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Arthur Rubin
Arthur Rubin, Tax Preparer
Category: Tax
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Experience:  22 years of tax preparation experience, including individual, trust, and estate returns.
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U.S. LLc held stocks with a maturity date, one year, broker

Customer Question

U.S. LLc held stocks with a maturity date, one year, broker withheld projected canadian taxes and paid to CRA 26,000 on value of stocks at the date of issue, stocks went down, loss considerable, we are now cashing out with the loss. how do we recover the tax paid on the stocks and pay u.s income tax on the transaction. stocks were held for 5 years.
Submitted: 2 years ago.
Category: Tax
Expert:  Arthur Rubin replied 2 years ago.

Arthur Rubin :

Thank you for using Just Answer.

Arthur Rubin :

In order to answer your question, I need to know your residency and citizenship; and why the (apparently US) broker paid Canadian taxes.

Customer :

In 2007 ABC Corp. of Canada, leased certain mineral properties in the U.S. from AVD, LLC., registered in Colorado, U.S.. A lease payment was paid and reported as income through and in the name of AVD, a two member LLC. Each person received 1099 forms from accountant and filed tax with the IRS, as personal income. In addition to the lease payment, ABC paid in part by restricted stock in ABC to AVD. This restricted stock did not mature or was not available for selling for several years. ABC reported this stock issue as income or as Future income, to the Canadian Revenue Dept., receipt received, and withheld $ 26,000 based on the value of the stock at the time of issuance. They paid the Canadian Revenue Department this tax on these shares as income through the International Tax Treaty between the United States and Canada. Tax was withheld on these stocks at the value of the time of issuance, now the value of which is a considerable loss, near $0.02 value per share. Now, if I understand this correctly, this tax credit is to be applied to tax owed to the IRS at the time of sale, hence, considered income. Income/sale of these shares did not become available until years later when the restriction was lifted.

The intermediate steps of validating these shares is not important other than AVD, working through Canacord of Canada established an account with a Clearing House Brokerage Firm in the U.S in order to sell said shares. In 2011 shares became available to sell. Mr. S, one of the two members of AVD sold all of his shares, an equal share division. Mr. S received in 2011 cash for the shares sold. He left some cash in the account with Pershing LLc., the brokerage firm in the U.S. and received some cash in hand as probable taxable income.

The question becomes, do we need to change the status of the AVD, LLc from a two member LLC. to a reclassified IRS “P” partnership, or a “C” LLc, “S” LLc regards to paying tax on income? And how does the tax credit sitting in the coffers of the Canadian Revenue Dept. apply? Does it apply? Any possibility of a refund? And, how do we claim/apply it toward tax due?. Keeping in mind, that the other LLC. member, Ms. A, will at some time sell her equal shares, in part or in whole. And, as well, someday in the future AVD, may have properties to lease out once again.

This is the main question: How does the tax credit sitting in the coffers of the Canadian Revenue Dept. apply? Does it apply? Any possibility of a refund?

Thank you for your assistance.

Arthur Rubin :

I cannot answer the (implied) Canadian tax question. The answer of what you need to do on the US end depends on whether the "treaty" withholding is a full and complete tax, or whether AVD was supposed to file a Candian tax return in 2008 for tax year 2007 to adjusted the tax liability.

Arthur Rubin :

If it was a "full and complete tax", then AVD or its passthrough entities can still claim the deduction or credit for the foreign tax; per 26 USC 6511(d)(3), the statute of limitations is 10 years, rather than the usual 3 years. If taken as a credit on form 1116 or 1118, it's suspended until there is adequate foreign income to absorb the tax, which may never happen.

Arthur Rubin :

If AVD was supposed to file a Canadian tax return, then only the amount that would have been shown on that tax return is allowable as a US foreign tax credit, even if the tax return could no longer be filed.

Arthur Rubin :

I realize that this doesn't fully answer your question, but the remainder of the question should only be in the Canada Tax category.

Arthur Rubin :

I am sorry about the delay, but I wanted to give as complete an answer as possible.

Customer :

After much research. The Canadian revenue dept. were very helpful. I now know more about the canadian tax system than the U.S. tax system.

Customer :

After much research. The Canadian revenue dept. were very helpful. I now know more about the canadian tax system than the U.S. tax system. In my case, a U.S citizen who received restricted stock, only became available last year, 2011. The stocks were transferred to a U.S brokerage firm for maintaining from Canacord of canada with all the forms appropriately filed with the IRS and available to sell. Sold some, paid U.S. tax on the income. Canadian Revenue dept said to file Form NR-7 for a non resident, with proof of tax withheld, tax certificate SLXXXX along with proof of citizenship and U.S tax return.

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