Cross-border deemed dividend taxation

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Cross-border deemed dividend taxation

Post by sabraham »

Hi all,
Note first that I'm talking about a "deemed dividend", which shouldn't be confused with the totally different concept of a deemed disposition.

I've been living in the US for many years, and I hold a small amount of stock in a Canadian private corporation.
That company bought back a portion of my stock in 2020. That sale generated a capital event (a loss, in this case), as well as the more unusual concept of a Canadian "deemed dividend" [1], which is not at all what I think of as being a dividend. The company held back 15% of my deemed dividend amount, to be sent to the CRA as non-resident withholding.

My question is what to do about this for my US resident taxes. As far as the US tax system is concerned, this share repurchase just seems like a simple capital loss. I know of no analogue in US tax law to a Canadian deemed dividend. The whole reason for Canada's deemed dividend mechanism seems to be to stop a loophole for Canadian residents around the difference between their capital gains and dividend tax rates. However in the US there's no difference between qualified dividend and long-term capital gains rates, so that seems irrelevant.

Do I have to declare this thing as a dividend on my 1040, just because Canada calls it one? Even with the partial foreign tax credit offset, this will end up costing me a lot of extra money to the IRS and to my state, and it just doesn't strike me as being at all reasonable.

Thanks for reading!

[1] ... me-tax-act
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