"2. Foreign passive income is foreign passive income. It ALL gets lumped into one pile, along with its proportion of your overall Cdn tax."
So if I understand this correctly, declaring TFSA income on US taxes should seldom result in any additional US tax given the generally higher Cdn tax rate (on non-TFSA income).
(The only exception that I can think of would be if you invested the TFSA into US securities. In that case, you would not have any FTC to offset the US taxes.)
Does that sound right?
2008 Budget TFSAs
Moderator: Mark T Serbinski CA CPA
Phew! Sounds like we're on the same page regarding US-sourced dividends being foreign income in Canada.
As for the cap gains on US securities, we agree that those gains are considered Canadian (by treaty). However, the recovery mechanism for US citizens (to avoid double taxation) is using the "re-sourced" category on the 1116 (as opposed to "passive"), right?
Thank you!
As for the cap gains on US securities, we agree that those gains are considered Canadian (by treaty). However, the recovery mechanism for US citizens (to avoid double taxation) is using the "re-sourced" category on the 1116 (as opposed to "passive"), right?
Thank you!
For dividends and for cap gains resulting from US real property, the re-source method would be used, but only if your US tax could not be fully used in Canada. otherwise no credit is availble.
For cap gains (other than on US real property), since none of the US tax is eligible for Cdn foreign tax credit, the re-source method would be used.
For cap gains (other than on US real property), since none of the US tax is eligible for Cdn foreign tax credit, the re-source method would be used.
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For capital gains (other than US real property), wouldn't there be a risk that the gain could be sourced to the US?
Under IRC Sec. 865(g)(2), personal property gains where the foreign tax paid is less than 10% are considered US source where a US citizen has a tax home outside the US. Since gains within a TFSA would be 0% Cdn tax, this section would prevent a US citizen from taking a credit for unused passive foreign tax credits, since the gain would be re-sourced from Canada to the US.
I am unsure how the treaty might protect the gain to keeping it Canadian source.
Article XXIV - no double tax of gain, since there would never be any Canadian tax on gains in a TFSA. Not sure how this article could apply.
Article XXIII(4) - perhaps, but this treaty provision was made law in 1984, while IRC Sec 865(g)(2) was made law in 1988. IRC Sec 7852(d) states that neither treaty nor US law should take precedence by reason of its being a treaty or US law. If the later in time principle applies here like it did in the Lindsay tax court case, then gains might be considered US source.
My concern is the $50,000 home run gain would attract a 15% or 20% US tax on LTCG where a client might be expecting a tax free result in both countries.
I can't find many answers on this so far. The big firms are mentioning US citizens and the specific issues related to them in their TFSA briefs, but none are very detailed so far.
Nelsona, any thoughs on how or if this section might apply?
Under IRC Sec. 865(g)(2), personal property gains where the foreign tax paid is less than 10% are considered US source where a US citizen has a tax home outside the US. Since gains within a TFSA would be 0% Cdn tax, this section would prevent a US citizen from taking a credit for unused passive foreign tax credits, since the gain would be re-sourced from Canada to the US.
I am unsure how the treaty might protect the gain to keeping it Canadian source.
Article XXIV - no double tax of gain, since there would never be any Canadian tax on gains in a TFSA. Not sure how this article could apply.
Article XXIII(4) - perhaps, but this treaty provision was made law in 1984, while IRC Sec 865(g)(2) was made law in 1988. IRC Sec 7852(d) states that neither treaty nor US law should take precedence by reason of its being a treaty or US law. If the later in time principle applies here like it did in the Lindsay tax court case, then gains might be considered US source.
My concern is the $50,000 home run gain would attract a 15% or 20% US tax on LTCG where a client might be expecting a tax free result in both countries.
I can't find many answers on this so far. The big firms are mentioning US citizens and the specific issues related to them in their TFSA briefs, but none are very detailed so far.
Nelsona, any thoughs on how or if this section might apply?
Not sure where you are going on this. TFSA gains will indeed be taxable in US, no way around that.
What we are looking at in this thread is ways of minimizing the US tax, by the foreign tax credit methods by either (a) combining it with other similar Cdn-sourced income on which Cdn tax has been paid. or (b) applying this technque with other similar US-sourced income and tehn using the re-source rules in the treaty. US-based non-real property is the prime candidate for this application as it should be would have a zero tax rate in the re-source world.
What we are looking at in this thread is ways of minimizing the US tax, by the foreign tax credit methods by either (a) combining it with other similar Cdn-sourced income on which Cdn tax has been paid. or (b) applying this technque with other similar US-sourced income and tehn using the re-source rules in the treaty. US-based non-real property is the prime candidate for this application as it should be would have a zero tax rate in the re-source world.
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This is basically in agreement with what KPMG has said:
"For instance, while earnings in a TFSA will be tax-free for Canadian tax purposes, they will be taxable for U.S. tax purposes. However, it may still be beneficial for a U.S. citizen to establish a TFSA if he or she has sufficient foreign tax credits to absorb the additional income reported for U.S. income tax purposes."
sufficient foreign tax credits means of course sufficient other Cdn (or in some cases, US) income which is taxable in US.
"For instance, while earnings in a TFSA will be tax-free for Canadian tax purposes, they will be taxable for U.S. tax purposes. However, it may still be beneficial for a U.S. citizen to establish a TFSA if he or she has sufficient foreign tax credits to absorb the additional income reported for U.S. income tax purposes."
sufficient foreign tax credits means of course sufficient other Cdn (or in some cases, US) income which is taxable in US.
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I can see the argument for "income" earned in a TFSA and how it could use excess foreign tax credits from other income outside a TFSA. By combining the two, there might not be any US Federal tax liability.
Where I am concerned is how this would apply to capital gains as opposed to income. If capital gains in a TFSA were considered US source gains for the reasons I outlined earlier, there would be no foreign tax credit on the US return and therefore a US Federal tax liability.
How can we get personal property gains to be Canadian source under the Treaty in this situation?
Where I am concerned is how this would apply to capital gains as opposed to income. If capital gains in a TFSA were considered US source gains for the reasons I outlined earlier, there would be no foreign tax credit on the US return and therefore a US Federal tax liability.
How can we get personal property gains to be Canadian source under the Treaty in this situation?
Just so I'm clear on this, are you referring to personal property as oopposed to investments, or are you using the term personal property in general terms? By definition stocks and such are NOT personal property.
If you are referring specifically to personal property, it is unlikley that such property would be included in a TFSA in the first place. maybe you could set up a scenario for me to better understand.
If you are referring to investments in general, there is no doubt that US-sourced investment which are NOT real estate or resource based are considered Cdn-sourced when the taxpeyer is resident in canada, XXIII(4). I don't know of IRS ever questionning this.
Moreover by the re-sourcing rules, even such property that IS US sourced, can under some circumstances be re-sourced for FTC purposes.Americans in canada have never had a problem dealing with this, and the technucal expalantion to the current treaty has several examples outlining the method.
In any event, we are not discussing the taxability of such gains. They will be taxed in US, regardless of source.
That is why it is proably not a good idea -- barring an IRS ruling making TFSA non-taxable -- for a US citizen to have a TFSA.And he certainly would want to minimize any US holdings in such TFSA.
If you are referring specifically to personal property, it is unlikley that such property would be included in a TFSA in the first place. maybe you could set up a scenario for me to better understand.
If you are referring to investments in general, there is no doubt that US-sourced investment which are NOT real estate or resource based are considered Cdn-sourced when the taxpeyer is resident in canada, XXIII(4). I don't know of IRS ever questionning this.
Moreover by the re-sourcing rules, even such property that IS US sourced, can under some circumstances be re-sourced for FTC purposes.Americans in canada have never had a problem dealing with this, and the technucal expalantion to the current treaty has several examples outlining the method.
In any event, we are not discussing the taxability of such gains. They will be taxed in US, regardless of source.
That is why it is proably not a good idea -- barring an IRS ruling making TFSA non-taxable -- for a US citizen to have a TFSA.And he certainly would want to minimize any US holdings in such TFSA.
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Let me temper that last remark by adding that, of course, paying less tax is always a good idea.
If you were going to buy 100 shares of stock, and it could be either inside a TFSA or outside, there is no harm in it being inside, even for a US citizen.
At least they won't pay Cdn tax. They would pay US tax in either case.
Putting it inside a TFSA does NOT change the way it is taxed in US. It simply means that ALL the tax will be paid to US rather than split between Canada and US.
It is just that US citizens should not view this as a tax-FREE account.
Note that this is not like the Roth situation, where one can be penalized for early withdrawal and cannot put money back once taken out.
I used the tax-free muni bands as an analogy. Just because something is taxed in one jurisdiction does not all of a sudden mean that the tax-break offered by the other is worthless.
A US citizen getting $1000 interst in a TFSA was still going to pay some tax in US anyways. A US citizen investing a 100 shares in google was still going to pay US cap gains tax anyways. So with the TFSA, nothing has changed, but the Cdn treatment of that income.
You came to this thread with the premise thatan american might THINK he has a tax-free account. Once he understands that it is not, TFSAs can be a useful tool.
If you were going to buy 100 shares of stock, and it could be either inside a TFSA or outside, there is no harm in it being inside, even for a US citizen.
At least they won't pay Cdn tax. They would pay US tax in either case.
Putting it inside a TFSA does NOT change the way it is taxed in US. It simply means that ALL the tax will be paid to US rather than split between Canada and US.
It is just that US citizens should not view this as a tax-FREE account.
Note that this is not like the Roth situation, where one can be penalized for early withdrawal and cannot put money back once taken out.
I used the tax-free muni bands as an analogy. Just because something is taxed in one jurisdiction does not all of a sudden mean that the tax-break offered by the other is worthless.
A US citizen getting $1000 interst in a TFSA was still going to pay some tax in US anyways. A US citizen investing a 100 shares in google was still going to pay US cap gains tax anyways. So with the TFSA, nothing has changed, but the Cdn treatment of that income.
You came to this thread with the premise thatan american might THINK he has a tax-free account. Once he understands that it is not, TFSAs can be a useful tool.
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Where I think the real win could be for a US citizen is where they have a pool of excess passive basket foreign tax credits that may never get used. The US citizen will likely continue to add to this passive basket foreign tax credit pool where they have interest and dividends subject to Canadian tax.
Now, with a TFSA, they won't pay Canadian tax on the income, but the income will attract US Federal tax. However, the income is non-US source, so they can claim a foreign tax credit. While there is no current Canadian tax, they can start claiming some of the past passive foreign tax credits that were carried over. The end result would be no or minimal net US Federal tax, as the past foreign tax credits can offset the US federal tax liability on income from the TFSA.
I don't think I said anything there that nelsona didn't already say in this thread.
However, my concern would be capital gains from the sale of stocks (I used the term personal property before, which is how the Internal Revenue Code would describe the sale of stocks in IRC Sec 865, sorry if I mislead). I am concerned that capital gains from the sale of stocks are treated differently than income by the Internal Revenue Code for sourcing purposes. Where a capital gain is sourced US (due to reasons discussed previously), no foreign tax credit would be available on the US return and the capital gain would generate some US Federal tax
I haven't had a discussion with any of our clients yet on TFSAs, so I don't know if many are considering such a plan.
Now, with a TFSA, they won't pay Canadian tax on the income, but the income will attract US Federal tax. However, the income is non-US source, so they can claim a foreign tax credit. While there is no current Canadian tax, they can start claiming some of the past passive foreign tax credits that were carried over. The end result would be no or minimal net US Federal tax, as the past foreign tax credits can offset the US federal tax liability on income from the TFSA.
I don't think I said anything there that nelsona didn't already say in this thread.
However, my concern would be capital gains from the sale of stocks (I used the term personal property before, which is how the Internal Revenue Code would describe the sale of stocks in IRC Sec 865, sorry if I mislead). I am concerned that capital gains from the sale of stocks are treated differently than income by the Internal Revenue Code for sourcing purposes. Where a capital gain is sourced US (due to reasons discussed previously), no foreign tax credit would be available on the US return and the capital gain would generate some US Federal tax
I haven't had a discussion with any of our clients yet on TFSAs, so I don't know if many are considering such a plan.
I believe your concerns are unwarranted, as I've outlined above.
There is no history of IRS not accepting 'regular' capital gains as Cdn-sourced, otherwise millions of Cdns would be paying US tax
. I still beleive that Article XXIV(3)(B) would apply in determining source of any TFSA income (even though there is no Cdn tax on that specific income, the sourcing matters):
'gains of a resident [Canada] which may not be taxed in the [US] in accordance with the Convention (without regard to paragraph 2 of Article XXIX (Miscellaneous Rules)) [the saving clause] ...shall be deemed to arise in [Canada]'.
Since this would cover all non-real property, including US stocks, I don't see an issue here.
And just to ammend your paragraph that staers with "Now, with a TSFA,..." not only will PAST unused foreign tax credits be useful, buy also current Cdn tax on non-TFSA assets.
And this will prove even more the case should a US citizen leave Canada witha TFSA balance He could strategically leave the balance there, in order to generate some foreign income to 'use up' any past foreign tax surplus.
There is no history of IRS not accepting 'regular' capital gains as Cdn-sourced, otherwise millions of Cdns would be paying US tax
. I still beleive that Article XXIV(3)(B) would apply in determining source of any TFSA income (even though there is no Cdn tax on that specific income, the sourcing matters):
'gains of a resident [Canada] which may not be taxed in the [US] in accordance with the Convention (without regard to paragraph 2 of Article XXIX (Miscellaneous Rules)) [the saving clause] ...shall be deemed to arise in [Canada]'.
Since this would cover all non-real property, including US stocks, I don't see an issue here.
And just to ammend your paragraph that staers with "Now, with a TSFA,..." not only will PAST unused foreign tax credits be useful, buy also current Cdn tax on non-TFSA assets.
And this will prove even more the case should a US citizen leave Canada witha TFSA balance He could strategically leave the balance there, in order to generate some foreign income to 'use up' any past foreign tax surplus.
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