reporting passive capital gains and losses on Form 1116

jenfin · Post by **jenfin** » Thu Sep 17, 2015 5:33 pm

I still am not confident on how to reflect capital gains and losses on form 1116-Passive. I qualify for the "adjustment exception" so I am not required to adjust for qualified dividends and capital gains.

I understand that the gross income on lines 3d and 3e includes gross capital gains without netting out gross capital losses.

However when it comes to line 1a I am not certain as to whether to include gross gains because were I to not take the "exception" and use worksheet A to determine the adjustment, that worksheet calls for using net gains, not gross.

Also for Losses line 5 I have been using the -1500 I report on the 1040. Does this make sense or should I be using gross losses for the year if I am to include gross gains on 1a. Between the 2008 debacle and "energy" over the past year I have sufficient losses carried forward to be using the -1500 on the 1040 for some years to come.
Regards,

nelsona · Post by **nelsona** » Fri Sep 18, 2015 1:29 am

What does your software say? Generally if reporting GAINS, there is a schedule D accompanying the 1116.

If you are reporting no net passive income on your 1040, then there is little point to filing a passive 1116. The losses (including the $1500 you deduct, will make the foreign income NIL, making the tax credit NIL. Is there some CDn tax that you are wanting to report to carry forward?

jenfin · Post by **jenfin** » Fri Sep 18, 2015 8:58 am

My Canadian passive income is as follows:

I have Cdn interest income of 2000 Cdn dividend income of 6000.

On my Schedule D (all Cdn as dual citizen resident in Canada) I have net short term gains of 200, net long term losses of 3000 and 30000 long term net loss carryforward for a net long term loss of 33000.

The short term gain for 2014 is made up of 300 of gains and 100 losses.

The long term loss for 2014 is made up of 4000 of losses and 1000 of gains

Line 21 limits the loss carried forward to line 13 of 1040 to $1500.

I use TaxAct which is excellent but some of the input is manual for the 1116.

Because line 1a calls for GROSS Canadian passive income I do not know if it is simply the 8,000 of div + interest or if I have to add in gross short term gains, 300 and gross long term gains 1000 which are taken into account in lines 3d and 3e which call for gross receipts without reduction of losses.

Hope this clarifies my situation.

nelsona · Post by **nelsona** » Sat Sep 19, 2015 11:14 pm

I think you are missing something. Your capital losses are limited on libe 21 only if you have no cap gains to write off. So, every year until you use up your losses, you will have NO cap gains, and 1500 write off.

So, you have $2K interst, $6K dividends, and maybe $200 ST gains, unless you are alloeed to use some of your LT gains to write off your ST gains. I always thought that losses were losses once carried forward.

jenfin · Post by **jenfin** » Sun Sep 20, 2015 8:41 am

Thank you. This is how I have been treating it for years on the 1040 and on the 1116. I started doubting myself this year in respect to line 1a of the 1116 when it came to my attention through using the software that for lines 3d and 3e I was to include gross gains without offsetting the losses - "i.e the 200 st gains and the 1000 lt gains for the year." I assumed line 1a required the same treatment. ...or did I misinterpret lines 3d and 3e instructions too and fill the gains box on the 1116 manual input with " gross" gains when I should have left it blank.

nelsona · Post by **nelsona** » Mon Sep 21, 2015 7:55 am

Other than saying to try filling out the cap gains worksheet in the 1116 instructions, I'm tapped out of any help for you.

MGeorge · Post by **MGeorge** » Mon Sep 21, 2015 12:25 pm

Hi Jenfin,

I thought I had an answer for you but when I worked it out, it didn't add up. This is tricky one. I'll fire up TaxACT later today and see what I can come up with.

MGeorge · Post by **MGeorge** » Mon Sep 21, 2015 1:36 pm

Hi Jenfin,

I think what you should be reporting on 1116 is:

1a = $9,300
3d = $9,300 (same as 1a since you aren't adjusting)
line 5 = $2,800
since you are only "using" $1,300 of losses to effectively eliminate your gains, this is all that you could include on line 5 to make the math work out. The additional $1,500 is allowed to offset other passive income, and if there is no other, then it would have offsetted general in come for foreign tax credit purposes. That's why I think the total for line 5 should be $2,800.

Do you have general limit income?

If so, and you don't have US sourced income, then a good test is the fraction that comes out on line 19. If your amount on line 19 on the passive form + the amount of line 19 on the general form = 1, then you got it right.

I can't see this written explicitly in the instructions, but I think line 5 should only be the losses that you are allowed to use on this return. It makes sense because, you should have the foreign tax credit calculated based on the $6,500 net passive income.

jenfin · Post by **jenfin** » Mon Sep 21, 2015 1:51 pm

Hi Mgeorge. Sorry your right it doesn't add up. Net long term loss after carryforward would be 27,200. thats what i get for using round instead of actual numbers. As per nelsona's suggestion I read instructions for the 10th time. I guess I misthought that with the adjustment exception I didn' t use Worksheet A.

Also Think I was confused by the word "gross" in respect to line 1a. The end result simply is there are no capital gains to include on line 1a. ...and in the end it should only be the interest and dividend since I have a net loss. Correct? But am I correct in including "gross" gains in lines 3d &3e. It came from filling in the gains field in the manual input for Taxact.

Also in filling out worksheet A for separate category gain do I use (1500) or the (27200) but still only use (1500) on Line 5.

Note i'm a dual citizen in Canada thus all g/l are Foreign.
Nelsona - thanks for bearing with me on this one. I think I've been doing this for too long.

jenfin · Post by **jenfin** » Mon Sep 21, 2015 1:54 pm

00ps our notes must have crossed in the mail will read yours and respond. thanks

MGeorge · Post by **MGeorge** » Mon Sep 21, 2015 2:01 pm

Yes - lines 3d and 3e should only be made up of only gains (no losses included) and other positive income. This works in your favour because it determines what fraction of your standard deduction is used for passive income. As a US citizen in Canada, passive foreign tax credits are generally more valuable than general FTC.

A good test for correctness, 3d on your passive 1116 + 3d on your general limit 1116 should equal line 3e on either of forms 1116.

It would also be reasonable to go with:
1ine 1a = $8,000
line 3d = $9,300
line 5 = $1,500

But I think my early solution is better.

nelsona · Post by **nelsona** » Mon Sep 21, 2015 2:02 pm

I would agree, so long as ST gains can be written off against LT losses.

It goes back to the definition of "Gross". For 1116 purposes, "Gross" means income that constitued part of your AGI Adjusted GROSS Income

RRSP holders face the same issue of ambiguity when you consider their "Gross" pension income and their "Net" pension income. The "Net" pension income, is really the "gross" (line 1) amount for 1116 purposes.

Some instaead put ther Gross RRSP ammount on 1116 line 1, and then below this deduct the non-taxable portion. The end result is the same: your net RRSP is what your FTC is being calculated on.

Using this principle you could put $8000 on line 1 ($8200 if you can't write of your ST gains-- MGeorge seems to concur that you can) and $1500 below.
Bottome line: your FTC is being determined on $6500 of passive income.

Here's to recouping some of those enormous losses over the next few years.

MGeorge · Post by **MGeorge** » Mon Sep 21, 2015 2:14 pm

I hear ya.
I help my Mom with her taxes and she's still carrying forward 2008 related losses.

jenfin · Post by **jenfin** » Mon Sep 21, 2015 2:58 pm

Thank you both for your help. I'll run my real numbers through in the morning (have to babysit grandchildren now). Do have about $1000 of US dividends which are included in line 3e....also do have pension income - general limiitation, also losses allow me to write off shortterm gains.. I'll try the recommended "tests" and let you know how I fare. Also appreciate the comments on RRSP withdrawals which I start in 2015.

Also the wishes re: losses...don't think 2015 is a good year to recoup. One thing that made a difference this year was the Cdn dollar. Canadian gains became US losses.

MGeorge · Post by **MGeorge** » Mon Sep 21, 2015 3:12 pm

You're welcome.
I didn't know that you had US dividends, so those tests for correctness only apply without the US dividends considered.

So:
line 3d passive + 3d general + US divs = line 3e

The fraction that appears on line 19 passive + line 19 general will be less than 1 when you have US source income.

What you can do to check, is only enter your Cdn sourced income on your 1040, the confirm that 3d passive + 3d general = 3e, and 19 passive + 19 general = 1. After confirming this, you then add your US dividends. I recall that TaxACT will automatically calculate lines 3e and 19 based on 1040 info.

I hope this helps.
Cheers,