# Why would my foreign broker be treating my US REIT distributions as qualified dividends on 1099-DIV?



## readmylips_nonewtaxes (May 19, 2021)

Year 2020 is the first year in which I have invested in US REITs in my Canadian discount brokerage account. The brokerage firm has my W-9 on file and sends 1099 forms in my name only. There are no with holdings. When I look into the annual report to shareholders and the Form 10-K issued by the various REITs, I see that these funds did not pay out any qualified dividends. Some are return of capital (ROC), some as capital gain distros, and some as ordinary income (with a percent allowed for 199A dividends). 

My question is - is there some US-Canada tax treaty which has allowed my Canadian discount brokerage firm to classify these REIT dividends as “qualified dividends” for the purposes of my US taxes? I am a US/Canadian citizen, but full year resident in Canada. The brokerage firm was very tight lipped when I inquired. If there is some tax treaty, which articles?

If there is not some treaty which allows for this, do I need to manually correct my 1099-DIV forms for each REIT and attach a statement to my 1040 every year? And won’t this increase the likelihood of my return being rejected? Perhaps the majority of investors see 100% qualified dividends and jump for joy, but it doesn’t seem right and it ultimately will mess up my cost-basis if I am not correctly adjusting for return of capital.


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## NickZ (Jun 26, 2009)

From the Cdn point of view qualified dividends applies only to Canadian companies. 

From the US view point wouldn't listing them this way increase your taxes payable?

Return of capital should lower your cost base. That's non taxable until you sell.

The capital gains under the capital gains rules.

Unless something has changed recently I can't think of anything in the treaty that would apply. I can't imagine any change that could. 

Capital gains are Cdn taxable. Shouldn't you be paying all this in Canada?


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## readmylips_nonewtaxes (May 19, 2021)

NickZ - thank you for your reply. Yes, Canada pretty much gets all tax income from all my passive investments, but as a dual citizen, the IRS also gets my 1040 and related forms and, I would think, deserves to have the income properly reported. 

My question here is only about the 1099-DIV form on the IRS side, not the Canadian side. Imagine that I have a US REIT which pays out 70% as ordinary dividends, and only 30% as return of capital. If I earn enough in passive income (let's say 25K) which are ordinary dividends and it exceeds my standard deduction (~12K), then I would first pay taxes to the IRS on this US-sourced income and claim a foreign tax credit on the Canadian returns. Now if that 25K is incorrectly classified as "qualified dividends", then the threshold is up to ~40K and the US wouldn't receive any tax revenue. While the end result in the amount of tax I pay is the same, it just gets divided up differently if the dividends are incorrectly classified. I think think the IRS would not be too happy with this. 

Thus why is my Canadian discount brokerage firm classifying all my REIT and some ETF income as "qualified" when the annual report to shareholders and the Form 10-K say otherwise?


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## NickZ (Jun 26, 2009)

Most likely a clerk messed up. The only thing that makes any sense.
You're the one with the responsibility to report correctly. I'd ask to speak to somebody in the back office and ask for the form to be corrected and resent.


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## readmylips_nonewtaxes (May 19, 2021)

NickZ said:


> Most likely a clerk messed up. The only thing that makes any sense.
> You're the one with the responsibility to report correctly. I'd ask to speak to somebody in the back office and ask for the form to be corrected and resent.


I keep pushing them on it, but I am politely pushed aside. I have received replies like, "the back office is very busy", "talk to your tax adivsor", and "I'll check with them again". I don't want to be correcting it every year. About a dozen funds are impacted. I bet they don't even account for spill over dividends and ROC cost-basis adjustments.

I was contemplating hiring a cross-border tax attorney to look into if there are any treaty articles which have allowed the broker to do this, but I suspect this will ultimately be a waste of money.

As a side question, is there any clause which may allow ROC from US REITs to be treated as capital gains or ordinary dividends in the current tax year (IRS side) rather than reducing my cost basis at the time of disposition? I ask because apparently ROC and capital gain distros from US REITs are to be treated as ordinary dividends on Canadian returns. It would be nice for them to be treated identically on the IRS side. And for my situation, the reduction of the cost-basis only works against me. I understand that once the cost-basis reaches $0, that ROC's become capital gains, but I was hoping there was a clause which might let me treat all ROC is capital gains or ordinary income in the distribution tax year instead.


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## NickZ (Jun 26, 2009)

readmylips_nonewtaxes said:


> I keep pushing them on it, but I am politely pushed aside. I have received replies like, "the back office is very busy", "talk to your tax adivsor", and "I'll check with them again". I don't want to be correcting it every year. About a dozen funds are impacted. I bet they don't even account for spill over dividends and ROC cost-basis adjustments.
> 
> I was contemplating hiring a cross-border tax attorney to look into if there are any treaty articles which have allowed the broker to do this, but I suspect this will ultimately be a waste of money.
> 
> As a side question, is there any clause which may allow ROC from US REITs to be treated as capital gains or ordinary dividends in the current tax year (IRS side) rather than reducing my cost basis at the time of disposition? I ask because apparently ROC and capital gain distros from US REITs are to be treated as ordinary dividends on Canadian returns. It would be nice for them to be treated identically on the IRS side. And for my situation, the reduction of the cost-basis only works against me. I understand that once the cost-basis reaches $0, that ROC's become capital gains, but I was hoping there was a clause which might let me treat all ROC is capital gains or ordinary income in the distribution tax year instead.


Are you sure the return of capital is considered an ordinary dividend? It shouldn't be. At least I don't think so.

Return of capital only becomes a gain once you sell. The lower cost basis will lead to a higher capital gain.


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## readmylips_nonewtaxes (May 19, 2021)

I've read this in more than one place online, that if you invest in US REITs in Canada, that ROC is treated as an ordinary dividend for Canadian tax returns. On the USA tax returns, it remains return of capital. I too was dumbfounded.


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## readmylips_nonewtaxes (May 19, 2021)

At any rate, the reason I have for pause is because if all these REIT dividends, which are not normally qualified dividends on the IRS side, are being treated as ordinary income (ordinary dividends) on the Canadian side, perhaps there is a US-Canada tax treaty which lets them be treated as "qualified dividends" on the IRS side. Does anyone have any insight on this?


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## readmylips_nonewtaxes (May 19, 2021)

I spoke with a cross-border CPA today. Apparently, foreign brokers don't have sufficient information to correctly classify foreign dividends accordingly, nor do they care to. Even when I provided the broker with the correct information from Form 10-K and others, their response was that those forms were available too far in to 2021 to be used, which is just ridiculous. The forms were available long before they even issued the 1099-DIV. The CPA said that 99% of US persons in Canada will just report whatever is on their 1099-DIV form from the Canadian broker, even if it is wrong. The proper way is to correct the 1099-DIV by attaching a statement to a paper return, showing the source of the information and the proper ratios of the distribution. 

I then asked the CPA if any brokerage firm in Canada continually gets IRS tax forms correct; he said no!

To answer another question about return of capital distributions - the CPA said there is no requirement to take the preferential tax treatment of ROC. I can decline the preferential treatment and claim it as ordinary income. This will keep my original cost-basis intact.


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