# Taxes on Foreign Stock Dividends



## Saredi (Dec 18, 2010)

Howdy all!

Background info: I am a Canadian in Canada who own shares in a US company, SDVI, that is traded on the Pink Sheets. SDVI is spinning off one of their subsidiaries, Graffiti Entertainment, and so I will be receiving free dividend shares in Graffiti as a result. Graffiti will be listing on the Frankfurt exchange in Germany.

Question: I have received the dividend shares, though they are valued at 0 right now as the IPO for Graffiti will not be happening until around March 2011. When that occurrs and my Graffiti dividend shares have value (which is currently expected to be a significant amount), will this count as an immediate tax liability for 2011 regardless of whether I sell the shares, or are the taxes deferred until after I have actually sold the shares? I have heard conflicting ideas from colleagues, so thought I'd put this out there, as I've heard some horror stories of people not selling their dividend shares, being taxed a year later on the full, say, $150,000 capital gain, and by then the shares no longer have the value to cover the taxes... :S

Thanks for any advice!
Saredi


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## OptsyEagle (Nov 29, 2009)

It depends on how the company has set up the spin off for tax purposes. Most likely the receipt of these new shares will not be taxable when you receive them but only when you sell them, but what your cost base will be and everything else would be ansered by the company in its prospectus.


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## kcowan (Jul 1, 2010)

The gain will be taxable in your hands the day they are transferred. This will depend on the company valuation, not the market value. This will be payable regardless of whether you sell the shares.

What many accountants recommend is that you sell enough shares to pay the whole tax.


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## OptsyEagle (Nov 29, 2009)

kcowan said:


> The gain will be taxable in your hands the day they are transferred. This will depend on the company valuation, not the market value. This will be payable regardless of whether you sell the shares.
> 
> What many accountants recommend is that you sell enough shares to pay the whole tax.


That is not correct. Sometimes it is taxable and sometimes it is a tax deferred spin off. You may want to read the prospectus.


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## humble_pie (Jun 7, 2009)

one poster in this thread is thinking of canadian spin-offs. It is true that these are often - even usually - structured in a variety of ways so that the taxation consequences for canadian shareholders can be mitigated or absent for the present and rolled forward to the future.

US companies do not give a hoot about foreign shareholders when they spin off or otherwise reorg. Why should they. Their hands are full worrying about their US shareholders. Those are the shareholders they'll favour if any.

saredi you really have to do your homework here. Since you have already received your shares the documentation must have been published. There should be at least a detailed memorandum concerning the reorg on their website.

it's a pink sheet. Here's a link to EDGAR's search page, might be worth a try, although most pink sheets don't file on EDGAR because they're not required to. It's also unlikely the company will help you once they learn that you're a canadian taxpayer.

http://www.sec.gov/edgar/searchedgar/companysearch.html

lastly, may i say that it's likely that kcowan has pointed you in the right direction.

good luck. BTW i see this story as fitting into a fairly recent pattern of cash-heavy companies in both the US & canada that are deciding to issue special dividends of one kind or another. These can have bizarre & unwanted effects. The time to sell & avoid a killer div is before the X date, though.


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## Saredi (Dec 18, 2010)

Thanks for the quick replies! I've got a word in with the CEO to clarify whether they structured things appropriately for a Canadian shareholder to achieve tax deferred status, although I'm probably the only Canadian involved so that's doubtful.

Regarding kcowan's comment: "The gain will be taxable in your hands the day they are transferred". As these were 'free' dividend shares, would that imply that 100% of the value will be gain? (assuming IPO goes through and a price can finally be put on them) Or is the value of those free shares averaged out with the cost of buying the original parent companies shares, which inspired the dividend? Or is this really just another detail that the prospectus should contain?

Sounds like I need to read their prospectus, but as of now it has not been made publicly available for the shareholders. Thanks for all your advice; if I can't figure it out in time, I'll just sell the freebies and accept the gain. Can't go wrong with profit. 

Saredi


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## horsthief (Mar 7, 2011)

Saredi said:


> I'm probably the only Canadian involved so that's doubtful.
> Saredi


I'm involved in this transaction as well, and I do know at least two other Canadians involved in this transaction.

The other Canadian's are your boat, how with the divi of a US stock be taxed.

I'll add my own curve to this. I'm a natural Canadian citizen, and I hold the stock in a Canadian account (it is the only security I currently hold in Canada) - but I'm not currently a resident for tax purposes.

So, the only 'Canadian' thing connecting me to this transaction is itrade - how will I be taxed I wonder? Remember US stock.


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## TaxGuy (Apr 7, 2009)

If your not a resident of Canada there are no Canadian tax implications. Canada only taxes residents of Canada. Non residents are subject to withholding tax on dividends or interest from Canadian companies. 

You would be subject to US withholding tax on dividends and interest. You may also be subject to income tax in the country you live in. You should advise itrade you are not a resident to avoid tax complications. Although when you do your account may be restricted.


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## billiam (Aug 24, 2009)

You should probably familiarize yourself with this:

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/frgn-eng.html


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