Reporting Canadian Income on a US Return: Where Each Slip Goes, Which Rate to Use, and the Mistakes That Trigger Letters

A US person with Canadian income receives Canadian slips that do not map cleanly onto the 1040. The T4 is wages, but the box numbers are Canadian; the T5 reports dividends with a gross-up the US ignores; the T3 reports trust income that may be capital gains, dividends, or return of capital; the T5008 reports proceeds without basis; the T4A(P) is CPP, which the treaty taxes like Social Security. Each slip has a home on the US return, a conversion rule, and a foreign tax credit basket. Here is the map.

Key takeaways

• Conversion: use the IRS yearly average exchange rate for income received evenly through the year (wages, pensions, dividends), the spot rate for one-time items (a capital gain, a lump sum), and the rate on the payment date for tax paid.
• Wages (T4): box 14 employment income to Form 1040 line 1 (as foreign wages, no W-2); box 22 income tax deducted plus the balance paid on the T1 to Form 1116 (general basket). CPP and EI contributions are not deductible in the US; the RPP contribution in box 20 is deductible only under Article XVIII(8) for certain employer plans.
• Dividends (T5, T3): the actual dividend (not the grossed-up amount) to Schedule B; Canadian corporate dividends are qualified dividends if the corporation is a treaty-country resident, taxed at 0/15/20%; Canadian tax to Form 1116 (passive basket).
• Interest (T5): to Schedule B; passive basket.
• Capital gains (T5008, T3 box 21): proceeds less basis in US dollars at transaction-date rates, on Schedule D; the T5008 has no basis and the T3's capital gains distribution is reported in full (not the 50% taxable amount); passive basket.
• CPP (T4A(P)) and OAS (T4A(OAS)): taxable only in the US for a US resident under Article XVIII(5), treated as Social Security: up to 85% included on Form 1040 line 6; no Canadian tax, no credit.
• RRSP and RRIF withdrawals (T4RSP, T4RIF, NR4): taxable in the US as pension income; the Canadian withholding (25% lump sum, 15% periodic) to Form 1116 (passive basket, or general for employer-sourced amounts per the regulations).
• Canadian pensions (T4A, NR4): taxable in the US; the 15% treaty withholding to Form 1116.
• Rental income (T776 or NR4): to Schedule E in US dollars with mandatory ADS depreciation; Canadian tax (Section 216) to Form 1116.

Slip by slip

T4. Box 14 is gross employment income; report on Form 1040 line 1 as foreign wages (the return will not have a W-2; attach a statement). Box 16/17 (CPP/QPP) and box 18 (EI) are not deductible. Box 20 (RPP contributions) is deductible only under the treaty's Article XVIII(8) for a plan meeting conditions, otherwise not. Box 22 is Canadian tax withheld; the total Canadian tax for the year (withholding plus balance on the T1, less refund) goes to Form 1116 in the general basket.

T4A. Box 016 pension income, box 018 lump-sum payments, box 020 self-employed commissions, box 048 fees for services: each to the corresponding US line (pension income on line 5, self-employment on Schedule C). Canadian tax to Form 1116.

T5. Box 24 actual eligible dividends and box 10 actual other dividends (not boxes 25 and 11, the grossed-up amounts) to Schedule B; dividends from Canadian corporations are qualified. Box 13 interest to Schedule B. Box 15 foreign income (non-Canadian dividends) to Schedule B. Canadian tax on these (computed on the T1) to Form 1116, passive.

T3. Box 49 actual dividends (not box 50); box 26 other income (interest, foreign income) to Schedule B; box 21 capital gains to Schedule D at the full amount (the T3 reports the full gain; the T1 taxes half); box 42 return of capital reduces basis. A T3 from a Canadian mutual fund trust is also a PFIC report; Form 8621 applies.

T5008. Proceeds only; basis must come from the taxpayer's records in US dollars at purchase-date rates. Gain or loss to Schedule D. Canadian tax on the gain to Form 1116, passive.

T4A(P). CPP retirement, disability, or survivor benefits. For a US resident, Article XVIII(5) makes them taxable only in the US as Social Security: report on Form 1040 line 6a, with up to 85% taxable on line 6b depending on total income. No Canadian tax (Canada does not withhold on CPP paid to US residents under the treaty); no credit.

T4A(OAS). Same treatment as CPP. The OAS clawback does not apply to US residents because Canada does not tax the benefit.

T4RSP and T4RIF. RRSP and RRIF withdrawals. For a US resident, the withdrawal is taxable in the US on line 5 (pensions and annuities); the taxable amount is the full withdrawal less any US basis (contributions made while a US person that were not deductible). Canadian withholding (25% or 15%) on the NR4 to Form 1116.

NR4. Canadian payments to non-residents with Part XIII withholding: RRSP withdrawals, pensions, dividends, rent, interest. Each income code maps to the corresponding US line; the withholding to Form 1116 in the matching basket.

The rate

The IRS publishes yearly average rates; use them for recurring income. Use the transaction-date rate for capital gains (both legs), lump sums, and the departure-date basis under the XIII(7) election. Use the payment-date rate (or average if withheld through the year) for Canadian tax paid. The CRA's Bank of Canada rates are acceptable to the IRS if applied consistently.

The mistakes

• Reporting grossed-up dividends (box 25 or 50) instead of actual dividends.
• Reporting half the capital gain (the Canadian taxable amount) instead of the full gain.
• Claiming CPP and EI as foreign tax.
• Treating CPP and OAS as pension income with a foreign tax credit, instead of as Social Security taxable only in the US.
• Claiming the 25% RRSP withholding against US tax on other income (basket mismatch).
• Omitting the T3 from a mutual fund, which is also a PFIC.

Worked example

A US citizen in Ottawa has a T4 ($120,000 CAD, $32,000 tax withheld), a T5 ($4,000 eligible dividends actual, $600 interest), a T5008 (proceeds $30,000 CAD on shares bought for $22,000 CAD three years earlier), and a T4A(P) ($9,000 CPP). Average rate 1.36; purchase-date rate 1.30; sale-date rate 1.36.

• Wages. $88,235 USD on line 1; general basket credit for Canadian tax on it.
• Dividends and interest. $2,941 qualified dividends and $441 interest on Schedule B; passive basket credit for the Canadian tax on them.
• Capital gain. Proceeds $22,059 USD less basis $16,923 USD: $5,136 USD gain on Schedule D; passive basket credit for Canadian tax on half of the CAD gain.
• CPP. He lives in Canada, so Article XVIII(5) makes CPP taxable only in Canada; not reported as taxable on the 1040 (report on line 6a, taxable amount zero, with Form 8833 disclosure). Had he lived in the US, it would be Social Security-equivalent taxable only in the US.

Official sources

"You must express the amounts you report on your U.S. tax return in U.S. dollars... Use the exchange rate prevailing when you receive, pay, or accrue the item." — Internal Revenue Service, Foreign Currency and Currency Exchange Rates, https://www.irs.gov/individuals/international-taxpayers/foreign-currency-and-currency-exchange-rates

"If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes." — Internal Revenue Service, Foreign Tax Credit, https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit

Practitioner note

The slips are the map, and the mistakes are the same every year: grossed-up dividends, half-gains, CPP as pension, and the mutual fund T3 that is also a PFIC. We build the 1040 from the slips line by line with the rate written beside each one, and we reconcile the foreign tax credit by basket before we file.

See also: Planning a move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the annual US return built from the Canadian slips with the correct conversion and basket for each, and the Form 1116 computations. See cross-border pricing or book a call.