada.
• The taxpayer has died: the personal representative signs Form 1040-X, marked “Deceased”. See Final returns when a US citizen dies in Canada.
• Your corporation, not you, claimed the credit: see Claiming US tax on your corporate return.
• You need to choose someone to coordinate the filings: see When you need a cross-border accountant.