The arrival of summer signals that time of year when you need to get your transcripts in order to back-up your claim for a foreign tax credit. The CRA usually comes looking for that proof in August, and it can take a little time to get the documents you need from the IRS.
One of the frustrations of dealing with the IRS is that they’re not very forthcoming when it comes to keeping in touch. In Canada, we get a Notice of Assessment from the Canada Revenue Agency every time we file our taxes. It doesn’t matter whether the CRA wants to change our return, agrees with it, or hasn’t assessed it at all, we always get that notice and know where we stand.
In the US, you have to assume that no news is good news because the IRS won’t get in touch unless they think you owe them money. They’ll even make changes to your return without communicating further, as long as those changes don’t affect the bottom line.
A little over a year ago, the CRA became much more stringent in their demands for proof of US foreign tax credits. Historically, a copy of your US tax return attached to your Canadian return was good enough. As anyone can produce a US tax return that says just about anything they want, the CRA began to insist on a higher level of proof. Without the automatic issuance of a Notice of Assessment by the IRS, however, it can be challenging for Canadian taxpayers to comply with the new CRA requirements.
The answer is to make sure you request a transcript from the IRS sometime in July. There are a couple of ways to do this. The first is to file Form 4506-T by mail. The second is to ask for a transcript online at https://www.irs.gov/individuals/get-transcript.
Before submitting your request for a transcript, make sure you’ve left enough time for your US return to be processed. For e-filed returns, that means about four weeks. If you filed a paper return, you’ll need to wait at least three months.
Be prepared when the CRA comes calling this year, and start the process of requesting a transcript from the IRS as soon as you think your US return has been processed. It’s the only way you’ll be able to meet the proof requirement when claiming foreign US tax credits, and anticipating the CRA demand is the best way to satisfy it.