Canada income treaty taxed twice?

[astral101]

So this is the situation: after consulting with the Canadian Revenue Agency (similar to the IRS but Canadian), they said that I am being CORRECTLY taxed by them (I work remotely for a Canadian company but live in the U.S.). They said that according to their rules, tax treaty, etc., I need to pay them taxes because the Canadian company is located within Canada, etc., etc., etc. I have already filed taxes in Canada and this employment income was reported and even more taxes paid on it to Canada.

Now at the time of filing my US taxes, since I have already paid the Canadian government even a higher tax rate that I would owe in the U.S. and because Canada/USA have a tax treaty to avoid double taxation on the same income, how would I go about claiming this income and the tax credit?

Question 1: Do I need to report the income twice on the U.S. return? This being in the foreign income section and then form 1116 (foreign tax credit form)? If yes though, form 1116 says "enter income that has NOT been reported ANYWHERE else...". If I don't report it on the 1116, I don't get the credit, so my assumption is that I should report it on form 1116, but if so, then by following its instructions I should not report it anywhere else including under the "foreign income" section.

Question 2: If I do report it (again), under the "foreign income" section, this shows that I may "owe tax" which doesn't make any sense since Canada has a higher tax rate and I have already paid them all types of taxes on that employment income. It also doesn't make sense because form 1116 says to report there income that has not been reported elsewhere.

Please help!

[astral101]

OK, Please let me know as soon as you can. I'm under a tight deadline and already on an extension.

[Anonymous_]

If you don't get an answer here within a couple of hours, contact Support.

What is the TurboTax phone number? (intuit.com)

[pk]

@astral101 , while I am not familiar with the screens of the on-line version, for Windows CD/Download of Home & Business  -->

(a) Report your foreign income on Schedule-C -- which will allow  Schedule-SE to come into play.    You can choose to pay only SECA / FICA top one country by using  totalization agreement required  "Certificate of participation"

(b)  Thus your AGI will include your world income ( including income earned  from foreign sources  while l performing in the USA.

(d) Then under  Deductions & Credits tab  go down till you find  Foreign Tax credit -- this will open up form 1116.  The  income from Canada is  "General Category".  Here you enter the Foreign Source income and the taxes you paid to Canada.  This should result in allowable Foreign Tax Credit for the  year thus  ameliorating the double taxation bite ( same income being taxed in the USA and in Canada )

Does this help ?  Is there more I can do for you ?

[astral101]

Sorry but your reply doesn't help. There's no Schedule C present.

This is the situation: If I only enter the foreign income (approx 51k) on form 1116, I see a small refund. If I enter the foreign income BOTH on form 1116 and under the foreign income section 1040 h (other earned income) then it says that I owe taxes to the U.S. But how can this be when Canada's tax rate is higher than the U.S. and I was already taxed on the 51k in Canada? The foreign tax credit I get from form 1116 is not enough to offset the tax I would supposedly owe to the U.S. unless I enter an amount on form 1116 which is higher than 51k (e.g. 61k or 65k, etc.).

[pk]

@astral101 , I am sorry to disappoint you.  But IMHO, the path you are following is not correct.   

(a) From US perspective ( without looking at the  Treaty ) the income is US sourced -- and it is active income.  Thus  it needs to go through a Schedule-C  ( just like a sole proprietor or independent  worker ).  And thus you are not Immune from, SECA ( except  for Totalization agreement )

(b) Per the US-Canada Treaty  " double taxation"  clause, US can only give you credit for the tax it levies -- this is pretty standard of most US-Other Country treaties.

Is there more I can do for you ?

My apologies

pk

[astral101]

As I said, I spoke with the Canada Revenue Agency and they said that they have the right to tax me because I still have significant ties to Canada.

I am not sure I understand what you mean by this: (b) Per the US-Canada Treaty  " double taxation"  clause, US can only give you credit for the tax it levies -- this is pretty standard of most US-Other Country treaties.

If I enter in TurboTax that I paid Canada 10,000 or 20,000 in income tax on that income, it makes no difference how much I owe the U.S. which tells me that whatever I paid Canada makes no difference to the U.S.? Or is there something wrong with the TurboTax software and it should take a higher tax already paid into account?

[pk]

@astral101 , per Treaty Canada is correct ---  and US  will limit tax  credit allowable for the year ( the rest is recognized but carried back / forward ) to lesser of  actual paid or the US tax allocated to the same income.

I don't believe I can contribute much more to this position .   

Here is the US-Canada  original treaty  -- there have been some  changes/ updates  here-->

Canada - Tax treaty documents | Internal Revenue Service (irs.gov)

pk

[astral101]

Ok but I do have a foreign tax credit leftover amount from last year in the amount of $5,700. How can I apply it to this year to lower the U.S. tax burden?

[pk]

@astral101  Turbo  would have automatically drawn down the carry-over credit --- but this happens once it has exhausted current year foreign taxes claimed .   It is a pity  that  section 911  of IRC,   does  limit allowable  credit only to the tune of "lesser" of US taxes vs. foreign taxes  paid/accrued/accumulated -- it results in a never ending  cycle of  trying to get full credit for taxes paid to another taxing authority.

My apologies  for the situation.