sign in sign up
<<
Home , Dividend tax, Foreign tax credit, Tax withholding

NavigatorThe

RBC Wealth Management Services implications of investing in the Withholding and considerations for the Canadian investor

With representing only a small percentage of the world’s economy, more and more Canadians are investing in the U.S. to diversify their portfolios. As a result, a general understanding of the tax issues including withholding tax associated with such investments, or the requirement to file a U.S. income tax return, is important. This article will illustrate some of the As a Canadian more common types of U.S. investment income and the general U.S. and resident, you need Canadian tax implications taking into consideration the Canada-U.S. Income to report your Tax Convention (“Treaty”). You may also refer to the Appendix, which provides worldwide income for a summary of the U.S. withholding for common U.S. investments. tax purposes, which This article assumes that you are an individual who is a resident of Canada for includes the gross tax purposes (not a , non-taxable organization or trust) and are not amount of any foreign a U.S. citizen or holder. It does not discuss U.S. estate tax issues income you earn. that may apply to Canadians with U.S. investments. For further information, ask your RBC advisor for a copy of our article on U.S. estate tax for Canadians.

This article outlines several strategies, not all of which will apply to your particular financial circumstances. The information in this article is not intended to provide legal or tax advice. To ensure that your own circumstances have been properly considered and that action is taken based on the latest information available, you should obtain professional advice from a qualified tax advisor before acting on any of the information in this article.

Foreign withholding tax ●● Your country of residence (i.e. Canada) for tax purposes; When you are investing in foreign securities, including those from ●● The tax laws of the foreign country the U.S., you may be subject to where your investment is issued; non-resident withholding tax. To

determine the amount of withholding ●● Whether a exists between tax that you may have to pay on your country of residence (Canada) income from foreign investments, you and the foreign country; must generally consider the following: 2 | RBC Wealth Management

●● The type of account in which of Foreign Status of Beneficial Owner you hold your investment (e.g. for United States . registered, non-registered); and Without appropriate documentation, income from U.S. investments may ●● The type of investment income you be subject to the U.S. domestic tax are earning. rate which is generally a flat 30% U.S. non-resident withholding tax Avoiding rate. Note that a signed W-8BEN form As a Canadian resident, you need to is only valid for three years, after report your worldwide income for tax which, you will need to provide a purposes, which includes the gross new form to continue to receive a amount of any foreign income you preferential withholding rate. earn. You must report this income Under the Treaty, there regardless of whether you receive a U.S. interest and is a special exemption tax slip for the income. Since you may income earned in a Canadian from U.S. withholding also be subject to foreign withholding registered account tax, the foreign income you earn may tax on interest and Under the Treaty, there is a special be subject to tax twice. In order to dividend income that exemption from U.S. withholding avoid this double taxation, Canadian you earn from U.S. tax on interest and dividend income tax laws generally allow you to claim investments through a that you earn from U.S. investments a foreign on your Canadian through a trust set up exclusively for trust set up exclusively income tax return for taxes paid to the purpose of providing retirement for the purpose of foreign jurisdictions. This includes income. These trusts include RRSPs, providing retirement both foreign withholding tax and any RRIFs, LIRAs, LIFs, LRIFs and income. income taxes you pay if you have to Prescribed RRIFs. They do not include file a foreign tax return. By claiming RESPs, TFSAs and RDSPs. a , you will generally reduce your Canadian taxes payable The special exemption is not and may avoid double taxation. Note currently available in any other tax that Canada will only allow a foreign treaty that Canada has with other tax credit for taxes paid up to the countries. Therefore, interest and reduced treaty rate (if applicable) you receive from investing even if a higher rate of tax was paid. in non-U.S. securities may be subject to foreign withholding tax. Reduced rate of withholding under the Canada-U.S. treaty Certain types of U.S. investments you A reduced rate of withholding tax hold in an RRSP do not qualify for the is generally available to Canadians Treaty exemption and will be subject under the Canada-U.S. Treaty. In to U.S. withholding tax. For example, order to qualify for the preferential if you hold a Canadian mutual fund withholding , you will need to or ETF that invests in the U.S. market provide proper documentation. This in your RRSP/RRIF, there will be signed documentation is generally U.S. withholding tax on the dividends a valid IRS Form W-8BEN Certificate that you cannot recover. RBC Wealth Management | 3

Taxation of various types of U.S. preferred shares (e.g. hybrid U.S. investment income securities) that are exempt from U.S. withholding tax. You should confirm The following sections discuss the the withholding tax requirement with taxation of income received from your tax advisor before investing in common types of U.S. investments. U.S. preferred shares. The information provided assumes that you have completed the Since U.S. dividends are not paid necessary personal documentation from Canadian , so that you qualify for any applicable U.S. dividends do not qualify for exemptions or reduced U.S. foreign the preferential Canadian dividend withholding tax rates. tax treatment. Foreign dividends, including U.S. dividends, are subject U.S. interest income to tax at your marginal tax rate like “Portfolio interest” as defined under interest income. Under the Treaty, a U.S. domestic tax rules is generally 15% withholding tax exempt from U.S. withholding tax. Dividends from shares of Canadian generally applies to The portfolio interest exemption public corporations that on a U.S. dividends you applies to many common types U.S. exchange will generally receive from U.S. of interest, such as interest from not be subject to U.S. non-resident corporations. U.S. federal and corporate debt withholding tax. Dividends from obligations issued after July 18, 1984, Canadian public corporations are U.S. state and municipal bonds, and considered Canadian dividends interest on bank deposits in the U.S. regardless of what stock exchange they trade on. For example, shares of The Treaty (with changes that came RBC and Bell Canada, which trade on into effect on January 1, 2008) will both the Toronto Stock Exchange and generally eliminate U.S. withholding the New York Stock Exchange, pay tax on U.S. interest that does not Canadian dividends. These dividends qualify as portfolio interest. In cases will be eligible for the preferential where the portfolio interest exemption credit on your Canadian and the Treaty do not apply, a 15% income tax return, even if these withholding tax may apply. shares were purchased on a U.S. stock exchange. The interest you earn on foreign currency denominations in bank Capital gains on sale of and brokerage accounts located in U.S. securities Canada is not generally subject to Withholding tax is generally not foreign taxes. withheld on capital gains realized U.S. dividend income on the sale or redemption of shares of a U.S. corporation. The capital Under the Treaty, a 15% withholding gain or loss is taxable in Canada and tax generally applies to U.S. will receive the same beneficial tax dividends you receive from U.S. treatment that the sale of Canadian corporations. This will generally shares would receive (i.e. 50% capital apply to dividends you receive on gains/losses inclusion rate). U.S. common and preferred shares. However, there are certain types of 4 | RBC Wealth Management

Corporate actions ●● The investor is an individual Certain types of corporate actions (including an estate or (i.e., takeovers, mergers, spin-offs, testamentary trust that acquired etc.) involving shares in the U.S. the REIT as a consequence of an and other foreign corporations may individual’s death) and holds an be considered to be non-taxable interest of less than 10% of the REIT. for Canadian tax purposes. Every Note: for estates and trusts the 15% corporate action is unique and you rate only applies for a period of five will need to review the transaction years following the death of the prior to taking any action in respect individual. to the security. For example, if one ●● The REIT is publicly traded and the of the securities you hold is going beneficial owner (e.g., individual or to have a spin-off, it may not be a corporation) holds not more than taxable event. Ask your RBC advisor 5% of any class of the REIT’s stock. Similar to U.S.- for our article on the tax implications

based mutual funds, of foreign spin-offs. ●● A person holds not more than any a 10% interest in the REIT and American Depository Receipts (ADRs) distributions from U.S. the REIT is diversified. A REIT is REITs will be taxable as ADRs, also known as ADSs (American considered diversified if the gross foreign income on your Depository Shares) or GDRs value of no single interest in real Canadian tax return at (Global Depository Receipts), are property exceeds 10% of the REITs negotiable certificates issued by marginal tax rates. total interest in real property. a U.S. commercial bank. These certificates represent ownership The withholding rate on capital gain in a stated number of underlying distributions from a U.S. REIT may non-U.S. equity securities. ADRs are also be 15%. In order to qualify for registered with the U.S. Securities the 15% rate, you must own 5% or less and Exchange Commission, are of the stock at any time during the quoted in U.S. dollars and income is one-year period ending on the date paid in U.S. dollars by the depository. you receive the capital gains and the However, the income from these REIT is listed on a U.S. stock exchange investments is not U.S.-source where the REIT stock is regularly income. They are not subject to U.S. traded. Otherwise the non-resident tax reporting or withholding tax for withholding tax rate on capital gain non-U.S. persons. For information distributions will generally be equal on the taxation of income from ADRs, to the highest U.S. federal corporate ask your RBC advisor for our article tax rate. on the taxation of dividends from foreign equities and ADRs. U.S. withholding tax generally does not apply on the sale or redemption U.S. Investment Trusts of a U.S. REIT. However, where the (REITs) interest in the REIT is considered A U.S. REIT will generally distribute to be a real property interest, either dividends or capital gains. withholding tax may apply in certain Under the Treaty, you will generally cases. A discussion of these rules be subject to a withholding rate of is beyond the scope of this article 15% on the dividends you receive and investors should consult with if you satisfy one of the following their tax advisors regarding the tax conditions: consequences of their particular REIT investment. RBC Wealth Management | 5

Similar to U.S.-based mutual funds, fully taxable foreign income and will any capital gains distributions from be subject to tax at your marginal tax U.S. REITs will be taxable as foreign rate. The disposition of a U.S. ETF income on your Canadian tax return may trigger a capital gain or loss that at marginal tax rates and will not will qualify for the 50% capital gains be eligible for the 50% capital gain inclusion rate. Note that U.S. capital inclusion rate. However, the capital gains distributions by the U.S. ETF gain or loss on the disposition of the do not receive the 50% capital gains U.S. REIT itself will qualify for the inclusion rate for Canadian tax 50% capital gain/loss inclusion rate. purposes like they do for Canadian You may be able to claim a foreign tax mutual funds. credit on your Canadian tax return to reduce or avoid double taxation. If you invest in a U.S. ETF that earns Any U.S. source income investment income from outside you receive during the U.S. Exchange Traded Funds (ETFs) the U.S., the ETF may be subject year that is “effectively A U.S. ETF may pay interest, dividends to foreign withholding tax in those connected” with the or capital gain distributions. A 15% foreign countries. As an investor U.S. may be subject withholding tax rate applies to in the ETF, you may not be able to recover this tax. to non-resident dividends and capital gains that you receive from the ETF. There is also withholding tax equal U.S. limited to the top U.S. marginal a 15% withholding tax starting in 2014 on interest income received If you make an investment in a tax rate. (in previous years no withholding U.S. or an entity that tax was applied on interest income elects to be treated as a partnership, distributed). you will generally be required to file an annual non-resident U.S. personal A U.S. ETF may qualify as a Regulated income tax return. A U.S. partnership Investment Company (RIC). A RIC includes a U.S. Master Limited may be set up as a corporation that Partnership and Limited Liability pays U.S. dividends or capital gain Companies. The reason for this is distributions. If so, the capital gain that the partnership may be carrying distributions may be considered on a trade or business effectively long-term capital gains (i.e., where connected with the U.S. In this case, the investment in the RIC is held for each non-U.S. partner is treated as more than 12 months) or short-term if they too are carrying on a trade or capital gains. Ordinary dividend business in the U.S. distributions are subject to a 15% U.S. withholding tax. Long-term Any U.S. source income you receive capital gain distributions are not during the year that is “effectively subject to U.S. withholding tax. connected” with the U.S. may be Starting in 2014, interest-related subject to non-resident withholding dividends and short-term capital tax equal to the top U.S. marginal tax gains dividends are subject to a 15% rate. You may be able to recover any withholding tax (in previous years it excess U.S. withholding tax when you was possible for no withholding tax to file the annual non-resident U.S. tax apply to these types of distributions). return.

For Canadian tax purposes, all As a Canadian resident, you must U.S. ETF distributions are considered also report U.S. limited partnership 6 | RBC Wealth Management

income on your Canadian tax limited partnership in your registered return. However, from a Canadian account and the partnership elects tax reporting perspective, unless the to be treated as a partnership for limited partnership publishes specific tax purposes, you may be subject to information for Canadian investors, U.S. withholding tax. Further, you there may be difficulty in obtaining may have a U.S. income tax liability adequate information to properly file resulting from the requirement to a Canadian tax return. U.S. limited file a U.S. non-resident income tax partnerships typically provide return. Therefore, consider holding information using U.S. Form 1065 U.S. limited partnership investments The Canadian (Schedule K-1) to its limited partners. outside of your registered accounts. government requires you However, this form generally lacks When you make a withdrawal from to disclose information sufficient detail to allow a taxpayer to your registered plan in later years you about your foreign assets convert income from a U.S. tax basis will not be able to claim a foreign tax if you meet certain to a Canadian tax basis. With the credit on your Canadian income tax conditions. cooperation of the partnership, these return for the U.S. income tax paid difficulties may be overcome, but will in earlier years. This may give rise to typically increase the complexity and double taxation. cost of your personal tax return. Before investing in U.S. partnerships If the partnership elects to be treated you should consider the U.S. and as a corporation, the dividends you Canadian income tax impact. Ask receive may be treated as foreign your tax advisor for advice. dividends. The dividends may be subject to a 15% withholding tax Reporting foreign income on your as described above in the dividend Canadian tax return income section. You may also not have Under Canadian tax rules, you must to file a U.S. tax return in this case. report all of the income you earn in Canadian dollars. Ask your RBC It is important to note that if a advisor for our article on currency tax foreign investment you hold in your reporting. This article explains the registered account requires you to tax reporting requirements for cash pay taxes and file an income tax and various types of securities held in return in the foreign country, you foreign currencies. cannot claim a foreign tax credit

on your Canadian tax return for

any foreign income tax paid. For

example, if you invest in a U.S.

RBC Wealth Management | 7

Canadian information reporting Other considerations of foreign assets When determining the merits of investing in foreign securities, The Canadian government requires there are many things you should you to disclose information about consider. In addition to income and your foreign assets if you meet capital appreciation potential and certain conditions. For example, if fluctuations in currency exchange the total cumulative cost of certain rates, you should also consider the Similar to U.S.- foreign assets you hold exceeds tax implications of the investment. based mutual funds, C$100,000 at any time during the You may be subject to foreign tax year, you may be required to disclose any capital gain and you may be able to claim a full these assets on Canada Revenue distributions from U.S. foreign tax credit on your Canadian Agency’s Form T1135 – Foreign REITs will be taxable as income tax return. Where you cannot Income Verification Statement. Ask foreign income on your claim a full foreign tax credit, you your RBC advisor our article on Canadian tax return at consider this an additional cost of the foreign reporting requirements in marginal tax rates. investment. It is important for you to Canada for more details. consider your after-tax yield (i.e. after

considering Canadian and foreign

taxes). Speak to your RBC advisor

and your tax advisor for assistance in

calculating your after-tax yield and evaluating your investments. 8 | RBC Wealth Management

APPENDIX – Common U.S. investments and related U.S. withholding taxes

U.S. investment Type of income and U.S. withholding rate (assumes valid documentation is provided for preferential treaty rates)

U.S. government or corporate bonds Interest – 0%

If you have any Shares of U.S. corporations Dividend – 15% questions or require Capital gain on sale – 0% clarification of any of the issues discussed in Shares of Canadian corporations Dividend – 0% this document, do not traded on a U.S. exchange Capital gain on sale – 0% hesitate to contact your RBC advisor or discuss American Depository Receipts No U.S. withholding. Withholding rate is as set by foreign country them with your own tax where underlying corporate issuer originates. advisor. May be higher than treaty rate. Capital gain on sale – 0%

U.S. Exchange Traded Fund (ETF) 1. U.S. ETF qualifies as RIC: traded on a U.S. exchange • Interest related dividends and short-term capital gain distributions 15% starting January 1, 2014 • Dividend – 15% 2. U.S. ETF does not qualify as RIC – Interest, dividend and capital gain distributions – 15% Capital gain on sale of ETF investment – 0%

U.S. REITs * Dividend and capital gain distributions – 15% Capital gain on sale* – 0%

U.S. Master Limited Partnerships (MLPs)* Effectively connected income – Top U.S. federal and U.S. Limited Liability Companies marginal rate. (LLCs)* (if LLC elects to be treated as U.S. non-resident tax return required to be filed partnership) annually.

* Tax treatment may vary depending on investment’s tax status. Verify tax treatment with your tax advisor.

This document has been prepared for use by the RBC Wealth Management member companies, RBC Dominion Securities Inc. (RBC DS)*, RBC Phillips, Hager & North Investment Counsel Inc. (RBC PH&N IC), RBC Global Asset Management Inc. (RBC GAM), Royal Trust Corporation of Canada and The Royal Trust Company (collectively, the “Companies”) and their affiliates, RBC Direct Investing Inc. (RBC DI) *, RBC Wealth Management Financial Services Inc. (RBC WMFS) and Royal Mutual Funds Inc. (RMFI). *Members-Canadian Investor Protection Fund. Each of the Companies, their affiliates and the Royal Bank of Canada are separate corporate entities which are affiliated. “RBC advisor” refers to Private Bankers who are employees of Royal Bank of Canada and mutual fund representatives of RMFI, Investment Counsellors who are employees of RBC PH&N IC and the private client division of RBC GAM, Senior Trust Advisors and Trust Officers who are employees of The Royal Trust Company or Royal Trust Corporation of Canada, or Investment Advisors who are employees of RBC DS. In Quebec, financial planning services are provided by RMFI or RBC WMFS and each is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RMFI, Royal Trust Corporation of Canada, The Royal Trust Company, or RBC DS. Estate and trust services are provided by Royal Trust Corporation of Canada and The Royal Trust Company. If specific products or services are not offered by one of the Companies or RMFI, clients may request a referral to another RBC partner. Insurance products are offered through RBC WMFS, a subsidiary of RBC DS. When providing life insurance products in all provinces except Quebec, Investment Advisors are acting as Insurance Representatives of RBC WMFS. In Quebec, Investment Advisors are acting as Financial Security Advisors of RBC WMFS. The strategies, advice and technical content in this publication are provided for the general guidance and benefit of our clients, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. This publication is not intended as nor does it constitute tax or legal advice. Readers should consult a qualified legal, tax or other professional advisor when planning to implement a strategy. This will ensure that their individual circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax rules, and other investment factors are subject to change. This information is not investment advice and should only be used in conjunction with a discussion with your RBC advisor. None of the Companies, RMFI, RBC WMFS, RBC DI, Royal Bank of Canada or any of its affiliates or any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. ® Registered trademarks of Royal Bank of Canada. Used under license. © 2016 Royal Bank of Canada. All rights reserved. NAV0155 (06/2016)