This tax season, challenge your knowledge on personal tax … fun?
Here is another in a series of typical tax planning and preparation situations to test you.
In 2019 you earned $5,000 of US dividends inside your Canadian brokerage account.
You also paid $750, or 15%, tax to the US. These are US dollar amounts. The amounts have been converted to Canadian funds by the brokerage firm so the total revenue is $6,500 and the tax paid is $975.
You actually received $5525 deposited into your account.
Do you report the full revenue amount and tax paid, or do you just report the net amount of $5525 you actually received?
You report the full revenue of $6,500 Canadian dollars on your tax return. You also claim the $975 Canadian dollars of tax paid to the US.
Because of the Canada-US Tax Treaty, Canada and the US recognize tax paid to their country by someone not living in their country. In that way, a person is not double taxed.
Claiming the US tax paid on your tax return is using the foreign tax credit (FTC). The FTC rules are complex. A key criterion is that you would have paid as much tax in Canada on those earnings as you actually did pay to the US.
In this case then, the tax on $6,500 of dividend income from Canadian sources would warrant about $1,300 in taxes to Canada.
You paid $975 to the US. So, recognizing the $975 of tax paid to the US, Canada Revenue Agency (CRA) will require you to pay another $325 in tax to Canada on that $6,500 of revenue.
However, if those tax amounts were reversed and you were required to pay $975 to Canada and you had paid $1,300 to the US, CRA will not refund the extra $325 you paid to the US, nor will CRA apply that $325 toward any other tax you owe in Canada.
Your brokerage firm did not convert the US dollars to Canadian dollars. What do you do?
You do not report US, or any other foreign currency, on your Canadian tax return.
Typically you use the average annual Canada-US exchange rate as published by CRA.
However, if you know the precise timing of a financial transaction, the exchange rate for that month, or even day, should be used. If any foreign currency conversion is reviewed by CRA, a different applicable exchange rate may be determined by CRA and your return reassessed.