How to report foreign income if no foreign return filed

[parvitstax]

US Citizen and Full Year Resident

Received Canadian Pension and Retirement funds totaling $25K in USD

They did not file a Canadian tax return

1. Do I need to report this income on their 1040 since they are not filing a Canadian Tax Return?
2. Do I wait for them to file the Canadian return and then update their US Taxes with Form 1116 based on the Canadian Taxes?
3. Fill out form 1116 with the $25k income ($0 for taxes paid/accrued) and finalize their 1040?

Please let me know if more information is needed. 

[Accountant-Man · Accepted solution]

1. US citizens report worldwide income, so Canadian Pension and Retirement funds totaling $25K in USD are reported on the US 1040 regardless of filing Canada return. They might owe USD on it.

2. Do they need to file Canadian return? There might be CAD $ taxes withheld.

3. Even if they don't file a CAD return, they can still file 1116 since the tax they paid was the withholdings, if any.

[Terry53029]

see this link.

https://www.irs.gov/businesses/international-businesses/canada-tax-treaty-documents

[parvitstax]

Does reporting Canada pension and Retirement receive similar treatments as US income from similar sources (1099R / 1099SA)

Or does this just fall into a full taxable situation as "Other Income" on the 1040?

[sjrcpa]

The US Canada income tax treaty will have the answers.

[parvitstax]

From what I am reading the US does not double tax Canadian income. 

If I read that correctly, does that mean the Retirement and Pension income does not get reported on the 1040? 

I reported on Form 1116 and reported the tax withheld as tax paid but then the software says the Gross Income is too low (because I did not add the Canadian income to the 1040). 

Before adding Canada income to 1040 (Other Income) : Fed Refund $2k

After adding Canada income to 1040 : Fed Refund 1.4k 

Thanks for any replies on this in advance. I really want to do this correctly and learn for the future. 

[sjrcpa]

You can only get a foreign tax credit on income that has been doubly taxed.

[Terry53029]

How pensions, and retirement funds are taxed from Canada depend on source (government or private). Where are your clients funds from?. If from Government (like our SS) you report it same as our SS (some may be taxable or not depending on other income. If from a pension from a private company it will be double taxed, and you report it on 1040 schedule 1. Use 1116 to get a credit on that double taxed income. If from investment (like our IRA's) Do same as pension. The above is my interpretation of the treaty, but you need to research yourself.

[parvitstax]

This is what I have done and seems to follow the feedback given here:

1. I opened the Canadian Registered Retirement Plans Worksheet
2. Entered the Plan Providers Information
3. Selected the checkbox for Registered Retirement Income Fund (RRIF)
4. Entered the total amount received in Retirement income on Lines 7a and 7b
5. Filled out Form 1116 with the same income total and also reported the tax withheld in Canada as Tax Paid

** All values were converted to USD

[Accountant-Man]

5. So you are claiming a tax credit for CA tax paid on the same income THAT IS BEING TAXED BY THE US.

Where are you reporting the US income?

[parvitstax]

@Accountant-Man This worksheet feeds the taxable amount into Line 5b of the 1040. Does your comment mean this is being done incorrectly? 

1. I opened the Canadian Registered Retirement Plans Worksheet
   
   
   

[Accountant-Man]

No, that's good.