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I am a US citizen and resident. I own 1/3 of the shares of a private Canadian corporation in the manufacturing business. I have agreed to sell-out by having the company redeem my shares. They tell me that this will result in 15% Canadian tax. Is that right? I thought that capital gains that Americans earn on shares of Canadian corporations are generally exempt from Canadian tax. My CPA here says that I cannot get any credit for this tax in the US.

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Tax Professional Answers

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Michael Atlas, CPA, CA
If the shares you own are common shares, it is actually a “purchase for cancellation”, rather than a redemption, since common shares would not normally be redeemable. However, the tax results are the same in either case: under subsection 84(3) of our Income Tax Act, any amount paid by the company in excess of the “paid-up capital” (“PUC”) of the shares is a deemed to be a dividend-not a capital gain. Normally, the PUC of shares in a private corporation is only nominal. Hence virtually all of the amount you will receive will be a dividend that is subject to non-resident withholding tax at a rate of 15% under Article X(2)(b) of the Canada-US Tax Convention (“Treaty”). In this connection, it is significant to note that under Article X(3), as long as the amount is treated as a dividend under Canadian tax law, it is treated as a dividend for the purposes of the Treaty. You should be able to claim a foreign tax credit in the US for the 15% Canadian tax, even if the gain is not foreign sourced under the Internal Revenue Code. You do that by electing to claim foreign tax credits based on the sourcing rules found in Article XXIV(3) of the Treaty,
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