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moneysense.ca, 13/05/08
Tax Implications of Foreign Dividend Investing
If you invest in US-listed stocks or foreign stocks that trade on U.S. exchanges as American Depository Receipts (ADRs), you need to be aware of some tax implications:
- If you hold American stocks in your investment 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 favourable treatment available to dividends from your Canadian stock holdings. You do get a credit for the withholding tax when filing your Canadian taxes.
- American stocks held in your RRSP account are not subject to a US withholding tax on dividends. Since the account is tax-deferred, no Canadian taxes are owed either. That’s why U.S. dividend stocks are best held in RRSP accounts.
- When ADRs (foreign stocks that trade on U.S. exchanges) that pay a dividend are held in a taxable account, a withholding tax is levied that depends on the tax treaty that Canada has with the country where the stocks is domiciled. For example, Nokia (NOK), which is domiciled in Finland, attracted a 28% withholding tax (if I recall correctly) on its dividends.
- For ADRs held in RRSP accounts, the situation is murky as the withholding tax depends on the tax treaty with Canada. Since Canada’s tax treaty with Finland does not distinguish between dividends paid to taxable and RRSP accounts, the same withholding tax of 28% is levied even when Nokia (NOK) is held in a RRSP account.
Thanks to Million Dollar Journey’s comment for this post idea. You can find a lot of discussion on the Financial Web Ring Forum on the thoroughly confusing subject of withholding taxes.
moneysense.ca, 13/05/08
Thanks for the link CC, glad my confusion could help!
On the Finance Dept.’s website is a list of tax treaties in force:
http://www.fin.gc.ca/treaties/in_force-e.html
FT: We aren’t the only confused ones. This entire withholding tax is one big mess.
Jon: From your link, it looks like the Finnish withholding tax should be 15% as well. Thanks for the link and I’ll correct the post.
I had an odd (I think) thing happen in that I paid foreign tax for a dividend paid by BCE which I hold in my 401k account. Even ignoring the fact that I’m Canadian, doesn’t the tax treaty indicate that I should not be paying taxes on dividends paid by a foreign company in a registered account?
telly: That sounds strange but I wonder if it is due to the fact that the 401k, which is considered domiciled in the U.S. has a beneficiary who is a Canadian resident.
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Banks in the US are getting beat, would this be a good time to buy them.
Example
Bank of America | BAC-N is trading at ~$18.83 and pays a yearly dividen of 2.56 (~13% yield). Is this correct, seems like this is a good dividend investment even for a foreign stock?
[...] But if you hold these stocks in your RRSP, they are not subject to the same rules. See this post. [...]
Do you happen to know if the tax rules are the same for the TFSA, at least in terms of US dividends? If so it would seem that interest should be in your RRSP, US dividends should be in your TFSA, and Canadian Dividends and Capital Gains should be used as taxable investments.
Its’ a good a plan as any, I suppose.
Traciatim: I believe US dividends from stocks held within a TFSA would be subject to withholding taxes. The reason RRSPs are exempt due to specific provisions in our tax treaty with US:
http://www.bylo.org/fp13oct00rk.html
I live in Canada. If I purchase a ETF (listed on a foreign exchange such as Xetra) domiciled in Luxembourg whose components soley comprise of companies from the United States and the ETF fact sheet indicates that its dividend yield is 1.99% and under ‘Income Treatment’ it indicates “reinvestment” what are the tax implications for the following (assuming the ETF is kept in a non-registered account):
1) How will the dividend be taxed? (According to the fact sheet it mentioned income is reinvested)
2) Will capital gains be treated the same as ETFs domiciled in Canada? (i.e. 50% of the capital gains taxed at your marginal rate)
Thank you
First of all, I don’t think US and Canadian residents are permitted to buy most Luxembourg and Ireland (offshore) domiciled ETFs. You need to read the fund prospectus and check with your broker. Assuming you can buy such ETFs, note that US dividends paid to a Luxembourg-domiciled ETF are probably taxed at 30%, and you would not be able to claim back this tax. You would pay Canadian tax on dividends paid by the ETF, if any, and capital gains tax when you sell the ETF. You would be better off buying a US-domiciled ETF which holds US stocks. In this case, the US withholding tax would be 15% and you should be able to deduct this from your Canadian tax. When investing in US-domiciled ETFs and US companies, be aware that you may be liable for US estate tax.
[...] the TFSA account situation changes. I am including a link to Canadian Capitalist who summarized the tax implication on dividends from foreign corporation. 3. Understanding your different investment options I have not really covered all the types of [...]
I am an investor in a private company in the US. It will be doing an IPO in the new year (if its not acquired by a larger company first) and I will eventually sell some of my stock or all of it. When I do this am I subject to pay tax on the appreciation (capital gain) in the US and in Canada? Or is there another tax treatment this would receive? It is all common stock.
Hi EVERYONE
Please help I am confused.
Would somebody please tell me, how does taxation work for Diversified Monthly Income Fund such as XTR?
It can have capital gains, interest, dividends from Canadian and foreign bonds shares and reits. 10 different ETFs in one ETF. How do I know what money came from dividends and what from interest and what is Canadian part of my income ? If I sell it how much of capital gain/loss do I have from foreign vs Canadian securities? How do I deal with CRA at the end of the year?
@David: The T-slips issued to you should have the distributions classified correctly. Capital gains or losses work exactly as it does for other securities. Any Return of Capital is used to reduce the ACB. There is no distinction between Canadian securities or foreign securities for capital gains/loss calculations.