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US Citizens in Canada With Taxable US Bonds

The September 4th article “How Bonds are Taxed [1]” discussed that taxation of bonds held by residents of Canada for tax purposes.  A reader recently wrote me asking what the tax implications would be if a US citizen, who was living in Canada and a resident of Canada for tax purposes, owned a taxable US bond.  The reader also asked how to estimate the Canadian taxes owing on the interest income.

Residents of Canada for tax purposes, regardless of citizenship, who own bonds from any foreign jurisdiction, will be taxed in the same manner as any other bond.  The full amount of interest earned on the bond will be included in the taxable income of the resident regardless of the tax status of the bond in the foreign jurisdiction.

In order to estimate the taxes payable look at the marginal tax rates for the providence of residence under Tax Rates [2] on this website. Look for your income level before the interest and then find the rate on interest or employment income. This will be roughly the rate you will pay.

Example: $10,000 10% bond. If the marginal rate is 30% the estimated tax would be $300. 

Now if the interest received has been subject to US withholding tax then a tax credit is available against Canadian taxes payable.  This amount is the lesser of 15% of the interest or actual tax withheld. This would be amount needs to be deducted from the tax above. 

From the example above, if the withholding tax was 15% the amount of taxes due in Canada would be $300 less the $150 withheld.

Remember, if you are a US citizen, you must still file a US tax return in addition to your Canadian return.

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