I have Canadian stock in my roth and traditional ira is getting hit with a 15% tax. Can I get any of it back?

Answer 1

If you are pulling money out of your retirement in the same year you paid Canadian tax, you can possibly get a US federal credit (Form 1116)*. But, if you did not make any withdrawals from your retirement account in 2006, then say goodbye to the Canada tax forever.

I own FDG which is a Canadian trust fund. It is in my taxable account. Canada taxes my dividends at 15%. The IRS also taxes my dividends at 15%, but since they credit me with whatever I paid Canada, my total tax is 15%. PA even gives me a break on taxes I pay Canada. Having this stock in a retirement account not only causes you to pay ordinary income on all gains, but it also prohibits you from deducting the Canadian tax. If you are in the 35% bracket when you withdraw your money, you will effectively be taxed at 44.75% (65% of 85% is what you keep). I'd much rather pay 15%.

My advice is, if you have both a tax-deferred account (IRA) and a taxable account AND you own both foreign dividend paying stocks and non-dividend paying stocks, put the former in the taxable account and put the latter in the IRA. I use my IRA for short-term gain stocks and my taxable account for dividend and long-term gains stocks...and especially for foreign dividend paying stocks.

* why do I say you need to pull money out of the IRA in the same year? Because the IRS says you can only claim the foreign tax credit if you owe taxes to both the US and a foreign country for income taxable to both the US and a foreign country in the same year. Pulling money out of an IRA causes the "deferred" income to be "taxable" income. One could argue that unless you pulled out all the money from the IRA, you wouldn't know which dollars were from the dividend and which were not. So far, the IRS hasn't challenged anyone for that, and I doubt you'd be the first.

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Answer 3

Probably not. It's likely that it's subject to source-taxation since it's foreign. Not a smart addition for a tax-deferred account, IMHO.