Getting full credit for tax withheld at source in US

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Getting full credit for tax withheld at source in US

Postby retireat50 » 12 Apr 2011 14:33

I am preparing my brother’s tax return and there is a situation I don’t understand. He works in Canada but the company is part of a US conglomerate. Over time the employees can purchase shares in the company (private, not public stock) and every few years the employees are able to sell the stock or there is some kind of spin off where stock is disposed of. This was one of those years and it exceeded $200,000 in proceeds. He has filled out an NR-1 in the past and therefore 15% was withheld or about $30,000 on a 1042-S from the IRS. I reported the income as a capital gain – after deducting the ACB of these shares it is a gain of about $150,000 - so tax owing of about $30,000 on this at the top marginal tax rate ($150,000 gain X 50% X 39% tax rate).

Since there has already been tax withheld in the US, in theory there should be no tax payable in Canada. I should report this tax withheld on a T2209 – I am using Ufile and it indicates this on the “Help” section as well, however there is no form T2209 in the program. It does however have a section to recognize foreign tax paid – I used that section to report the foreign tax paid and it does reduce the tax liability but appears as though only at 75 cents on the dollar (ie for every $1US paid in tax only getting 75 cents back in tax on the Canadian side). I understand that the tax relief is limited based on what kind of and how much income is reported and that the calculations behind the scene are bit complex but I am not understanding why it would not provide 100% recognition of the tax withheld on Form 1042-US from the IRS. Right now as it stands he is paying about 55% tax on the taxable capital gain between the US and Canada. It’s a unique situation but hopefully someone can assist.
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Re: Getting full credit for tax withheld at source in US

Postby theoldtimer » 12 Apr 2011 15:33

When I search for T2209 in Ufile, the following info appears:


T2209 - Federal foreign tax credits Generated automatically based on the entries for foreign income.
In Interview setup tick Foreign income or foreign property .
Select Foreign income & property.
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Re: Getting full credit for tax withheld at source in US

Postby AltaRed » 12 Apr 2011 15:36

UFile generates the T2209 based on Foreign Income you input via the Income section of UFile. If you have already input a bunch of data, click on the Results tab and it will calculate Results and you can then click on Tax Return tab and you will see a T2209 form with data on it plus Diagnostic sheets for the data that goes on the T2209. When you are inputting the data in Schedule 3, be sure to put it in the non-Business sections. It may well be from the calculations that Canada will not let you recover all that withholding tax as a tax credit.

OTOH, the issue may be that stock sales, as a result of exercising stock options, is considered compensation income and is included on a T4 in Box 38 and there is a 50% Security Options deduction provided in Box 39 to ensure this income is taxed at only 50% rate. Box 38 amounts are also included in the totals in Box 14. I believe that is the place to put this data rather than Schedule 3. That is how my 2008 T1 return was done as a result of exercising US based stock options. I could dig further into that return if you wish..... or PM me.

Caution: I am not a tax expert by any means. Caveat emptor
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Re: Getting full credit for tax withheld at source in US

Postby SLeazebag » 12 Apr 2011 15:37

My understanding is that the foreign tax credit is the lesser of the foreign taxes paid on the foreign income and the Canadian taxes that would otherwise be payable/attributable to the foreign income. So maybe this latter amount is less than the 15% foreign withholding tax and that is why you are not getting 100% credit?
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Re: Getting full credit for tax withheld at source in US

Postby SLeazebag » 12 Apr 2011 19:18

I've just had a look at Ufile and it's a bit difficult to see what you should do with respect to data entry.

I would suggest that you try to get a deduction for foreign taxes under Section 20(11). It would appear that the foreign tax rate on the foreign taxable capital gain is effectively 40% and since this exceeds 15%, a deduction might well be allowed under Section 20(11) for $18,750. I'm not sure if this would give you a better result.

Then I think the remaining $11,250 would be eligible for a foreign tax credit. It would appear than you will never get a full foreign tax credit offset for foreign taxes. While the foreign taxable capital gain would be taxed at the marginal tax rate, looking at T2209 and T2036, the foreign tax credits (Federal & Provincial) appear to be determined on an average tax rate basis.
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Re: Getting full credit for tax withheld at source in US

Postby AltaRed » 12 Apr 2011 20:48

I think the key problem is the US employer was asleep at the wheel. When I exercised US based stock options, market price and strike price (ACB) were always known and withholding was based on the difference only. Further the US employer should have passed on that information to the Canadian affliate for proper construction of the T4 (as part of the compensation arrangement) so that the appropriate information was documented in the T4.

If I am correct, the proper procedure here would be for the individual to file an NR1040 to recover excess tax paid in the USA and then do a T1ADJ. It may be best for the individual to access a cross-border tax accountant to deal with this situation. Enough money is at stake to make it worthwhile. I personally don't see CRA being sympathetic to, and accommodating, excess foreign tax paid in the USA.
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Re: Getting full credit for tax withheld at source in US

Postby OhGreatGuru » 13 Apr 2011 19:50

Ouch, my brain hurts just thinking about this. But if the US charged him 15% on the whole $200K, why should Canada only be charging tax on $150K? It seems to me there is a disagreement on what the taxable income is in this case. In fact the US return implies he received these shares at no cost, which makes the market value at the time of "deemed purchase" a taxable benefit.
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Re: Getting full credit for tax withheld at source in US

Postby AltaRed » 13 Apr 2011 21:19

OhGreatGuru wrote:Ouch, my brain hurts just thinking about this. But if the US charged him 15% on the whole $200K, why should Canada only be charging tax on $150K? It seems to me there is a disagreement on what the taxable income is in this case. In fact the US return implies he received these shares at no cost, which makes the market value at the time of "deemed purchase" a taxable benefit.

We don't have those facts so we do not know. I am simply accepting the OPs assertion of a $50k ACB. If so, IRS withheld too much. OTOH, on what basis do the shares have an ACB of $50k? This is the issue for the discrepancy.

Also, we haven't heard from the OP on why he is using Schedule 3 for a cap gain instead of a T4 properly filled out for 'security options'.
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Re: Getting full credit for tax withheld at source in US

Postby retireat50 » 13 Apr 2011 22:21

As for why the US withheld on the $200K and not on the gain. This was as per the 1042-S. The IRS would have no knowledge of what the ACB on the shares were so it's right off the total proceeds. I've never heard of withholding tax being assessed on a net value, it is always on the gross.

As for why they were not on a T4. My brother works for the Canadian division and this is who issued the T4. The shares come from the US parent company. There was a memo from the company stating that it must be disclosed as a capital gain on Sch 3.
Last edited by retireat50 on 13 Apr 2011 22:25, edited 1 time in total.
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Re: Getting full credit for tax withheld at source in US

Postby retireat50 » 13 Apr 2011 22:24

AltaRed wrote:
OhGreatGuru wrote:Ouch, my brain hurts just thinking about this. But if the US charged him 15% on the whole $200K, why should Canada only be charging tax on $150K? It seems to me there is a disagreement on what the taxable income is in this case. In fact the US return implies he received these shares at no cost, which makes the market value at the time of "deemed purchase" a taxable benefit.

We don't have those facts so we do not know. I am simply accepting the OPs assertion of a $50k ACB. If so, IRS withheld too much. OTOH, on what basis do the shares have an ACB of $50k? This is the issue for the discrepancy.

Also, we haven't heard from the OP on why he is using Schedule 3 for a cap gain instead of a T4 properly filled out for 'security options'.


I believe that in the US cap gains are also on 50% of the gain and I assume that the marginal tax rate would be in the 40% range giving us 20% tax owing on the gain (200K-50K x 50% x 40%)which works out to virtually the same as 15% on the proceeds (200K x 15%). Otherwise if this was not the case it would be advantageous to file a US return to get a refund.
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Re: Getting full credit for tax withheld at source in US

Postby AltaRed » 13 Apr 2011 23:52

retireat50 wrote:As for why they were not on a T4. My brother works for the Canadian division and this is who issued the T4. The shares come from the US parent company. There was a memo from the company stating that it must be disclosed as a capital gain on Sch 3.


If (and that is the key word here) the shares were awarded as part of a compensation package, I would submit the company has not handled this correctly. Perhaps they need to employ a proper cross-border tax accountant. I worked for a Canadian affiliate of a multi-national and options were from the US parent. My options were always part of compensation... with the share sales handled as compensation on a T4 (translated from a US W-2 on the sale). No 1042-S. No Schedule 3 entries. That made all withholding taxes in the USA creditable.

That said, if you are going with what you got, then do as Sleazebag suggests for the foreign tax credit.
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Re: Getting full credit for tax withheld at source in US

Postby retireat50 » 16 Apr 2011 15:26

They were "awarded" in a sense that any management employee is able to purchase them each year. These are not publicly traded. Over time (100+ year track record) they have returned in excess of 20%+ per year. They are not stock options. Something like this would never show up on a T4.
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Re: Getting full credit for tax withheld at source in US

Postby SLeazebag » 17 Apr 2011 21:15

retireat50 wrote:They were "awarded" in a sense that any management employee is able to purchase them each year. These are not publicly traded. Over time (100+ year track record) they have returned in excess of 20%+ per year. They are not stock options. Something like this would never show up on a T4.


It would show up on a T4 if there was a taxable benefit arising because of his employment. Assuming the purchase price is FMV (difficult to establish since the shares are not publicly traded), then there should not be any taxable benefit to report on a T4.

Presumably the (15%) US withholding tax is "back-up" withholding tax which can apply to payments in the US from brokers on stock and bond transactions. I believe that the (back-up) US withholding tax could have been avoided by proving the broker with a completed W-8 Ben Form.
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