I am a dual national (Canadian/US citizen) resident in Canada. I own shares in a U.S. domiciled ETF, which is held in a Canadian brokerage account. No tax has been withheld from the ETF distributions because I am a US citizen.
I have some questions about how to report this income on my tax returns:
1) To which country should I pay tax on this income and for which country should I claim a foreign tax credit on the tax paid to the other country?
Option 1: Pay tax on the distributions through my U.S. tax return, then claim a foreign tax credit on my Canadian tax return.
Option 2: Pay the tax through my Canadian tax return and claim a foreign tax credit on my U.S. tax return?
It seems Option 1 is the correct way because it appears that with Option 2 I will not be able to claim a foreign tax credit on my U.S. tax return for U.S. sourced income. But I'm not sure about this.
2) Looking at form 1116 - Foreign Tax Credit - from the IRS, it seems like there might be a way to make Option 2 work, by classifying the income as "Certain income re-sourced by treaty" (box f). Then it appears that income from the U.S. ETF becomes "re-sourced" as Canadian sourced income, enabling me to claim a foreign tax credit on my U.S. return. But I'm not sure if this is allowed.
3) I have the same questions as above about capital gains income when I sell the ETF shares.
Any help would be appreciated.