If you invest in U.S. stocks or hold stocks from other foreign countries, you may have had a withholding tax deducted from the dividends you were paid. This a tax charged by the U.S. or other foreign country to non-residents of that country.
The Canadian Tax On Your Foreign Investments
As a resident of Canada you must report and pay tax on all interest, dividends and capital gains generated from foreign investments. The tax is payable whether or not you actually hold the investments in Canada or in some off-shore account.
The full amount of the interest and dividends must be included on your income tax return as foreign income. For example, if your investment paid a $100 dividend but you only received $85 after the withholding tax, you include $100 on your tax return as income.
You Get A Foreign Tax Credit For Foreign Tax Paid
You can generally claim a tax credit on your Canadian income tax for any foreign tax paid on foreign income reported on your income tax return.
If you have foreign non-business income such as interest, dividends, and capital gains, then the amount of the tax credit is restricted to the lesser of 15% of the foreign non-business income and the amount of Canadian income tax otherwise payable on the foreign non-business income.
The purpose of these limits is to ensure that you do not receive a credit greater than the Canadian tax paid on the income.
If you have foreign tax paid that was higher that what is allowed for a credit, you may be able to claim the excess as a deduction from your income (similar to an RRSP deduction).
The Overall Result?
For the most part you should generally receive a dollar for dollar credit for the foreign tax that was paid to the foreign government!