Federal Foreign Tax Credits
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Thread: Federal Foreign Tax Credits

  1. #1
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    Federal Foreign Tax Credits

    "If your blue chip stocks are U.S. dividend payers, there’s another tax issue to understand: the U.S. imposes a 15% withholding tax on dividends paid to Canadians. However, if you hold your U.S. stocks in an RRSP, this withholding tax does not apply. And if you hold them in a non-registered account, you can recover it by claiming the foreign tax credit on your return."

    I read the above on another forum somewhere. For you tax experts here. Is it correct?
    Specifically - in a non-reg. acct. do you recover ALL of the US 15% withholding tax - or just a portion of it?
    Seems to me, having just completed a Form T2209 "Federal Foreign Tax credit" for my tax return, I paid $484 in foreign taxes, but the foreign tax credit calculation works out to only $179.
    Anyone care to comment?


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    The FTC is a function of your taxable position, i.e. it is a tax credit, not a tax refund. If you did not have more than $179 in income tax owing in Canada, you can only recover $179 of FTC.

    Another factor is whether the witholding tax was more than 15%, as in US MLPs in which case, not all withholding may be recovered through the FTC. Although I have read that tax software allocates the remainder to a different deduction line on the tax return.

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    Yes. The quote is correct. Can't comment on your tax return as I don't know the make up of your taxes.

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    I dont get it.
    If the quote is correct, shouldn't I be able to recover the full $484 I paid?

    And if you hold them in a non-registered account, you can recover it by claiming the foreign tax credit on your return."

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    Quote Originally Posted by jargey3000 View Post
    I dont get it.
    If the quote is correct, shouldn't I be able to recover the full $484 I paid?

    And if you hold them in a non-registered account, you can recover it by claiming the foreign tax credit on your return."
    The foreign tax credit is a non-refundable credit. This means it can reduce the tax you pay attributable to that income down to zero, but that you won't receive any refund beyond that. Basically, form T2209 looks at the total federal tax you paid and pro-rates it to figure out which portion is attributable to foreign income. So: federal tax X foreign income / total income.

    Now I know you look at your form, and it's a bummer that you haven't recovered it all, but don't despair yet! There is a separate form for provincial tax. Go into your tax software and check out form T2036. You will see that you recover some of the tax here as well, specifically offsetting the provincial tax you pay on that foreign income.

    If at the end of the day, you still haven't recovered all of the taxes it means you're average tax rate is less than 15% which is hopefully some comfort

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    Thank you for that ^Nerd. that's how I see it (for me it's more like 17% )
    sooo....back up to my opening post....not to split hairs, but isn't the part about recovering the tax in a non -reg acct - incorrect, or misleading? shouldn't it say you can recover a PORTION of it by claiming the foreign tax credit!

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    Quote Originally Posted by jargey3000 View Post
    Thank you for that ^Nerd. that's how I see it (for me it's more like 17% )
    sooo....back up to my opening post....not to split hairs, but isn't the part about recovering the tax in a non -reg acct - incorrect, or misleading? shouldn't it say you can recover a PORTION of it by claiming the foreign tax credit!
    Well, many will be able to recover the entire thing. Maybe they should add something along the lines of "provided your average Canadian tax rate exceeds 15%"

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    Quote Originally Posted by jargey3000 View Post
    ... not to split hairs, but isn't the part about recovering the tax in a non -reg acct - incorrect, or misleading?
    shouldn't it say you can recover a PORTION of it by claiming the foreign tax credit!
    That's why when commenting I usually put in "recover all/some of the US withholding tax" by claiming the FTC. I have seen some articles that use similar wording to indicate that full recover is not guaranteed.

    IMO, it should not be "portion" as some do recover it all.


    Cheers

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    ok... I think? i got it now.

  11. #10
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    Quote Originally Posted by jargey3000 View Post
    ...
    Specifically - in a non-reg. acct. do you recover ALL of the US 15% withholding tax - or just a portion of it?
    It depends. Likely not. If you complete Form T2209, and the corresponding form for your provincial tax credit, you will see that the amount of the credit you can claim is affected by the ratio of your foreign business or non-business income to your net income. It's a crazy methodology in my opinion, and one of many pet peeves I have with the Income Tax Act. But the effect is that you may only be able to claim a credit for a portion of the foreign taxes paid.


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