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 only eligible for a foreign tax credit if the ETF is listed on an American exchange (ex. the withholding tax is recoverable for VOO:NYSE, but not for 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.

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