Hemisphere and CVE dividend classification question

[cmm3rd]

Fidelity classified my HMENF and CVE dividends paid on 6/30/22 as "non-qualified" dividends. I believe that means Fidelity will report them as not eligible to receive the favorable US tax treatment accorded "qualified" dividends (i.e., not taxed at capital gains rates, rather, taxed as ordinary income).

Fidelity's discussion of "qualified" dividends is here: https://www.fidelity.com/tax-informatio ... -dividends. Note the discussion says that qualified dividends can include those paid by "certain qualified foreign corporations ...."

HMENF's 6/7/22 press release, https://www.hemisphereenergy.ca/news/tu ... wed-credit, says "the dividend is designated as an "eligible dividend for income tax purposes." While I cannot find anything that says whether a Canadian company's "eligible dividend" is necessarily a "qualified" dividend for US income tax purposes, I did find this discussion of Canadian tax treatment of "eligible" and "non-eligible" dividends in that country. https://help.truenorthaccounting.com/en ... -dividends.

For those who trade using platforms other than Fidelity and are holding HMENF or CVE, how are those dividends being classified?

Are HMENF and CVE "qualified foreign corporations" for purposes of US tax treatment of their dividends? If not, could that change? Is it just a matter of whether/how the companies report such status to US brokerage firms (if they must report such to each firm), or do they not qualify for some reason that will not change?

If they are "qualified foreign corporations" under US tax law, what needs to be done to so inform US brokerage firms and change the dividend classifications?

Thanks.

[dan_s]

Not sure this answers your question, but I think brokerage firms like Fidelity, ETrade, etc. are required to withhold 15% Canadian income tax when Canadian companies pay dividends to U.S. citizen. Just remember that you can get them back as a foreign tax credit.

I did send your post to Don Simmons.

[cmm3rd]

Yes, Fidelity withholds an amount on dividends paid on foreign stocks that are held in a taxable account, but normally not on those held in a tax deferred account (such as an IRA). The amount withheld is intended, I believe, to be the tax imposed by the foreign government on the dividend.

The US taxpayer is still required to report the dividend payment (when in a taxable account) on his US return, however, and thus to pay income tax on the dividend to the US in an amount that is determined by whether the dividend is "qualified" or "non-qualified". So, whether the dividend is qualified or non-qualified is still a relevant issue, independent of the fact that the taxpayer may recover, via a tax credit, the amount that was originally withheld at the time the dividend was paid.

So, yes, taxpayers should claim a foreign tax credit for the amount of the foreign tax paid, assuming the amount in question qualifies. https://www.irs.gov/individuals/interna ... tax-credit

Thanks for forwarding the question to Don Simmons. Hopefully the answer is that HMENF's dividends should be "qualified," or if not, Don can explain why. I would expect there are a substantial number of US citizens holding HMENF shares so that it would be worthwhile to have this clarified.

[Orindakid]

Here is how Charles Schwab classified this in a non IRA personal account. Qualified and foreign tax.

06/30/2022
Foreign Tax Paid
HMENF
HEMISPHERE ENERGY CO F
-$1.25
06/30/2022
Qualified Dividend
HMENF
HEMISPHERE ENERGY CO F
$8.35

They did withhold the tax of 15%

[dan_s]

Based on the limited research below, Hemisphere's dividends should be "Qualified Dividends".
--------------------
Qualified dividends, as defined by the United States Internal Revenue Code, are ordinary dividends that meet specific criteria to be taxed at the lower long-term capital gains tax rate rather than at higher tax rate for an individual's ordinary income. The rates on qualified dividends range from 0 to 23.8%.

What are qualified dividends and nonqualified dividends?
A dividend is a share of a company’s profits that is distributed to shareholders. For tax purposes, there are two kinds of dividends: qualified and nonqualified (sometimes called "ordinary").

Qualified dividends come with the tax advantage of a lower tax rate. Three things usually determine whether a dividend is qualified:

1. It is paid by a U.S. corporation or qualifying foreign entity. For many investors — be they in stocks, mutual funds or ETFs — this one’s easy to satisfy.

2. It is actually a dividend in the eyes of the IRS. Some things don’t count as dividends, despite what they might be called, including:

Premiums an insurance company kicks back.

Annual distributions credit unions make to members.

“Dividends” from co-ops or tax-exempt organizations.

Also, dividends aren’t the same as capital gains.

3. You held the underlying security for long enough. The definition of "enough" gets a little tricky, but typically, if you owned the security for more than 60 days during the 121-day period that began 60 days before the ex-dividend date — that is, the day by when you must own the stock to receive the dividend — the dividend is usually qualified. (Preferred stock has special rules, by the way.)

Here's an example. If your Ford shares paid a dividend on Sept. 1 and the ex-dividend date was July 20, you would need to have owned your shares for at least 61 days between May 21 and Sept. 19. And when you count the days, include the day you sold the shares but not the day you bought them.

If you don’t hold the shares long enough, the IRS might deem them nonqualified, and you’ll pay tax at the higher, nonqualified rate. Again, remember that there are many exceptions and unusual scenarios with special rules — see IRS Publication 550 for the details.