Basically, given that for the lawsuit proceeds the other party is receiving a townhouse, it is the equivalent of a real estate transaction. The cost of the legal proceedings can be deducted as sales expense, given that part of your proceeds are reimbursement for your legal expense.
The transaction is reportable on both your U.S. and Canadian tax returns.
To prevent double taxation of foreign income in the U.S., two remedies are available to you; the foreign tax credit or the foreign tax deduction if you itemize deductions.
You claim the foreign tax credit with Form 1116; you will receive credit for the amount of U.S. tax that the foreign income generated, not the foreign income tax actually paid. For more details on how the credit is calculated and for help deciding which choice is best for your tax situation, please see Foreign Tax Credit – Choosing to take credit or deduction.
I hope the above is helpful. Congratulations on finally settling this matter!
