CAN - US Treaty (Capital Gains and Dividends)

[CadUSfile]

Dual Citizen (CAN-US): Can resident.
Looking for guidance about treatment of capital gains and dividends earned from CAN-based public companies and U.S.-based public companies.

(1) Under the Treaty, it looks like max tax rate % in the U.S. for dividends is 15%. So, if CAN tax % + provincial tax % is greater than 15%, there should be no tax to remit to U.S. Procedure would be to declare dividends earned on 8833 and claim treaty section xxxxx. Anyone know if this is accurate? Does it make a difference if Dividends originate from U.S. Company or Can company?

(2) Same sort of question for capital gains (from sale of public company stock). However, the Treaty seems to state that if CAN resident (with added requirements), capital gains should be taxed using the CAN tax rates and rules without the need to file capital gains schedules on US tax return. Again, does this require an 8833 with reference to a specific section in the Treaty? Does this mean that there is no need to calculate the US tax liability on cap gains or determine whether they are long or short term? Does origin of cap gains (us co. or can co.) have an impact?

Thanks for your assistance. Much appreciated.

[nelsona]

As a dual citizen living in canada, your first step is to report ALL world income on both returns.

As you will find, all your income including your dividends from US firms will not be taxed 15%, so you will simply claim the overall taxrate you calculate on your 1040 towards your Cdn tax.

All other passive income you have is Cdn-sourced, including the cap gains frorm US companies. You simply file a 1116 reporting the Cdn tax. this effectively reduces your US tax to zero.

No need for treaty.

[cfn2007]

I think I am confused by your comment that your US tax is effectively reduced to zero. You would still need to send some money to the IRS for the US dividends, right? It's just that the US tax is then recovered on your Canadian return.

So, for example, if your overall tax rate on the 1040 is 13% and you had $1000 of US dividends, you would send the IRS $130 and take a $130 credit on your Canadian taxes.

[nelsona]

Not quite that simple, but yes, as you pointed out, your US sourced income will result in some US tax liability. in you example that would be only the US dividends.

Its all the rest of the income you have that will yeild zero US tax, one way or another.

[cfn2007]

Thanks for clarifying. I was pretty sure there was some US tax liability on the US dividends.

What does the taxpayer have to do to prove the US tax (from the US dividends) on their Canadian return? Obviously, there is no withholding tax for these dividends itemized on a T5 or 1099. Do you just include a copy of the 1040 with the Canadian return? Assuming that's the way you "prove" the US taxes to the CRA, do you also need to include any of the 1040 attachments (e.g. Schedule B) or a page showing your calculations?

Thanks.

[nelsona]

You always have to include a 1040 (or 1099 if you don't file) when you file for US tax credit in Canada.

[nelsona]

... and there would have to be itemization of the tax withheld.. there ALWAYS is a record of tax withheld. You are confusing this with interst that is not reported on a T5. The tax would alsways be.

[cfn2007]

What you're saying seems to be somewhat different than what is happening in my case. Perhaps different Canadian brokers handle the situation of dual/American citizens differently.

I hold a US stock in a Canadian taxable brokerage account. They send me 2 forms each year for these dividends: a T5 showing that I received $x in USD dividends (no tax withheld) and a 1099 for the same $x USD dividends (again, no tax withheld). I use the 1099 to complete my 1040 (and keep the form for my records) and I attach the T5 to my Canadian return. I can't think of any reason to attach the 1099 to my Canadian return (since the exact same USD income is already reported on a T5).

I pay my share of US tax on these dividends when I file my 1040. It seems to me that the only record of my paying any US tax is the 1040 since there was no tax withheld (and therefore no itemization). I guess what I'm trying to figure out is whether attaching the 1040 is sufficient to re-coup the US taxes on my 1040 or whether I need to also attach any of the 1040 schedules and/or show my calculations?

I hope that all makes sense. If you think I'm doing something wrong (or my broker is doing something wrong), please let me know so I can fix it. Thanks!

[nelsona]

I'm not sure what you are trying to say. If your broker withheld US tax from you, then he would HAVE TO report this to you and IRS on a 1099. That is all I said.

As I also said, ANYTIME you request credit for US tax on your Cdn return, the method of verification is your 1040. If, becuase of of not having to file 1040 (non-residents, for example), then attaching OTHER proof of the withheld tax would be the alternate method of establishing US tax paid.

You haven't had any tax withheld. So why are we even discussing withheld tax.

[cfn2007]

Sorry, I was confused by your comment that "there ALWAYS is a record of tax withheld". I now see what you were saying. My bad.

Thanks!