# Question Re Foreign Tax Credit



## Karen (Jul 24, 2010)

When my America husband died, I was the beneficiary of his U.S. 403 B plan (roughly similar to our Canadian RRSP) which I'm debating whether to start drawing on. If I take it as annuity payments, it would be subject to a 15% withholding tax which would be eligible for a foreign tax credit when I file my Canadian tax return. But, if I took the total amount (approximately $165,000 U.S.) as a lump sum, it would be subject to a 30% withholding tax, according to the terms of the U.S./Canada Tax Treaty. My question is: would the full 30% also be eligible for a CRA foreign tax credit - in other words, is there a limit on the amount a Canadian taxpayer can claim as a foreign tax credit? I phoned CRA and asked that question but the person I spoke to seemed confused and I didn't get a satisfactory answer. (She said it would depend on which province I lived in, but she couldn't explain that any further and couldn't say what the situation would be in B.C.) I had the feeling that she simply didn't know the answer.

I've googled the question, but I ended up thoroughly confused. I realize that I shall have to call back to CRA and make sure I speak to someone more knowledgeable but, in the meantime, does anyone know the answer to my question?


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## AltaRed (Jun 8, 2009)

You may want to ask that question on the Serbinski tax forum http://forums.serbinski.com/ and/or peruse their threads.


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## Karen (Jul 24, 2010)

Thank you, AltaRed- I didn't know about that site.

Edited to add:

I posted the question and received a response almost immediately saying that the full 30% U.S. withholding tax would be deductible on my Canadian return. Apparently there is a limit to the credit for businesses, but not for individuals.


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## warp (Sep 4, 2010)

Karen said:


> Thank you, AltaRed- I didn't know about that site.
> 
> Edited to add:
> 
> I posted the question and received a response almost immediately saying that the full 30% U.S. withholding tax would be deductible on my Canadian return. Apparently there is a limit to the credit for businesses, but not for individuals.



I believe that any US taxes withheld can be used as a "foreign tax credit" ONLY against canadian taxes otherwise payable.

In other words you would have had to pay canadian taxes, and then use your US taxes withheld as a credit against those canadian taxes. So......I would make sure that you have enough canadian taxes payable in any given year that you could use against any US taxes that would be withheld.

Call CRA FORMS Line at 1-800-959-2221, and ask for form T 2209..Federal Foreign Tax Credits...
And also ask for the form you would need for your province. You fill in 1 form for federal taxes and the other for provincial taxes.

Good luck


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## Karen (Jul 24, 2010)

Thanks, Warp. I'll be aware of that but, since the whole amount of $165,000 will be taxable in Canada in one year, I'm sure I'll have plenty of room to deduct the 30% paid to the IRS (if I decide to go that way).


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## TaxGuy (Apr 7, 2009)

If your average Canadian tax rate is more than the US withholding then you will likely fully use the foreign tax credit. 

Otherwise you may want to file a US return. 



Karen said:


> Thanks, Warp. I'll be aware of that but, since the whole amount of $165,000 will be taxable in Canada in one year, I'm sure I'll have plenty of room to deduct the 30% paid to the IRS (if I decide to go that way).


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## TheMoneyGuide (Nov 19, 2012)

Karen said:


> When my America husband died, I was the beneficiary of his U.S. 403 B plan (roughly similar to our Canadian RRSP) which I'm debating whether to start drawing on. If I take it as annuity payments, it would be subject to a 15% withholding tax which would be eligible for a foreign tax credit when I file my Canadian tax return. But, if I took the total amount (approximately $165,000 U.S.) as a lump sum, it would be subject to a 30% withholding tax, according to the terms of the U.S./Canada Tax Treaty. My question is: would the full 30% also be eligible for a CRA foreign tax credit - in other words, is there a limit on the amount a Canadian taxpayer can claim as a foreign tax credit? I phoned CRA and asked that question but the person I spoke to seemed confused and I didn't get a satisfactory answer. (She said it would depend on which province I lived in, but she couldn't explain that any further and couldn't say what the situation would be in B.C.) I had the feeling that she simply didn't know the answer.
> 
> I've googled the question, but I ended up thoroughly confused. I realize that I shall have to call back to CRA and make sure I speak to someone more knowledgeable but, in the meantime, does anyone know the answer to my question?


It's unlikely that the bank will withhold more than 15% even on lump sums. The IRS doesn't distinguish between lump sum and periodic payments (pursuant to the treaty) like Canada does. Always best to ask however before you withdraw any lump sum amounts.


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## Karen (Jul 24, 2010)

Good point, TaxGuy - I'll keep that in mind. Thanks!


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## TaxGuy (Apr 7, 2009)

Where are you getting your information from?

The standard withholding on US plans is 30% and only periodic payments are at 15%. 

US institutions are not that sophisticated when it comes to non-residents and will often make mistakes and either whithhold only 15% an sometimes nothing. 



TheMoneyGuide said:


> It's unlikely that the bank will withhold more than 15% even on lump sums. The IRS doesn't distinguish between lump sum and periodic payments (pursuant to the treaty) like Canada does. Always best to ask however before you withdraw any lump sum amounts.


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## dogleg (Feb 5, 2010)

I'm not sure about 'tax limits' but my understanding of foreign tax credits is as follows: On US div. paying stocks there is a 15% withholding tax. On your Can. filing you pay tax on the full dividend amount. The 15% withholding tax gets a foreign tax credit on Can. return. So total US div. held in non-regist. accounts will be taxed at the same rate as interest income. Whether these rules apply in your example I'm not certain but I would think so. If it is a registered account then of course the withholding tax is different. If I am wrong please advise.


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