Withholding on US dividends and Canadian foreign tax credit
Moderator: Mark T Serbinski CA CPA
Withholding on US dividends and Canadian foreign tax credit
Canadian resident, US citizen. For years my investment company had been withholding at 15% on my dividends from US companies. Recently they sent out a packet of forms to update all their client files, and this included the W-9 form. On a recent statement I see that they are not withholding any more. Is this okay? And if so, then that would bring up a second question: Through the years, I have been claiming the amounts withheld as a foreign tax credit on my Canadian taxes. Was that inappropriate?
The 15% withheld is the rate for Cdn residents.
Since you are a US citizen, required to file a US tax return, you are not subject to US withholding, thus the W-9, and no more withholding.
Your US dividends are subject, as always, to US tax, as determined on your 1040, not as determined by the amount withheld, or lack thereof.
The US tax eligible for use on your Cdn return is not the withheld tax in your case (as it would be for non-US citizen living in Canada), but the tax actually determined on your 1040 for that dividend income. I would assume it would be much lower that 15%, if any. The tax withheld would have been used as a tax payment on 1040. which you would probably have recovered when you filed.
What are the results of your 1040?
Since you are a US citizen, required to file a US tax return, you are not subject to US withholding, thus the W-9, and no more withholding.
Your US dividends are subject, as always, to US tax, as determined on your 1040, not as determined by the amount withheld, or lack thereof.
The US tax eligible for use on your Cdn return is not the withheld tax in your case (as it would be for non-US citizen living in Canada), but the tax actually determined on your 1040 for that dividend income. I would assume it would be much lower that 15%, if any. The tax withheld would have been used as a tax payment on 1040. which you would probably have recovered when you filed.
What are the results of your 1040?
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In prior years, 2011-2014, my effective tax rate to US was 0. On my 1040's, I never claimed any refund of the dividend tax withheld. The preparer that did my Canadian and Quebec taxes claimed these amounts as the foreign tax credit on my Canadian returns.
I am working now on my 2015 US return. Year 2015 is far different than prior years, as I received an IRA from a deceased relative. Also from that inheritance, I received a non-qualified tax-deferred annuity, and I started to take withdrawals from that. (Everything from the inheritance had been payable on death to specified beneficiaries, and also the amounts were lower than the Estate tax floor.)
I computed the effective tax rate arising from my Canada and Quebec returns, and allocated my Canadian income (RRQ income, dividends, interest and gains) into the baskets for the Form 1116. (RRQ income being 0, but generating nevertheless a General basket carry-forward.)
On my 1040, my effective tax rate arrived at 3% ($2100 / AGI $70,000). The passive basket is then bringing in a foreign tax credit of $1300.
Note that my Canadian tax preparer has already filed, showing dividend taxes $600 as a foreign tax credit on my Canadian return.
I am working now on my 2015 US return. Year 2015 is far different than prior years, as I received an IRA from a deceased relative. Also from that inheritance, I received a non-qualified tax-deferred annuity, and I started to take withdrawals from that. (Everything from the inheritance had been payable on death to specified beneficiaries, and also the amounts were lower than the Estate tax floor.)
I computed the effective tax rate arising from my Canada and Quebec returns, and allocated my Canadian income (RRQ income, dividends, interest and gains) into the baskets for the Form 1116. (RRQ income being 0, but generating nevertheless a General basket carry-forward.)
On my 1040, my effective tax rate arrived at 3% ($2100 / AGI $70,000). The passive basket is then bringing in a foreign tax credit of $1300.
Note that my Canadian tax preparer has already filed, showing dividend taxes $600 as a foreign tax credit on my Canadian return.
For 2015, Remember that the US tax eligible for credit on your Cdn return is determined BEFORE applying any 1116's. Qualified Dividends are handled a little differently since their tax is determined apart from the tax tables (0% or 15%).
So, probably the incorrect amount was put for credit for 2011-14 on your Cdn return. Also, I'm surprised IRS didn't correct your taxes, since they did receive tax from you, and it should have been put on line 64.
When claiming US tax as a credit, CRA requires you to submit, as a minimum, your US tax return and or info slips (I guess that is how you got away with the credit).
It's up to you, but you should (a) get the US tax back from IRS, and (b) amend your Cdn return to reduce/remove the US tax credited.
So, probably the incorrect amount was put for credit for 2011-14 on your Cdn return. Also, I'm surprised IRS didn't correct your taxes, since they did receive tax from you, and it should have been put on line 64.
When claiming US tax as a credit, CRA requires you to submit, as a minimum, your US tax return and or info slips (I guess that is how you got away with the credit).
It's up to you, but you should (a) get the US tax back from IRS, and (b) amend your Cdn return to reduce/remove the US tax credited.
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Just want to make sure I am following.
For 2015, the $2100 I spoke of was my Line 47 of the 1040, (I had no other taxes or credits to add or subtract). And that amount was indeed before considering the passive credit of $1300. So that establishes my effective tax rate for the US at 3% ($2100/AGI $70,000) So I presume that theoretically the only amount I could claim as a foreign tax credit in Canada would be 3% of the dividend amount, (subject to my next step of looking further at the qualified dividends).
Now, as to what you said about the qualified dividends: Indeed all my US company dividends were qualified. And indeed I effectively was in the lower brackets, so my qualified dividends and long term capital gains were truly taxed by the US at 0%. So I presume that would effectively reduce the 3% I stated above to 0%, and so I could not claim any foreign tax credit to Canada.
Instead I would claim the withheld amounts on my US return, Line 64, (and I presume I should attach a copy of my T5 slip to my 1040?)
And we need to amend my Canada return to remove the FTC.
Another question: When submitting a US tax return to Canada, how much should be sent? Doe CRA just want the 2-page 1040, or the 1040 and the 1116 Forms, or do they want the whole thing with every imaginable schedule?
For 2015, the $2100 I spoke of was my Line 47 of the 1040, (I had no other taxes or credits to add or subtract). And that amount was indeed before considering the passive credit of $1300. So that establishes my effective tax rate for the US at 3% ($2100/AGI $70,000) So I presume that theoretically the only amount I could claim as a foreign tax credit in Canada would be 3% of the dividend amount, (subject to my next step of looking further at the qualified dividends).
Now, as to what you said about the qualified dividends: Indeed all my US company dividends were qualified. And indeed I effectively was in the lower brackets, so my qualified dividends and long term capital gains were truly taxed by the US at 0%. So I presume that would effectively reduce the 3% I stated above to 0%, and so I could not claim any foreign tax credit to Canada.
Instead I would claim the withheld amounts on my US return, Line 64, (and I presume I should attach a copy of my T5 slip to my 1040?)
And we need to amend my Canada return to remove the FTC.
Another question: When submitting a US tax return to Canada, how much should be sent? Doe CRA just want the 2-page 1040, or the 1040 and the 1116 Forms, or do they want the whole thing with every imaginable schedule?
Correction:
In my last post I said we would amend my Canadian return to remove the FTC. I should have said we would remove from the FTC the amount of dividend tax withheld. I believe there would still be an FTC on the Canadian return: If I am following the logic, my FTC for Canada would be 3% of the taxable amount of the IRA and annuity income, but nothing pertaining to my dividends.
In my last post I said we would amend my Canadian return to remove the FTC. I should have said we would remove from the FTC the amount of dividend tax withheld. I believe there would still be an FTC on the Canadian return: If I am following the logic, my FTC for Canada would be 3% of the taxable amount of the IRA and annuity income, but nothing pertaining to my dividends.
Your qualified dividend are taxed in US at either 0% or 15% flat tax, so that is what you can use on your T1 for FTC for that US dividend income. Your other US-sourced income would then have a higher than 3% eligible FTC.
Only the US tax on non-qualified dividends would use a different calculated figure.
There is no "instead" regarding claiming the US tax that was withheld, it should ALWAYS be reported in line 64 whether or not it was correctly withheld, over-withheld. It would be a good idea to attach the T5, although a 1099 should have been issued to you (had they known you were USC).
CRA, in the past, has asked for 1040 only, and any W-4 for wages. They are now, as of this year, asking for official transcripts, but that has not been 100% applied yet.
Only the US tax on non-qualified dividends would use a different calculated figure.
There is no "instead" regarding claiming the US tax that was withheld, it should ALWAYS be reported in line 64 whether or not it was correctly withheld, over-withheld. It would be a good idea to attach the T5, although a 1099 should have been issued to you (had they known you were USC).
CRA, in the past, has asked for 1040 only, and any W-4 for wages. They are now, as of this year, asking for official transcripts, but that has not been 100% applied yet.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing