Q&A: U.S. withholding tax

Question: I don’t want to put U.S. stocks into my RRSP or TFSA and I have yet to get a complete explanation of the tax ramifications of having U.S. stocks in an unregistered account. From what I gather, I will pay an up-front 30 per cent withholding tax to the U.S. government and may get a rebate of 15 per cent from the Canadian government. So is 15 per cent the net tax that I will pay on U.S. dividends? I cannot seem to get a complete answer anywhere. – Alex R., Toronto

Gordon Pape answers: Even the incomplete answers you are receiving are way off the mark. Here’s the straight goods. Under the Canada-U.S. Tax Treaty, each country imposes a 15 per cent withholding tax (not 30 per cent) on dividends paid to residents of the other country. However, the Treaty specifically exempts “retirement plans” from this tax. This means that U.S.-source dividends paid to RRSPs, RRIFs, LIFs, etc. are not affected. You receive the full amount.

U.S. dividends paid to non-registered accounts are subject to the tax. However, you can claim an offsetting foreign tax credit on your Canadian return which should reduce the actual tax paid to zero or close to it.

TFSAs are an anomaly. They are not considered to be “retirement plans” within the meaning of the term for Treaty purposes. Therefore, U.S. dividends paid into TFSAs will be assessed the 15 per cent withholding tax. However, since TFSAs are tax shelters, no offsetting foreign tax credit can be claimed. You are out the full 15 per cent. On the plus side, the net dividends you receive will never be subject to tax again. Dividends paid into an RRSP or RRIF will eventually be taxed at the time of withdrawal.

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