Form 1116: Claiming Canadian Tax on Your First US Return

Can I claim Canadian tax on my first US return?

Only Canadian tax on income that is also on your US return. The foreign tax credit offsets US tax on foreign income; it cannot offset anything when the income was never on the US return. Publication 514 says a resident alien can usually credit only foreign tax on income received while a resident alien.

On a dual-status return, that splits the moving year in two:

Publication 519 confirms the timing rule: foreign income is US-taxable if received while you are a resident alien, even if earned before. Dual-status and resident filers claim the credit on Form 1116. You can instead deduct foreign tax on Schedule A, but not both in the same year (Publication 514).

Three things make a case harder: a married couple choosing full-year residence (the whole Canadian year comes onto the US return), a large departure gain, and a bonus or stock award paid after the move. Gather the Canadian departure return and its notice of assessment, pay stubs split at your US start date, NR4 slips, any section 216 or 217 return, and the dates each tax was withheld or paid.

Is Canadian departure tax a foreign tax credit on my US return?

Usually not in the moving year. Canada taxes a deemed sale on the day you leave, but the US does not treat that as a sale, so the gain is not on your US return unless you make the treaty election below, and there is no US tax for the Canadian tax to offset.

The treaty's Article XIII(7) election lets you be treated, for US purposes, as if you sold and bought back the property at its value on the day Canada taxed it (treaty). For a person not subject to US tax at that time, the Treasury explanation and Revenue Procedure 2010-19 say the effect is a new US cost equal to that value, so a later sale is taxed in the US only on growth after you left. It works as a cost reset, not a credit. If the property was already taxable in the US before you moved (for example US real estate), the election instead puts the gain on your US return, and Article XXIV decides which country gives the credit; for a non-citizen, Rev. Proc. 2010-19 says relief comes under Article XXIV(2), the Canadian side, not Form 1116. The election is made with Form 8833 on a timely filed first US return. See moving from Canada to the US for the election.

Which Canadian tax paid after moving to the US can I credit?

Canadian tax on income you receive after your US start date generally can be credited, as long as Canada was entitled to tax it.

• Final pay, bonus and vacation pay for work done in Canada: Canada may tax pay for work done in Canada (treaty Article XV), and the US taxes it because you received it as a resident. Only the income tax counts: CPP or QPP contributions and EI premiums are social security taxes, and Publication 514 allows no credit or deduction for them because the US has a social security agreement with Canada. Pay and stock awards that span the move are split by workdays: see stock awards and pay after a move.
• RRSP and RRIF withdrawals: Canada withholds non-resident tax; the credit is for the final Canadian tax on the part the US also taxes. See RRSP and TFSA after leaving Canada.
• Rent from your former home: Canada withholds 25% of gross rent unless you arrange otherwise. See renting your Canadian home after moving to the US.
• Canadian dividends: creditable up to the tax the treaty allows Canada to keep, generally 15%. Under treaty Article XI, Canada generally cannot tax ordinary interest paid to a US resident, so tax withheld on it is reclaimed from Canada, not credited.

Provincial income tax counts too, including Quebec tax (Publication 514).

What if Canada withheld tax it should not have?

That tax is a refund claim in Canada, not a US credit. Publication 514 allows a credit only for your legal and actual foreign tax liability, and not for tax reasonably certain to be refunded if you claimed it. Where a treaty country withholds at full rate and refunds the excess, only the treaty-rate amount qualifies.

Two common cases after a move:

• Pay for US workdays: under Article XV, a US resident's pay for work done in the US is generally taxable only in the US. Canadian tax withheld on it is generally recovered by filing in Canada, not credited.
• Withholding above the treaty rate: for example 25% withheld on a dividend where the treaty allows 15%. Only the treaty amount is creditable. The same applies to periodic pension payments: Article XVIII caps Canadian tax at 15% of the gross payment. Under Canada's Income Tax Conventions Interpretation Act, RRIF payments count as periodic only up to the greater of twice the year's minimum and 10% of the fund's start-of-year value. Larger RRIF withdrawals and RRSP withdrawals are not capped, so the full non-resident tax on them is creditable.

Does the NR4 amount count, or the final tax after a section 216 or 217 return?

Only the final tax counts. A section 217 return taxes certain Canadian income at resident rates and may refund part of the non-resident tax withheld; a section 216 return does the same for rent. The section 217 return must be filed within 6 months after the year ends (Income Tax Act s. 217). Either way, the credit is the tax Canada keeps, not the NR4 figure. A refund on the departure return reduces the credit the same way.

If you already claimed the NR4 amount and Canada later refunds part, that is a foreign tax redetermination: Publication 514 requires you to notify the IRS, with an amended return and revised Form 1116, or, if your US tax does not change, with Schedule C (Form 1116) on your return for the year of the change; a penalty can apply if you do not. See amending your return after the other country changes yours.

What if the Canadian tax is not final when I file the US return?

Claim what you have paid or what has accrued, then correct it when Canada assesses. The Canadian departure return is due April 30 of the year after you leave (CRA dates), so the final Canadian figure can arrive near or after your US deadline.

Under the accrued method, tax not paid within 24 months after the year ends must be taken back off the credit until paid (Publication 514; Form 1116 instructions). If you later find you paid more Canadian tax than you claimed, you have 10 years from the regular due date of the return for the year the tax was paid or accrued to claim the extra credit.

Which Form 1116 category for Canadian income?

Use a separate Form 1116 for each category. Wages, salary and a bonus as an employee are general category; dividends, interest and rent are usually passive (Form 1116 instructions).

Some income is US-source under US rules but taxable in Canada under the treaty, for example part of a stock award. Article XXIV(3) treats income Canada may tax under the treaty as arising in Canada (treaty). If you use that rule, the re-sourced income gets its own Form 1116; Publication 514 says Form 8833 is not required for this Canada re-sourcing claim.

You can skip Form 1116 only if all your foreign income is passive, all of it and its tax were reported on a qualified payee statement (such as a US Form 1099-DIV or 1099-INT), and the foreign tax is US$300 or less (US$600 on a joint return). Canadian pay, or income shown only on Canadian slips, generally means Form 1116. For the limit itself, see the Form 1116 limit, categories and carryovers.

How do I convert Canadian dollars to US dollars for the credit?

For tax you claim when paid, use the exchange rate on the date it was paid, or for withholding, the date it was withheld (Publication 514). For tax claimed on the accrued method, you generally use the average rate for the year the tax relates to, if paid during that year or within 2 years after it. You can elect to use the date-paid rate instead, by a statement attached to a timely filed return; the election binds later years unless the IRS consents to revoke it. The IRS publishes yearly average rates. Form 1116 Part II asks for each tax in Canadian dollars and in US dollars.

Does choosing full-year US residence with my spouse change the credit?

Yes. If a married couple chooses to be treated as US residents for the whole year, both spouses' worldwide income for the whole year goes on a joint US return (Publication 519), including January-to-move salary. Canadian tax on that income then has US income to offset and can be credited, subject to the limit.

Decide the election and the credit together: the election adds Canadian-period income to the US return, and the credit decides how much US tax that income costs. The choice is once per couple, and neither spouse can make it again in a later year. It may also change how the departure-gain election above applies, which depends on facts. See the dual-status return in the year you move.

What happens to unused Canadian tax credit?

Canadian tax above your Form 1116 limit carries back 1 year and then forward 10 years, within the same category (Form 1116 instructions). In the moving year, a carryback usually has nowhere to go, because the year before had no US return with Canadian income. In your second US year, if Canadian tax paid that year is more than that year's limit allows, the excess can be carried back to the moving year. Details: carryovers.

Example

Illustrative figures in Canadian dollars; convert each to US dollars at the rate the method requires.

Moved on July 1, filed dual-status

The Canadian departure return shows C$25,000 tax on January-to-June salary and C$8,000 on the departure gain. Neither item is on the US return, so neither gives a US credit. A C$10,000 bonus for Canadian work, paid in August, had C$3,000 Canadian tax. The bonus is on the US return, so the C$3,000 is creditable, general category, up to the US tax on the bonus.

Same person, married, full-year joint return

The couple chooses full-year US residence. The January-to-June salary is now on the US return, so the C$25,000 Canadian tax on it can be credited too, limited to the US tax on that income. The bonus tax is credited as before. The C$8,000 departure tax still has no US income to offset unless the Article XIII(7) election puts the gain on the US return, which depends on facts.

RRSP withdrawal after the move

A C$20,000 RRSP withdrawal had C$5,000 withheld. A section 217 return later cuts the Canadian tax to C$3,000. The creditable tax is C$3,000 converted to US dollars, assuming the US taxes the whole withdrawal; the credit allowed is still subject to the Form 1116 limit. If the US return already claimed C$5,000, it is corrected.

Different for you?

• You are married and weighing full-year residence: the election and the credit change each other; see the dual-status return guide and get cross-border tax help.
• You paid a large departure tax or plan to sell assets: the Article XIII(7) election must be on a timely first US return; see moving from Canada to the US and cross-border tax help.
• A bonus or stock award was paid after the move: the workday split sets both the credit and any Canadian refund; see stock awards and pay after a move and cross-border tax help.
• Canada withheld tax on pay for US workdays, or above the treaty rate: that is a refund claim in Canada, not a US credit; see stock awards and pay after a move and get cross-border tax help.
• The CRA reassessed after you filed: see amending your return after the other country changes yours and get cross-border tax help.
• You still own your former Canadian home: see renting it out or selling it.
• You want the limit worked out: see the Form 1116 limit, categories and carryovers.