Blog post

Question

Mr. Hogan, I’ve been following you on the Facebook group for some time and I really enjoy the articles you write. I hope someday that I could earn enough money to have you help me file my tax returns. For now I’m filing them myself because I can’t afford to pay someone to help me file them.

My question is this. I also file an extension for my US tax return and try to file my Canadian return in April. Should I file my US return before my Canadian return? Does the IRS or Canada revenue care? I haven’t had problems in the past but my brother got into it big time with Canada rev and he owes a bunch of tax now because he didn’t file his US tax return before the Canada return.

Any thoughts on this, just want to make sure I don’t get into any tax trouble.

Thanks

XXXXX

Answer

Hi XXXXX

Thanks for the email, thanks for the kinds words about the articles and please call me Phil.

In the office, unless the client can’t get the information to us in a timely manner we tend to file both the Canadian and US income tax returns are the same time. That’s because most clients have foreign tax credits that need to be calculated on both respective returns based on the taxes calculated for each return.

For example, if you earn US source income you’ll need to not only report this income on your Canadian return, you will also need to claim a foreign tax credit on your Canadian return for any US tax that you paid on this income. You won’t know how much US tax you’ll owe unless you actually prepare and file the US tax return at the same time.

That being said, in some cases it actually won’t matter. If 100% of your income is Canadian source you can often get away with extending the US return and filing the Canadian return first. That’s because you won’t be claiming any foreign tax credits on your Canadian return and therefore won’t need to know how much US tax is owing. You will however likely need to claim a foreign tax credit on your US return. By the time you file the US return any Canadian tax calculations are known because the returns has already been filed. However, even in cases where clients have no US source income we tend to do the returns together to maintain efficiencies.

That’s likely what happened to your brother. I can’t be 100% sure, however he likely tried to claim a foreign tax credit on his Canadian return for taxes paid on US source income. When you file your Canadian return electronically (which is required in most cases) very little of the detail within the tax return actually goes to the department. CRA then randomly reviews specific deductions and credits to ensure taxpayers have properly calculated these amounts. In this case they likely sent your brother a letter asking for more information related to the foreign tax credit and he either provide information that they deemed incorrect or he didn’t respond to the letter and they reassessed his tax return accordingly.

I know the information above is quite dense and may not make sense completely. Please don’t hesitate to respond back if you have any further questions.

Cheers

Phil