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

Veronica · Post by **Veronica** » Sat Mar 17, 2007 6:33 pm

Hi,

I returned in Canada in 2005 and stayed in Canada for 2006.

I still have Fidelity investment account where I bought mutual funds. In 2006, there are:
(a) Ordinary dividends.
(b) Qualified dividends.
(c) Capital gain distributions.
(d) Interest income.

Here are my questions:

(1) For 2006, there is no withhold on these, is 1040NR enough to file tax in States?

(2) For Canada, where should these income go? I don't want to be double-taxed.

(3) Early in 2007, I filed a W-8BEN to fidelity, from 2007 onward, there'll be a 30% withholding on distributions of short-term captical gains and 15% on dividends from Fidelity. Is there a way to avoid this?

Thanks!

nelsona · Post by **nelsona** » Mon Mar 19, 2007 9:14 am

Assuming you are not a Green card holder....

Capital gains are not taxable in US if you reside in canada, regardless that the stocks are held in a US brokerage. So, you do not need to report these in US. I'm puzzled that filing a W-8BEN would make fimr withhold 30%, since that is the point of filing W-8BEN -- to reduce cap gains withholding to 0%. The withholding rate if you DIDN'T submit W-8BEN would be 30%.

The interest, and dividends are taxable in US. That said, unless you are making quite a large amount, the result on 1040NR will be 0 tax, since you get a personal exemption

You report the income on your Cdn return as if it were from canada, since no tax was paid there is no double tax to worry about.

For 2007 and future, you can file 1040NR to recover any US tax that is withheld, especially the tax on capital gains. If you choose to leave the tax as is (ie. the ammount withheld on interest and dividends), you can claim this as a foreign tax credit on your Cdn return.

Veronica · Post by **Veronica** » Mon Mar 19, 2007 7:27 pm

Thanks nelsona! You are always so helpful!

Veronica · Post by **Veronica** » Sat Mar 31, 2007 11:32 pm

Hi Nelson,

Just a few more detailed questions on 1040-NR.

On 1040-NR form, I put:

(1) Qualified Div, 1b of 1099-DIV, to Line 10b.
(2) Ordinary Div, 1a of 1099-DIV, to Line 10a.
(3) Interest, 1099-INT, to Line 9a.

My questions:
(1) As you mentioned, capital gain should not be taxed in States since I resides in Canada for the entire 2006. In the 1040-NR, should it put under M, in "effectively connected income exempt from tax" and copied to Line 22?

(2) Just to make sure, the dividends and interest cannot be put under M, right

(2) In 1099-DIV, there is 6, foreign tax paid, where should this be in 1040-NR?

(3) Line 40, taxable income is less than 100K, for Line 41, tax, should I use the "Qualified Div and Cap Gain Tax Worksheet" or the tax table?

(4) In the "deduction for exemptions worksheet - Line 39" of the "Instructions for form 1040NR", page 18, line 5 is a negative number and thus making line 9 negative and line 10 bigger than line2, does this look correct?

Thanks very much for your help.

nelsona · Post by **nelsona** » Sun Apr 01, 2007 1:10 am

I'll let you handle the mechanics.

nelsona · Post by **nelsona** » Sun Apr 01, 2007 1:25 am

The cap gains exclusion would be more correctly mentionned in 'M' as NOT effectively connected, thus should not go anywhere on 1040NR

The foreign taxes paid on 1099 should not be going anywhere on 1040NR, this is tax paid to another country.

I would suggest that if these are Cdn stocks, you should repatriate these to a Cdn broker to avoid this withholding. You should consider repatriating all your US holdings.

nelsona · Post by **nelsona** » Sun Apr 01, 2007 1:59 am

...soryy the foreign tax credit would go on line 44. You should not need a Form 1116.

Didn't you say there was no withholding on these? Then why are you even filing a 1040NR. If the income generated was less than 3300

Veronica · Post by **Veronica** » Sun Apr 01, 2007 11:00 am

Thanks nelson.

Yes, the total is less than 3300. But in 2007, Fidelity will withhold tax on short-term capital gain distributions, dividends, and interest on the mutual fund I bought.

You mentioned:
[quote]The cap gains exclusion would be more correctly mentionned in 'M' as NOT effectively connected, thus should not go anywhere on 1040NR [/quote]

But the form I got is 1099-DIV, not 1042-S. Does it make sense here?

Also I have short-term/long-term "Realized Capital Gain" when selling one fund, are they treated the same way as the "Capital Gain Distributions"?

The "Short-Term Capital Gain Distributions" is included in Ordinary Dividends, for reporting tax in Canada, should I put it as Capital Gain instead of Dividend because the tax rate is lower?

Thanks!

nelsona · Post by **nelsona** » Sun Apr 01, 2007 4:31 pm

The capgains distributions are cap gains in Canada.
Your future cap gains are NOT taxable in US by fidelity, so if they insist, I would be moving these funds to Canada.

You should be doing this anyways, since dealing with them while in a Cdn province is skirting the law.

William · Post by **William** » Wed Apr 04, 2007 12:45 am

I have been wondering about a similar situation with a capital gains distribution. I am a US citizen living and working in Canada. I received a cap gains distribution this year on a 1042-S from a Templeton closed end mutual fund sold on the NYSE. I called Revenue Canada and asked how to report it. The woman with whom I spoke told me that I didn't have to report it and that it would just alter my Adjusted Cost Base. I questioned her several times about it but she stuck to her guns. I am about 99.9% sure she is wrong. I happen to have my dividends and other distributions in their DRIP and so the distribution was, in fact, re-invested but it [u]increased[/u], not decreased, my ACB. I use Intuit's QuickTax to do my return and I get nothing when I search for a cap gain distribution. I'm slowly getting the sinking feeling that I'm going to have to report it as income and be taxed at the full rate. Nelson can you, or anyone else, help me here? Thanks. -Bill

nelsona · Post by **nelsona** » Wed Apr 04, 2007 1:23 am

I do not see how a cap gain distribution would not be taxable in Canada, If it is, then, as you say it increases your ACB.

It is capital gain, just as any distribution from a Cdn mutual fund would be.

I'll look into the 1042 aspect a little further...

Norbert Schlenker · Post by **Norbert Schlenker** » Wed Apr 04, 2007 2:09 am

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.

nelsona · Post by **nelsona** » Wed Apr 04, 2007 8:40 am

Thanks Norbert, when I woke up this morning I was going to post this correction.

And just to repeat -- to contradict what the CRA agent said -- it IS taxable.

William · Post by **William** » Wed Apr 04, 2007 11:08 am

Thanks Norbert and Nelson. Ouch! The distribution was approximately 13% so it wasn't exactly peanuts. Now to decide whether to bite the bullet and sell it with a sizable cap gains hit (it's up >300% since I bought it) plus figure out where to re-deploy the funds or go through this agony every spring. I guess the former is more sensible in the long run. Thanks again to you both for your input.

brians · Post by **brians** » Wed Apr 04, 2007 11:14 am

[quote="nelsona"]
(snip)
Capital gains are not taxable in US if you reside in canada, regardless that the stocks are held in a US brokerage. So, you do not need to report these in US.
(snip)
[/quote]

I was reading through this thread and I wanted to verify the above in the IRS documentation; I wasn't able to find anything. If anything, the instructions for "Line 14 - Capital gain or (loss)" on the 1040-NR seem to indicate otherwise.

Can someone please point me in the right direction?