My client earned a little bit of employment income in the US and has a W2. I created a foreign income slip in taxcycle and entered box 1 (wages) under employment income and box 2 under foreign tax paid. My question is what about boxes 4 and 6 (social security tax withheld and medicare tax withheld)? Can my client get a tax credit for those amounts as well? Would I include that under foreign tax paid?
Yourâe basically wasting your time expecting to get a FTC based on a W2.
CRA will reverse everything.
Get the client to provide proper acceptable proof of eligible USA tax liablity paid.
Thanks! How do I get that? Paystubs? I have asked him to provide me with his US tax return but still waiting.
They will need to order from IRS - things have changed over time - not sure what the current procedure is.
If client does not want to provide the proof, maybe prepare a draft with the income but without the credits, and let them pay in to CRA at least the resulting liability.
If/when they come up with the supportable info, you can file with that.
Years ago, I once had a client who was very forceful in swearing up and down that his W2 income and tax witholdings were correct.
It was all nonsenseâŚ
The CRA checks every return with FTCâs on employment income and as Joe says will not allow the tax paid without an IRS transcript. You can imagine how this has messed up my clients when the CRA wants back up for all the 2021 FTCâs claimed that the IRS hasnât issued yet. Many of my clients have huge balances owing on their Canadian returns until the IRS comes up with a transcript which they havenât yet for a lot of the returns filed last April.
Tell your client he needs a US return first. You can then claim the tax paid on the tax return - which might be higher or lower than the tax on the W2 as well as claim the medicare and social security. As the IRS is currently running about a year to process tax returns Iâd almost not bother with the tax for now - just claim the Medicare and Social Security and paper file an amendment to the Canadian return to include taxes paid once the client has transcripts in hand.
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Really? A year? Thatâs nuts! Does he have to actually request a transcript from the IRS or will they send him a notice of assessment regarding the tax return filed?
Just so Iâm clear, I should include only the medicare and social security taxes withheld on his T1? And where to put that? Under foreign taxes paid? Arenât they likely to reject that as well?
The US 1040 or 1040NR needs to be filed. The IRS does NOT issue a Notice of Assessment. You may want to file based on the taxes reported on the US return, or you can let the taxpayer pay the Canadian taxes and adjust the return once the IRS transcript is available. Your firm may have a policy regarding the risk associated with these situations.
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Yes - put it in as FTC paid. The CRA will accept the Medical and Social Security Tax off the W2 with a copy of the W2 when they question it but the income taxes need to come from the transcripts. Which you have to request - they have info on the IRS website about how to do this. Your client can also get signed up for the US equivalent of the CRA 's My Account and will be able to see the transcripts there once they are available.
It didnât used to be that long - in 2021 and earlier it used to take 2-3 months to process paper returns so stuff filed in March and April would be done by May to July and the CRA doesnât usually start asking for proof until about July or August most of the time. So it worked out fine. 2022 they were seriously understaffed and over worked as a result of covid spill overs and behind on late filed 2020 returns so yes - they are currently still working on things I submitted last April.
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Thank you all for your replies! I knew the CRA would ask for backup but didnât realize how complicated it would be to get it.
I really appreciate the guidance!
I will add that if they donât need to file a US return under the IRS guidelines (i.e. they didnât earn enough US Income to warrant a 1040NR to be filed), then CRA will accept the W2 as support, provided that you explain to them in writing that the Taxpayer was not obligated to file a 1040NR, so they did not and will not file a 1040NR and thus will never get those withholdings refunded.
I have a client who receives an NHL pension every year. 90% of it is Canadian-sourced, but 10% of it is US-sourced. He gets a 1042-S yearly for the 10% portion with withholdings. Itâs only for around $5k USD. So we claim the FTC using the 1042-S. CRA has selected him twice in ten years for process review on FTCs. Both times they accepted it with a letter explaining the situation.
You mentioned your client âearned a little bit of employment income in the US.â If itâs less than the filing threshold and he doesnât file a 1040NR, CRA should accept the W2.
This is anecdotal of course. It might actually be in your best interest to have the client prepare the 1040NR (if itâs just a single W2 it wouldnât be hard) and see if he gets back all the withholdings. Then you donât need to bother claiming an FTC on the Canadian return because heâs not entitled to one anyway.
The 1040NR does not allow for any personal exemptions
Without a transcript CRA is not going to allow the FTC.
And CRA chases you in 99 out of 100 cases for FTC, to collect all the paperwork.
Hello everyone,
I have a client with W2 income to be recorded on a Canadian tax return. The figures from the W2 have been entered into the appropriate fields on the T1 form (after conversion to CAD) as follows:
- Box 1 - Wages, Tips, and other compensation = Line 10400 on T1
- Box 2, Box 4, Box 6 - Federal, social security, medicare tax withheld (combined) = flows to T2209 & T2036 for foreign federal & provincial tax credit.
My inquiries are as follows:
- Where should the amount in Box 12a with code DD from W2, on the T1 form be reported?
- I have entered Box 12b with code D from W2, on Form RC268 on lines 1 & 2. According to the pay stub, this 401K deduction is a pre-tax deduction. Iâve come across comments in the protax community forum suggesting that this deduction needs to be added to line 104 with employment income. Iâm wondering if this deduction needs to be added and then deducted again on line 20700, and if so, whatâs the rationale behind it? O it is just a deduction and we will not add this amount in income.
- The clientâs pay stub shows state income tax and local income tax as well. Should these be factored into the calculation of the foreign federal tax credit?
Appreciate your guidance.
- you should remove the entries on line 10400
- you should remove the entries made for box 2, wherever you made them
- The correct way to record a W2 is on the âForeign Incomeâ slip input schedule, with the amount in Box 1 under employment income. In box 2 you enter all the foreign taxes: a) the federal tax from the total tax line on the 1040,b) the total state tax from the total tax line on the State return, c) social security(FICA) taxes, d) Medicare tax.
Most of the codes in box 12 are like the âtaxable benefits and allowancesâ on a T4 slip, and do not require special entry on a T1.
- DD â Code DD includes cost of employer-sponsored health coverage. Information only.
Thank you @BertMulderCGA
I already entered the box in W2 on âforeign incomeâ slip that flows to line 10400 and T2209 & T2036 respectively.
What about the code D in Box 12b from W2, which is for 401K? How to record this on T1?
You canât file with the tax from the W2 - it has to be from the 1040 or 1040NR plus the state return plus the local city return plus the FICA and Medicare from the W2.
The 401k is deductible in the US only and needs to be added back to income on the Canadian return. If you miss it the CRA will do it for you once they ask about the foreign tax credits. Which they will as they ask about every one every year.
The only time I have seen RC268 accepted is with 408(p) (I think) plans. It required a lot of explanations to the CRA to get them to accept it but I did finally get it accepted. Not for 401k plans.
Client has provided me 1040NR. and the amounts are matched with W2 as well.
You also need state and city returns.
- Is the client American, dual citizen or green card holder. Perhaps the 1040NR is wrong. If heâs considered a US person the plot thickens.
2 Was the income earned in states where there are no taxes. Iâm thinking of New Hampshire and Florida
but there are others Iâve not had to deal with. That may explain why there isnât a state return.
3 If everything is correct, foreign taxes paid will be the amount of taxes on line 24 of the 1040NR plus social security tax and medicare tax.