Everything you need to know about US withholding taxes

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Contents

  1. What are US withholding taxes?
  2. What accounts do US withholding taxes apply to?
  3. Example T5 for non-registered accounts
  4. Do ETFs pay US withholding taxes?
  5. Does the US withholding tax apply to cross-listed stocks?

What are US withholding taxes?

When you invest in American companies, the IRS takes their cut in the form of a dividend withholding tax. If you’ve filled out form W-8 BEN with your brokerage, they’ll withhold 15% of your dividends, otherwise they’ll withhold 30%. Most brokerages fill this form out for you automatically when you sign up, but if you’re unsure it’s worth looking into.

This tax means that the yield of American securities is reduced by 15% for Canadians. For example, an American equity with a 4% yield will have an effective yield of 3.40%. Depending on the account you’re trading in, this tax may be recoverable with a foreign dividend tax credit, and in some cases it does not apply at all.

US listed securities without a dividend aren’t charged a withholding tax, and capital gains are taxed as normal.

What accounts do US withholding taxes apply to?

Registered accounts recognized by the US as being exclusively for the purpose of retirement are not subject to withholding taxes:

  • RRSP
  • RRIF
  • LIRA
  • LIF
  • LRIF
  • PRRIF

Registered accounts not recognized by the US as being exclusively for the purpose of retirement are subject to withholding taxes, and this tax is not recoverable:

  • TFSA
  • RESP
  • RDSP

Non-registered accounts are subject to withholding taxes. However, you can claim a foreign dividend tax credit so that you aren’t double taxed by the CRA. The relevant forms are T2209 for the federal tax credit, and T2036 for the provincial tax credit. Keep in mind that these tax credits are non-refundable.

Another consideration for investments in a non-registered account is that Canadian companies are taxed at a reduced rate due to the dividend tax credit, and you forgo this tax incentive if you invest in American companies.

Example T5 for non-registered accounts

Below is an example of a T5 slip generated by a US equity in a non-registered trading account. You can see that U$50.40 in dividends were paid out (box 15), and $7.56 USD was automatically deducted (box 16). This amount won’t be taxed again by the CRA, provided forms T2209 and T2036 are filed with your tax return.

 Example T5 slip showing the effect of US withholding taxes on dividends

Do ETFs pay US withholding taxes?

For this question, I defer to this excellent report by Justin Bender and Dan Bortolotti, but here are the most important points:

  • In a registered account recognized by the US as being exclusively for the purpose of retirement (ex. RRSP, RRIF), dividends from US listed ETFs aren’t taxed, but their Canadian listed equivalents are (ex. VOO:NYSE isn’t taxed, but VFV:TSX is)
  • In a registered account not recognized by the US as being exclusively for the purpose of retirement (ex. TFSA, RESP), the withholding tax applies and is not recoverable with foreign tax credits
  • In a non-registered account, the US withholding tax applies and is eligible for a foreign tax credit if the ETF is listed on an American or Canadian exchange (ex. the withholding tax is recoverable for both VOO:NYSE and VFV:TSX)

The effect of withholding taxes on Canadian ETFs is subtle, because they are paid internally by the ETF. This is usually reflected in the yield of the ETF. For example,  VOO:NYSE currently has a yield of 1.84%, compared to 1.48% for VFV:TSX.

Do US withholding taxes apply to cross-listed companies?

Many of our largest companies are listed on both the TSX and the NYSE. In this case, withholding taxes do not apply if you purchase shares on an American exchange. 

Remember that you can journal cross listed shares between exchanges free of charge at most brokerages.

23 thoughts on “Everything you need to know about US withholding taxes”

  1. Great clarification on (No) US withholding tax regarding dual/cross-listed Canadian stocks. I have been searching for the information. Thanks!

  2. Hello,

    I stumbled upon your article while I was researching on US witholding taxes subject. I’m curious to know how this would be applied in case of US REITs.

    Do you also happen to have an article that explains where to hold what securities (US/Canadian)? Thanks for the well written article. It was very helpful!

    1. REITs are tough because their dividend payments can come from a variety of sources – income, capital gains, and return of capital – and each of these sources has a different tax treatment.

      Return of capital payments are non-taxable events. Regular income payments would be subject to a withholding tax. Capital gains distributions would be subject to a capital gains tax, but not a withholding tax.

      Each REIT has a different payout structure, so you’re going to have to do some research on each company you’re interested in to find out how taxes will work.

  3. from p12 Bender and Bortolotti document, it says for taxable accounts, that U.S. listed ETFs have no taxable advantages, which seems to contradict when above you say that in non-registered accounts, withholding tax is recoverable for VOO but not VFV.

  4. for something like TD shares, does it make sense to hold the TSX or NYSE version since they have significant U.S. operations and some of their dividend must be U.S.? Should we journal it to the NYSE because of withholding? Does only the TSX version get the Canadian dividend tax credit?

    1. Unfortunately you can’t avoid the withholding taxes placed on a Canadian company by owning it on an American exchange. So it doesn’t really matter in this case. Whether you should own the TSX or NYSE version really just depends on what currency you want your dividends to be in and what currency you’ll receive when you ultimately sell.

  5. So for clarity, it doesnt matter if we hold vsp or vfv in TSFA or RRSP in regards to withholding tax because its already withheld by the ETF and reflected in the lower yield?

    1. That’s right, Canadian ETFs pay the withholding tax internally.

      In an RRSP the withholding tax will not apply if you buy an American ETF. In a TFSA it doesn’t matter either way.

    2. Just a step further- so is there any advantage to holding VFV in a non-registered account instead of an RRSP? And what is the effect of having a DRIP for VFV in your RRSP?

      Thanks very much!!

      1. You should always max out your RRSP and TFSA before investing in a non-registered account. There might be some very niche exceptions to this, but generally you’ll want to take advantage of the tax savings.

        Setting up a DRIP won’t have any affect on your RRSP contribution room, since dividends are not considered a deposit for tax purposes in an RRSP. So the only effect is putting your investments on autopilot!

  6. I have a TFSA and a US stock I owned was bought out by another company. Part cash pay out and part stock in the new company. Just noticed a 30% withheld tax on this transaction. Is this right? All I can find for taxes being withheld is 15% on dividends paid. Am I missing something?

    1. Is it possible the cash payout was a special dividend? A 30% dividend withholding tax applies instead of the regular 15% if you haven’t filled out form W8-BEN with your brokerage.

  7. Trying to figure out if an ETF holds some US and some Canadian, does the withholding apply to the entire dividend, or only a calculation of the US portion of the dividend? So like maybe only 9% because 6% of the div is Canadian? Does that make sense? Thanks! Great site!

    1. Thanks for the feedback! Yes, that is how it works – if 50% of the dividend comes from the US and the rest comes from Canada you’ll pay the 15% withholding tax on just half of the total dividend.

  8. I’ve been reading through many forums and would like a clarification. Is the US withholding tax only on dividends or also on any gains my US stock makes in my TFSA.

    Say I buy 1000.00 US stock in my TFSA. If the stock pays out dividends the US will apply the withholding tax correct? But if I hold US stock that doesn’t pay dividends, and the value of the stock goes up to say 2000.00 and I cash out say 5 years down the road, am I liable for any taxes to the US for the 1000.00 gain?

    Sorry if this is a newbie question : )

    1. The withholding tax only applies to dividends! You only pay capital gains tax to the CRA, as long as you aren’t an American citizen.

  9. Hi there,

    I am looking at BDC’s as investments to hold in an RRSP. These dividends would be considered non qualified dividends in the US as these companies do not pay corporate income tax pre distribution of dividends. So normally fully taxable like interest to US citizens.
    My question is would these dividends still qualify for the withholding tax exemption in an RRSP account? Thanks

    1. Great question, and I haven’t been able to find a clear answer either. I suspect they are tax free, because Americans can avoid taxation on BDC dividends in an IRA. Probably the best way to test this out is to just buy 1 share of a BDC and see if your brokerage applies a withholding tax.

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