Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

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nielkfj
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Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

Post by nielkfj »

I am a dual national (Canadian/U.S. citizen) resident in Canada. I own shares in a U.S. domiciled ETF, which is held in a Canadian brokerage account. No U.S. tax has been withheld from the ETF distributions because I am a U.S. citizen.

I have some questions about how to claim a foreign tax credit on the tax that I will pay on this income:

1) To which country should I pay tax on this income and for which country should I claim a foreign tax credit on the tax paid to the other country?

There are two possibilities, but I'm not sure which is correct:
Method 1: Pay tax on the distributions through my U.S. tax return, then claim a foreign tax credit on my Canadian tax return.
Method 2: Pay tax on the distributions through my Canadian tax return, then claim a foreign tax credit on my U.S. tax return.

It seems Method 1 is the correct way because it appears that with Method 2 I will not be able to claim a foreign tax credit on my U.S. tax return for U.S. sourced income. But I'm not sure about this.

2) Looking at form 1116 - Foreign Tax Credit - from the IRS, it seems like there might be a way to make Method 2 work, by classifying the income as "Certain income re-sourced by treaty" (box f). Then it appears that income from the U.S. ETF becomes "re-sourced" as Canadian sourced income, enabling me to claim a foreign tax credit on my U.S. return. But I'm not sure if this is allowed. Is it?

3) I have the same questions as above about capital gains income when I sell the ETF shares.

Any help would be appreciated.
nelsona
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Re: Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

Post by nelsona »

As a US citizen living in Canada, you report ALL income on BOTH returns.

For US dividends, you can only claim 15% of any US tax as a credit on your Cdn return. (any extra can be taken as a deduction in Canada)
When you do your US taxes, if the overall rate (before including your 1116s for CDn income) is more than 15%, then you file a specie l1116 (re-sourced) to reduce the tax to 15%.

The effect is that on your US tax return you should owe 15% of the dividend income, and whatever above that to Canada/Prov.
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nelsona
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Re: Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

Post by nelsona »

For gains, all gains, even on items held in US, are considered Cdn sourced, so you use the taxrate you paid in Canada on your normal 1116 for passive income against your schedule D taxes.
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nielkfj
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Re: Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

Post by nielkfj »

Thanks for the reply. It sounds complicated.

> For US dividends, you can only claim 15% of any US tax as a credit on your
> Cdn return. (any extra can be taken as a deduction in Canada)

According to the web page for the ETF the break-down of the distributions is categorized entirely as "Ordinary Income", not specifically as dividends. The other categories shown are "Short Term Gains", "Long Term Gains", "Return of Capital" and "Liquidation Distribution", but these are all blank. Does this have any impact on the 15% limitation for the FTC on the Canadian return?

> When you do your US taxes, if the overall rate (before including your 1116s
> for CDn income) is more than 15%, then you file a specie l1116 (re-sourced)
> to reduce the tax to 15%.
>
> The effect is that on your US tax return you should owe 15% of the dividend
> income, and whatever above that to Canada/Prov.

To calculate the overall tax rate, would it be (Tax)÷(Adjusted Gross Income)? (On the 1040 for 2019: (line 8b)÷(line 11b) )

About the sequence of doing the returns, should I do my Canadian return first with the T2209 even though the US tax hasn't been paid yet, then do my US return with the special 1116 if needed?

If I have to do a special 1116 (re-sourced), then the tax credit I would claim should be minus the 15% that I claimed for a FTC on my Canadian/Prov. return, correct?

Can I take a deduction for the extra tax above 15% on my Canadian return AND claim the special 1116 (re-sourced) for the same amount on my US return?
nelsona
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Re: Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

Post by nelsona »

Any dividend that ia a cap gain, should be reported as such in US. In Canada they are al treated as ordinary income (like interest).
You do each return without any FTC to come up with the rates.

You may have several 1118, the re-sourced income would only appear on that specific 1116, since it is US-sourced, the other incomes would appear on 1116 only if they were non-US sourced. (passive, general, etc)
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nelsona
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Re: Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

Post by nelsona »

If your US taxrate is more than 15% before you do FC, you can use the extra -- for the dividends only -- as a deduction (most software can handle this). Really your dividends are probably the only income that qualifies for Cdn FTC.
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nielkfj
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Re: Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

Post by nielkfj »

I'm still not clear on how to calculate the tax rate on the US dividends. Income Tax Folio S5-F2-C1, Foreign Tax Credit says to use "gross income", not "adjusted gross income" as I mentioned previously (section 1.22):

https://www.canada.ca/en/revenue-agency ... redit.html

I assume "gross income" would be line 7b "total income" on the 2019 1040 form. So the calculation would be (Tax)÷(Adjusted Gross Income) = (line 7b)÷(line 11b), correct?

Noted - Tax on capital gains from US dividends (or "distributions") are to be paid to the US up to the 15% threshold on the total dividend amount, but tax on capital gains from sale of the fund units are to be paid to Canada, correct?

Noted - All US dividends to be reported on the Canadian return as "income from foreign sources" on line 12100, correct?

It looks like a FTC from "re-sourced" income reported on the 1116 form can be carried over to other years, correct?
nielkfj
Posts: 27
Joined: Fri Apr 17, 2020 2:01 pm

Re: Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

Post by nielkfj »

nelsona wrote:
> If your US taxrate is more than 15% before you do FC, you can use the extra
> -- for the dividends only -- as a deduction (most software can handle
> this). Really your dividends are probably the only income that qualifies
> for Cdn FTC.

I'm thinking that if I claim a special 1116 (re-sourced) FTC on my US return for taxes above the 15% threshold paid to Canada, then I can't also claim a deduction for those taxes on my Canadian return- it's one or the other only. Correct?
nelsona
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Re: Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

Post by nelsona »

No, it is both.
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nielkfj
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Re: Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

Post by nielkfj »

nelsona wrote:
> No, it is both.

I'll take your word for it. I suppose it is a loop-hole in the laws then, because I would be deducting US tax that I am actually not paying.
nelsona
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Re: Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

Post by nelsona »

It is right there in the treaty. Besides, its only a deduction, not a credit.
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lanman2000
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Re: Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

Post by lanman2000 »

I've searched high and low and cannot find any information on whether dividends in my US based brokerage could be re-sourced to Canada. It would simplify things for returns if I could. I already re-source the interest income and its super helpful.

Dual citizen US/CAN
Current Tax home : CAN

Anyone know?

Maybe @nelsona!?
nelsona
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Re: Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

Post by nelsona »

No, they cannot, unless the taxrate in US on your entire return is more than 15%, then you can resource enough to reduce the tax to 15% IN us.

But aren't your dividends qualified dividends?
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lanman2000
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Re: Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

Post by lanman2000 »

I have about 9000 in total dividends and only 5500 are qualified. Why do you ask?
nelsona
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Re: Can I Claim a Foreign Tax Credit on US Tax Return for Cdn Tax Paid on US Sourced Income?

Post by nelsona »

Because it is highly unlikely that dividends would be taxed at a very high rate, if at all, if they were qualified.

So, you may have to pay some tax on dividends in US, but no more than 15%
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