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Check Your Withholding Tax

January 7th, 2008 · 22 Comments

Often, it doesn’t pay to procrastinate. I wrote about how I was in the process of moving our investment accounts out of Questrade and though I had filled out the transfer forms, I’ve been neglecting to mail the forms to TD Waterhouse. Sure enough, at the end of the year, some of my ETF holdings paid dividends and I find out yet another issue with Questrade.

If you hold a stock that trades in a US exchange in a taxable account and the stock pays you a dividend, a withholding tax is automatically charged to your account. Under a bilateral treaty, the withholding tax for Canadian residents is 15%. If you are not classified as a Canadian resident, the default withholding tax of 30% is charged. Fortunately, you can receive a credit for the 15% tax paid to the IRS when you file your taxes with the CRA but the 30% rate will result in some double taxation. Note that the withholding tax does not apply to RRSPs. You can find a detailed discussion on the withholding tax on Bylo’s website.

Though I had submitted a driver’s license along with my application and Questrade says that it’s policy is to classify clients as Canadian residents when a government-issued photo ID is supplied, our account “slipped through the net” and was set up as a non-resident account. As a result, when some of our ETF holdings made a distribution, 30% of the dividends were withheld. I contacted customer service and as is my usual experience, received little help beyond being told that it was my responsibility to submit a W8BEN form and since I didn’t, there was nothing they could do.

So, once again I contacted Emil Vojkollari, Chief Acquisitions Supervisor at Questrade to sort things out and as things stand now, I’ll be classified as a Canadian resident for future dividend payments and I’ll be issued a NR4, which I should file along with a NR7 to claim back the extra withholding tax. I could have avoided this headache if I had paid more attention to a dividend payment in September when a tax of $9.63 was withheld on a dividend payment of $32.10. I missed it because somehow we don’t tend to pay attention to small amounts.

If you have an account with Questrade and you hold US stocks in an investment account, you may want to check that 15% of dividend payments are being withheld. If not, contact Questrade and ensure that the correct withholding rate will be applied to future dividend payments. Check if a NR4 will be issued to you. As for me, I’ve finally had enough: my transfer papers are in the mail.

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Tags: Discount Brokers · Investing

22 responses so far ↓

  • 1 Leslie S // Jan 8, 2008 at 9:10 am

    I believe you’ll have to fill out the W8BEN if you move to TDW as well–any broker, in fact. All brokers I believe, are required to deduct & submit the withholding tax for dividends for US based securities held: confirm with your broker. Note this also applies to Canadian companies like Tim Horton’s that are registered in the US, and some mutual funds. Again, confirm with the broker–hopefully you’ll get someone who’s in the know at the call centre.

  • 2 Canadian Capitalist // Jan 8, 2008 at 9:40 am

    Leslie: I don’t recall filling out a W8BEN for TDW but they did require a copy of my driver’s license when opening an account. I vaguely remember E*Trade wanting a W8BEN form and sending constant reminders to send one.

    A Questrade account specialist told me that a W8BEN is not necessary (but recommended) for classifying a client as a Canadian resident and a government-issued id would be enough. I guess its best to submit a W8BEN anyway.

  • 3 Financial Jungle // Jan 8, 2008 at 1:40 pm

    The big banks normally fill in the W8BEN on your behalf. This was what happened with Royal Bank ActionDirect when I signed up with them a few years back.

    After reading this post, I immediately went to verify my Questrade statements, all US dividends were deducted by 15%. Even Vanguard European Pacific.

    I don’t remember filing W8BEN for Questrade though.

  • 4 Canadian Capitalist // Jan 8, 2008 at 2:13 pm

    FJ: Good to know that you were correctly classified as a Canadian resident. I guess it’s just my run of bad luck with Questrade.

  • 5 pessimist // Jan 9, 2008 at 9:41 am

    I’m confused. If I, as a Canadian, buy shares through Questrade in a vanguard ETF say – do I have to file a tax return in the US?! Tell me this is not true. Thanks.

  • 6 Canadian Capitalist // Jan 9, 2008 at 10:19 am

    pessimist: No, you don’t have to file a tax return in the US. But if you hold say VTF in a taxable account, a withholding tax of 15% is charged. You get a credit for the withholding tax when filing a Canadian tax return.

  • 7 pessimist // Jan 9, 2008 at 12:43 pm

    Thanks a lot CC. That is reassuring.

  • 8 Middle Class Millionaire // Jan 9, 2008 at 7:38 pm

    CC,

    I don’t think your experience at Questrade is unique. I’ve also had many bad experiences and have closed my account as a result. If you’re interested here were my reasons:

    http://middleclassmillionaire.blogspot.com/2007/11/questrade-recently-closed-my-account.html

  • 9 Canadian Capitalist // Jan 9, 2008 at 9:41 pm

    MCM,

    I did check out your post on Questrade (I’ve subscribed to your feed). Nothing gets resolved with them unless you have Emil on speed dial. I won’t be with them long – my transfer application is in the mail.

  • 10 tax return // Jan 10, 2008 at 1:25 am

    In the United States Tax Returns are filed with the Internal Revenue Services or with the state or local tax collection agency containing information used to calculate income tax or other taxes. Tax returns are generally prepared using forms prescribed by the IRS or other applicable taxing authority.

  • 11 Tax Implications of Foreign Dividend Investing // May 13, 2008 at 7:15 am

    [...] account, you will be subject to a 15% withholding tax on dividends (for Canadian residents; Check with your broker that you are correctly classified.). You will be paying your marginal tax rate on dividend income because it does not qualify for [...]

  • 12 marta paz // Nov 21, 2008 at 12:42 pm

    How can a foreing customer could claim the backwithholding
    interest amount hold thru this year, he just signed his w8ben .
    and he wants his interest withholding back . as far I know we the banks send in to irs every month.

  • 13 KS // Jan 31, 2009 at 2:38 pm

    Hi,

    Unfortunatley, I moved all my five accounts with Questrade last summer. I regret it so much as it has been a nightmare. I am not going to see naything else about Questrade as there is enough said about them on this and other website.

    I am not sure how can I transfer to another financial institution with the least cost. I think Questrade charges $125 per account so that will be $625 for me. Any idea on how to avoid or reduce this. As well, I am holding several ETF’s in each account. Do I need to sell all of them with Questrade and then then buy each one of them in the other financial institution?
    As well, if anyone transferred accounts from Questrade, please let me know what else to watch for.
    thank you very much for your advise and insights.

  • 14 terry tanton // Feb 22, 2009 at 3:15 pm

    KS, sometimes some companies will swallow their competitors fees in order to get your business. Tradefreedom did this. The big banks are less likely to, and Tradefreedom may not now that it is owned by Scotia Bank. But it never hurts to ask. It might be worth it for them if you have large accounts.

    Good luck

  • 15 terry tanton // Feb 22, 2009 at 3:19 pm

    BTW, I have sent in a W8BEN form for every account I opened, and it has been specifically recommended that I do so at every brokerage except questrade. I found the form and sent it in anyways figuring I would rather be safe than sorry.

  • 16 Andrea // Feb 25, 2010 at 1:28 am

    Nick,
    I am also having problems with the CCA and rental income using net file. It seems like there is a problem with the input for “to whom the CCA should be allocated”. In the help, it indicates that yourself alone is one of the options, but in the pull downs for the tab, its not an option. The only options are business level, partner level, or use of home for business purposes.
    I’d love to hear if anyone who has a sole owned rental property has been able to successfully claim CCA deduction using u-file.
    I’m definitely showing a positive rental income in my results so there should be room to claim some CCA.

  • 17 Tony // Apr 10, 2010 at 2:12 am

    I had EXACTLY the same issue! Talk to 2 of their reps in the chatting room, got 2 different stories, the 2nd rep told me that is just way it is, and if you don’t believe it, contact CRA to verify. I did call CRA, and I was confirmed that I should not be taxed within RRSP account what so ever. I wouldn’t even bother getting my money back, will switch to Virtual Brokers, they provide cheaper commissions (6.45), free Level II screen, most importantly, more knowledgable staffs (met a few at Money Show in Vancouver)

  • 18 Tony // Apr 10, 2010 at 2:27 am

    Another thing about Questrade, I think they have trouble with their business, right now they are so desperately trying to push their customers to crank up trading volume. They send emails to their customers encourage them to participate a course provided by Online Trading Academy which is affiliated to Questrade and promise that they will reimburse tuition. I went to one of their seminars, and found out how Questrade reimburse is actually by giving you a 10% discount on commission of each trade, basically 1 dollar each trade. I did some simple calculations, to get that 5K tuition back, I will have to make 5 thousand trades, and spend 45K on commission. No, thanks.

  • 19 Rod // Dec 31, 2010 at 5:05 pm

    I’m a Canadian and recently sold my US stock through a US broker. When the cheque and the transaction detail, there are 28% of the proceed has been withheld (TAX WITHHELD). Is there anything this withheld tax can be claimed back? and/or, is there any credit can be claimed when filing the personal tax return and how if yes?
    Thank you.

  • 20 Jerry // May 18, 2012 at 10:08 am

    I bought LVMUY on the OTC/pink market through TDW and they seem to take a 30% NRT and about a 10% fee. Anyone have any idea what this is – and why the NRT is not 15% like on my US stocks? Thanks.

  • 21 Mark // Feb 18, 2013 at 1:46 am

    I am a non-resident Canadian and thus, do not fill out tax returns since I live abroad. Am I taxed on capital gains as long as I am a non-resident?

  • 22 John // Apr 1, 2013 at 11:07 pm

    Nick, did you ever figure out the problem? I’m having the same problem three years later!

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