Form 1116 Explained: The Foreign Tax Credit for Individuals

Form 1116 is how a U.S. individual claims a credit for foreign income taxes — such as Canadian federal and provincial tax — against U.S. tax on the same income. The credit is limited by category to the U.S. tax on foreign-source income, and unused credits carry back one year and forward ten.

On this page

1. How the limit works
2. The treaty's re-sourcing rule
3. When you don't need the form
4. Frequently asked questions
5. Related guides
6. Official sources
7. Next step

How the limit works

The treaty's re-sourcing rule

A U.S. citizen living in Canada with U.S.-source income (a U.S. dividend, a U.S. pension) pays Canadian tax on it, but the U.S. limit allows no credit for U.S.-source income. The treaty's Article XXIV(4)–(6) fixes this in three steps: Canada credits the U.S. tax only up to what a non-citizen resident would owe (15% on dividends); the United States credits the remaining Canadian tax, without reducing that treaty-rate U.S. tax; and the income is deemed Canadian-source to the extent needed for that credit, so the U.S. citizen isn't taxed twice. Because this relief applies only to U.S. citizens resident in Canada, the income isn't put in the separate §904(d)(6) re-sourced-by-treaty category (Reg. §1.904-4(k)(1)(iv)(A)), and an individual's treaty re-sourcing is exempt from Form 8833 reporting (Reg. §301.6114-1(c)(1)(v)).

When you don't need the form

Individuals whose foreign income is all passive (most interest and dividends) and reported on qualified payee statements such as Form 1099-DIV, with total creditable foreign taxes of US$300 or less (US$600 joint), can elect to claim the credit directly on Schedule 3 without Form 1116. The election removes the limitation, but that year's foreign taxes can't be carried back or forward.

Frequently asked questions

Official sources

The IRS explains: “File Form 1116 to claim the foreign tax credit if you are an individual, estate, or trust, and you paid or accrued certain foreign taxes to a foreign country or U.S. possession.” — Internal Revenue Service, About Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), https://www.irs.gov/forms-pubs/about-form-1116

The IRS explains: “If you are a U.S. citizen or green card holder living in Canada, you still have to file a Form 1040 and report your worldwide income because of the "saving clause" in Article XXIX(2), which allows the United States to tax its citizens and residents as if the treaty had not entered into effect.” — Internal Revenue Service, Publication 597 (10/2015), Information on the United States–Canada Income Tax Treaty, https://www.irs.gov/publications/p597

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk and Canadian Tax Desk handle foreign tax credit computations, treaty re-sourcing, and carryover tracking for cross-border individuals. See pricing or book a call.