1. I sold all my company assets and held only cash in the company.
2. I have moved to the USA and now own the company as a non-resident. All filings were reported.
3. I realize I will never move back to Canada, and I have decided to cash in.l
4. The Canadian accountant said no problem, I will report a deemed dividend of 100,000 less paid up capital of $100. There is 15% withholding and I report dividend income in the USA.
I was reading the IRS guide and I noticed this: "Ordinary dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of the corporation. Ordinary dividends are taxable as ordinary income unless they are qualified dividends. Qualified dividends are ordinary dividends that meet the requirements to be taxed as net capital gains."
1. what is a qualified dividend?
2. is there any way a Canadian Deemed dividend can be treated in the USA as a qualified dividend if the tax treatment is better.
I will get a us accountant to do tax filing, but I would like to be informed first. All my other US income is simply employment earnings and I have no other investments.
Canadian Deemed Dividend a Qualified US Dividend?
Moderator: Mark T Serbinski CA CPA
Okay, I looked it up. The following is a quote from Notice 2006-101:
Section 1(h)(1) of the Internal Revenue Code (the “Codeâ€) generally provides that a taxpayer's “net capital gain†for any taxable year will be subject to a maximum tax rate of 15 percent (or 5 percent in the case of certain taxpayers). The 2003 Act added section 1(h)(11), which provides that net capital gain for purposes of section 1(h) means net capital gain (determined without regard to section 1(h)(11)) increased by “qualified dividend income.†Qualified dividend income means dividends received during the taxable year from domestic corporations and “qualified foreign corporations.†Section 1(h)(11)(B)(i).
Subject to certain exceptions, a qualified foreign corporation is any foreign corporation that is either (i) incorporated in a possession of the United States, or (ii) eligible for benefits of a comprehensive income tax treaty with the United States that the Secretary determines is satisfactory for purposes of this provision and that includes an exchange of information program (the “treaty testâ€). Section 1(h)(11)(C)(i). A foreign corporation that does not satisfy either of these two tests is treated as a qualified foreign corporation with respect to any dividend paid by such corporation if the stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States. Section 1(h) (11)(C)(ii). * * * A qualified foreign corporation does not include any foreign corporation that for the taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is a passive foreign investment company (as defined in section 1297). Section 1(h)(11)(C)(iii). A dividend from a qualified foreign corporation is also subject to the other limitations in section 1(h)(11). For example, a shareholder receiving a dividend from a qualified foreign corporation must satisfy the holding period requirements of section 1(h)(11)(B)(iii). The appendix to this notice sets forth the current list of U.S. income tax treaties that meet the requirements of section 1(h)(11)(C)(i)(II).
The Canada-U.S. Income Tax Treaty is listed in the appendix.
From my understanding, a Canadian-controlled private corporation (“CCPCâ€):
- is a corporation that was resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year;
- is not controlled directly or indirectly by one or more non-resident persons;
- is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
- is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada;
- is not controlled directly or indirectly by any combination of persons described in the three previous conditions;
- if all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a designated stock exchange, were owned by one person, that person would not own sufficient shares to control the corporation; and
- no class of its shares of capital stock is listed on a designated stock exchange.
It looks to me like a CCPC could qualify for benefits under the Canada-U.S. Income Tax Treaty and that it could be a qualified foreign corporation. Thus, I would expect that dividends from a CCPC could be qualified dividend income. Which of the requirements do you think it doesn’t meet?
Section 1(h)(1) of the Internal Revenue Code (the “Codeâ€) generally provides that a taxpayer's “net capital gain†for any taxable year will be subject to a maximum tax rate of 15 percent (or 5 percent in the case of certain taxpayers). The 2003 Act added section 1(h)(11), which provides that net capital gain for purposes of section 1(h) means net capital gain (determined without regard to section 1(h)(11)) increased by “qualified dividend income.†Qualified dividend income means dividends received during the taxable year from domestic corporations and “qualified foreign corporations.†Section 1(h)(11)(B)(i).
Subject to certain exceptions, a qualified foreign corporation is any foreign corporation that is either (i) incorporated in a possession of the United States, or (ii) eligible for benefits of a comprehensive income tax treaty with the United States that the Secretary determines is satisfactory for purposes of this provision and that includes an exchange of information program (the “treaty testâ€). Section 1(h)(11)(C)(i). A foreign corporation that does not satisfy either of these two tests is treated as a qualified foreign corporation with respect to any dividend paid by such corporation if the stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States. Section 1(h) (11)(C)(ii). * * * A qualified foreign corporation does not include any foreign corporation that for the taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is a passive foreign investment company (as defined in section 1297). Section 1(h)(11)(C)(iii). A dividend from a qualified foreign corporation is also subject to the other limitations in section 1(h)(11). For example, a shareholder receiving a dividend from a qualified foreign corporation must satisfy the holding period requirements of section 1(h)(11)(B)(iii). The appendix to this notice sets forth the current list of U.S. income tax treaties that meet the requirements of section 1(h)(11)(C)(i)(II).
The Canada-U.S. Income Tax Treaty is listed in the appendix.
From my understanding, a Canadian-controlled private corporation (“CCPCâ€):
- is a corporation that was resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year;
- is not controlled directly or indirectly by one or more non-resident persons;
- is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
- is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada;
- is not controlled directly or indirectly by any combination of persons described in the three previous conditions;
- if all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a designated stock exchange, were owned by one person, that person would not own sufficient shares to control the corporation; and
- no class of its shares of capital stock is listed on a designated stock exchange.
It looks to me like a CCPC could qualify for benefits under the Canada-U.S. Income Tax Treaty and that it could be a qualified foreign corporation. Thus, I would expect that dividends from a CCPC could be qualified dividend income. Which of the requirements do you think it doesn’t meet?
yes it will but my point is that since it is now paid to a US resident there will be a 15% witholding tax which may not be always creditable to you in the US so in effect the dividend may loose its favorable tax treatments as qualified ones do. Te qualified dividends can be taxed in the US at zero in some cases thus you will not get back the 15% witholding tax paid to Canada, it may become more costly than a regular qualified dividend would.
JG
So you went from dividends from CCPCs are never qualified dividend income, to sometimes they are qualified dividend income (but not in this case), to maybe they are qualified dividend income in this case, but you never really mean that the dividends are not qualified dividend income, instead you meant that in some strange circumstances the Canadian withholding taxes imposed on qualified dividend income "might" not be able to be utilized as foreign tax credits. Now I see.
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Concerned Cdn
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