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 US listed securities is reduced by 15% for Canadians. For example, a US equity with a 4% yield will lose 0.60% to withholding taxes for an effective yield of 3.40%. Depending on the account you trade in this tax may not apply or may be recoverable with a foreign dividend tax credit.
US listed securities without a dividend aren't charged any additional taxes, and capital gains are taxed as normal in non-registered accounts.
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:
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:
Non-registered accounts are subject to withholding taxes, however you can claim a foreign dividend tax credit so that you aren't doubled 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.
A major consideration for non-registered accounts is that Canadian companies generate a substantial dividend tax credit, and you forgo this tax incentive if you invest in American companies instead.
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 U$7.56 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.
Do ETFs pay US withholding taxes?
For this question I defer to this excellent report by Justin Bender and Dan Bortolotti, but these 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 is lost no matter what
- In a non-registered account the US withholding tax is only recoverable 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 the withholding tax on Canadian ETFs is a bit more subtle than with equities because the withholding taxes generated by US investments are paid internally by the ETF. This tax is usually reflected in the yield of the ETF. For example, as I write this article, VOO:NYSE 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 cross listed on the TSX and the NYSE. In this case you are not subject to a withholding tax if you own shares purchased on an American exchange. This is a situation that might occur if you have spare USD in your account and you want to buy shares in a cross listed Canadian company, such as RBC or Enbridge.
Remember that you can journal cross listed shares between exchanges free of charge at most brokerages.