On my way to Portland, OR – and sourcing under the US-Canada tax treaty

Oct 1, 2015

Hello from the Amtrak bus! Now, being a tax geek, the question that comes to mind is related to tax treaty: if a Canadian tax accountant (Canadian resident, US citizen) prepares tax returns in the US, will he have tax owing for that US-sourced income?

Foreign Earned Income Exclusion (FEIE):

No luck here. IRC 911(a) excludes from taxation “foreign earned income” whereas IRC 911(b)(1)(A)  states “The term “foreign earned income” with respect to any individual means the amount received by such individual from sources within a foreign country or countries which constitute earned income attributable to services performed by such individual during the period described in subparagraph (A) or (B) of subsection (d)(1), whichever is applicable.” As such, income earned in the United States is not to be excluded under the FEIE

Foreign Tax Credit (FTC):

The foreign tax credit can only offset taxes arising from foreign-sourced income, so at first look, no luck.

But then, as we note, we have several categories of income, to subdivide how the foreign tax credit is allocated: General, passive and resourced by treaty – IRC 904(d)(6)(a) bingo !!!

(6) Separate application to items resourced under treaties

(A) In general


(i)without regard to any treaty obligation of the United States, any item of income would be treated as derived from sources within the United States,

(ii)under a treaty obligation of the United States, such item would be treated as arising from sources outside the United States, and

(iii)the taxpayer chooses the benefits of such treaty obligation,

subsections (a), (b), and (c) of this section and sections 902907, and 960 shall be applied separately with respect to each such item.

Hence we have the “resourced by treaty” FTC basket. In this case, we’ll use the US-Canada tax treaty. The analysis is a little lengthy so I put it in another post here.

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