I have been getting a few clients bringing in K-1 forms from the US. Has anyone else come across this and how do we report this? Also does this form mean that the taxpayer will also have to file a US return?
I have no idea about the US return part and have advise client to consult with a US tax specialist for that. On the Canadian return, check a few things:
Is the investment held in a TFSA or RRSP? If so, they would still get a K1, but there is nothing to report on the T1
If held in an unregistered account, then it should be reported. I’ve only dealt with a small one (under $1,000 received in total) and most lines were self-explanatory: I have gone over each lines and allocated to foreign income where it said rental, interest, business income, etc.; It had a couple lines referring to long-term and short-term capital gains and I reported the sum of those on S3.
If it is for a large amounts or had significant amounts in boxes that didn’t make apply or made sense from a Canadian tax perspective, I would recommend you consult with a US tax specialist.
I do a lot of US returns. What type of income is being reported? It is fairly rare that a K-1 would trigger the need to file a US return for someone living in Canada who is not a US citizen. You tend to see them for investment income (similar to T5013’s in Canada) and these are not taxable on a US return as any tax due is withheld at source similar to Part XIII tax on Canadian non-residents when they have Canadian investment income.
Thanks for the information @laurie
For the one I dealt with, it was held in a CIBC investment account but neither distributions or foreign taxes withheld were included in any of the T5 related to that account.
Is there a box on the K1 that indicates the foreign taxes paid? And would they base the tax withholdings on the actual cash distributed in the year, or the partnership income (which is presumably not known at the time the distribution is made). For instance, the total income of the partnership for 2018 was $545, but they distributed $3,339 according to the K1 (Part II, section L).
I guess I can have the client bring us every monthly investment statements for the year, but again, I’m looking at a fairly small amount of income and not sure it warrants my digging into it that much.
If you have any bits of wisdom on the matter of K1 to share, I scoured the internet (obviously wrong info here) and professional resources (deadly silence there) with little to show for.
You have to read the codes - listed in the instructions for filling out the form. I have seen ones with state taxes withheld but usually not. These are partnership forms and the entity issuing them is not taxable itself - they are flowing through the income to the taxpayer who then reports it and pays the taxes. Although K-1’s are for regular US type investors. I think if federal taxes are withheld they report that on a 1042-S or 1099-Misc form instead. The tax should be on the partnership income and not the distribution. The total partnership income doesn’t usually match the distributions. You need both figures to calculate the ACB of the investment (i.e. initial ACB + business income + other types of income like capital gains if any - distributions = ACB at the end of the year) but the various types of income is what gets reported on the tax return and taxes paid on it each year. Keep all the K-1 forms and keep a running total of the ACB for when it gets sold. Trying to dig that info up years after the fact when the investment is sold is a major nightmare otherwise.
We scan everything in for our clients, but I think I’ll also create a permanent folder and excel to calculate ACB based on your advice.