How to report NR4 canada gross income and canada taxes paid/withheld on u.s. tax return

[rschechter]

wife who is u.s. citizen dad passed in 2022.  He was canadian citizen.  She inherited half of his tax free retirement accts (RRIF & TFSA). Between when he passed and the account were liquidated and she got her half of the distribution.  The accounts increased in value by $10k.  Bank in canada paid 25% taxes on the $10k as gross income and send us NR4 with the $10k as gross income and taxes paid of $2,500 to canada tax authority.

The $10k from my standpoint was a short term capital gain from the stock sold and because my wife is a non-resident of canada, they automatically took out 25% for taxes.   All amounts are in canadian dollars.

How do I report this in Turbo Tax/u.s. tax return?   My initial analysis says: 1. report the $10k in u.s. $ as short term capital gain on schedule D and report the foreign tax paid in U.S. $ on form 1116 for a tax credit.  Also assume form 3520 Part IV needs to be filled in if over $100k.

Have tried to find tax professional for help, but so far no luck.

Thanks

Ron

[JohnB5677]

If your wife inherited the money from her dad, the only taxable portion would be an amount that was earned after he passed until it was cased in and distributed. 

• If it was stock that was sold within the year it would be short term capital gain. 
• If there was a capital gain that was taxable you could use the Canadian tax to offset that amount
• All funds must be converted to US$

The Canadian issue is a different story.  You would have to file a Canadian tax return.

File your simple Canadian tax return for free with no hidden fees. 

Follow a simple step-by-step process to fill out your return and our software does the math for you and stores your information to use on next year's return.

Free Canadian Tax Software | TurboTax® Canada 2022-2023

[rschechter]

thanks for the feedback.    I assume that on put the short term capital gain (increase in stock value from death date till distribution) as a short term capital gain on schedule d and use form 1116 to enter the taxes paid to canadian tax authority?   In addition, form 3520, if the amount distributed in 2022 is over $100k?

thanks

Ron

[ThomasM125]

Yes, you are correct. The gain would be short term if you held it for less that one year. TurboTax will categorize it properly based on the dates you enter for date acquired and date sold.

Form 1116 will be generated by TurboTax when you enter the foreign income and foreign taxes paid.

You will need the form 3520 since the distribution came from a trust.

[Billy213]

I am in the identical situation as you described.   My Mom passed away end of 2023 but I was given an NR4 for the income generated until early 2024.  May I ask how you filed in the USA using TurboTax?  I have seen posts that say the income is Retirement Income and others that say make up a 1099.

The code for my NR4 is 06.  Appreciate anything you can share.  

[AmyC]

NR4 code 06 is death benefit from a pension plan. The income should be entered on the same type of tax form the US would use. The US equivalent is a  1099-R with box 7 code 4 for death benefit.

Reference for code: Filling out the NR4 slip

That being said, entering the income on your return as other income with the description is an acceptable alternative and easier to accomplish. Follow these steps to enter the income:

1. go to the federal income section
2. scroll to the bottom
3. Miscellaneous Income, 1099-A, 1099-C, Start
4. Scroll to the bottom
5. Other reportable income, Start
6. Other taxable income?
7. Select YES
8. Description  death benefit Canadian pension NR4 code 6
9. Amount, enter your amount 
10. Continue

[Billy213]

Thanks very much.  I followed your advice and simply used the Misc. Income section to report the NR4 Code 06 income. 

Not to be greedy with my questions, but can you tell me how to claim the foreign tax credit for the tax I will pay in Canada?  

The foreign tax credit section of my return TurboTax walks me through getting a credit for foreign taxes reported on my 1099-DIV but I don't see where to add foreign taxes paid in Canada.

(For interest to some readers:  I have filed a Canadian Non Resident income tax form and am waiting for the results.  What I learned was that non-residents of Canada do not get deductions so that we pay 15% income tax from dollar 1 up until $55k, I think.  Since I was below this threshold, I expect to pay 15% income tax in Canada and get a refund because 25% was withheld.  I will wait for a few weeks to confirm my calculations before filing in the US to avoid needing to do an amendment in the US)

[DaveF1006]

Yes, here is how to claim your foreign tax credit.

1. Go to Federal
2. Deductions and credits 
3. Estimate and other taxes paid 
4. Foreign Tax Credit>start or revisit
5. When it asks We just need to check if you have any uncommon situations indicate I paid foreign taxes on income I earned while working in another country. 
6. At some point in the interview, it will ask if you wish to take a deduction or a credit. If you are able to itemize deductions, you may consider taking the deduction.
7. There will be questions in the next screen asking you the description of the Foreign Taxes paid and the amount.
8. If you find that this has no effect on your tax return, you may circle-back and choose you wish to take a credit.
9. Navigate and record the entries that the program asks for and when you reach the page that mentions Foreign Tax Credit Worksheet, this is where you take notice.
10. The first that you will be asked is what category of income is it, you will say Passive income.
11. Next screen will say Country Summary, select add a country 
12. When it says Other Gross Income - XXXX, Here you put in the Gross Amount you earned in that country. 
13. Then you will navigate through the screens until you come to a screen that says Foreign Taxes Paid - XXXX, here is where you record the amount paid under Foreign Taxes.
14. Finish out the section

@Billy213