I have shares in a private Canadian company purchased while a US resident and will be disposing of them while still a US resident. I may either
a) sell my shares to another owner for a capital gain
b) tender my shares to the company and will receive what the company accountant terms a deemed dividend for CRA purposes.
The company accountant is favoring (b), but I'm not sure of his US-Can Tax Treaty knowledge, and he is not considering the US tax consequences, except to suggest that (b) may also be considered a capital gain by the IRS. For (b), the company would withhold 15% for CRA and more for (a).
For these 2 options, what should the company withhold, what would the final tax be to Canada, and how should the transaction be treated in my IRS filings (long term cap gain/(non)qualified dividend, foreign tax credit).
Disposition of shares of Cdn private company by US resident
Moderator: Mark T Serbinski CA CPA
Not sure about the 2 choices, however I can explain in detail the treatment of (a):
For canada, while you may get tax withheld, your stock is categorized as Canadian taxable Property, and thus is must be reported on a Cdn tax return (in your case a non-resident return). half of the gain will be taxable, the first $30,000 or so at ~23%. you would use any tax withheld as a payment of tax, with lpossible refund/extra payment due. This will likey be the only thing on the return. You *might* get some deductions, but I would not count on it, depending on your other types of US income and expenses.
In US it will also be treated as a cap gain (long-term if kept for more than 1 year). The Cdn tax you pay will nmore than cover your US tax, with form 1116. Your state will likely want some of it too, with no tax credit
So, you are looking at, say 12-18% tax of the entire gain.
For (b): the Cdn dividend tax would be 15% and that is all. If you have more than 10% voting rights in the company, this rate drops to 5%.
For US, it would *probably* be considered a long-term cap gain, although that question is a little out of my league.
In any event, if you are talking about a net gain of more than $60,000, the dividend is probably the best way, while less than that I would say for sure that a sale would be best.
For canada, while you may get tax withheld, your stock is categorized as Canadian taxable Property, and thus is must be reported on a Cdn tax return (in your case a non-resident return). half of the gain will be taxable, the first $30,000 or so at ~23%. you would use any tax withheld as a payment of tax, with lpossible refund/extra payment due. This will likey be the only thing on the return. You *might* get some deductions, but I would not count on it, depending on your other types of US income and expenses.
In US it will also be treated as a cap gain (long-term if kept for more than 1 year). The Cdn tax you pay will nmore than cover your US tax, with form 1116. Your state will likely want some of it too, with no tax credit
So, you are looking at, say 12-18% tax of the entire gain.
For (b): the Cdn dividend tax would be 15% and that is all. If you have more than 10% voting rights in the company, this rate drops to 5%.
For US, it would *probably* be considered a long-term cap gain, although that question is a little out of my league.
In any event, if you are talking about a net gain of more than $60,000, the dividend is probably the best way, while less than that I would say for sure that a sale would be best.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 