Effect of Exchange on Cap Gains/Loss Reporting and Form 1116

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MsTunnelCoin762
Posts: 17
Joined: Fri Jan 01, 2021 2:02 pm

Effect of Exchange on Cap Gains/Loss Reporting and Form 1116

Post by MsTunnelCoin762 »

Hi all,

I understand that for purposes of FTC and Form 1116 Cap Gains on stocks are Canadian Sourced and relief from double taxation (although not complete by my experience) for USC filers is by way of use of Form 1116... The question, however, is this:

Stocks were sold in 2021(first ever disposition of stocks, thus uncharted territory here) but because of the movement of the exchange rate (specifically, improvement in the value of CAD vs USD) between the point of acquisition and sale, in calculating the capital gain/loss for purposes of the 1040 and T1 there is a net capital gain to report in the US and a capital loss in Canada...

Now, if there were a capital gain in Canada and a capital gain in the US there would naturally be taxes to claim as a credit on Form 1116, BUT here there is no tax in Canada (due to the reportable loss) to claim on 1116, so is this a "just out of luck" situation wherein taxes are to be paid in the US with no offsetting FTC available? Or maybe (thinking outside the box) can I claim with a Form 8833 a tax exemption of the gains as calculated for the 1040 insofar as they are Canadian sourced...?

A separate inquiry, unrelated, although I've scoured the forum and understand that the FTC for dual citizens on 1116 (or is in my experience) always short of the Canadian taxes payable, I've not encountered a simple explanation as to why... Not germane to the original inquiry, and feel free to ignore in favor of the primary question, but if anyone has a pithy explanation it would be appreciated as well...
Canadian Newbie
Posts: 71
Joined: Thu Mar 12, 2015 11:59 am

Re: Effect of Exchange on Cap Gains/Loss Reporting and Form 1116

Post by Canadian Newbie »

That is a great question and it applies to me as well. I sold some personal items in 2021 and am paying almost no tax based on the Canadian basis calculation. I am paying tax on my 1040.
My guess was that as you said, it is a "just out of luck" situation. But when you think about it, you are not paying any CDN tax. The US credit is limited to the tax paid on Canada. I wind up paying tax in the US with no or little FTC...because there is not foreign tax paid based on the rules of the determination of the gain in Canada.
The 8833 question will need to be addressed by the experts. I am interested to see what the answer is.

I am a Dual Citizen residing in Canada.
Canadian Newbie
Posts: 71
Joined: Thu Mar 12, 2015 11:59 am

Re: Effect of Exchange on Cap Gains/Loss Reporting and Form 1116

Post by Canadian Newbie »

I forgot to add that I am curious what you mean by the FTC falling short if you are a dual citizen. I became a DC in 2021. I am curious as to what you mean by that. Is there a change in how the US FTC is calculated upon becoming a Canadian Citizen?
MsTunnelCoin762
Posts: 17
Joined: Fri Jan 01, 2021 2:02 pm

Re: Effect of Exchange on Cap Gains/Loss Reporting and Form 1116

Post by MsTunnelCoin762 »

Howdy, by "falling short" I meant that the FTC on passive income to which I am entitled per my 1116, and even the FTC on re-sourced income (as calculated through software) is never a full dollar-for-dollar credit (that is, fully equal to the Canadian taxes allocated to that income), with some carry forward of the difference that will in most likelihood expire unused down the road (in my situation)...

A word of caution since you recently acquired dual citizenship, most would advise that you do not open or maintain a TFSA as doing so is fraught with complication reporting-wise...
Canadian Newbie
Posts: 71
Joined: Thu Mar 12, 2015 11:59 am

Re: Effect of Exchange on Cap Gains/Loss Reporting and Form 1116

Post by Canadian Newbie »

Greetings.
My FTC on my US return falls way short of the tax I pay in Canada on the stuff I am entitled to take a credit on. Lots of variables involved. My total tax in US is way below my Canadian tax. In my case it never will be dollar for dollar unless for some reason my US tax goes way up due to rate/law changes.

My US FTC Carryforward keeps getting bigger each year and will go poof down the line.
Thanks for the heads up on the TFSA. I stay away from anything that would require me to file PFIC forms. Probably losing money but I don't want to be bothered.
nelsona
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Re: Effect of Exchange on Cap Gains/Loss Reporting and Form 1116

Post by nelsona »

If you have no tax paid in canada on the capital loss, there is no tax to claim on 1116.
However, it is still foreign income, which you can report on 1116, in the hopes of having tax the next year, which you can carryBACK one year (only one year).

So, file the 1116 so that it will be on the record.

The reverse, when you have a US cap loss and a CDn cap gain, is solved by the carryforward of the CDn tax on 1116 to future year (up to 10 years).

These gains and losses are NOT reported as re-sourced, since they are Cdn-sourced.

Only certain **US-sourced** income, which the treaty allows to be re-soured use this method. Specifically it is US-sourced income that would not normally be taxed in US for a resident of Canada: US Bank interest, self-employment income earned in US are the typical once. Not stocks.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
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Re: Effect of Exchange on Cap Gains/Loss Reporting and Form 1116

Post by nelsona »

When living in canada, the purpose of 1116 is to reduce US tax on your Cdn income to zero, nothing more.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
MsTunnelCoin762
Posts: 17
Joined: Fri Jan 01, 2021 2:02 pm

Re: Effect of Exchange on Cap Gains/Loss Reporting and Form 1116

Post by MsTunnelCoin762 »

Thank you nelsona, I very much appreciate the response/information, and its clarity!
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