Non Resident hit with a big tax by C-R-A
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Posts: 2873
Location: Western Hemisphere
Posted on: 05-06-12 16:02:44
Location: Western Hemisphere
Posted on: 05-06-12 16:02:44
Quote:
Originally posted by web2000
"If tax is under paid in foreign country then balance will be paid to CRA and if tax is over paid then refund will created by CRA'
Since person is filing based on world wide income and resident in both countries, so credits and debits both should be applied.
If tax is overpaid in a foreign country, refund is provided by the country to which the overpayment was made.
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Dimple2001
Posts: 2873
Location: Western Hemisphere
Posted on: 05-06-12 17:04:32
Location: Western Hemisphere
Posted on: 05-06-12 17:04:32
Quote:
Originally posted by ashedfc
Its doesn't works like that... why should the foreign country give you a refund, they have taxed you based on their tax laws; its your home country (Canada in this case), where the refund is eligible.. Now Canada gives a refund (in cash or in credits) is something which needs to be clarified.
Yes it does work that way.
Let's say I earn 100k in the US and they withheld $30k at source based on my choice on the W4. I am a Cdn tax resident. When I file my taxes, I file US taxes first and let's say my tax obligation ends up being $25k (fed + state). I overpaid 5k to the US and I get a refund from the US and not from Canada. US is the foreign country in this case and based on their tax laws, they have taxed me and given me the refund.
Let's say, on the other hand, if my witholding at source was 20k because I did not choose the corect exemptions in my W4. Then I owe 5k to the US and not Canada. This is also based on the foreign country's (US) tax laws.
The key to the calculation is the amount of tax paid to the foreign country, not how much was witheld.
Now I turn around and file Cdn taxes on my "WW" income which happens to be income from the US and nowhere else (as an example). Based on the tax treaty, I can claim 25k as the foreign tax credit in my Cdn return.
A - Let's say my Cdn tax based on 1 to 1 xchange and on an income of 100k happens to be 25k. When I file the fed and provincial foreign tax credit forms, I get a credit upto the entire amount of 25k and it's a wash.
B - Let's say my Cdn tax payable happens to be 20k. Then I am allowed to take a foreign tax credit upto 20k. Canada will not refund 5k because, similar to avoidance of double taxation, there is also avoidance of double refund. If there were refundable credits in Canada due to totally unrelated items (such as those that exist in the US fed and state tax laws), then you might receive a refund from Canada.
C - Let's say my Cdn tax payable happens to be 30k. Then, I have to pay 5k because that's what I am subject to per Cdn tax laws. In this case, it would behoove you to have a plan in place to avoid this tax burden. One such possibility is the usage of RSp deduction amount to offset anything payable to Canada. What I would do in this case is to use only as much deduction amount required to bring the tax burden to 25k and then use the tax credit provision to make it a wash.
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Dimple2001
Quote:
Originally posted by dimple2001
Quote:
Originally posted by ashedfc
Its doesn't works like that... why should the foreign country give you a refund, they have taxed you based on their tax laws; its your home country (Canada in this case), where the refund is eligible.. Now Canada gives a refund (in cash or in credits) is something which needs to be clarified.
Yes it does work that way.
Let's say I earn 100k in the US and they withheld $30k at source based on my choice on the W4. I am a Cdn tax resident. When I file my taxes, I file US taxes first and let's say my tax obligation ends up being $25k (fed + state). I overpaid 5k to the US and I get a refund from the US and not from Canada. US is the foreign country in this case and based on their tax laws, they have taxed me and given me the refund.
Let's say, on the other hand, if my withholding at source was 20k because I did not choose the correct exemptions in my W4. Then I owe 5k to the US and not Canada. This is also based on the foreign country's (US) tax laws.
The key to the calculation is the amount of tax paid to the foreign country, not how much was withheld.
Now I turn around and file Cdn taxes on my "WW" income which happens to be income from the US and nowhere else (as an example). Based on the tax treaty, I can claim 25k as the foreign tax credit in my Cdn return.
A - Let's say my Cdn tax based on 1 to 1 xchange and on an income of 100k happens to be 25k. When I file the fed and provincial foreign tax credit forms, I get a credit upto the entire amount of 25k and it's a wash.
B - Let's say my Cdn tax payable happens to be 20k. Then I am allowed to take a foreign tax credit upto 20k. Canada will not refund 5k because, similar to avoidance of double taxation, there is also avoidance of double refund. If there were refundable credits in Canada due to totally unrelated items (such as those that exist in the US fed and state tax laws), then you might receive a refund from Canada.
C - Let's say my Cdn tax payable happens to be 30k. Then, I have to pay 5k because that's what I am subject to per Cdn tax laws. In this case, it would behoove you to have a plan in place to avoid this tax burden. One such possibility is the usage of RSp deduction amount to offset anything payable to Canada. What I would do in this case is to use only as much deduction amount required to bring the tax burden to 25k and then use the tax credit provision to make it a wash.
Nice explanation Dimple.
You can get a Foreign Tax Credit (Both Federal and Provincial Foreign Tax Credits) in Canada only up to a maximum of actual taxes paid outside Canada and not withheld. So, if the overall liability in Canada is more than what you actually paid outside Canada, then you have to pay the remaining balance at the time of filing tax return in Canada. However, if the overall tax liability in Canada is less than what is paid outside Canada, then your Tax Credits do not generate any refund for you in Canada.
One more thing I would like to add, specially for Ontario that you still have to pay OHIP premium over and above the taxes paid as your Tax Credits would not wash to OHIP premium.
So, in your examples above you still have to pay $750 in addition to tax liabilities, if any.
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Pramod Chopra
Senior Mortgage Consultant
Mortgage Alliance Company of Canada
Posts: 2873
Location: Western Hemisphere
Posted on: 05-06-12 20:17:35
Location: Western Hemisphere
Posted on: 05-06-12 20:17:35
Quote:
Originally posted by Pramod Chopra
Nice explanation Dimple.
You can get a Foreign Tax Credit (Both Federal and Provincial Foreign Tax Credits) in Canada only up to a maximum of actual taxes paid outside Canada and not withheld. So, if the overall liability in Canada is more than what you actually paid outside Canada, then you have to pay the remaining balance at the time of filing tax return in Canada. However, if the overall tax liability in Canada is less than what is paid outside Canada, then your Tax Credits do not generate any refund for you in Canada.
One more thing I would like to add, specially for Ontario that you still have to pay OHIP premium over and above the taxes paid as your Tax Credits would not wash to OHIP premium.
So, in your examples above you still have to pay $750 in addition to tax liabilities, if any.
Thanks Pramod.
You are absolutely right on the OHIP. OHIP amount falls outside of all the calculation when cross-border taxation is involved.
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Dimple2001
Quote:
Originally posted by dimple2001
Quote:
Originally posted by ashedfc
Its doesn't works like that... why should the foreign country give you a refund, they have taxed you based on their tax laws; its your home country (Canada in this case), where the refund is eligible.. Now Canada gives a refund (in cash or in credits) is something which needs to be clarified.
Yes it does work that way.
Let's say I earn 100k in the US and they withheld $30k at source based on my choice on the W4. I am a Cdn tax resident. When I file my taxes, I file US taxes first and let's say my tax obligation ends up being $25k (fed + state). I overpaid 5k to the US and I get a refund from the US and not from Canada. US is the foreign country in this case and based on their tax laws, they have taxed me and given me the refund.
Let's say, on the other hand, if my witholding at source was 20k because I did not choose the corect exemptions in my W4. Then I owe 5k to the US and not Canada. This is also based on the foreign country's (US) tax laws.
The key to the calculation is the amount of tax paid to the foreign country, not how much was witheld.
Now I turn around and file Cdn taxes on my "WW" income which happens to be income from the US and nowhere else (as an example). Based on the tax treaty, I can claim 25k as the foreign tax credit in my Cdn return.
A - Let's say my Cdn tax based on 1 to 1 xchange and on an income of 100k happens to be 25k. When I file the fed and provincial foreign tax credit forms, I get a credit upto the entire amount of 25k and it's a wash.
B - Let's say my Cdn tax payable happens to be 20k. Then I am allowed to take a foreign tax credit upto 20k. Canada will not refund 5k because, similar to avoidance of double taxation, there is also avoidance of double refund. If there were refundable credits in Canada due to totally unrelated items (such as those that exist in the US fed and state tax laws), then you might receive a refund from Canada.
C - Let's say my Cdn tax payable happens to be 30k. Then, I have to pay 5k because that's what I am subject to per Cdn tax laws. In this case, it would behoove you to have a plan in place to avoid this tax burden. One such possibility is the usage of RSp deduction amount to offset anything payable to Canada. What I would do in this case is to use only as much deduction amount required to bring the tax burden to 25k and then use the tax credit provision to make it a wash.
Thanks.
That is good explanation.
I have one more question to ask.
What about the tax on income which is fully exempted by the Indian govt. A good example is the income from agricultural produce which is not subjected to any tax in India. Will that income be fully taxable in Canada?
Posts: 2873
Location: Western Hemisphere
Posted on: 07-06-12 06:52:43
Location: Western Hemisphere
Posted on: 07-06-12 06:52:43
Quote:
Originally posted by web2000
I have one more question to ask.
What about the tax on income which is fully exempted by the Indian govt. A good example is the income from agricultural produce which is not subjected to any tax in India. Will that income be fully taxable in Canada?
That would entirely depend on the terms of the tax treaty (if any) between India and Canada. You'll have to talk to tax experts or read through hundreds of pages to find out if there is any mention of such terms.
The concept works like this. The country where you earn the wages expects you to file and pay/receive money independent of any other country.
Once you settle the bill of the wage earned country, the "home" country where you are a tax resident expects you to report WW income and pay/receive money independent of any other country.
The home country allows you take credit for taxes already paid regardless of presence/abence of tax treaties.
The tax treaty, if exists, then digs deeper and says what income is exempt and what is not and what credits can be taken and what cannot be. The tax treaty provides potentially further advantage to the terms of the cross-border taxation.
For example -
Canada allows charitable contributions (made in the US to US charities) to be deducted in your Cdn return.
Canada does not recognize 401k contribution and does not reduce your before tax income. Therefore if you made 100k usd and contributed 20k usd before taxes, US wages would be 80k and Cdn wages to be reported on line 104 would be 100k.
Canada recognizes the social security amount and medicare amount taken out of your US paycheck as taxes paid. So, in my earlier post, my fed+state tax paid was 25k. Let's say I paid 10k in SS and medicare. My total taxes paid is not 25k, but 35k. Hence, my available foreign tax credit is 35k. This benefit given by Canada offsets to certain extent the non-recognized 401k reduction.
The above examples most likely are due to tax treaty agreements.
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Dimple2001
