Why is my Canadian brokerage firm listing my US REIT distributions as qualified dividends?

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readmylips_nonewtaxs
Posts: 3
Joined: Thu May 20, 2021 7:51 am

Why is my Canadian brokerage firm listing my US REIT distributions as qualified dividends?

Post by readmylips_nonewtaxs »

I am a dual US/Canada citizen with full year residency in Canada. Year 2020 is the first year in which I have invested in US REITs in my Canadian discount brokerage account. The brokerage firm has my W-9 on file and sends 1099 forms in my name only. There are no with holdings. When I look into the annual report to shareholders and the Form 10-K issued by the various US REITs I own, I see that these funds did not pay out any qualified dividends. Some of the funds paid out return of capital (ROC), some capital gain distros, and some as ordinary income (with a percent allowed for 199A dividends).

However, when I look at the 1099-DIV issued by my Canadian discount brokerage firm, I see that all my REIT dividends were classified as "qualified". Why has my brokerage firm listed them as qualified? The annual report to shareholders and Form 10-K for the various REIT say otherwise. Is there some US-Canada tax treaty which has allowed my foreign brokerage firm to classify these REIT dividends as “qualified dividends” for the purposes of my US taxes?

Now for the same US REIT income on the Canadian tax forms (T5), all the dividend income is listed as ordinary dividends (not eligible). Could there be some treaty article which speculates that if all US dividend income on the Canadian returns is treated as ordinary income, then it is automatically qualified on the US side? That wouldn't make sense to me because it seems that the IRS would have first dibs on US-sourced income to a US person.

If there is not some treaty which allows for this, do I need to manually correct my 1099-DIV forms for each REIT and attach a statement to my 1040 every year? And won’t this increase the likelihood of my return being rejected? My brokerage firm has been very tight lipped when I inquire about this.

What is further confusing is that I've read from a few online sources that US REIT return of capital (ROC) dividends are not treated as ROC on Canadian returns - it falls under ordinary income and the cost-basis does not decrease. Same is true for a US REIT which distributes a capital gain dividend - counts as ordinary income on the Canadian return. Does anybody know what tax law allows for this? It doesn't make sense to me.
readmylips_nonewtaxs
Posts: 3
Joined: Thu May 20, 2021 7:51 am

Re: Why is my Canadian brokerage firm listing my US REIT distributions as qualified dividends?

Post by readmylips_nonewtaxs »

I spoke with a cross-border CPA on this issue and it seems that it is rather common for foreign brokerage firms to goof up IRS tax forms. The easiest way to fix it is to file a paper return and correct the 1099-DIV values by attaching a statement, showing the source of the information and the proper ratios of the distributions. Information from annual and semi-annual report to shareholders, Form 10-K, income dividend statements from the security, Form 8937, etc. are all OK to use for the source information.
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