# How Should Dual National Resident in Canada Report US Sourced Income on Tax Returns?



## nielkfj (Apr 16, 2020)

I am a dual national (Canadian/US citizen) resident in Canada. I own shares in a U.S. domiciled ETF, which is held in a Canadian brokerage account. No tax has been withheld from the ETF distributions because I am a US citizen.

I have some questions about how to report this income on my tax returns:

1) To which country should I pay tax on this income and for which country should I claim a foreign tax credit on the tax paid to the other country?

For example:
Option 1: Pay tax on the distributions through my U.S. tax return, then claim a foreign tax credit on my Canadian tax return.
Option 2: Pay the tax through my Canadian tax return and claim a foreign tax credit on my U.S. tax return?

It seems Option 1 is the correct way because it appears that with Option 2 I will not be able to claim a foreign tax credit on my U.S. tax return for U.S. sourced income. But I'm not sure about this.

2) Looking at form 1116 - Foreign Tax Credit - from the IRS, it seems like there might be a way to make Option 2 work, by classifying the income as "Certain income re-sourced by treaty" (box f). Then it appears that income from the U.S. ETF becomes "re-sourced" as Canadian sourced income, enabling me to claim a foreign tax credit on my U.S. return. But I'm not sure if this is allowed.

3) I have the same questions as above about capital gains income when I sell the ETF shares.

Any help would be appreciated.


----------



## NickZ (Jun 26, 2009)

Your Cdn broker will send you a tax receipt. In normal years you should have received it by now.

Normally what happens is the US withholds 15% unless it's interest income than it withholds 10%. You show the income and taxes on your Cdn return.

With the US not withholding from you the foreign tax credit doesn't apply from the Cdn point of view. 

From the US viewpoint I'll leave that to the others but you first have to figure out if the income is taxable in the US. Is the ETF actually reporting taxable income? A return of capital? Is it something like a taxfree muni?


----------



## nielkfj (Apr 16, 2020)

NickZ said:


> Your Cdn broker will send you a tax receipt. In normal years you should have received it by now.
> 
> Normally what happens is the US withholds 15% unless it's interest income than it withholds 10%. You show the income and taxes on your Cdn return.
> 
> With the US not withholding from you the foreign tax credit doesn't apply from the Cdn point of view.


Thanks for the comments.

Yes, I have no problems preparing a Cdn tax return. I have lived in Canada most of my life so I know how to do them. Its the US return that I am trying to figure out.



> From the US viewpoint I'll leave that to the others but you first have to figure out if the income is taxable in the US. Is the ETF actually reporting taxable income? A return of capital? Is it something like a taxfree muni?


It's a regular index ETF following a major US market index, not municipal bonds. It pays quarterly distributions, all of it ordinary income. It's "domiciled" in the US, as it's from a US financial institution and is traded in USD on the American exchanges. But I hold it in my Canadian brokerage account.


----------



## NickZ (Jun 26, 2009)

If it's a normal index it likely is giving you a mix of income

dividends
capital gains/losses

Aren't they breaking this down for you?


----------



## nielkfj (Apr 16, 2020)

NickZ said:


> If it's a normal index it likely is giving you a mix of income
> 
> dividends
> capital gains/losses
> ...


It does seem kind of odd. But, I'm looking at the 1099-DIV that I received from my broker and it only lists values in boxes 1a "Total ordinary dividends" and 1b "Qualified dividends". All the other boxes are blank.


----------



## NickZ (Jun 26, 2009)

Might depend on the ETF and the year. If they don't sell anything during the course of the year they won't trigger any capital gains or losses.


----------



## nielkfj (Apr 16, 2020)

NickZ said:


> Might depend on the ETF and the year. If they don't sell anything during the course of the year they won't trigger any capital gains or losses.


The company that sells the ETF publishes a table of historical distributions on their web site. Looking at that table the column for ordinary income is the only one with values in it going all the way back to 2003. The other columns in the table for "Short Term Gains", "Long Term Gains", "Return of Capital" and "Liquidation Distribution" are all empty. I guess it must have something to do with how they structured the ETF that it only pays out ordinary income.

Can I ask you, are you a U.S. citizen living abroad?

If so, do you have any U.S. sourced income and to which country to you pay tax on it, and for which country do you take the foreign tax credit?


----------

