Non-Resident Tax on Investment Income

Question

I moved to the US from Canada 3 years ago and I’ve recently received some CRA tax notices that have been causing me problems. When I left in 2012 I neglected to tell my broker that I was moving. It wasn’t until the next year that I realized (because he told me) that I should have turned my account into a non-resident account and taxes should have been withheld and sent to CRA on my dividends.

After many months of going back and forth with CRA I managed to get the tax withholdings resolved. However now I have a different problem. I’ve also paid US tax on these dividends and now I have CRA notices telling me that I also have to pay tax on the same dividends. From my calculations I’m paying about 10% US tax and 15% Canadian tax on these dividends. Should I really be paying 25% total on dividends from Canada?

I tried to get some help from my US CPA but he keeps telling me that there’s nothing I can do and to just pay the CRA bill.

Is this really my only option? They also continue to withhold the 15% tax. Am I stuck with 25% tax. If so, should I move these investments to the US?

Answer

I have to disagree with your current CPA. You do in fact have some options on how to deal with the extra taxes.

First, the 15% CRA remittance from your investment account on dividends appears to be correct. I would confirm with your CPA however that all of your Canadian source investment income (dividends, interest, capital gains and other income) is properly reported on your 1040. I would also ensure that you are properly filing FBAR forms.

The 15% you paid on the dividends to CRA is the final tax on those dividends to Canada. You’ll also need to report and pay tax to the US on these additional earnings. However you will be able to claim a foreign tax credit on your 1040 for all the Canadian taxes you’ve already paid. That’s the point of the tax treaty in place between Canada and the US. In order to claim the credit (and hopefully obtain a refund of taxes paid) you’ll need to prepare a 1040x adjustment and include form 1116 to calculate the credit. The calculation of the credit can be tricky so please give me a call if you need help.

Any tax that is not fully utilized as a credit on your adjustment will be available for carryforward to subsequent years.

Hope that helps and please don’t hesitate to call me at 250-381-2400 if you have any questions on the information above.

Cheers

Phil

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