Where is Foreign Interest Income Taxed?

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bigricardo
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Where is Foreign Interest Income Taxed?

Post by bigricardo »

If I have a canadian strip bond and I live in the US (as a canadian non-resident), do I have to fill out a tax form in Canada to report the Canadian interest (in addition to US tax form). Or can I just report it on the US tax form?

Conversely, if I have a US Certificate of Deposit and I now live in Canada (canadian citizen), do i have to fill out US tax form (in addition to Canadian). Or can I just report it on Canadian tax form?

Also, what about REITS? If I own a canadian REIT and live in the US, do I have to fill out a Canadian tax form?

Any advice would be greatly appreciated. Thank-you.
nelsona
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Post by nelsona »

In Canada, the income from these Cdn instruments is supposed to have Cdn NR tax withheld AUTOMATICALLY from them, that is why you MUST advise your broker/bank that you are non-resident.

Your trusts should issue you a NR4 (some will lazily issue you a t3), and you *may* have to calculate a 'return of principle' for tax purposes.

Of course, by treaty, Cdn Gov't-backed bond is NOT subject to any Cdn tax for non-residents.

In US , you will have to report any income (using your choice of the cash or accrual methods) and pay US and state tax, taking credit for any Cdn tax paid.

Your trusts will likely also have to be reported on a 3520 form (stiff penalty for failure).

Conversely, if you own a US interest-bearing instrument, you are suposed to report this in both US and Canada. You may even have to have US NR tax withheld. It is unlikley however that you would owe any US tax unless you made a lot of interest, as the exemption on a 1040NR would be such that you would get any tax back, otherwise you likely don't even need to file a US 1040NR return.

But in general, you don't get to choose on what tax return you report income; it's either reported on both, or there is a specific reason not to report it on one or the other (ie. final tax has already been withheld, or treaty allows for exclusion).

<i>nelsona non grata</i>
bigricardo
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Post by bigricardo »

In regards to the REITS, does this mean that 25% (or less) of my income will be withheld by the brokerage at which I purchased the REIT each month? Or is this something I'll have to do myself?

Also, will I be able to get this 25% refunded on my American tax return at the end of the year?
nelsona
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Post by nelsona »

The firm is supposed to withhold the tax each time they pay you. They have to know that you live in US.

Like I said, the tax may be more than you actually owe, and you will have to file a cdn non-resident return, showing how you calculate the 'true' income form the procedds (ie. taking out your principal) and CRA will refund you what was overtaxed. You could also just opt to accept the flat NR tax as final.

You then also have to report this income in US (and also file a 3520). It is unlikely that you would be getting any back from US, but your final Cdn tax would be used as a foreign credit, so you may only pay another 2-3% on the income to IRS, plus your state tax on that as well.

<i>nelsona non grata</i>
orillia4
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Post by orillia4 »

I received a distribution on a mutual fund statement (non-RRSP) for tax year 2004 (re-invested). Do I need to file the 3520 form?
nelsona
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Post by nelsona »

No. This is not a trust. What you have to do is declare this on your 1040 as a either a capital gain or a dividend.

Does your investmenyt manager know you are in US? If so, depending on the distribution, he is supposed to withhold NR tax on it.

<i>nelsona non grata</i>
parentr
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Post by parentr »

Hello, I'm a first time user ! This is a great forum !
So I'm a US resident with Canadian type CD (Certificates of Deposit)
<$10,000 (2003) & >$10,000 (2004).

Do I need to file form 3520 on contribution & interest earned ?

Note that I've been simply declaring interest on 1040-Sched.B.

It is not clear to me what a Trust is ; I guess one question is :
doesn CD fall into a Trust ?
Thank you

Regis Parent
nelsona
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Post by nelsona »

A GIC is not a trust.

Continue reporting interest on Sched B.

I presume that Cdn non-resident tax (10%) is also being withheld from your interest from the Cdn bank?

If not, you should be contacting your bank to correct this, as you now owe Cdn Gov't 10% tax.

<i>nelsona non grata... and non pro</i>
parentr
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Post by parentr »

Thank you very much Nelsona !!!
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