Sourcing of investment income
Moderator: Mark T Serbinski CA CPA
Sourcing of investment income
US citizen, Canadian resident. I have a non-registered investment account located in Canada. This account has a Canadian dollar sub-account with Canadian holdings, and a US dollar sub-account with US holdings. I understand from Forum posts that the sourcing of investment capital gains is based on the residence of the payEE; the sourcing of interest and dividends is based on the residence of the payOR. I would like to confirm: Is it correct that for the Passive Form 1116, Line 1a would thus include the capital gains from both sides of the account, and the dividends and interest from just the Canadian side of the account. That is, the dividends and interest from US companies would be considered US sourced. I am presuming that the fact that the account is located in Canada is not a deciding factor in these sourcing decisions.
Interest and dividends from Cdn sources, along with cap gains from any source (except US real estate) would be reported on 1116 passive income, as you say.
US interest (since it would not normally be taxable in US but for your citizenship - thus not eligible for tax credit in Canada) is reported on a "re-sourced" 1116, in order to eliminate any US tax that has arisen. US dividends would also be reported, if your tax rate on dividend income was greater than 15% (since it would only be taxed 15% but for your US citizenship). the payer is the US company, not the broker.
On your Cdn return, only the US tax on US dividends would be creditable, limited to the lesser of 15% or the US tax on dividends determined before applying any 1116 credits.
US interest (since it would not normally be taxable in US but for your citizenship - thus not eligible for tax credit in Canada) is reported on a "re-sourced" 1116, in order to eliminate any US tax that has arisen. US dividends would also be reported, if your tax rate on dividend income was greater than 15% (since it would only be taxed 15% but for your US citizenship). the payer is the US company, not the broker.
On your Cdn return, only the US tax on US dividends would be creditable, limited to the lesser of 15% or the US tax on dividends determined before applying any 1116 credits.
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Thank you very much for your explanations. I had previously not sourced this appropriately, and have revised my work (I am using TaxAct software.) I have removed my US interest and US dividend income from my Passive Form 1116. I then created a Resourced Form 1116, on which I show the US interest income. (The tax rate on my US dividends is less than 15%, and thus I have not resourced any amount for dividends.)
I realize that I am still having some conceptual problems: For the Passive Form 1116, Line 8, I am uncertain now how to appropriately revise the amounts for taxes paid to Canada. Having moved the US-source interest to a Resourced Form 1116, I presume I should move the associated Canadian tax amount to that same form. And having removed the US-source dividend income, do I need to as well remove from Line 8 the proportionate share of Canadian taxes paid for US-source dividends? I see that if I continue to include those taxes, effectively they will be removed for the current tax year by the limitation percentage, but the credits will remain available against passive income in future years. Or do I need to drop the taxes paid on US-source dividends from Line 8, such that they are not available this year, nor in the future? In this regard, I have seen elsewhere on the Forum the words "no Canadian tax is wasted". Is this a situation where that applies? Thank you.
I realize that I am still having some conceptual problems: For the Passive Form 1116, Line 8, I am uncertain now how to appropriately revise the amounts for taxes paid to Canada. Having moved the US-source interest to a Resourced Form 1116, I presume I should move the associated Canadian tax amount to that same form. And having removed the US-source dividend income, do I need to as well remove from Line 8 the proportionate share of Canadian taxes paid for US-source dividends? I see that if I continue to include those taxes, effectively they will be removed for the current tax year by the limitation percentage, but the credits will remain available against passive income in future years. Or do I need to drop the taxes paid on US-source dividends from Line 8, such that they are not available this year, nor in the future? In this regard, I have seen elsewhere on the Forum the words "no Canadian tax is wasted". Is this a situation where that applies? Thank you.
Thank you very much for your response
1) I wanted to verify: when you mention the chart, I presume you are referring to "Table 2, Source of Income" on page 13 of the Publication 514 for 2015. Do I understand correctly?
2) If I am following well, when resourcing my US-source interest, I use only the amount of tax that sets my US tax to 0 for that item. And that is the reason why it would be the US tax amount which would be claimed on Line 8 of my resourced Form 1116, rather than the amount of Canadian tax (which was, as one might expect, higher).
3) And I can understand that there is never any carry-forward for resourced. It arises and pertains to that one year only.
4) I am still confused about the notion that no Canadian tax is wasted, and if it applies in this situation. Are all the taxes paid to Canada reported on one of the Forms 1116, even when some of the income was US-sourced? When there is US-sourced income, as with my dividends this year, can the taxes on those dividends be included on Line 8 of the Passive Form 1116? If included, the limitation percentage will make it such that the Canadian taxes on that US-sourced income will not be available as a credit this year. But having been included on Line 8, they will nevertheless be available as a carryforward to a future year. Or do I not include them on Line 8, and thus they will never be available as a credit?
1) I wanted to verify: when you mention the chart, I presume you are referring to "Table 2, Source of Income" on page 13 of the Publication 514 for 2015. Do I understand correctly?
2) If I am following well, when resourcing my US-source interest, I use only the amount of tax that sets my US tax to 0 for that item. And that is the reason why it would be the US tax amount which would be claimed on Line 8 of my resourced Form 1116, rather than the amount of Canadian tax (which was, as one might expect, higher).
3) And I can understand that there is never any carry-forward for resourced. It arises and pertains to that one year only.
4) I am still confused about the notion that no Canadian tax is wasted, and if it applies in this situation. Are all the taxes paid to Canada reported on one of the Forms 1116, even when some of the income was US-sourced? When there is US-sourced income, as with my dividends this year, can the taxes on those dividends be included on Line 8 of the Passive Form 1116? If included, the limitation percentage will make it such that the Canadian taxes on that US-sourced income will not be available as a credit this year. But having been included on Line 8, they will nevertheless be available as a carryforward to a future year. Or do I not include them on Line 8, and thus they will never be available as a credit?
1. Ther is a table you need to complete deep in the guide.
2. Yes, you report the amount of US income you need to reduce the US tax to 0.
4. Of course cdn tax is wasted, since the Cdn tax is almost always higher that the US tax. Who said it wasn't wasted? You get carryforwward on the passive and general forms.
2. Yes, you report the amount of US income you need to reduce the US tax to 0.
4. Of course cdn tax is wasted, since the Cdn tax is almost always higher that the US tax. Who said it wasn't wasted? You get carryforwward on the passive and general forms.
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You only get to use carryforwarded amounts in years when the foreign tax you paid was LESS that what the US tax is. Other wise you simply keep carrying forward plus whet you don't use that year.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing