Purchased (and sold) US securities/ETF in 2021 but got no fed/prov credit. Is this normal? | Income tax filing | Discussion forum

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Purchased (and sold) US securities/ETF in 2021 but got no fed/prov credit. Is this normal?
July 16, 2022
3:05 pm
piggybank
British Columbia
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I bought US securities/ETFs in 2021 and paid taxes on them, but Canada won't give me federal/provincial credit. Is this normal?
Screenshot in Wealthsimple Tax:

View post on imgur.com

Update: My title says "bought and sold", but I don't know if I sold them. Maybe I still have these. lol.

July 16, 2022
3:20 pm
AltaRed
BC Interior
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Selling a capital asset results in a capital gain or loss in a taxable account. There are no tax credits associated with a Schedule 3 capital transaction.

What your image is saying is that you received 'income' from your US securities during 2021 and you did pay withholding tax (15% or 30%) on that income to Uncle Sam. The Foreign Tax Credit (FTC ) is a mechanism to be sure you do not pay taxes twice on the income, e.g. once to the USA and once to Canada. Since you said elsewhere that you will be paying no income tax with your tax filing to Canada, you have no Canadian tax to recover with the FTC.

A tax credit is not a tax refund. A tax credit only is possible to the extent that you owe and would otherwise be paying income taxes to Canada.

July 16, 2022
3:42 pm
piggybank
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Selling a capital asset results in a capital gain or loss in a taxable account. There are no tax credits associated with a Schedule 3 capital transaction.

I'm preparing my tax return electronically, so the various Schedules (e.g. Schedule 3) is something I'm not familiar with. But I see it on https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package/5000-s3.html.

What your image is saying is that you received 'income' from your US securities during 2021 and you did pay withholding tax (15% or 30%) on that income to Uncle Sam.

Right. This part I understand.

The Foreign Tax Credit (FTC ) is a mechanism to be sure you do not pay taxes twice on the income, e.g. once to the USA and once to Canada. Since you said elsewhere that you will be paying no income tax with your tax filing to Canada, you have no Canadian tax to recover with the FTC.

Yes, you're right. I have no income tax owing. I expect the opposite -- I expect to get a refund (money) in my bank account after I file.

If I understand you correctly, the US and Canada have an agreement where a Canadian won't pay taxes twice on the same thing.

But what I'm trying to understand is... what's the connection between a person who doesn't owe income tax (like me) and the FTC?
Or to put in another way, don't people who owe taxes (say from employment income) also entitled to foreign tax credit?

July 16, 2022
4:37 pm
AltaRed
BC Interior
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piggybank said
But what I'm trying to understand is... what's the connection between a person who doesn't owe income tax (like me) and the FTC?
Or to put in another way, don't people who owe taxes (say from employment income) also entitled to foreign tax credit?

There is no connection between a person who does not owe Canadian income taxes and the FTC. There is no FTC in that case against zero income tax owing.

Taxpayers who would otherwise owe taxes from various sources of income, including employment, would receive the value of the FTC as a credit against taxes otherwise owing.

Example 1: Taxpayer #1 happens to owe $350 in income taxes to Ottawa from world sources of income, but has already paid $25 in non-business income tax withheld to the IRS. That $25 is credited as an FTC on Canadian taxes and that taxpayer only pays Ottawa $325 in income taxes.

Example 2: Taxpayer #2 happens to owe $20 in income taxes to Ottawa from world sources of income, but has already paid $25 in non-business income tax withheld to the IRS. Only $20 of the $25 can be credited as an FTC on Canadian taxes and nothing is owing to Ottawa in income taxes.

Example 3: You.... Since you don't owe any income taxes to Ottawa, you don't get to recover any of the $25 you paid to the IRS and there is $0 of FTC.

July 16, 2022
6:32 pm
Norman1
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It doesn't matter that one doesn't owe any Canadian income taxes on the income from the US. One still owes US non-resident income taxes of 15% on that income.

The federal and provincal foreign tax credits ensure that one pays the higher of

  1. Canadian income taxes and
  2. US income taxes

on the US income instead of A + B.

Consequently, one won't be receiving any refund when the Canadian income taxes on the US income are less than the US taxes paid.

July 17, 2022
3:47 am
savemoresaveoften
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Norman1 said
It doesn't matter that one doesn't owe any Canadian income taxes on the income from the US. One still owes US non-resident income taxes of 15% on that income.

The federal and provincal foreign tax credits ensure that one pays the higher of

  1. Canadian income taxes and
  2. US income taxes

on the US income instead of A + B.

Consequently, one won't be receiving any refund when the Canadian income taxes on the US income are less than the US taxes paid.  

That’s good to know. In my case my T5 has multiple stocks that I rec US dividends from, and there is always a foreign tax credit. So that means I am already paying a higher withholding tax than the Canadian tax ??, Given my marginal Canadian tax bracket, that does not sound right tho…
And it’s way too much work to try to hunt down how much withholding tax I pay in each name… I just hope I am not overpaying at the end of the day.

July 17, 2022
8:28 am
AltaRed
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It is not difficult to understand. Canada taxes Canadians on world wide income and one pays taxes based on the appropriate tax brackets for that income. Canada also taxes non-residents on income earned from Canadian sources such as Cdn stocks (a withholding tax).

Most countries do the same thing, i.e. want to tax income sourced in their own country, e.g. the US wants to tax dividends earned on US domiciled stocks (a withholding tax).

In either case, that would result in double taxation so the US-Can tax treaty, as an example, makes provisions to avoid double taxation. The deal is for each country to take, for dividend income on stocks as an example, 30% tax on income earned by each other's residents on income earned in their respective countries. A form, in the case of Canadians, a W-8BEN filled out by Canadians with their financial institutions, reduces that US withholding tax rate to 15%. That tax withheld and paid to the IRS is what is shown on your T5s.

Each countries tax system recognizes that withholding tax has been paid to the respective tax authorities and provides a foreign tax credit for that 15% tax already withheld. US tax residents get the same thing for 15% taxes withheld by Canada on dividend income they have earned in Canada.

These provisions are tax credits, not tax refunds. You can only recover that 15% withholding tax paid to the IRS to the extent you would otherwise pay taxes to CRA in Canada. IF you have no tax owing to CRA on your tax return, you have no way to get that 15% withholding tax paid to the IRS back.

The T1 General tax return sorts all that out. You simply don't recover what you have already paid to the IRS if you have no taxes otherwise owing to Canada. Hence my examples in post #4.

July 17, 2022
11:55 am
Norman1
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savemoresaveoften said
That’s good to know. In my case my T5 has multiple stocks that I rec US dividends from, and there is always a foreign tax credit. So that means I am already paying a higher withholding tax than the Canadian tax ??, Given my marginal Canadian tax bracket, that does not sound right tho…

There's no foreign tax credit on T3 or T5 slips. It is foreign taxes paid that's reported on the slips.

The Canadian foreign tax credits are calculated from that on forms T2209 and T2036.

Part of the calculations in the forms is the federal and provincial income taxes due on the foreign income. As AltaRed indicated, one will not receive full credit for the foreign taxes paid when the federal and provincial income taxes are less.

July 17, 2022
11:58 am
Bill
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It's not clear what "tax owing" means here. It could mean either there are no taxes owing at all for the year or there are no further taxes owing at time of filing. If the latter then there might be a credit for this, seems to me.

The original scenario about buying US securities and paying taxes on them started out unclear to me as you don't pay taxes when you buy US securities, far as I know.

July 17, 2022
12:10 pm
savemoresaveoften
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Norman1 said

savemoresaveoften said
That’s good to know. In my case my T5 has multiple stocks that I rec US dividends from, and there is always a foreign tax credit. So that means I am already paying a higher withholding tax than the Canadian tax ??, Given my marginal Canadian tax bracket, that does not sound right tho…

There's no foreign tax credit on T3 or T5 slips. It is foreign taxes paid that's reported on the slips.

The Canadian foreign tax credits are calculated from that on forms T2209 and T2036.

Part of the calculations in the forms is the federal and provincial income taxes due on the foreign income. As AltaRed indicated, one will not receive full credit for the foreign taxes paid when the federal and provincial income taxes are less.  

ic. looks like I recd a Fed credit but nothing for provincial.

July 17, 2022
12:53 pm
Bill
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If you got it all back via federal there's no provincial left to get back.

July 17, 2022
1:37 pm
AltaRed
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Bill said
It's not clear what "tax owing" means here. It could mean either there are no taxes owing at all for the year or there are no further taxes owing at time of filing. If the latter then there might be a credit for this, seems to me.

The original scenario about buying US securities and paying taxes on them started out unclear to me as you don't pay taxes when you buy US securities, far as I know.  

Agree it is a matter of definition. "Tax owing" should (would) mean any tax payable on taxable income, e.g. Line 42900. It is from that number that Line 40500 is subtracted from to get Line 40600. That latter line cannot be less than zero..... so hence why the FTC is a tax credit and any foreign taxes paid cannot be used to reduce one's federal tax owing to less than zero.

The original post actually has nothing to do about selling anything. It is about foreign taxes withheld on investment income received which is reported on either a T3 or T5.

July 17, 2022
1:57 pm
piggybank
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AltaRed said

The original post actually has nothing to do about selling anything. It is about foreign taxes withheld on investment income received which is reported on either a T3 or T5.  

You're probably right. I don't recall if I even sold these US-based securities

July 17, 2022
2:14 pm
AltaRed
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piggybank said
You're probably right. I don't recall if I even sold these US-based securities  

You would know. You would have the confirmation slip records from your broker that you did with the pertinent sale details and your brokerage would/should have sent you a T5008 to put the data on Schedule 3 of your 2021 tax return. You HAVE to report any cap gain/loss dispositions in the year they are transacted.

July 17, 2022
2:49 pm
Bill
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Agree, sounds weird as monthly statements would show whether or not those securities are still held.

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