Ihave received a number of questions lately asking if withholding tax applies to foreign stocks held in the TFSA.
RRSPs, RRIFs and other registered accounts are “normally” exempt from non-resident withholding taxes under a tax treaties with the foreign governments. For example, under both the Canada-US and Canada-UK income tax treaties, stocks and bonds from those countries held in a Canadian RRSP will not be subject to foreign withholding taxes on the interest and dividends received.
The exemption from foreign withholding taxes on RRSPs, RRIFs and other registered accounts stems from the fact that registered accounts are pension trusts under most income tax treaties with Canada. Subsequently the treaties specifically exempt dividends and interest from withholding tax.
The only exception to this rule is securities that trade as an American Depository Receipt (ADR). ADRs are special securities that trade represents the ownership in the shares of a foreign company trading on a US stock exchange. ADRs are not the original security but rather an interest in that security. Withholding taxes are applied to these securities based on the country the company is located and the US and withholding taxes are applied in registered accounts is not recoverable.
The TFSA Is Not A Pension
The TFSA is not a pension trust under Canada’s income tax treaties and therefore foreign dividends and interest would be subject to the normal withholding taxes under those treaties. In addition, since the TFSA is a tax free account in Canada the foreign tax credit cannot be claimed for withholding tax applied to interest and dividends subjected to non-resident withholding taxes.
Under the Canada-US tax treaty interest is no longer subject to withholding tax and dividends are subject to a 15% withholding tax. If you were to hold a US stock in your TFSA and it paid a $100 dividend, you would only receive $85. Note that this withholding tax is still far less than anyone would pay in income tax and subsequent earnings will still grow tax free in Canada.
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{ 29 comments… read them below or add one }
I am a Canadian resident. I own some UK Premium Bonds. Prizes from these Bonds are tax-free in the UK. Are they subject to Canadian tax or tax-free also in Canada?
As understand the UK premium bond product, an investor purchases the bonds but unlike a regular bond, there is no regular or stated interest payment. Instead, there is a monthly random draw and some bondholder may receive “prizes” while other receive nothing.
In my opinion, it would appear that the prizes from these bonds would generally be treated as lottery winnings and typically are not taxed in Canada.
I have some Canadian stocks that have gone public and I may want to cash them. However, how do I make sure that only the gain is taxed/withhheld instead of all the proceeds?
@ Pam:
I assume these shares were not held in a TFSA. If so and you are a resident of Canada, when you sell the shares your gain is the difference between the price you received and the price you paid. You would report this on your income tax return.
If you are a resident of the U.S. then you report the gain on your 1040 like any other gain. The Canadian non-resident withholding tax does not apply to capital gains.
If I have a TFSA where I have a TD eSeries fund: TD US Index (TDB902) that has US holdings, am I being charged a withholding tax?
@Dan – The siple answer is yes. Mutual funds that have foreign investments are subject to withholding tax. The fund manager pays the withholding tax and passes your portion along to you. The withholding tax will be reported on Box 16 of the T3.
I also own the TD-e US index fund in my TFSA (and in my RRSP). I’m just curious: for the units in my RRSP, would I get 100% of my dividends? It’s hard to imagine the fund manager sifting through which units were held in RRSP and which were held in TFSA, but maybe I’m wrong.
@JC – You would get 100% of the dividends as long as the securities were on a prescribed stock exchange. To answer your other question, the mutual fund companies have different share classes for each type of account. They know exactly which ones are TFSA, RRSP and neither.
Thanks, Tax Guy.
I keep getting conflicting information.
I asked this question recently and was told:
“The problem is that the US government does not look through the Mutual fund to the ultimate unitholder when determining who needs to withhold. Therefore US companies must withhold when paying dividends to a Canadian Mutual Fund. RRSP’s are only exempt from US withholding taxes when they hold the US investment directly…”
Recently I noticed that non US resident withholding tax for some of the US based Partnerships that I am holding in non registered account was 35% which is significantly more than usual 15% for any US based corporation or US based trust. Has this always been a case or it is a new withholding tax rate for US Partnerships?
@Nik – The tax treaty between Canada and the U.S. sets the withholding on dividends, distributions from estates and trusts and pensions at 15%. Partnerships are not covered and are subject to the maximum rate charged by the U.S.
I am a canadian, I have some US stock that will go up, is the foreign withholding tax apply to me in a TFSA when these stock go above there book value. If so by what percentage
Dale:
The withholding tax does not apply to gains. It only applies to dividends from US stocks.
Can anyone direct me to a single source where I can learn about the dividend withholding rates for Canadian residents who invest in and receive dividends from the following countries?
1. US
2. UK
3. Most major EU markets
4. Selected other markets such as Australia, Mexico and Brazil.
For US investors, the answers are: 1. n.a. 2. 0% 3. 15%. 4. Varies for franking for Australia, 0% and 0% for Mexico and Brazil. Just trying to get the same simple list for Canadians. It appears that the answer for the US is 15%.
Daniel:
I’ll prepare and post one on Monday.
Hello Chris,
After carefully reviewing my list an accompanying notes, the amount of upkeep on such a list as well as the amount of explanation required makes it unfeasible. I simply would not be able to maintain the list.
That being said, residents of Canada are subject to the following withholdings on interest and dividends:
UK 10% / 15%
Germany 10% / 15%
Australia 10% / 15%
Austria 10% / 15%
France 10% / 15%
India 15% / 25%
Mexico 10% / 15%
Netherlands 10% / 15%
Singapore 15% / 15%
Brazil 15% / 25%
Other forms of income (royalties, pensions, annuities etc. may be subject to different rates).
So more or less 15% across the board for dividends. Question: the country missing from that list is the US. You reference a 15% rate for dividend coming from US securities in your blog above, but I wanted to double check and make sure that that is the case.
Thanks again, Dan
I bought a parcel of land in Calgary in 1995 as an investment from a development company with the view that the land would be developed by this company in 3 -5 years i.e. by 2000. I was just one of many investors. I have now owned the land for 15 years and since it has not been developed and I have not made any money on this land speculation deal. I now have the opportunity to sell my holding. I am a non-resident of Canada, a Canadian by birth but I live in the UK and have done so for many years. I would like to know what my tax liabilities are. Do I have to pay tax on the capital gains I have made? If so, at what rate? Am I allowed to have made a certain amount of profit each year on which I am not taxed or will I be taxed on the entire gain I have made?
Hi Karen,
When you sell the property you will be required to complete and file a form with the Canadian tax authorities. Along with that form, you will be required to submit a tax of 25% of the “gain” on the sale.
The CRA issues a compliance certificate to both buyer and seller. If you do not pay the tax, then the purchaser will be liable. SO be aware that a buyer may withhold 25% or more of the cost of the property to ensure compliance.
For more information see the CRAs’ guide: T4058 Non-Residents and Income Tax.
A few years ago I was reading an article in one of the more reputable canadian investment magazines about an invester that was living off his dividends and was not paying any taxes or capital gains. I would like to know if this true and if so how it works.
Hello Dale,
Everyone in Canada is entitled to a basic personal exemption of $10,380 and if you are over the age of 65, you are entitled to an additional $6,500 for income below $32,000. This means that a senior may be entitled to receive $16,880 of regular income tax-free, about $45,000 of eligible dividend income from Canadian public corporations, or about $25,000 of capital gains.
The above assumes you are not entitled to receive CPP or OAS.
The risk of investing in dividend paying stocks and capital appreciation stocks is higher than with fixed income and the pursuit of these investments should be done after accounting for your risk tolerance.
Last year when I filled out my 2008 -1040NR, there was a section to get back my withholding taxes which accumulated over the year on my U.S. stocks/devidends. This year I do not see this section on the 2009 – 1040NR. Has this refund been discontinued?
Hello RH:
Would this not be indicated on Schedule NEC? I don’t know as much about the 1040-NR, but any non-resident withholding that was required, I had to report on that schedule.
I am a Canadian adult who has been a resident of the US for over 10 yrs. Recently, I was informed that my grandfather (deceased) owned a mutual fund account which named me ‘in trust’ and was set up as an in-formal in trust account about 20 years ago.
I would like to cash out this account of approx. $5K Cdn – what kind of Canadian withholding taxes should I expect to pay?
Thank you.
Withholding tax at 15% only applies to dividends you receive. These may be claimed as a foreign tax credit on your 1040.
Cashing has no other Canadian tax issues and you don’t have to file a Canadian tax return.
I have some shares in a Canadian public company (TSX-v) and am considering a non-resident employment opportunity (I have been a non-resident before). Is there an advantage to waiting until I am non-resident (locating to Singapore) before selling the shares or am I still going to have to pay capital gains tax no matter what?
You will have a tax event when you cease to be a resident. If the funds are in a TFSA, then there is no tax event on ceasing to be a resident.
I have a few u.s. dividend paying stocks in a Scotia trading account.Holding tax is being deducted from the payments.Can I apply to the u.s. goverment to get it back?,or at the very least is it useful as a tax deduction on my tax return,is there anyway to benefit from this 15% loss.
Tony,
The withholding tax is not recoverable from the U.S. and you cannot use it as a foreign tax credit in Canada.
The TFSA is not protected under tax treaty and the withholding tax applies. Since the foreign tax credit is available when the underlying income is taxable, you cannot use the foreign tax credit on foreign withholding tax from a TFSA.
I’m not sure what province you are in but the 15% withholding tax is still far less than you’d pay in any province in Canada. For example, the minimum tax in Ontario is 21%.