Hemisphere's Dividends are "Qualified" for US tax purposes

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dan_s
Posts: 34463
Joined: Fri Apr 23, 2010 8:22 am

Hemisphere's Dividends are "Qualified" for US tax purposes

Post by dan_s »

Here is the response from Hemisphere's CFO
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We have talked with our US legal, Dorsey, and they have confirmed that, since Hemisphere Energy is listed on the TSX-V and the dividends paid do not exceed Hemisphere’s earnings and profits, Hemisphere should be a “qualified foreign corporation” for U.S. federal income tax purposes and, subject to the applicable shareholder level holding period requirements, the dividends paid by Hemisphere to its shareholders should be considered “qualified dividends” for U.S. federal income tax purposes.

We will also be putting information on our website to state the dividend tax classification for US shareholders.

Regarding Fidelity, they seem to default to non-eligible for smaller companies.

FYI, see below the US Qualified dividend requirements.

Qualified Dividends Requirements for Non-US Corporations

“Qualified dividends” are subject to US federal income tax to US shareholders at the lower long-term capital gains rates. Please see below a list of the primary qualified dividend requirements that would apply for a distribution by a Canadian public corporation to a shareholder.

Qualified Dividend. To the extent a non-U.S. corporation has sufficient earnings and profits (“E&P”), a qualified dividend to a non-corporate U.S. shareholder may eligible for lower long-term capital gains tax rates for U.S. federal income tax purposes. Under this provision, a “qualified dividend” includes any dividend during the taxable year received from a “qualified foreign corporation,” subject to certain exceptions. Qualified dividends will not include (i) dividends from certain tax exempt entities; (ii) amounts allowed as a deduction for dividends paid on deposits under Code Section 591; or (iii) amounts allowed as deductions paid on certain employer securities under Code Section 404(k).

Qualified Foreign Corporation. A “qualified foreign corporation” includes a non-U.S. corporation that is eligible for benefits under an income tax treaty with the United States to the satisfaction of the Treasury Secretary, which includes an exchange of information program. For these purposes, the Canada-United States Tax Convention (the “Treaty”) qualifies under this provision. Under the Treaty, a company whose principal class of shares or units is primarily and regularly traded on one or more recognized stock exchanges will qualify for benefits under the Treaty. Notwithstanding, special exclusions may apply if such non-U.S. corporation were a passive foreign investment company or a surrogate foreign corporation under the U.S. inversion rules.

Holding Period. In conjunction, shareholders will only be eligible to received qualified dividend treatment if they have held the shares for the prescribed holding period. Under Code Section 1(h)(11)(B)(iii) in coordination with Code Section 246(c), to be eligible a shareholder must hold a share of stock for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. For these purposes, an “ex-dividend date” is the day the stock trades without a right to declare a dividend. In addition, under the same provision, qualified dividend treatment will not apply to the extent that a taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.

Calculating E&P. Assuming the shareholder meets the above holding requirements and is not subject to an exception, the dividend will receive capital gains treatment as a qualified dividend to the extent the corporation has sufficient E&P under Code Section 301(c)(1). Under Code Section 316, a dividend will be first be made to the extent of the corporation’s current E&P as ratably allocated to all distributions during the current year, followed by the corporation’s accumulated E&P at the specific time of distribution. Under the applicable dividends test, even if the corporation has a deficit with respect to its accumulated E&P, the dividend will still receive qualified dividend treatment to the extent of the current E&P in the year of distribution. In addition, in making such calculations with respect to a dividend of property as opposed to cash, the E&P will also include any gain recognized by the corporation on the distribution of the property, less any respective taxes paid on such gain.

Capital Gains Rate. To the extent there is sufficient E&P, the qualified dividend will receive capital gains treatment. Currently, the statutory tax rate for adjusted net capital gains, including qualified dividend income, for single filers is 0% up to US$40,400, 15% between US$40,401 to US$445,850, and 20% thereafter. In addition, Code Section 1411 imposes a 3.8% Medicare surtax for individuals on the lesser of: (i) the individual’s “net investment income” for such taxable year, or (ii) the excess (if any) of the individual’s modified adjusted gross income for such taxable year over the statutory threshold amount. For purposes of Code Section 1411, the current statutory threshold for an individual taxpayer is US$200,000. Accordingly, the maximum capital gains rate that could be imposed on the qualified dividend is 23.8% in the aggregate.

Distribution Waterfall. Finally, to the extent there is not sufficient E&P, any amount if excess of the corporation’s E&P will be treated by the shareholder as a return of capital to the extent of the shareholder’s tax basis in their stock under Code Section 301(c)(2). If a portion of the distribution is in excess of both E&P as well as the shareholder’s tax basis in their stock, then such portion of the distribution is taxed as gain from the sale or exchange of the underlying stock under Code Section 301(c)(3), which generally results in capital gain treatment.

Regards,
Dorlyn Evancic
Chief Financial Officer
Hemisphere Energy

PS: Hemisphere will release Q2 results on August 18 < Q2 2022 results will be a RECORD QUARTER for Hemisphere by a wide margin.
Dan Steffens
Energy Prospectus Group
grimaldi
Posts: 79
Joined: Sat Apr 20, 2013 8:27 pm

Re: Hemisphere's Dividends are "Qualified" for US tax purpos

Post by grimaldi »

Thanks, but I have been beaten down over the years in my efforts to argue with brokerage house accountants--- If the 1099 calls it 'qualified', 'ROC' or 'charitable donation', that's what goes on my return.
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