Sourcing Rules

Sourcing Rules - what is US or Canada source income?

This presentation lays out very clearly how to determine to which country to source different kinds of income. You need to know to which country to source a piece of income in order to determine which country to take a foreign tax credit.

The following are common types of income and how to source them:
  • General Rule: Interest income is sourced to the payor's location.
    Exception: Interest paid by US branch of foreign corporation treated as US source. See Internal Revenue Code §884(f)(1)(A); Reg. §1.861-2(a)(2)(iv). Interest paid by foreign branch of US corporation is treated as foreign source. See §861(a)(1)(A)(i).

  • General Rule: Dividends are sourced to the payor's location.
    Exception: However, dividends from a foreign corporation are treated as proportionally US sourced if 25 percent or greater of the foreign corp.'s gross income was ECI – USTB. §861(a)(2)(B). Based on “gross” rather than “net” from each source.

  • Personal Services (includes wages) - Income sourced to where services are performed - §§861(a)(3) & 862(a)(3).

  • Source of rental and royalty income is determined by place where property is physically located or used – both tangible and intangible property. §861(a)(4) or §862(a)(4).

  • Income from sale of real property is sourced where the real property is located. §861(a)(5) & §862(a)(5)

  • Depreciation recapture gain is sourced to country where depreciation is claimed. §865(c).

Important warning! I do not provide tax, legal or accounting advice. I am writing this guide only for informational purposes, and based heavily on my own unique personal facts and circumstances. And I am a unique individual with a unique background and my unique set of personal facts and circumstances, so what is applicable to me might not be applicable to you. This guide, like all other content in this blog, is not intended to provide, and cannot be relied on for, tax, legal or accounting advice. You are responsible for consulting your own tax, legal and accounting advisors to obtain advice on your personal situation.

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