What is the dividend withholding tax in the US Canada treaty?
Under the Treaty, a 15% withholding tax generally applies to U.S. dividends you receive from U.S. corporations. Certain types of corporate actions (i.e., takeovers, mergers, spin-offs, etc.) involving shares in the U.S. and other foreign corporations may be considered to be non-taxable for Canadian tax purposes.
What do you pay? The U.S. withholding tax rate charged to foreign investors on U.S. dividends is 30%, but this amount is generally reduced to 15% for taxable Canadian investors by a tax treaty between the U.S. and Canada. 1 Source: MSCI, BlackRock, as of August 31, 2023.
An important point is that Canadian mutual funds and exchange-traded funds (ETFs) that own U.S. stocks are considered Canadian residents and are subject to 15% withholding tax. If you own these in your RRSP, they will not qualify for the 0% withholding tax rate.
U.S.: 30% (for nonresidents)
US-Canada estate tax treaty
The US-Canada Income Tax Treaty contains relief provisions relating to US estate tax. First, the treaty allows a Canadian resident to claim a proportionate share of the US “unified credit,” which is based on the ratio of US-situs assets to worldwide assets.
Persons who are a non-resident of the US are subject to a maximum withholding tax rate of 30% on the income derives from US sources. Once the required form is completed by the fund, a less withholding tax rate may apply. In accordance with the DTA table, the withholding tax rate would be 15% in this case.
U.S. stock dividends paid into an RRSP, registered retirement income fund (RRIF) or a similar registered retirement account are generally free from withholding tax for Canadian residents who have completed W-8BEN forms.
As a Canadian resident, you are required to report the gross foreign dividend (before withholding tax) on your Canadian income tax return and pay tax at your marginal tax rate. Canadian tax rules allow you to claim a foreign tax credit for foreign withholding tax paid to alleviate double taxation.
Are dividends included in taxable income in Canada? When a shareholder receives a dividend, they must include it in their tax return. Dividends are federal and provincial taxes. The tax component of qualified dividends is taxed at 15.0198 percent, while the tax portion of non-eligible dividends is taxed at 9.031%.
U.S. stocks held in a TFSA are subject to 15% withholding tax on U.S. dividend income. Withholding tax would apply to other foreign stocks held in a TFSA, with rates starting at 15%, depending on the country. Only Canadian stocks are not subject to withholding tax on their dividends inside a TFSA.
How do I report US dividends in Canada?
If you received foreign interest or dividend income, report it in Canadian dollars. Use the Bank of Canada exchange rate in effect on the day that you received the income. If you received the income at different times during the year, use the average annual rate.
Double taxation refers to income tax being paid twice on the same source of income. This can occur when income is taxed at both the corporate level and the personal level, as in the case of stock dividends. Double taxation also refers to the same income being taxed by two different countries.
Several strategies could lend a weapon to your arsenal against high taxes on foreign dividends. These include investing in countries with U.S. tax treaties that may offer relief from double taxation or holding foreign stocks in tax-advantaged accounts.
Canada's Tax Treaties. Tax treaties between two countries seek to avoid double taxation that may otherwise occur when a resident of one country (the “residence country”) earns income in or from the other country (the “source country”).
Article XVIII, Paragraph 1, provides that Canadian pensions and annuities that are paid to a U.S. resident can be taxed by the United States; however, the amount of the pension that would be exempt from Canadian taxes for Canadian residents getting the same pension or annuity is exempt from U.S. taxes.
Tax Implications of Eventual Sale of U.S. Property
Canadians are subject to the Foreign Investment in Real Property Tax Act (FIRPTA) rules. Under the FIRPTA rules, Canadian residents who sell U.S. real estate are generally subject to a 15% withholding tax on the gross proceeds of the sale.
If you reside in a country that has an income tax treaty with the country that taxed the dividend, and said treaty provides a lower tax rate when compared to the tax rate imposed on the dividend you received, you should be eligible for a refund of the excess tax withheld.
- Introduction to Withholding Taxes.
- United Kingdom.
- Brazil.
- Hong Kong.
- Singapore.
- Hungary.
- Estonia.
- Latvia.
Dividends. Dividends distributed by a resident company are subject to withholding tax at 25 percent; those distributed to non-residents are taxed at 15 percent, provided the country of the non-resident recipient allows a tax credit of 15 percent.
If your goal is to invest in U.S. dividend stocks for the long term, it's probably best to hold them in an RRSP. You won't pay the 15% withholding tax on the dividends you earn, which could otherwise eat into your overall earnings.
Is it better to hold US stocks in TFSA or RRSP?
The tax exemption provided for in the Convention between Canada and the United States for RRSPs and RRIFs is rather exceptional and not found in any other tax treaty signed by Canada. Therefore, for tax purposes, it will generally always be better to hold US investments in RRSPs rather than TFSAs.
It is taxed for a nonresident at the same graduated rates as for a U.S. person. FDAP income is passive income such as interest, dividends, rents or royalties. FDAP income that is non-effectively connected income is taxed at a flat 30% rate on the gross income unless a tax treaty specifies a lower rate.
Canadian dividend income you receive from directly investing in Canadian corporations through a non-registered investment account is generally subject to a 25% Canadian non-resident withholding tax. However, if you're a resident of a country that has a tax treaty with Canada, the withholding rate may be reduced.
All income and capital gains from the foreign shares will be reported on your Canadian income tax return. There will be withholding tax deducted from the foreign dividends at the time they are paid, which you can at least partially recover by claiming a foreign non-business tax credit when you file your tax return.
Generally, interest, dividends, or capital gains earned on investments in a TFSA are not taxable either while held in the account or when withdrawn.
