Does Dual Citizenship Negate Benefit of Dividend Tax Credit?

[William]

I have dual US/Canada citizenship. I came to Canada 25 years ago to do what was supposed to be a three year project and I'm still here. Several years ago, once I realized that I was going to finish my career and retire in Canada, I applied for and got my Canadian citizenship. Regardless of where I retired, I always envisioned a significant part of my retirement income to come from dividends and I have steadily been building a portfolio of dividend paying stocks for many years. At present, about 75% of my dividend income comes from eligible Canadian stocks and 25% from qualified US stocks. A few of the Canadian energy companies I hold qualify for Foreign Qualified Dividends in the US but it's only a small portion of my total.

From time to time over the years, I've thought about how each of the two countries gives tax relief on dividends from "home country" companies but not foreign dividends and the potential effect that might have on my total tax situation from having to file returns in both countries. This year, during my annual wrestling match with Form 1116 (after all these years, I still am not confident that I'm properly calculating the amount of taxes I pay on my eligible Canadian dividends) I really began to wonder to what extent the tax break I get from eligible dividends in Canada will be negated by having the same dividends taxed at a higher rate in the US. To date, my US tax obligation since moving to Canada has been zero every year but I'm not sure that's going to be the case going forward, especially in retirement. Retired Canadians can have a substantial income from dividends at a very low tax rate. To what extent does having dual citizenship wipeout that advantage?

It seems like the consensus of the forum regulars on TFSAs a few years ago was that they weren't worth it for dual citizens because of taxes. I consider TFSAs at least a good a deal as RRSPs, maybe even better in some respects, but, as much as I would like to have one, I don't because I have to file US taxes. I'm wondering if others with dual citizenship living in Canada have thoughts on how much of an advantage the Canadian Dividend Tax Credit is when you have to file US taxes. Are my concerns overblown?

[nelsona]

The IRS tax rate is still lower than the Cdn dividend taxrate.

[William]

Thanks for your comment, nelsona. In my Google-based search to better understand how to calculate the amount of tax I'm paying in Canada on my eligible dividends, I occasionally come across gems like, "Well, believe it or not, for an individual without any other taxable income in 2007, it is possible to receive approximately $66,460 in dividends from Canadian public companies without having to pay any federal income tax at all!" I realize that the CFA who authored the foregoing statement has concocted a skewed and highly improbable scenario in order to make a point and/or lure in new clients. While I call myself a dividend-oriented investor, I will not, unfortunately, have the burden of worry over stick handling a 1116 on more than $66K of dividend income in my retirement, although I suspect it will be at least a reasonable portion of that. Maybe I'm just being taken in by the hype – I always figured that if I were to pay next to nothing in taxes on my Canadian dividends in Canada, surely I'd get hit by the US for what I didn't have to pay in Canada. I understand that we, in Canada, in general have higher tax rates than the US and, as long as that situation holds, I can at least take some consolation that I won't have to be paying on both sides of the border. I wonder what the chances of that changing are at some point in the future. The Tea Party and Grover Norquist notwithstanding, I think the US is going to arrive at a point in the next few years that both sides of the Great American Divide are going to have to give ground to the tune of spending cuts AND increased taxes.

My sparse scattering of posts on this forum over the past few years reveals that I'm not at all a tax aficionado and get just a wee bit stressed at times when I'm doing my US taxes. My tax situation is actually quite simple and straightforward. I breeze through my Canadian taxes with UFile and am fully confident that they're done correctly. I started using Turbo Tax last year for my US taxes and am still not really comfortable with it, though I'm getting there. About a million years ago I was a high school English teacher for a few years. As such, one of my tasks was to help students improve their reading comprehension. While I might not have been the very best at it, I don't think I did such a bad job. I think about that sometimes when I'm reading an IRS instruction booklet and, two-thirds of the way through the first page, I have absolutely no idea of what it's saying – and I despair greatly when I realize that I've still got another 12 or 15 or 19 pages to go. If I really had a complex tax situation, I'd just have them done by a professional but I don't and it seems like I should be able to do them for myself. The fact that I'm an inveterate cheapskate also probably has something to do with my reluctance to pay someone else to do something that I think I should be able to do.

Thanks again, nelsona.

[nelsona]

You will also no doubt have other income thta is taxed at regular rates, and this will "even out" the tax treatment.

But, if you are highly invested in dividend yielding stock SOLELY becuse of the tax treatment, and not because the stock has growth potential, you might want to reconsider the balance you have struck.