Tax treaty and Article 13 for Canadian capital gains

looking4advice · Post by **looking4advice** » Wed Oct 19, 2011 8:14 pm

Does anyone have experience with Article 13 (paragraph 4) of the CDN/US tax treaty being used to eliminate US taxes on CDN capital gains from a small business sale?

One accountant said it could be used without any issue but it seems too good to be true.

Thank you.

nelsona · Post by **nelsona** » Wed Oct 19, 2011 8:39 pm

Not sure what benefit you are searching for.

If you are a US citizen living in Canada, or are living in US (thus subject to US taxation), you can't use XIII(4), due to the saving clause. You simply use foreign tax credit, available without the treaty, just like any other Cdn tax paid on any other income.

If you are a non-US citizen living in Canada, then you don;t pay US tax on anything.

So, what is your citizenship/residency, and where is the company?

nelsona · Post by **nelsona** » Wed Oct 19, 2011 8:46 pm

In reality, XIII(4) only applies to Cdn residents, with a capital gains from US stock. They only pay Cdn tax.

nelsona · Post by **nelsona** » Wed Oct 19, 2011 8:46 pm

Cdn residents who are not US citizens, that is.

looking4advice · Post by **looking4advice** » Wed Oct 19, 2011 8:52 pm

Sorry I should have said I was a US citizen living in Canada with no US income, property or ties since 1966.

So does that mean Xiii(4) could be used to eliminate the 15% US tax on capital gains in Canada from the sale of a private Canadian company? Or does the savings clause effectively remove that option for me?

nelsona · Post by **nelsona** » Thu Oct 20, 2011 6:54 am

There is no exemption. XIII(4) does not apply.
to US citizens.
You report all world income including gains on 1040, and then take 1116 to reduce the US tax on that portion.
Remember to calculate your gain based on USD for ALL the costs (in then current USD) as well as the proceeds.

triunbad · Post by **triunbad** » Thu Oct 20, 2011 5:25 pm

I assume this would mean a fairly large tax bill in the US if you were just under the $750,000 CGE limit. Can you use any of the Canadian AMT that would likely result from the sale to offset the US tax.

nelsona · Post by **nelsona** » Thu Oct 20, 2011 5:41 pm

Any Cdn income tax levied is eligible for the 1116 tax credit.

looking4advice · Post by **looking4advice** » Thu Oct 20, 2011 10:57 pm

The capital gain was about $300k and I have not used any of my $750k lifetime CDN exemption. A butterfly or purification was done and was fully onside to provide the eligible CDN cap gain deduction but that does not apply for US tax, correct?

So my understanding is the full $300k would be taxable at 15% in the US, right?

nelsona · Post by **nelsona** » Fri Oct 21, 2011 9:28 am

nelsona · Post by **nelsona** » Fri Oct 21, 2011 9:30 am

If you have been properly doing your US taxaes, you might have some unused Cdn tax from previous years that can now be used.

one of the advantages of using 1116 instead of 2555 at all times.