Julio has a savings account in a foreign country. The account earned $5,000 interest during 2020 but he only received $4,500 since $500 for foreign taxes was withheld by the bank. All amounts are stated in Canadian dollars. The effect on Julio's 2020 tax return is:
A)An increase in taxable income of $4,500 and a foreign tax credit of $0.
B)An increase in taxable income of $5,000 and a foreign tax credit of $500.
C)An increase in taxable income of $5,000 and a foreign tax credit of $75.
D)Nothing since the interest was earned outside of Canada.

Question

Quizplus · Accepted Answer

Julio is required to report the full amount of the interest earned on his 2020 tax return, which is $5,000. However, he can claim a foreign tax credit for the $500 of foreign taxes that were withheld by the bank. Therefore, his taxable income will increase by $5,000 and he will receive a foreign tax credit of $500.

Julio Has a Savings Account in a Foreign Country