Dual Citizen, Capital Gains on US stocks

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

Post Reply
HPDelete
Posts: 5
Joined: Sun Apr 18, 2021 4:36 pm

Dual Citizen, Capital Gains on US stocks

Post by HPDelete »

I have read your past posts as well as the Treaty XIII (Gains) and XXIV (Elimination of Double Taxation). So I can see why you have advised, with respect to capital gains on stocks of US companies traded on US stock exchanges held at a Canadian broker:

in 2018: "capital gains.... since they were triggered as a Cdn resident, are simply considered Cdn-sourced. Therefore, for foreign tax purposes, there is no re-sourcing to be done, You simply report the gains as foreign gains, and use the Cdn tax ... against the US tax." viewtopic.php?t=12473

and in 2017: "Cap gains: Unless the stock is from US real estate or resources, it is Cdn-sourced. So only those would be treated as US-sourced, with Canada giving credit. Cdn tax on all other gains would be handled by the passive 1116." viewtopic.php?t=11816

Your advice appears completely consistent with the Treaty, specifically XIII(4), and XXIV(1)and(3). https://www.irs.gov/pub/irs-trty/canada.pdf

However, as a point of implementation the IRS states:
"If a sourcing rule in an applicable income tax treaty treats U.S. source income as foreign source, and you elect to apply the treaty, you can include that income under the category Certain Income Re-sourced By Treaty. Treat the income as foreign source to the extent required in the treaty. You must compute a separate foreign tax credit limitation for any such income for which you claim benefits under a treaty, using a separate Form 1116, Foreign Tax Credit, for each amount of resourced income from a treaty country." https://www.irs.gov/individuals/interna ... ial-issues

My question is: Is there any reason why I would not, just for greater certainty, treat this capital gain as Income Re-sourced By Treaty and file a separate Form 1116 for it? ..I'm sure there are some nuances here that I do not appreciate! thanks
nelsona
Posts: 17014
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Dual Citizen, Capital Gains on US stocks

Post by nelsona »

Income re-sourced by treaty is specific to certain income that is US sourced (either by reg or trreaty) but is specifically allowed to be re-sourced for the purposes of eliminating US tax on that income, because the other country disallows or limits application of foreign tax credits on that income (usually spelled out in the treaty). It usually involves income that is taxed in US solely because the taxpayer is a US citizen, and would not otherwise be taxed for a resident of the other country.

For example, US bank interest is US-sourced by regs and by treaty. However a non-US resident/citizen does nor pay tax on US bank interest, So Canada does not allow one to claim any US tax as a credit in regard to that income. The treaty allows that income to be re-sourced to Canada for the sole purpose of eliminating double tax because Canada -- by treaty -- is not obliged to.

Not so with gains. Since non-real estate non-resource gains are already considered Canada sourced by treaty, normal foreign tax credit rules apply, Real estate and resource gains from US are US-sourced by treaty, and this Canada is obliged to grant foreign tax credit relief.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
HPDelete
Posts: 5
Joined: Sun Apr 18, 2021 4:36 pm

Re: Dual Citizen, Capital Gains on US stocks

Post by HPDelete »

Is Treaty XXIV (6) the re-sourcing rule that you refer to? https://www.irs.gov/pub/irs-trty/canada.pdf
nelsona
Posts: 17014
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Dual Citizen, Capital Gains on US stocks

Post by nelsona »

sure. where are you going with this?
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
HPDelete
Posts: 5
Joined: Sun Apr 18, 2021 4:36 pm

Re: Dual Citizen, Capital Gains on US stocks

Post by HPDelete »

I'm going to take your advice - just wanted the Treaty reference. thanks again!
nelsona
Posts: 17014
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Dual Citizen, Capital Gains on US stocks

Post by nelsona »

So, it was quiz?! Wow.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
HPDelete
Posts: 5
Joined: Sun Apr 18, 2021 4:36 pm

Re: Dual Citizen, Capital Gains on US stocks

Post by HPDelete »

I didn't see the words "sourcing" or "re-sourcing" in the Treaty so I wondered where in the Treaty this is generally thought to reside. But if such a question isn't a good use of your time, I apologize! Your prior explanation was great and I much appreciate it.
HPDelete
Posts: 5
Joined: Sun Apr 18, 2021 4:36 pm

Re: Dual Citizen, Capital Gains on US stocks

Post by HPDelete »

followup FYI for all readers: the instructions to form 1116 state

f. Certain Income Re-Sourced
by Treaty
If a sourcing rule in an applicable
income tax treaty treats U.S. source
income as foreign source, and you elect
to apply the treaty, the income will be
treated as foreign source.
Important. You must compute a
separate foreign tax credit limitation for
any income for which you claim benefits
under a treaty, using a separate Form
1116 for each amount of re-sourced
income from a treaty country. ****** This rule
does not apply to income that is
re-sourced by reason of the relief from
double taxation rules in any U.S. income
tax treaty that is solely applicable to
U.S. citizens who are residents of the
foreign treaty country ****** [emphasis added]

I think this pretty much seals it (that a separate 1116 is not needed) as Treaty XXIV(3, 4a, 4b) meets the statement above that I ****** 'd.
nelsona
Posts: 17014
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Dual Citizen, Capital Gains on US stocks

Post by nelsona »

Just so we are clear, that paragraph you mentioned and highlighted is referring strictly to the GROUPING of re-sourced income onto one 1116, not defining what qualifies to be re-sourced.

In other words, it is saying that if you use the treaty to re-source you must prepare a 1116 for each item of income you re-source, but you are not required to several 1116's if the reason you are re-sourcing is because of clauses related to being a US citizen living in a foreign country.

Since, in the case of most USC's living in Canada, that would be the only time you would re-source, then it means you should always lump together any US-source income (like wages, bank interest) that would otherwise not be taxable to a Cdn resident) on one re-sourced 1116, not several.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
Post Reply