How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask USTaxAdvising Your Own Question

USTaxAdvising
USTaxAdvising, Accountant
Category: Finance
Satisfied Customers: 1088
Experience:  Professional with finance related questions.
58296935
Type Your Finance Question Here...
USTaxAdvising is online now
A new question is answered every 9 seconds

1040 question for a US citizen, pls?A US citizen is also

Resolved Question:

1040 question for a US citizen, pls?

A US citizen is also a Canadian citizen. He works and lives in Canada. He bought some US stocks from a Canadian bank. Therefore he received T5 (canadian tax slip) on which captial gain and dividend income from US stocks are reported. But no foreign tax withholding on these income per T5. He also receives a 1099 on which only dividend income is reported. On his Canadian tax return, he reported capital gain and dividend income and paid full tax to Canada without deducting any foreign tax withholding. Since he is a US citizen, he needs to file 1040 as well. My question is could he claim Canadian tax paid on CG and dividend income on these US investment income?
Thanks
Submitted: 1 year ago.
Category: Finance
Expert:  USTaxAdvising replied 1 year ago.

Hello,

 

Yes, most certainly, the tax paid to Canada on the capital gain and the dividend income would be eligible to for the foreign tax credit on the 1040.

 

The source of the income is the U.S. but it is somewhat irrelevant for the foreign tax credit in this circumstance. The fact is that the U.S. citizen is being subject to tax on the US sourced dividend and capital gain in Canada. The tax paid on this income to Canada would be eligible for the foreign tax credit.

 

Note that if the tax credit is less than $150 Form 1116 does not need to be filed.

 

Best regards,

Customer: replied 1 year ago.

Thanks!


Could you pls refer me to the source of this conclusion, eg, treaty or IRC code?


 


Thanks again!

Expert:  USTaxAdvising replied 1 year ago.

Hello Lucia,

 

Certainly. Here are some references:

 

Foreign tax credit tests - http://www.irs.gov/Individuals/International-Taxpayers/What-Foreign-Taxes-Qualify-For-The-Foreign-Tax-Credit%3F

 

Instructions to Form 1116, see page 2 "Foreign Taxes Eligible for a Credit" (note that the amount is $300 not $150 to claim the credit without filing Form 1116) - http://www.irs.gov/pub/irs-pdf/i1116.pdf

 

See IRC 901 here - http://www.law.cornell.edu/uscode/text/26/901

 

Best regards,

 

Customer: replied 1 year ago.

Thanks.


 


What I don't understand is why in this case, the US income could be treated as Canadian income and FTC could be applied on these "US income"?


 


Thanks

Expert:  USTaxAdvising replied 1 year ago.

US Source income is not treated as Canadian source income. What is driving the credit is that it is being taxed in Canada as well. The purpose of the foreign tax credit is to eliminate double taxation from country to country.

 

I was having difficulty with this issue once before and you will note that the in order to qualify for the credit the "taxes" must be imposed by a foreign country. The source of the income is not used to when determining if the tax is creditable. Thus the source is somewhat irrelevant. The driving factor is that the tax is imposed by a foreign country and is also subject to taxation in the U.S.

 

See Publication 514 here as well - http://www.irs.gov/publications/p514/ar02.html#en_US_2012_publink1000224404

 

 

I hope this helps, please let me know if you have any further questions.

 

Best regards,

Customer: replied 1 year ago.

Thanks. I read the link you provide. Do you think the following paragraph from the same link could explain this situation?


 


"Certain Income Re-Sourced By Treaty



If a sourcing rule in an applicable income tax treaty treats U.S. source income as foreign source, and you elect to apply the treaty, the income will be treated as foreign source.


You must compute a separate foreign tax credit limitation for any such income for which you claim benefits under a treaty, using a separate Form 1116 for each amount of re-sourced income from a treaty country. See sections 865(h), 904(d)(6), and 904(h)(10) and the regulations under those sections (including Regulation section 1.904-5(m)(7)) for any grouping rules and exceptions."


 


 


 


 

Expert:  USTaxAdvising replied 1 year ago.

Hello Lucia,

 

No I don't think this applies in this fact pattern, you aren't resourcing income due to treaty really. 864 deals with sourcing and 904 is dealing with the limitation on the credit.

 

I believe you have the authority you need simply by the tests required. There is no sourcing test. Just that the tax is imposed by a foreign country.

 

Best,

Customer: replied 1 year ago.

How about the following paragraph from the same link? I think what you meant is reasonable. The reason I want to verify it is because I want to know whether a separate form 1116 and 8832 is necessary in this case. If form 8832 is failed to be provided, any trouble on it?


 


Thanks again.


 


"The United States is a party to tax treaties that are designed, in part, to prevent double taxation of the same income by the United States and the treaty country. Many treaties do this by allowing you to treat U.S. source income as foreign source income. Certain treaties have special rules you must consider when figuring your foreign tax credit if you are a U.S. citizen residing in the treaty country. These rules generally limit the amount of U.S. source income that is treated as foreign source income. The treaties that provide for this type of restriction include those with Australia, Austria, Bangladesh, Belgium, Bulgaria, Canada, Czech Republic, Denmark, Finland, France, Germany, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, Malta, Mexico, the Netherlands, New Zealand, Portugal, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, and the United Kingdom. There is a Worksheet at the end of this publication to help you figure the additional credit that is allowed by reason of these limited re-sourcing rules. But do not use this worksheet to figure the additional credit under the treaties with Australia and New Zealand. In addition, except as provided in regulations, the worksheet does not apply for tax years beginning after August 10, 2010. The amount of income re-sourced in the separate category, as described under Certain Income Re-Sourced By Treaty,earlier, must be computed in accordance with the applicable treaty provision."

Expert:  USTaxAdvising replied 1 year ago.
I don't see how form 8832 would apply...but perhaps I do not know all the facts.

I do not believe the sourcing rules apply here which is what the treaty is discussing. Basically the treaty eliminates or reduces the ability to create foreign sourced income to maximize the ability to claim the foreign tax credit.

In your fact pattern the income is in fact us sourced but taxed in Canada because of residency of the tax payer. The dividends are us sourced under irc 864 and the gain is sourced to the residence of the taxpayer.

How much of a potential foreign tax credit are we talking about?

Best regards,
Customer: replied 1 year ago.

$3000.

Expert:  USTaxAdvising replied 1 year ago.

Hello Lucia,

 

OK well that is good to know. As mentioned above the sourcing of the tax credit is somewhat irrelevant here. Here is an additional link supporting my conclusion.

 

http://www.amchamcanada.ca/business-in-canada/tax-issues/7

 

 

 

USTaxAdvising, Accountant
Category: Finance
Satisfied Customers: 1088
Experience: Professional with finance related questions.
USTaxAdvising and 4 other Finance Specialists are ready to help you
Customer: replied 1 year ago.
Thanks very much for your efforts on this,topic.

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Rakhi Vasavada

    Financial and Legal Consultant

    Satisfied Customers:

    2073
    Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
< Last | Next >
  • http://ww2.justanswer.com/uploads/RA/rakhi.v/2012-7-3_14374_RakhiVasavadaL.64x64.jpeg Rakhi Vasavada's Avatar

    Rakhi Vasavada

    Financial and Legal Consultant

    Satisfied Customers:

    2073
    Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
  • http://ww2.justanswer.com/uploads/BU/BusinessTutor/2012-2-2_115741_Kouki2.64x64.jpg Manal Elkhoshkhany's Avatar

    Manal Elkhoshkhany

    Tutor

    Satisfied Customers:

    1890
    More than 5000 online tutoring sessions.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    1755
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JK/jkcpa/2011-1-16_182614_jkcpa.64x64.jpg JKCPA's Avatar

    JKCPA

    CPA

    Satisfied Customers:

    838
    Bachelors degree and CPA with Accounting experience.
  • http://ww2.justanswer.com/uploads/starside8/2010-2-16_55433_DSCN1175.JPG Eric's Avatar

    Eric

    Financial Manager

    Satisfied Customers:

    558
    Loan servicing, counseling and real estate expert. Foreclosure Expert and Financial Planner.
  • http://ww2.justanswer.com/uploads/FA/fastfile/2011-12-15_23139_Klein2011small.64x64.jpg R. Klein, EA's Avatar

    R. Klein, EA

    Accountant

    Satisfied Customers:

    397
    Intuit Ask a Tax Expert. QuickBooks Certified Pro Advisor (all editions)
  • http://ww2.justanswer.com/uploads/dkaplun/2009-05-17_173121_headshot_1_2.jpg Dimitry K., Esq.'s Avatar

    Dimitry K., Esq.

    Attorney

    Satisfied Customers:

    324
    NASD Licensed Rep, 1997-2001, Business Attorney