Q&A: Problem With Withholding Tax

The dividend income was taxed in this reader’s RRSP. What’s going on?

 

Q – In May of 2013, I bought some shares of Honda in my RRSP believing that the tax treaty would take care of the 15 per cent withholding tax. Well, I just got a statement from RBC Direct Investing that had withholding tax on the dividends I received. I called them and they said the treaty doesn’t cover “Limited Partnerships”. Is this true? I thought that the treaty covered U.S. dividends. I was just wondering what I am missing here. – Calvin B.

 

A – Unfortunately, Honda is not a U.S. company, which is why its dividends are subject to withholding tax. Although it trades on New York, it does so as an American Depository Receipt (ADR) and these do not come under the Canada-U.S. Tax Treaty. (It is not a limited partnership as your broker suggested, but they are not covered either).

To be clear, only dividends from U.S. companies are exempt from withholding tax and then only if the shares are held in an RRSP or a RRIF. U.S. dividends paid to TFSAs and RESPs will be taxed. – G.P.

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