Last year (2023 when I become the tax resident in Canada), a US stock paid me back the US withholding tax for 2022 (before I become a tax resident in Canada) because they reclassified the dividend, do I have to report those money as income in 2023?
My thought is though refund is paid to me in 2023 but it’s due to something occurred in the past before I become the tax resident in Canada, so it should not be counted as my taxable income.
Thanks in advance!
It’s not income in 2023. It’s a refund of taxes paid. The full amount of the dividend before taxes should have been reported in 2022 to whichever country you were resident in if required and it has nothing to do with Canada. If you claimed a foreign tax credit on the income in your country of residence in 2022 that will likely need to be amended since the tax was refunded to you in 2023 however.
Three points…
@laurie answered your question.
If you have not already done so, I would highly recommend that file a CRA NR74, Determination of Residency Status (Entering Canada).
Create a table of contents for attachments.
Create as summary describing when, why, how, etc you entered Canada.
Attach all your supporting documentation.
File your Canadian tax return with the start date of your tax residency in Canada.
File your US tax return for your part year, if you severed all financial ties. No need to send a copy of your US tax assessment to CRA for US tax credits based on US Canada Tax Treaties.
You may need to file a a form or forms with the IRS to establish your closer connection to another country.
You may need to file two different tax returns in the event that you US tax residency status has changed. See above.
Send a paper copy of your US tax assessment to CRA requesting tax credit for your US taxes paid per the US Canada tax treaties.
Be sure to find a way to split your income and your US taxes paid into 2 periods - pre Canada tax residency + post Canada tax residency.
Attach supporting documentation.
File as a T1 Adj and request credit for your US taxes paid and the current US Canada Tax Treaties, regulations, and administrative policies.
PLEASE NOTE
The USA is one of three countries which requires personal tax returns to be filed regardless of tax residency status in a tax treaty country. IE you have file taxes in BOTH countries.
Who needs to file a US IRS tax return?
It is much, much better to be in front of this than to play catch-up. I spent 2 years as a tax preparation expert in tax prep for those who have multiple countries ties.
Thanks for the reply.
Out of curiosity, if the tax refund occurs when I am a tax resident of Canada and I have claimed foreign tax credit, let’s say the tax refund is $100, should I return all $100 to CRA?
My thought is, the tax is returned to me because the stock company does not define that “dividend” as taxable dividend anymore, so that “dividend” is not my “income”, and instead of returning that $100 US tax refund to CRA, actually I am entitled to get back the Canada tax charged on that “dividend”? Any thought about this?
Thanks in advance.
If you weren’t tax resident in Canada for 2022, you can’t claim a foreign tax credit on a 2022 Canadian tax return. Doesn’t matter when you received the refund. If that refund related to a 2022 tax year, and you were not filing a Canadian tax return in that year, it’s irrelevant.
Yes I understood. But what if the tax refund is for the period when I am the tax resident e.g. 2023? That’s not what is happening but out of curiosity, I wonder what should one do
It’s fraud if you try to claim a foreign tax credit that you didn’t pay to the other country. So yes - if you claimed a FTC on your Canadian return and then had the tax refunded back to you later because it was determined that it was not taxable in the country of origin that does not necessarily mean it is tax free here. It might be depending on what they reclassified it as (maybe ROC) in which case you would amend the return to take the income and FTC out but it might not be in which case you would amend the Canadian return to take out the FTC (assuming it was actually deducted on for 2209 or 2036) and pay the resulting taxes due to the CRA.
@eatandeatfat
If you are filing a 2023 tax return in Canada, and you are required to file a 2023 tax return in another country, you should probably get them both done at the same time by the same accountant - so that everything “matches”, or is reported as required by the relevant tax treaties.
I am not experienced in foreign tax, but I can imagine it is possible to have paid taxes to a foreign country, and still get a tax refund from that country. For example, $1,000 withheld by the foreign country for paycheques you received in that country, but after filing your tax return in that country, you got $500 back. On your Canadian tax return, you would probably be able to claim the net tax payable to the foreign country ($500).
Yes you are right. You can claim foreign tax credits for anything that stays paid. It is much easier when the accountant that is filing things does both countries (common with US & Canada but not so much with other pairs of countries) and knows what they are doing so there are not amendments afterwards. I have seen amended 1099’s issued but I don’t think I have ever seen the brokerage house refund the tax paid after issuing the slips. The IRS certainly does issue refunds and it’s one of the reasons that the CRA insists on tax returns and transcripts for almost all foreign tax credit claims on Canadian returns that involve foreign slips.