Having re-read many of the old posts on how a US citizen handles dividends while residing in Canada, there is still one thing that I still don't understand. What happens when the dividends are paid by a US-domiciled ETF (e.g. Vanguard, iShares, etc) that invests in international stocks (e.g. European equities)?
As a US citizen, let's say my 1099 for this ETF shows $1000 in dividends and $80 foreign tax withheld (to pay various European governments per their tax treaties with the IRS). And assume my effective US tax rate is 10%. How much can I claim as a FTC on my Canadian return? How much do I pay the IRS?
I see two possible answers:
a) Pay the IRS $20 which is the difference between the $100 effective tax rate minus the $80 FTC per my 1099. The FTC on Canadian return would also be $20.
or
b) FTC on Canadian return is $100 since that my effective US tax rate. The $80 FTC from my 1099 is then applied against the $100 of US taxes owed for a total payment of $20 to the IRS.
Which outcome is correct? Thanks.
FTC's from a US-domiciled foreign ETF
Moderator: Mark T Serbinski CA CPA
Bruce, the first thing you will need to do is determine the source of all this income. Canada will NOT give any credit on the US tax you pay on foreign (non-US) dividends. And you may have to check with each country's tax treaty with canada to ensure that the rate negociated between Cabada and the other countries is lower than that negociated with US. Thta may also limit your credit.
You will need to report each country's source income and each country's tax to get the credit on your Cdn return.
For your US return, you should look at the technical explanation of the treaty which talks about re-sourcing when a 3rd country source in involved.
For most US investors, this is not a concern, since the 1099 slip is the only foreign tax consideration they have, and IRS allows one to simply report the 1099 value witthout having to go thru 1116. But since you are a Cdn resident, and will no doubt have other income and foreign tax NOT reported on a 1099, you can't waive the 1116 requirement.
It will be painful.
You will need to report each country's source income and each country's tax to get the credit on your Cdn return.
For your US return, you should look at the technical explanation of the treaty which talks about re-sourcing when a 3rd country source in involved.
For most US investors, this is not a concern, since the 1099 slip is the only foreign tax consideration they have, and IRS allows one to simply report the 1099 value witthout having to go thru 1116. But since you are a Cdn resident, and will no doubt have other income and foreign tax NOT reported on a 1099, you can't waive the 1116 requirement.
It will be painful.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Nelsona - Thank you so much for your response!
Hmmm, what you have described does certainly sound painful! Without doing 20-30 different form 1116's (for every country), a USC would end up paying 8% tax to the 3rd party governments (withheld by ETF), 10% to the US government (effective tax rate), and at a full margin Canadian rate. So taxes on these distributions would be well over 50%??? WOW!
As a minimum, it sounds like the foreign tax paid to a 3rd country provides no value in terms of tax reduction (in either Canada or US). That sounds reasonable to me and is not surprising.
The part that I question is that Canada would not provide any tax credit on income tax paid to the US on this income. The income seems to be only notionally "foreign". Since a US-domiciled ETF is a US mutual fund trust, the entity paying the distribution is American. I would not have thought the fact that the underlying securities are foreign (non-US) would matter in the eyes of CRA. After all, the payer (mutual fund trust) is American.
To play devil's advocate a bit, let's look at this a different way. Let's say the individual in question was not a USC... simply a Canadian resident buying a US foreign stock ETF. Their Cdn broker would withhold 15% tax and remit it to the US government. The Canadian taxpayer would then be allowed to use that 15% as a FTC on their Canadian return. I understand this is the way it's done all the time. Using your logic, why would this be allowed??? How can that Canadian take a FTC for taxes paid the the US government on non-US income?
Looking forward to your thoughts on the above. Something just doesn't sound right. Thanks!
-Bruce
Hmmm, what you have described does certainly sound painful! Without doing 20-30 different form 1116's (for every country), a USC would end up paying 8% tax to the 3rd party governments (withheld by ETF), 10% to the US government (effective tax rate), and at a full margin Canadian rate. So taxes on these distributions would be well over 50%??? WOW!
As a minimum, it sounds like the foreign tax paid to a 3rd country provides no value in terms of tax reduction (in either Canada or US). That sounds reasonable to me and is not surprising.
The part that I question is that Canada would not provide any tax credit on income tax paid to the US on this income. The income seems to be only notionally "foreign". Since a US-domiciled ETF is a US mutual fund trust, the entity paying the distribution is American. I would not have thought the fact that the underlying securities are foreign (non-US) would matter in the eyes of CRA. After all, the payer (mutual fund trust) is American.
To play devil's advocate a bit, let's look at this a different way. Let's say the individual in question was not a USC... simply a Canadian resident buying a US foreign stock ETF. Their Cdn broker would withhold 15% tax and remit it to the US government. The Canadian taxpayer would then be allowed to use that 15% as a FTC on their Canadian return. I understand this is the way it's done all the time. Using your logic, why would this be allowed??? How can that Canadian take a FTC for taxes paid the the US government on non-US income?
Looking forward to your thoughts on the above. Something just doesn't sound right. Thanks!
-Bruce
Well, I wouldn't go so far as to say 50%. After all, you can't say that your US tax is at the effective rate and your Cdn rate is at the marginal, can you.
And, you can get refief for the foreign tax on both returns, its just not simple.
As to sourcing, remamner that whe na Cdn-domiciled trust has US stocks, even a Cdn pays US tax on the dividends, since they are US-sourced dividends. And the US would view those dividends as US-sourced too, even though they are held by a Cdn-domiciled trust.
Thats my reading anyways.
What it denotes however is that it is always simpler to have your holdings whwere you are domiciled.
And, you can get refief for the foreign tax on both returns, its just not simple.
As to sourcing, remamner that whe na Cdn-domiciled trust has US stocks, even a Cdn pays US tax on the dividends, since they are US-sourced dividends. And the US would view those dividends as US-sourced too, even though they are held by a Cdn-domiciled trust.
Thats my reading anyways.
What it denotes however is that it is always simpler to have your holdings whwere you are domiciled.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing