How to Report Capital Loss on Form 1116 Line 5

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
kev_indigo
Posts: 10
Joined: Fri Apr 17, 2015 4:18 pm
Location: Canada

How to Report Capital Loss on Form 1116 Line 5

Post by kev_indigo »

I am a U.S. citizen living and working full time in Canada with Permanent Residence status. I file returns in both Canada and U.S. and have been doing this for 16 years now. I prepare my own returns manually (don't use any software).

I have stock trading accounts in both Canada and the U.S. and report dividend income, capital gains and losses on both sets of returns as required. For tax year 2017, I only had dividend income, capital gains, and capital losses from my Canadian source accounts that are reportable to the U.S. (i.e. no U.S. income, gains, or losses to report on my U.S. return).

All of my foreign source dividends (from Canada) are treated as ordinary dividends only on my U.S. return (i.e. I am not taking the lower dividend tax rates for qualified dividends).

For 2017, I have total foreign source capital gains of $4,600 USD reported on my U.S. return.

For 2017, I have total foreign source capital losses of $178,000 USD reported on my U.S. return.

On my Canadian return, I am only able to use the capital losses up to the amount of capital gains (i.e. cannot take a net loss deduction in Canada, but can carry losses forward and back).

On my U.S. return, I complete Sch. D, and end of with a net loss of $3,000 USD on Sch D, Line 21, which carries over to Form 1040, Line 13.

My two questions are:

(1) What loss amount gets reported on Line 5 of my Form 1116 for my Catetory (a) passive income?

(2) Is the loss entered on Form 1116 Line 5 as a positive or negative number?

The Form 1116 instructions are not clear on how to report the loss, except if you use Worksheet A, then it appears the loss is entered as a negative number on Line 5.

I read the instructions on how to adjust losses, but this very confusing. I came to the conclusion that I am not required to make any adjustments to my loss because (a) the gains and losses are in Canada only (no U.S. gains/losses), and (b) I am not using any reduced tax rates for qualified dividends.

It doesn't seem right to enter the full $178,000 capital loss on Form 1116 Line 5, since I am not actually able to take the full loss in either country for tax year 2017.

So I am wondering, should the loss on Line 5 be the amount of loss I am allowed to take credit for in Canada (e.g. in this case, a $4,600 loss to offset the gains of th same amount?)

Or should the loss on Line 5 be based on or limited to the net $3000 loss as reported on my Form 1040, Line 13?

I could not find any good examples in the IRS form instructions or online on how to handle this situation.

I find that the Form 1116 FTC is the most difficult part of doing taxes in both Canada and the U.S. by far - the rest is easy compared to this form and understanding the instructions.

Thanks for any advice!
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

"I prepare my own returns manually (don't use any software). "
Time to change.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Post Reply