When TRP withholds 15% of dividends, do you get that back on your income tax. Also, are dividends considered a return of capital as you get with US pipeline companies? Any help is appreciated. thanks in advance.
You can claim a foreign tax credit for the foreign taxes paid on income also taxed in the US. The credit can't exceed the US tax paid on the foreign income. Form 1116 calculates the allowable credit.
If your foreign taxes paid are not more than $300 ($600 for married filing joint) you don't have to mess with the Form 1116. Just claim the credit for taxes paid.
A new quirk this year... If the foreign dividends are eligible for the 15% maximum rate under the new law, then only 42.86% is considered foreign income. (That supposedly compensates for the 15% maximum dividend tax rate vs. 35% normal maximum rate. 15/35=.4286)
The dividends are normally not return of capital. Even disributions from the U.S. companies are not normally return of capital except for those that are structured as publicly traded partnerships instead of corporations. (For example Kinder Morgan Energy Partners, L.P. is a PTP.) Partnerships have a different set of rules where the company's income is taxed directly in the owners' returns. They issue a schedule K-1 to the partners to tell them their share of the company's income to report in their returns. Any distributions paid from partnerships are considered return of capital because the income is already being taxed to the partners, regardless of whether it is distributed.
While distributions from corporations are generally fully taxable as dividends, there is an exception for corporations that pay out dividends in excess of their accumulated earnings & profits (a tax term similar to retained earnings.) Those excess distributions can be return of capital. You will sometimes see those in companies that are heavy in capital equipment such as pipelines and utilities.
Foreign companies' distributions to U.S. shareholders follow those same rules. Distributions are treated as taxable dividends unless they exceed the companies' accumulated E&P or the company is organized as a partnership instead of a corporation.
Possibly more than you wanted to know, but I hope it helps.
I am a Canadian who buys US stocks. When Pfizer (for example) pays its dividend they withhold 13% tax. This tax goes to the US government and I have no way to get it back from the US Government. HOWEVER, because the Government of Canada has negotiated a Tax Treaty with the US Government, the Canadian Government credits me (at tax time) for the tax that was withheld. In effect, they give me back the withheld tax by reducing my taxes by the same amount. I assume it works similarly for Americans investing in Canada.
WinWare, thanks for your reply. I have since found out that you are right. Do you, or anyone else, have any thoughts on equal weight income trusts such as Brompton and Barclay. It seems to spread the risk around and limits the exposure to oil and gas. Any insight is appreciated. Frank
Would you please explain what you mean by, "When TRP withholds 15% of dividends, do you get that back on your income tax?" I guess I don't know about TRP withholding 15% of dividends. What's that about?
Also, I suspect you're not going to get an answer to your question here because not very many people are posting here. Expalin what you mean by the above, and I'll (or you can do it) pose a more general question on an appropriate Google group. There are stock investing groups and accounting groups over there where you can probably get an answer.
I did ask my accountant about the tax issue on a Canadian company's dividends and he said there is a form one fills out stating they paid taxes. Unfortunately he had clients in his office so I didn't get a chance to pursue the question in depth. Anyway, let's try Google.
When my TRP dividend was posted on 2/2/04 to my account there was a deduction and beside it was "TRANSCANADA CORPORATION 15.0000% FOREIGN TAX" I think you are right. I'll have better luck on alt.tax. Thanks for your reply....Frank