Canadian Resident: US capital gains, 1040NR and Canadian Tax

[nelsona]

Assuming (from previous posts) taht you are not a US citizen, this is a treayy matter, which, of course, overrides any IRS regulations:

Article XIII(4):

"Gains from the alienation of any property other than that referred to in paragraphs 1, 2 and 3 shall be taxable only in the Contracting State of which the alienator is a resident."


Paragraphs 1,2, and 3 refer to real estate an/or business property.

There is a place on the 1040NR last page to describe excluded income.

[Badger]

Do you need to file an 8883 for this and explain the capital gain? I had shares in a US brokerage which I sold will I was resident in Canada. I claimed the capital gain in Canada but the sale shows up on my 1099 forms and I dont want any issues with the IRS?

Thanks

[nelsona]

Since you are filing a 1040NR, you can expalin it there.

If you file a 1040, then you can't claim this exemption.

[Badger]

Thanks. So for a 1040 then can you use an 1116 passive income form to get some relief?

[nelsona]

I misspoke above. So long as you are not a GC holder or US citizen, you can exclude the gain on 1040 (in the year you move).
If you wre GC or USC, you do not get any tax benefit, becuase: What tax would you have paid in canada? the cap gains in Canada is based on the value the day you moved back, not the original price. There would be little if any tax to be credited.

[bruce]

[quote="Norbert Schlenker"]I have bad news re capital gains distributions from US mutual funds to Canadian residents. They're not treated as capital gains. They are foreign investment income, taxable at full marginal rates.

The logic is that, since Canada cannot ensure that something called a "capital gain" in another country is calculated in the same way as a "capital gain" in Canada, it's not a capital gain for Canadian tax purposes. (This blind leap by CRA is in fact supportable in the case of US "capital gains", since nothing like the sale of specified lots is allowed under Canadian rules, while it's a common technique for reducing realized capital gains in the US.)

A Canadian resident should avoid if at all possible taking a capital gains distribution from a US (or any other foreign) mutual fund.[/quote]

So how do capital gains from US based mutual funds get reported on a Canadian resident's Canadian return? Do they get entered as capital gains using a 100% inclusion rate (vs. 50%) or is there another place for this "foreign investment income"?

[bruce]

[quote="nelsona"]I misspoke above. So long as you are not a GC holder or US citizen, you can exclude the gain on 1040 (in the year you move).
If you wre GC or USC, you do not get any tax benefit, becuase: What tax would you have paid in canada? the cap gains in Canada is based on the value the day you moved back, not the original price. There would be little if any tax to be credited.[/quote]

Hmmm... when a GC or USC moves to Canada, they would have a tax basis discrepency on their investments since the basis is reset for Canadian tax purposes upon moving to Canada (not remains low for US tax purposes). Couldn't that individual churn their portfolio to realize extra capital gains their US return?

I would think that they could match large US capital gains at low US rates (15%) against a smaller Canadian capital gain at high Canadian rates (let's assume 45% cdn rate since many of the U.S. funds capital gains distributions are considered "foreign investment income" in Canada)

For example, if this USC Canadian resident had $20k in distributions from US domiciled mutual funds, couldn't they effectively "use" this extra tax by crystallizing an extra $40k of foreign "passive income" for their US return. This would be done by selling funds/shares with a high cost basis in Canada (due to reset) and a low basis in the US.

$20k in CG distrubutions x 45% = $9k tax owed Canada
$60k in CG (including dist'ns) x 15% = $9k tax owed to the US

Then use the $9k Canadian tax as a FTC on US return. Seems to me that this trick wouldn't get the USC out of the extra Cdn tax but he could at least use it productively to raise his US cost basis. Would this work?

[William]

This is really a question about Form 1116 but it's illustrated with a question I asked earlier in this thread regarding a cap gains distribution. Form 1116, Part I 1a asks for "Gross income from sources within country shown above..." I'm not sure what "sources within country" means when filling out the form for passive income. When Canada is the country in column A, does this mean I cannot include dividends from shares that I hold in US companies and/or cap gains distributions I receive from closed end funds on the NYSE? I'm a US citizen, permanent resident of Canada. For this year, it doesn't make any difference. Passive income from US sources is very small relative to that from Canadian sources and my tax owning zeros out but I'd like to understand this for the future. Thanks.

[nelsona]

gains and dividends from US companies are considered US-sourced. This is true for Cdns or Americans, regardless of the exchange the stock was bought on.

so, in answer to your question, no, the income from those US finds is not to be included in your 1116 for canadaian passive income.


However, since yopu are american, and thus taxable in US on that income (a non-US citizen would not be), your tax relief comes on another 1116 category -- re-sourced by treaty.

say, $10 of us-sourced gains were taxable %15 in US and $12 in canada. Canada will not give you any credit, since does not give credit for US tax that arises solely by the fact that you are American. Under normal IRS rules you could not claim a tax credit on 1116, since the incoem is not foreign. However, IRS allows, by treaty, for you to re-source this US-sourced income to Cdn-source, and then take the crdit for as much of the $12 as you can get to reduce your US tax to zero (nominally $10).

[nelsona]

I meant to say $100 of US income.

[William]

Thank you very much, nelson. I infer from your answer that a cap gain from the sale of stock in a US company would also have to go into the "income re-sourced by treaty" category. Is that right?

[nelsona]

That is a US-sourced gain.

I'm pretty sure my answer stated that. Not much to infer.

[William]

Thanks, nelson. Read through your first answer too quickly. :oops:

[bruce]

Nelsona,

I could have sworn that you previously said (on another thread) that as a Canadian resident, all capital gains are considered Canadian sourced (not US sourced) and that only US dividends and interest are considered US sourced. The US tax on interest & dividends gets recovered at treaty rates on Canadian return. The Canadian tax on CGs (along with any excess Cdn tax on interest & dividends) gets recovered on US return (form 1116).

Did I completely mis-understand the situation?

-bruce

[nelsona]

If I did say this, I was incorrect.

However, what I might have been saying is that from a canadian tax point of view, even though such US investments were US-sourced, one could not claim any foreign tax credit on their Cdn return, since the treaty does not require Canada to credit any tax owed in US on cap gains (which would be due to US citizen or GC-holder).

So, they would be treated, for Cdn tax purposes, simply like any other stock.

Then, on the US return, it is essentially the US tax that gets recovered on 1116, by reducing the US tax paid. The most that will be credited is the US tax or the Cdn tax, whichever is lowest.