How to claim credits /FTC for foreign income tax

[Manu34]

Hello,

A bit of background first: I’m a Canadian resident, and I pay the bulk of my income tax in Canada. However, I also happen to own a condo in France from which I get rental income. This income is first taxed in France (as per tax treaty in place), and then also taxed in Canada (have to report world income). The tax treaty currently in place between the two countries states that the same income cannot be taxed twice, and according to the CRA the way to go about it is to claim an FTC against my Canadian income tax. The idea is that I would get my money back for the tax paid, whichever is less.

Here are some numbers:

• Gross French rental income: $6500
• Taxes paid in France (solely based on this income): $2500
• Extra Taxes paid in Canada for the same income: $2400
• Tax amount I should be able to claim with the CRA (the lesser of the two paid taxes): $2400

My questions are as follows:

• If I use the “Foreign rental income” option from under the interview / “Foreign income and property”, this allows me to claim an FTC and generate the Federal T2209 + Provincial T2036. All is good… except for two things:
  • When filling out the “Foreign rental income” page, if I leave the “Foreign rental income entered as income” field blank, the net foreign rental income is added to my overall income, and that’s on top of the income declared in my T776. Basically, the same income is counted twice. The only way to not count this income twice is to enter the same amount in both fields “Net foreign renal income or loss” and “Foreign rental income entered as income”. Is this the expected behavior in uFile? Is it supposed to work that way?
  • Note: I reached out a couple of times to the CRA, and they always told me I had to fill out a T776 even if my income was foreign…
• The max FTC I can get by using the T2209 + T2036 doesn’t come close to what I should be getting back: Only ~ $1700 (out of $2400). What is your recommendation to make up for the shortfall? I’ve searched for answers on a lot of forums and it seems that I can also make use of subsection 20(12), which happens to be the last option available from the last field called “Limit of foreign tax credit and deduction (T2209). But here is the thing:
  • The amount claimed as 20(12) has a direct impact on the FTC calculation. In other words, the more you increase the 20(12) deductions, the less you get in FTC. In my case, I did manage to add enough 20(12) deductions to get the tax amount of $2400 back… but the amount of FTC has been wiped out completely. Again, is this the expected behavior?

Any general feedback on how to best apply a “credit” for this foreign rental income without attracting CRA’ s attention is welcome... I just want to do things by the book.

 

Thanks,

Emmanuel

[clw]

Manu34,

The ‘Ontario taxpayer’ example calculation at the end of the link below might be helpful:

https://www.taxtips.ca/filing/foreign-tax-credit-non-business-income.htm

 

[Maggie3]

Hello clw,

According to the tax treaty between Canada and France, Article 23 “…income or gains arising in France shall be deducted from any Canadian tax payable in respect of such profits, income, or gains…”

Which means you may wipe out the tax payable in Canada, however, you are not entitled to receive a tax credit and wipe out the tax payable in Canada. You may choose one or the other.

To enter the amount of foreign rental income, you have two procedures to perform.

A. First, you must produce a rental income statement form by following these steps:

1. On the "Left side menu of the Interview tab", select "Interview setup".

2. On the right-hand side of the screen, go to the "Rental income" group, check the boxes for "Rental property income" and click "Next" at the bottom of the page.

3. On the "Left side menu of the Interview tab", select "Rental property Income" and on the right-hand side, choose "T776 - Rental income property".

4. Since the building is located outside of Canada, you have 3 choices.

     A) On page "T776 - Rental Property Identification". You can leave the "Address of your rental property" blank, and the program will use your home address of Canada and you may submit your return via NETFILE.

     B) Your second choice, which we favor, in the section "Address of your rental property" you indicate the civic number of the foreign property on the line "Street" and the line "City" you enter the city and state and the country. However, you indicate your province of Canadian residence and your Canadian postal code. You will be able to send by NETFILE.

     C) If you enter the full address of the property in the country where your property is located, you will not be able to submit your return by NETFILE, and then you must mail it to Revenue Canada.

5. Once the information regarding the identification of the property has been entered, click "Next" at the bottom of this page and you will have access to the items "Income, expenses", "Labour costs", "Motor vehicle expenses", "Partners" and "CCA" complete the sections that relate to your situation.

B. Then, as a second operation, you must enter your net rental income and foreign taxes paid in the foreign income section by following these steps:

1. Return to the "Left side menu on the Interview tab", select "Interview setup".

2.  On the right-hand side of the screen, go to the "Investment income and expenses" group, check the boxes for "Foreign income or foreign property (T1135)" and click "Next" at the bottom of the page.

3. Select "Foreign income & property" and in the screen to your right, go to the group "Forein non-business income" click the plus sign "+" icon to the right of the line "Foreign rental income".

4. On the page entitled "Foreign income - rental", if you have foreign taxes paid on foreign rental income that you reported as rental income, enter the net business income on the line "Foreign rental income entered as business income". If applicable, enter the "Amount of foreign tax paid" on this rental income and click "Next" at the bottom of the page.

Form T2209 will be produced by the program and the program will tell you if you are eligible for the federal foreign tax credit. While for residents of Quebec, form TP-772 will be generated by the program and will show you on line 49 the foreign tax credit.

The foreign tax credit will be carried forward by the program to line 40500 of the federal return and line 409 of Schedule E of Quebec, Foreign Tax Credit. In addition, the program will generate federal form T776 - Statement of Real Estate Rentals, as well as form TP-128 - Income and Expenses Respecting the Rental of Immovable Property.

For more information, please consult the following link:

https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/rental-income-non-resident-tax.html

Remember, if your foreign property has a value above $100,000 CAN, do not forget to indicate at "CRA questions" and complete the "T1135 Foreign Income Verification Statement".

[Manu34]

3 hours ago, Maggie3 said:

Hello clw,

According to the tax treaty between Canada and France, Article 23 “…income or gains arising in France shall be deducted from any Canadian tax payable in respect of such profits, income, or gains…”

Which means you may wipe out the tax payable in Canada, however, you are not entitled to receive a tax credit and wipe out the tax payable in Canada. You may choose one or the other.

To enter the amount of foreign rental income, you have two procedures to perform.

A. First, you must produce a rental income statement form by following these steps:

1. On the "Left side menu of the Interview tab", select "Interview setup".

2. On the right-hand side of the screen, go to the "Rental income" group, check the boxes for "Rental property income" and click "Next" at the bottom of the page.

3. On the "Left side menu of the Interview tab", select "Rental property Income" and on the right-hand side, choose "T776 - Rental income property".

4. Since the building is located outside of Canada, you have 3 choices.

     A) On page "T776 - Rental Property Identification". You can leave the "Address of your rental property" blank, and the program will use your home address of Canada and you may submit your return via NETFILE.

     B) Your second choice, which we favor, in the section "Address of your rental property" you indicate the civic number of the foreign property on the line "Street" and the line "City" you enter the city and state and the country. However, you indicate your province of Canadian residence and your Canadian postal code. You will be able to send by NETFILE.

     C) If you enter the full address of the property in the country where your property is located, you will not be able to submit your return by NETFILE, and then you must mail it to Revenue Canada.

5. Once the information regarding the identification of the property has been entered, click "Next" at the bottom of this page and you will have access to the items "Income, expenses", "Labour costs", "Motor vehicle expenses", "Partners" and "CCA" complete the sections that relate to your situation.

B. Then, as a second operation, you must enter your net rental income and foreign taxes paid in the foreign income section by following these steps:

1. Return to the "Left side menu on the Interview tab", select "Interview setup".

2.  On the right-hand side of the screen, go to the "Investment income and expenses" group, check the boxes for "Foreign income or foreign property (T1135)" and click "Next" at the bottom of the page.

3. Select "Foreign income & property" and in the screen to your right, go to the group "Forein non-business income" click the plus sign "+" icon to the right of the line "Foreign rental income".

4. On the page entitled "Foreign income - rental", if you have foreign taxes paid on foreign rental income that you reported as rental income, enter the net business income on the line "Foreign rental income entered as business income". If applicable, enter the "Amount of foreign tax paid" on this rental income and click "Next" at the bottom of the page.

Form T2209 will be produced by the program and the program will tell you if you are eligible for the federal foreign tax credit. While for residents of Quebec, form TP-772 will be generated by the program and will show you on line 49 the foreign tax credit.

The foreign tax credit will be carried forward by the program to line 40500 of the federal return and line 409 of Schedule E of Quebec, Foreign Tax Credit. In addition, the program will generate federal form T776 - Statement of Real Estate Rentals, as well as form TP-128 - Income and Expenses Respecting the Rental of Immovable Property.

For more information, please consult the following link:

https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/rental-income-non-resident-tax.html

Remember, if your foreign property has a value above $100,000 CAN, do not forget to indicate at "CRA questions" and complete the "T1135 Foreign Income Verification Statement".

Thanks Maggie3,

The procedure you provided is exactly the one I followed to add my foreign rental income, that, I had figured already. It's unfortunate you haven't answered any my questions, but no worries.

You made a good point about the tax treaty (I've read it many times over). The wording clearly states that the “…income or gains arising in France shall be deducted from any Canadian tax payable in respect of such profits, income, or gains…” which means that, and I'm sure everyone would agree, this particular income should be removed or "wiped out" from my CRA tax return. I don't think it leaves much room for interpretation. The key issue I'm having is how to technically makes that happen, when you have to report your world income. This rental income has to show somewhere (the T776) and then must be removed somewhere else. As I mentioned earlier, when both the Federal and Provincial FTC's are applied, the taxes I get back are way lower than the taxes I paid in France... How can I manage to wipe out this income, and do it "by the book"?

Thanks for sharing the CRA link. I will have a look at it shortly and see if I can find some answers.

 

Emmanuel

[Manu34]

14 hours ago, clw said:

Manu34,

The ‘Ontario taxpayer’ example calculation at the end of the link below might be helpful:

https://www.taxtips.ca/filing/foreign-tax-credit-non-business-income.htm

 

Hi Clw,

Thanks for helping. This webpage seems pertinent to my problem. I'll have a look at it shortly.

Emmanuel

[Manu34]

5 hours ago, Manu34 said:

Thanks Maggie3,

The procedure you provided is exactly the one I followed to add my foreign rental income, that, I had figured already. It's unfortunate you haven't answered any my questions, but no worries.

You made a good point about the tax treaty (I've read it many times over). The wording clearly states that the “…income or gains arising in France shall be deducted from any Canadian tax payable in respect of such profits, income, or gains…” which means that, and I'm sure everyone would agree, this particular income should be removed or "wiped out" from my CRA tax return. I don't think it leaves much room for interpretation. The key issue I'm having is how to technically makes that happen, when you have to report your world income. This rental income has to show somewhere (the T776) and then must be removed somewhere else. As I mentioned earlier, when both the Federal and Provincial FTC's are applied, the taxes I get back are way lower than the taxes I paid in France... How can I manage to wipe out this income, and do it "by the book"?

Thanks for sharing the CRA link. I will have a look at it shortly and see if I can find some answers.

 

Emmanuel

FYI: This link you provided at the end of your response does not apply to me. As per the below, it is for non-residents receiving rental income from Canada... not the other way around... 

 

Rental income and non-resident tax

This section provides information for non-residents who receive rental income from real and immovable property in Canada

[Manu34]

Good morning,

I've made my decision. I'm going to take a leap of faith and re-submit my tax return using a full deduction under section 20(12). I don't see any other way of cancelling out the taxes paid to the CRA due to this income, and this is in-line with what's stated in the French/Canadian tax treaty: “…income or gains arising in France shall be deducted from any Canadian tax payable in respect of such profits, income, or gains…”

As a consequence of deducting the entire net rental income, the calculation of the FTC is now nil (i.e. the net rental income is more than the foreign tax paid).

My only concern is that since I will re-file electronically, the 20(12) deduction that appears as "Other deductions (specify)" on line 23200 of my T1 may raise some flag. When looking at the complete Tax Return generated in uFile, there's a drop down menu called "SEE LIST" on line 23200, and I would assume the intent here is to indicate the reason for the "Other deduction". Unfortunately there is no drop-down menu popping up when clicking on the "SEE LIST" option... Is this normal? Is their a way to indicate what the deduction is for before submitting electronically?

Thanks

Emmanuel

 

 

[Maggie3]

Hello Manu34,

We strongly suggest that no personal information be added to this forum as it is a public forum.

To assist your further, please contact our office and we can view an anonymous copy of your file. 

We will review the data entry of your file.  If you are using UFile for Windows, please send an email to "support@ufile.ca"

 

 

[clw]

Hello Manu34,

You can easily check your approach anonymously by calling Revenue Canada at 1-800-959-8281, and ask to be transferred to the “Centre of Expertise”. Once connected ask to speak to a ‘ Tier 3 agent’. These agents know international tax treaties inside-out, and can easily confirm if the 20(12) approach is correct, and how to handle your paid foreign taxes under article 23.  Hopefully, this will enlighten everybody!

[Manu34]

6 hours ago, clw said:

Hello Manu34,

You can easily check your approach anonymously by calling Revenue Canada at 1-800-959-8281, and ask to be transferred to the “Centre of Expertise”. Once connected ask to speak to a ‘ Tier 3 agent’. These agents know international tax treaties inside-out, and can easily confirm if the 20(12) approach is correct, and how to handle your paid foreign taxes under article 23.  Hopefully, this will enlighten everybody!

Thanks Clw, but I have tried many times already. My patience has run out. I actually got to talk a couple of times  to those 'Tier 3 agents' and believe or not I got two different answers. The whole experience was painful.

Emmanuel

[Tak99]

Thanks Manu34.  i also had the same problem of duplicated rental income for my U.S. rental property when entering this data and it was driving me nuts.  Your fix of entering it again as “Net foreign rental income or loss” and “Foreign rental income entered as income” worked.  I also found that if I only entered the rental income as "Foreign rental income entered as income” and excluding it from “Net foreign rental income or loss” also worked.  really weird but seems to fix the problem and triggers the T2209 form to calculate the foreign tax credit.  

[Ron1stCBC]

For foreign income that requires travelling, accommodation and other overseas expenses in the foreign country, how is this deducted from the foreign income? 

[Geo123]

Hello Ron1stCBC,

>>Go to Right Hand Screen - Interview SetUp

  >> Investment income and expenses

  >> Foreign income and foreign property (T1135) "-->"(blue arrow)

 

>>Go to Left Hand side of screen

  >>Foreign income and property

  >>Section [Foreign non-business income]

  >>Foreign employment income  “+”  < - - CLICK on “+”

 

*Description of the source of the foreign income [IRS W-2]

If you are entering amounts in Canadian dollars, enter 1 for the exchange rate. The average exchange rate for $US was 1.3497 in 2023. See the Bank of Canada's website (www.bankofcanada.ca) for other exchange rates.

 

Exchange rate to apply    [1.3497]

*Foreign employment income already entered on a T4 page

*Foreign employment income not entered on a T4 page [$25,000.00]  < = = HERE

*Employment expenses related to the foreign employment income

*Sales expenses

*Travelling expenses   $500.00  < = = HERE
 

Other foreign employment expenses - specify
Description
 

 

*Amount of foreign tax paid $2,500.00 < = = HERE

      -payroll withholding  < - - State  and Federal (IRS)

      -medicare / social security <- - -  Include – Note is best to confirm these with CRA as it may have changed