capital loss carryover rules differ in US vs. Canada

[bwafusion]

I am a dual citizen and file both US and CDN tax returns. For 2018 I had large capital gains in Canada but was able to initially reduce any US tax owing to almost zero (aside from NIIT) using FTCs. However, I also have a capital loss carryover of approx. $35K in Canada which, when I recalculate CDN tax owing, gives a substantial reduction in CDN tax due. (good) The downside of this recalculation is that the reduction in CDN tax due also reduces my FTC on the US side and I end up owing approx. $4000 in US taxes because I cannot use the same $35K capital loss carryover on the US return (bad).

How can I reconcile this difference in capital loss carryover rules between the US and Canada so I do not end up owing the $4000. in US taxes? thanks

[nelsona]

You can't. That is the world of FTCs and previous history. You have no cap losses in US (why not?), so....

[bwafusion]

OK, then would it be reasonable to claim a FTC on the Canadian side (T2209) for the US taxes that I am paying on the full amount of capital gains, since I cannot deduct the CDN capital loss carryover of $35K to reduce the US capital gain. I.E. I am paying more in US taxes on the capital gains than I am in CDN tax on the gain.

[nelsona]

No. Canada does not allow foreign tax deduction on Cdn-sourced income.

I asked why you do not have commensurate US losses?

[bwafusion]

I do have prior year losses from the US, not current year. So I am limited to the $3000. capital loss carry forward on the US side.

[nelsona]

I think you may have that wrong. If you have reserves in capital losses, you can use ANY amount against current gains.

What you are limited to is DEDUCTING $3000 loss MORE than your gains.

Example: you have $20,000 in cap losses from past with IRS. You make a $15,000 gain, this year. You use the $15,000 of the losses against the current year FIRST (before any FTCs), AND $3,000 as a deduction, and carry forward $2,000

Unless you have been deducting the $3000 every year on your US return.

[bwafusion]

Thanks for that. I definitely have a mismatch in my record of prior years capital losses in Canada vs. what I have on record on my prior US tax returns. I'll need to look into that further.

[bwafusion]

Here's another thought -- for 2018 I have both US sourced and CAN sourced investment income. I should be able to apportion an amount of US taxes owing to US sourced income only and claim that portion as a FTC on my CDN return.

[nelsona]

No. None of your gains are US-sourced, by treaty. Canada will not accept any FTC on cap gains, unless it is US real estate.

If you have cap gain reserves with IRS, use them; you are not limited to $3000.

[nelsona]

How many years have you been filing dual country returns? I get the sense that you haven't managed these gains/losses correctly over the years.

[bwafusion]

In answer to your last question - 15 years. I have mostly used up all my prior cap gain reserves with the annual $3000. deduction.

Regarding my prior question of using a FTC on my T1 for US investment income, I was referring to non-capital gain income.

[nelsona]

The tax on dividends can be given as FTC on your T1. Nothing else. And only up to 15% of the reported income. Its not your Cdn tax that is the problem, it is your US tax.

So, lesson learned: when one has large cap loss reserves on both countries returns, DO NOT whittle down your US cap losses year by year, one needs to trigger any gains as soon as possible, since the $3000/yr mandatory drawdown doesn't buy you any thing in your overall tax picture, and results in what happened to our poster this year.

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