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

[nelsona]

In other words, all US capital gains for Cdn residents are fully taxable in canada with no opportunity for foreign tax credit -- which is exactly like Cdn-sourced.

If you find that other thread, let me know. If it is not quite right I will clarify it.

[bruce]

Nelsona,

I found the thread that seems to be contradictory (at least to me):

http://forums.serbinski.com/viewtopic.p ... 11&start=0

In your first post, you state "3. Your cap gains are condsidered to be sourced where you reside, not where the brokerage is located. Your cap gains will all be Cdn-sourced (except forany real property situated in US) once you move to canada. You will have to report these in US because of your citizenship, and claim Cdn tax as a credit on your 1116."

Also, in your second post you said "YES" in response to my this question: "2. All my income will be from earned income, dividends, interest and capital gains. If I understand you correctly, the only "US sourced" income that I would have is from interest & dividends earned in US domiciled accounts (since all cap gains are considered Canadian sourced). Everything else (including interest & dividends in Canadian domiciled accounts) is Canadian sourced. Right?"

Thanks.

[nelsona]

In both cases, I was referring to the Cdn treatment of such gains.

I should have been more clear. Gains arising from the sale of stock in US comapnies is considered US-sourced. However it is not considered foreign income eligible for foreign tax credit, since it would not be taxable in US to a non-citizen. They are Us-sourced if they are from US-based companies (not the brokerage), but are treated by Canada, by treaty, to be like they are Cdn -sourced, since no tax credit is given.

The US, by the saving cluse, ignores this re-sourcing by canada, but then allows you to re-source them by the double-taxation relief cluses.


Sorry for the confusion. However, I doubt whether such distinction would affect your tax situation.

[nelsona]

Note that I did correctly state, back then, earlkier in that thread

If you live and work in canada, The only US-sourced income you will have from CRA's point of view is the US-sourced interest and US-sourced dividends, and the most you will be granted in tax credit is 10%.

note, "from CRA's point of view". all other discussions would be from that starting point. I then explained how double tax relief worked for cap gains.

I really don't see the need to split hairs on this.

[bruce]

Thanks for the clarification. This helps a lot.

For shares of a company, it is now clear to me that the source of income depends on where the company is headquartered. In the case of Nortel, EnCana or BMO, I gains would be considered Canadian-based even if the stock was purchased in USD on NYSE. Also, I would guess that an ETF (or mutual fund) would be sourced based on where the fund is domiciled and not what it holds. For example the Canadian iShares ETF that invests in the S&P500 (XSP) is considered Canadian sourced, right?

It sounds to me that for a USC like myself, the "re-sourced" category on the 1116 is the critical tool to eliminate double taxation. I read on the Serbinski web site that the 10 categories of foreign income on the 2006 form 1116 are being narrowed down to 2 categories for 2007 (general limitation income and passive income). Any idea on the impact of this change? Does this mean double taxation or is it simply a streamlining of the paperwork?

As always, thank you for your guidance and expertise!

[nelsona]

Mutaul funds are sourced in the country whre they are managed, although some of the taxes may be foreign. We;ll leave that alone.

As I have sted earlier, the "re-sourced" category is a must for any US citizens living in canada with Us-sourced income. there is no other way to eliminate double tax.


I have not seen the new regs for 1116, although many categories are dissapearing. I would find it difficult for the IRS to get rid of the "re-sourced" category, as it is clearly spelled out in many of their treaties, like Article XXIV of US-Canada.

[Celineb]

I'm not sure where you guys are getting the info that you do not have to file a 1040NR since you say that because of the personal exemption ($3400) for nonresidents, you will not pay tax unless you have dividends above that amount. The thing is the 1040NR guide specifically says that you cannot claim the personal exemption unless the income is effectively connected with a business or trade (page 18 - line 39), and dividend income is not.

I have filed my 1040NR, and reported by dividend income only (cap gains distributions are not taxed as mentioned), then claimed a foreign tax credit when reporting all my gains in Canada. I believe that is the correct way to file (I work in the US for the Cdn govt though, so maybe it's different for me??)

Thanks.

[nelsona]

I think this was cleared up later in this thread, but thatnks ofr the further clarity. Your deemed resident status as a Govt employee shouldn't impact this.

You are still entitled by treaty to the lower tax rate (15%) on dividends and canada will still limit any credit to that 15%.