Many Canadians are looking to buy U.S. securities now that the loonie has gained a great deal of purchasing power against the U.S. dollar and stands near par. But keeptax angles in mind:
1. Dividends from U.S.-listed stocks do not qualify for the Canadian dividend tax credit.
2. Dividends from U.S. stocks will be subject to a 15% withholding tax if held in a non-registered account (assuming your brokerage firm has submitted a W8-BEN form on your behalf, otherwise the withholding tax rate will be 30%). The withholding tax can be reclaimed via the foreign non-business tax credit on your tax return.
3. Dividends from U.S. stocks will not be subject to withholding tax if held in a RRSP. They are subject to withholding tax if held in a TFSA or RESP.
4. The dividend income in non-registered accounts need to be converted to Canadian dollars for tax calculations, using the exchange rates on the dates your foreign dividend income is received or the average annual exchange rate (as published by the Bank of Canada) for all the dividends received in the year.
5. Canadian-domiciled mutual funds or exchange-traded funds (ETFs) tracking U.S. securities will pay withholding taxes on the U.S. dividends they receive; they will be embedded in the fund and borne by Canadian investors even if the fund is held in their RRSPs. U.S-domiciled ETFs paying dividends to Canadians will not have embedded withholding tax.
6. American Depositary Receipts (ADRs) trading on U.S. exchanges may withhold taxes at different rates depending on the tax treaty with the country from which the company issuing the ADR originates. Some countries may even deduct withholding taxes for ADRs held in registered accounts.
7. There is no withholding on interest income earned on bonds and other vehicles in the U.S.
Capital gains/losses on U.S. securities and cash
8. Capital gains or losses on U.S. securities held by Canadians are taxed in Canada. There usually is a gain or loss related to currency fluctuations. The first $200 of the currency gain or loss need not be reported.
9. Holding cash in a U.S.-dollar account gives rise to taxable currency gains or losses if they exceed $200.
U.S. estate tax
10. On death, Canadians holdings of U.S. shares (and other U. S. assets) are subject to U.S. estate tax at fair market value. Last heard, the first $3.5 million (U.S.) was exempt in 2009; all holdings in 2010 were exempt; and starting in 2011, only amounts under $1 million are exempt.
11. For estates above the threshold, tax can be reduced to a certain extent by a credit prorated according to the percentage that U.S. assets are of total assets. There are several strategies for minimizing U.S. estate taxes including: holding U.S. assets in a corporation, sharing ownership with someone else, and securing non-recourse loans to U.S. assets.
12 If U.S. estate tax paid is paid, it will be eligible in Canada for foreign dividend credits that can be used to reduce Canadian tax bills in the year of death.
Note: The above checklist was compiled from various sources believed to be reliable butinvestorsshould always consult with a tax expert prior to taking any actions.