Foreign Tax Credit Planning

By far the most complex, least understood, yet potentially beneficial area in your move is in the area of foreign tax credit planning. Foreign tax credits are a dollar-for-dollar credit allowed by the IRS to eliminate the double taxation of the same income by both the US and Canada . The aim is to alleviate the US taxpayer of taxes owed in the US when taxes are required on that same income in Canada . Despite their good intentions, the IRS makes it difficult to completely avoid being double taxed on the same income. They do this through the following:

	Foreign tax credits are thrown into different "buckets" depending on the type of income they are derived from. There are three primary buckets for individual taxpayers: passive, general limitation and high tax withholding.
	Foreign tax credits are given a "life" of the current year when generated, two years to carry back and five years to carry forward. If they have not been consumed in the specified timeframe, they expire.
	There is a convoluted formula that restricts how many foreign tax credits you can consume in any one year. It is based on a ratio of your total income from outside the US in comparison to your worldwide income including the US . This ratio then determines how many foreign tax credits can be used that year.

The key to good foreign tax credit planning is having a well-designed withdrawal strategy of your assets in Canada and a properly structured investment portfolio in the US that generates foreign passive income. Any income generated by the portfolio goes on your tax return but the tax liability associated with it is paid by the taxes withheld in Canada vs. out-of-pocket.

A Simplified Example

	Assumptions
	You have C$10,000 in a Canadian Mutual Fund in a regular brokerage account
	Canadian Mutual fund pays a 5% dividend (C$500)
	Canada/US Exchange rate is C$1 = U$0.75
	You have exited Canada and are a US resident/taxpayer

	Canadian Tax
	According to the Canada/US Treaty, the withholding on dividends is 15%
	Therefore, C$500 x 0.15 = C$75 must be remitted to the Revenue Agency
	US Tax
	C$75 x .75 = U$56.25 in Passive foreign tax credits on your US tax return
	Also must declare C$500 x .75 = U$375 as dividend income on US Return
	Assuming dividend is non-qualified, 25% tax bracket, U$375 x 0.25 = U$93.75 tax liability
	Use U$56.25 in foreign tax credits to offset U$93.75 in tax
	Net out of pocket U$93.75 - U$56.25 = $37.50 US tax liability

If not for the foreign tax credits, you would pay 25% + 15% = 40% tax on your dividends vs. 25% alone in the US . As you can see by this simple example, without proper understanding of the foreign tax credits, double taxation is inevitable and you end up paying far more taxes than you would paying a competent tax preparer.

Income Tax Planning
	Tax Filing Requirements - which tax return do you file? In which country? When?
	Severing Ties With Canada - make sure you are not taxed in both Canada and the US!
	The Canada/US Tax Treaty - learn what it is and how it works.
	Taxation of RRSPs/RRIFs/LIRAs - landmines in waiting.
	Taxation of Interest & Dividends - potential for double tax.
	Taxation of Capital Gains - Which country taxes? Canada/US comparison.
	Taxation of Pensions - company pensions, OAS, CPP/QPP.
	Social Security Number - or Individual Taxpayer Identification Number, why you might need one.
	Taxation of Rental Properties - a paperwork nightmare how to apply.
	Foreign Tax Credit Planning - your ticket to avoiding double taxation.
	Key Differences - Canada/US comparison of tax brackets, deductions, and so on.