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moneysense.ca, 13/05/08
Tax Implications of Foreign Dividend Investing
Current issue:
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