15% Foreign Interest Credit limit

otto · Post by **otto** » Thu Nov 19, 2009 1:21 pm

Thanks that's what I thought.

I didn't use 1116 for 2008; I used the 2555. Can I use the 1116 going forward. I thought I read that once you start using the 2555 you can't revoke it.

nelsona · Post by **nelsona** » Thu Nov 19, 2009 1:35 pm

Well, 2555 only applies only to your wages. You can and should still use 1116 for other income in conjuction with 2555.

otto · Post by **otto** » Thu Nov 19, 2009 9:46 pm

Does that mean I should have stopped paying estimated quarterly taxes to the US on the passive income being generated by the US Source (now going to be re-sourced) income? Will I still actually be sending a check to the IRS or does it all get paid to Canada because it will now be re-sourced?

Thanks for helping me.

Otto

nelsona · Post by **nelsona** » Thu Nov 19, 2009 11:03 pm

As a Cdn tax[ayer, you should never have to pay IRS any taxes. There is no jurisdiction of type of income that is less taxed in canada than in US, thus you should never have IRS tax to pay.

And if you have kids, you should actually be getting $1000 per from IRS.

otto · Post by **otto** » Wed Nov 25, 2009 7:39 pm

I am not sure I understand this completely yet.

Wouldn't I have to pay the IRS if I was a canadian tax payer and I received interest and dividends from a US-based ETF or equity dividend? My broker would withhold taxes and send that money to the IRS (right?) and then as a Canadian tax payer I would get a credit for this US tax paid on my Canadian return. So the US would still get paid because it was US sourced income.

Why doesn't the same hold true for a US citizen living in Canada? Although there is no withholding wouldn't I still have to report the income on my IRS 1040 and pay them the tax and then get a credit on Canadian return. What you seem to be saying is that all the US-based interest and dividend interest can be re-sourced as Canadian income on my IRS 1040 (1116) and then I get a credit on my US return and ultimately pay the higher rate on the Canadian return for the same interest income.

Is this right?

Thanks again and sorry about beating this dead horse.

Otto

nelsona · Post by **nelsona** » Thu Nov 26, 2009 9:34 am

As I corrected in another thread, a Cdn taxpayer should not pay anything to US ... IN EXCESS OF THE TREATY RATE for Cdns.

So US-source dividends would incur tax (upto 15%), but interest, cap gains (other than real estate) would not, since they are treaaty-rated 0%

otto · Post by **otto** » Thu Dec 03, 2009 12:52 pm

Hi,

Are my ordinary dividends that are generated from US Bonds Funds considered dividends or interest payments? When the word dividend is used in this thread it wasn't clear to me if it was referring to dividends generated by stocks and equity funds only or US Bond Funds too.

Can you clarify please.

Otto

nelsona · Post by **nelsona** » Thu Dec 03, 2009 3:11 pm

I find the US uses the term "dividends" far more loosely that canada for mutual funds. I prefer the term canada uses: "disitributions".
This allows for the "disitribution" to then be broken down into interest cap gains and true dividends.

One thing for certain is that 'ordinary dividends' from a mutual fund -- especially a bond fund --are unlikley to be the 'dividends' we are talking about here.

nelsona · Post by **nelsona** » Thu Dec 03, 2009 3:13 pm

For "qualified dividends" you would need to contact the fund manager to determine what if any of the didvidend arose from actaul company dividends, as qualified dividends may simply be long-term capital gains realized by the fund from selling a particular holding.

otto · Post by **otto** » Mon Dec 07, 2009 3:13 pm

Hi,

I still can't understand from your answers whether Bond Dividends from a US Mutual Fund or ETF are considered interest or dividends by Canada. I thought you were going to give me a yes or no answer:), I guess nothing is that simple with cross border taxes.

Here is a quote I pulled from the CRA website from a bulletin discussing canadian dividends -- but not specifically to mutual funds. The quote is discussing the definition of dividends (or lack thereof). But according to this quote it would seem that a mutual fund dividend would quality.

-- It is a corporation
-- It is distributing its profits in a pro-rata method to shareholders
-- not sure about 15 (3) subsection
--

"Because there is no specific meaning given to the word "dividend" in the
Act, it must be given its generally accepted meaning. Accordingly, any
distribution by a corporation of its income or capital gains made prorata
among its shareholders may properly be described as a dividend unless the corporation can show that it is another type of payment. The fact that a
distribution of this kind may not be called a dividend does not affect the
nature of the distribution. Any interest received on an income bond is deemed under subsection 15(3) to be a dividend where the payer corporation is not entitled to deduct such payment in computing its income. Where an amount is transferred from an unclaimed dividend account of a corporate broker or dealer in securities to a capital or surplus account and is subsequently distributed to the company's shareholders, the shareholders are in receipt of a taxable dividend."

Thanks again.

nelsona · Post by **nelsona** » Mon Dec 07, 2009 4:24 pm

So, now you know whay you won't get a yes or noa nswer: only the fund manager can tell you the breakdown of what the distribution was.