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Money Can I reclaim the withholding tax on my U.S. stocks?

12:35  05 march  2018
12:35  05 march  2018 Source:   moneysense.ca

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Taxation of dividend income from US stocks depends on where you hold them.

Q. I own U . S . stocks and Canadian stocks in my RRSP and RESP accounts for my kids. I do all the investing myself. I get annual performance statements from the bank that holds my RRSP online account and it shows about 0 in withholding tax .

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Q. I own U.S. stocks and Canadian stocks in my RRSP and RESP accounts for my kids. I do all the investing myself. I get annual performance statements from the bank that holds my RRSP online account and it shows about $200 in withholding tax. What is this? How can I claim it when I file taxes, and how can I get it back? I heard there was a form called W8 that can help. Is this accurate?

Thanks, Malay

Hi Malay. RRSPs are exempt from U.S. withholding taxes but RESPs and TFSAs are not. This is because the U.S. does not recognize them as tax-deferred registered accounts. Therefore, foreign taxes paid withheld in an RESP or TFSA cannot be recovered.

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This is similar to the withholding taxes taken out of the paycheck of a salaried employee in the U . S . An investor needs to be aware of the impact of such withholding taxes on the effective dividend yield of the foreign stock . Foreign Tax Credit.

In that article states: “The treaty requires 15% tax withholding on dividends and 10% tax withholding on interest. So if you own a U . S . stock , as a Canadian resident, there will be 15% withholding tax on any dividends earned.

If these withholdings were in non-registered accounts, you could reduce your taxes on the foreign income paid to Canada by filing for a foreign tax credit using Schedule 1. This ensures that you don’t pay tax on the same income in both Canada and the foreign jurisdiction. That option, however, is not available when the foreign income is within a registered account for the reasons mentioned above. In a non-registered account, Form W8 can also be filed to reduce the amount of withholding from U.S. dividends.

However,  foreign taxes paid in an RRSP will reduce the amounts of money available for distribution to you on your retirement, so you will pay less tax on the total accumulations when building your pension income.  Bottom line—no need to report anything for the foreign taxes paid in your RRSP now, and there is no immediate recovery of the tax, either.

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Which foreign stock markets can I invest in? What is an American depositary receipt (ADR) or a Global depositary receipt (GDR)? If you’ve had too much withholding tax (WHT) deducted from your foreign dividends, you can often reclaim the overpayment.

When U . S . dividend stocks are held inside a registered retirement savings plan or registered retirement income fund, on the other hand, there is no withholding tax on U . S . dividends. So the entire amount will land in your account (adjusted for currency).

Another question people in your situation have is whether the capital must be reported on Form T1135 Foreign IncomeVerification Statement. Here’s what you need to know: this form must be filed each year if you own foreign assets with a cost base in excess of $100,000 CAN. However, you don’t have to include the assets if any of the following apply:

  • The property is used primarily for personal use—that is, more than 50% of the time (e.g. a winter getaway)
  • The property is held as part of an active business venture (note, some day traders may be exempt based on this rule, but this is determined case-by-case)
  • The assets are held in a foreign retirement plan or in a Canadian registered plan such as RPPs, PRPPs, RRSPs, RRIFs, RESPs, RDSPs, or TFSAs
  • The assets are held within a Canadian-registered mutual fund

So, by virtue of the third bullet, your foreign investments in your RRSP and your children’s RESP do not have to be reported on T1135.

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Want to avoid the hassles of withholding tax altogether? Consider holding your U . S . stocks in a registered retirement savings plan, registered retirement income fund or other retirement account.

See my other answer for more details on withholding taxes and how to partially reclaim under a double tax treaty: What is the dividend tax rate for UK stock . Note: Although the taxation rules of both countries are similar

MORE ABOUT ASK A TAX EXPERT:

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