2013 Corrected Canadian taxes paid in 2015

[David]

New client had Canadian taxes and foreign tax credit carryforwards in 2012 and 2013. He had a minimal amount of Canadian wages in 2014.

The Canadian Revenue Agency sent the TP a letter in the summer of 2014 stating that his tax return was incorrect. They finally settled on the discrepancies in late 2014 and the TP paid an additional $90K+ taxes in January 2015.

How should the additional $90K Canadian taxes paid in January 2015 be reported so that my client gets the most favorable tax credit? The client filed an extension for his 2014 tax return.

Does the 2013 tax return need to be amended so that the 1116 shows the additional $90K and the box that is checked that says taxes paid is changed to taxes accrued? I am thinking this is better than reporting it as accrued taxes on the 2014 tax return since the 2014 foreign income is so minimal.

Is there a better way to help the TP get the most foreign tax credit for this situation?

Thanks.

[Abby Normal]

Cash basis. Can't claim it until 2015.

[David]

So the accrual box for foreign tax paid on Form 1116 indicates that the TP reports on the accrual basis?

If he can't claim the credit until 2015 and he doesn't have any foreign income, then he will never get the credit for those taxes paid, will he?

Thanks.

[jklcpa]

Even if he ends up not being able to take the FTC, he can still use it as a deduction on Schedule A.

[Abby Normal]

So the accrual box for foreign tax paid on Form 1116 indicates that the TP reports on the accrual basis?

If he can't claim the credit until 2015 and he doesn't have any foreign income, then he will never get the credit for those taxes paid, will he?

Thanks.

​If you are a cash basis taxpayer you can only take the foreign tax credit in the year you pay the qualified foreign tax unless you elect to claim the foreign tax credit in the year the foreign taxes are accrued. Once you make this election, you cannot switch back to claiming the taxes in the year paid in later years.

I guess it's a question of whether this qualifies as an accrual and also whether you can make a late election with an amended return. They also say on this same page:

"If the foreign income taxes you claimed as a credit are refunded or otherwise reduced, you must file an amended return on Form 1040X reporting the reduced foreign tax credit. There is no time limit on this requirement."

Hopefully, this works both ways.

The 1116 instructions say "accrued during your tax year" but I don't know what that really means. The instructions also say that you must pay the accrued tax within two years after the close of the tax year. That would eliminate accrual for 2012.

 

 

[David]

Thanks for your help.