# Foreign tax credit for capital gains



## HillbillyCanuck (Apr 9, 2012)

Hello,

I have a capital gain from the maturation of some Canadian corporate bonds I bought at a discount several years ago (long term capital gain) and I'm trying to figure how to handle them on an American tax return. I've done my Form 8949 and my Schedule D but I'm getting really bogged down trying to figure out how to handle the capital gain with respect to the foreign tax credit. The more I read, the more confused I become.

I'm retired with a total income well below six figures; the capital gain represents about 5% of my income. With the exception of the capital gain all of my income is from pension, interest and dividends (no qualified dividends), so all of my income is in the passive category with respect to the foreign tax credit. All my income is from Canadian sources and I don't have any investment expenses.

What I'd like to do is just add the capital gain to the rest of my passive category income (line 1a of Form 1116) and ignore all the nearly incomprehensible talk of elections, adjustments and special worksheets found in the instructions. 

Since my case is so simple, is it correct to do this? 

Plan B is to treat the capital gain as interest from my trading account. Even though this would result in the capital gain being taxed at a higher rate by the IRS I still wouldn't expect to owe any tax due to the higher tax rates in Canada. Plan B would give me an inaccurate tax return, but it has the virtue of simplicity.


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## BBCWatcher (Dec 28, 2012)

Naive questions: Did the bond pay interest that you reported in prior tax years? Did you amortize the bond interest in each of those years to reflect the discount when you purchased the bond?


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## HillbillyCanuck (Apr 9, 2012)

BBCWatcher said:


> Naive questions: Did the bond pay interest that you reported in prior tax years? Did you amortize the bond interest in each of those years to reflect the discount when you purchased the bond?


The bonds were held inside an investment account and interest was paid into the cash component of the account. The interest and dividends earned by items within the account were reported in aggregate as having been paid by the institution which provides the account. This means that I didn't make an individual entry for each of the bonds.

To the best of my knowledge the institution doesn't amortize the interest to reflect the discount.


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## BBCWatcher (Dec 28, 2012)

HillbillyCanuck said:


> The bonds were held inside an investment account....


A Passive Foreign Investment Company (PFIC) perchance?


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## HillbillyCanuck (Apr 9, 2012)

BBCWatcher said:


> A Passive Foreign Investment Company (PFIC) perchance?


Heaven forbid! 

No, it's the investment arm of one of Canada's "Big Five" banks; they offer individual trading accounts. If the IRS considers them a PFIC, then a LOT of Americans living in Canada are in deep doo.


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