U.S. Taxes For Canadian Investors: What You Need To Know

Up to date on Might fifth, 2022 by Kay Ng

For Canadian buyers, having publicity to the US inventory market is essential. There are a variety of explanation why.

First, the US is the most important inventory market on the planet. To be able to keep away from house nation bias and have a globally diversified funding portfolio, publicity to American shares is required.

Second, there are particular sectors which can be underrepresented within the Canadian inventory market. Examples embody healthcare, know-how, and shopper staples. Curiously, these sectors are among the many strongest within the U.S. market.

To spend money on shares from the US, Canadian buyers want to grasp how this may impression their tax payments.

This text will focus on the tax implications for Canadians that spend money on U.S. shares, together with examples of dividend- and non-dividend-paying shares held in each taxable accounts and nontaxable accounts.

Desk of Contents

Whereas we advocate studying this text in its entirety, you’ll be able to skip to a selected part of this text utilizing the desk of contents beneath:

Capital Beneficial properties Tax

There are two kinds of investing taxes that Canadian buyers can pay if they’re investing outdoors of a tax-free retirement account. The primary is capital good points tax, which will likely be mentioned first.

A capital acquire happens when a safety is offered for greater than its buy value. Conversely, a capital loss comes from promoting a safety for lower than it was bought for.

Canadian buyers are pressured to pay capital good points tax on 50% of their realized capital good points. The tax price for these transactions is equivalent to the person’s marginal tax price.

Marginal tax charges are composed of a federal part (which is paid in the identical quantity by all Canadians) and a provincial part (which varies relying on which province you reside in).

In line with the Canada Income Company, present federal tax charges by tax bracket are:

• 15% on the primary $50,197 of taxable revenue, +
• 20.5% on the following $50,195 of taxable revenue (on the portion of taxable revenue over $50,197 as much as $100,392), +
• 26% on the following $55,233 of taxable revenue (on the portion of taxable revenue over $100,392 as much as $155,625), +
• 29.38% on the following $66,083 of taxable revenue (on the portion of taxable revenue over $155,625 as much as $221,708), +
• 33% of taxable revenue over $221,708.

As talked about, provincial tax charges differ by province. Examples on this article will use Ontario’s tax charges, as it’s Canada’s most highly-populated province. Ontario tax charges by tax bracket are proven beneath:

• 5.05% on the primary $46,226 of taxable revenue, +
• 9.15% on the following $46,228, +
• 11.16% on the following $57,546, +
• 12.16% on the following $70,000, +
• 13.16% on the quantity over $220,000

So how do capital good points taxes differ for holders of U.S. shares?

Luckily, the capital good points tax paid on investments in U.S. shares is equivalent to the capital good points paid on Canadian securities. The one minor distinction is that capital good points have to be expressed in Canadian {dollars} for the aim of calculating an investor’s tax legal responsibility.

An instance might help us perceive capital good points tax from U.S. shares within the context of those Canadian tax brackets. Let’s assume that you’re a Canadian investor who has executed the next trades:

• Bought 100 shares Johnson & Johnson (JNJ) for US$100 at a time when the USDCAD trade price was 1.25
• Bought your Johnson & Johnson shares for US$110 at a time when the USDCAD trade price was 1.20

You’ll pay capital good points on the distinction between your buy value and your sale value, expressed in Canadian {dollars}. The next desk might help us to grasp the right strategy to calculate the CAD-denominated capital acquire. Though indirectly calculated within the picture above, the capital acquire for this transaction – expressed in U.S. {dollars} – is US$2,500. Nonetheless, that’s irrelevant for the aim of calculating capital good points tax as a result of capital good points tax relies on transaction costs expressed in Canadian {dollars}. What actually issues is the CAD$1,875 capital acquire proven within the backside proper cell of the desk.

That is the quantity used to calculate capital good points. As talked about beforehand, half of this quantity can be taxed on the investor’s marginal tax price. We’ll assume for simplicity’s sake that the investor is within the highest tax bracket, which is 46.16% for Ontario residents.

The next desk breaks down the capital good points tax calculation for this hypothetical funding in Johnson & Johnson (JNJ).

This calculation was fairly concerned and demonstrates how sophisticated the calculation of capital good points tax will be for Canadians.

Luckily, capital good points tax will be averted fully if U.S. shares (or shares from another nation) are held in Canadian retirement accounts. We focus on the 2 kinds of Canadian retirement accounts (TFSAs and RRSPs) in a later part of this text.

For now, we’ll transfer on to discussing the taxation of dividends paid to Canadian buyers from U.S. companies.

Dividend Tax

Not like capital good points taxes (that are calculated in the identical means for U.S. shares and Canadian shares), the taxes that Canadian buyers pay on worldwide inventory dividends are totally different than the taxes they pay on home dividends.

This is because of a particular sort of dividend tax known as “withholding tax.” Not like different taxes paid by Canadian buyers, these taxes are withheld at supply (by the corporate that pays the dividend) and remitted to their very own tax authority – which, for United States firms, is the Inside Income Service (IRS).

Dividend withholding taxes meaningfully scale back the revenue that Canadian buyers are capable of generate from U.S. shares. Luckily, this impact is partially offset by a particular tax treaty between the US and Canada (known as the Conference Between Canada and the US of America). The U.S. withholding tax price charged to international buyers on U.S. dividends is generally 30% however is diminished to fifteen% for Canadians as a consequence of this treaty.

How does this examine to the common withholding tax of nations throughout the globe?

Even after accounting for the particular tax treaty, the U.S. remains to be an unfavorable marketplace for Canadian buyers from the angle of tax effectivity. In line with Blackrock, the weighted common international withholding tax on worldwide inventory dividends is 12%. Even after accounting for the tax treaty, Canadians nonetheless pay a 15% withholding tax — 25% increased than the weighted common dividend withholding tax all over the world.

Canadian buyers will likely be comfortable to listen to that this international withholding tax is ready to be reclaimed come tax time. The Canada Income Company lets you declare a international tax credit score for the withholding tax paid on United States dividends. This prevents buyers from paying tax twice on their dividend revenue.

Nonetheless, U.S. dividends should not as tax environment friendly as their Canadian counterparts. The rationale why is considerably sophisticated and is expounded to a Canadian taxation precept known as the “dividend tax credit score.” The dividend tax credit score meaningfully reduces the taxes that Canadians pay on dividends, and causes dividend revenue to be the only most tax-efficient type of revenue out there to Canadians.

In line with MoneySense:

When a non-resident invests in U.S shares or U.S.-listed trade traded funds (ETFs), the usual withholding tax on dividends is 30%. A Canadian resident is entitled to a decrease withholding price of 15% below a treaty between the 2 international locations if they’ve filed a kind W-8 BEN with the brokerage the place they maintain the investments.

Our advice for Canadian buyers on the lookout for publicity to U.S. shares is to carry their U.S. shares in retirement accounts, which concurrently reduces their tax burden and dramatically reduces the tax complexity of their funding portfolios. We focus on dividend taxes in retirement accounts within the subsequent part of this text.

Dividend Tax in Retirement Accounts

One of the best ways for Canadian buyers to realize publicity to U.S. shares is thru retirement accounts.

There are two main retirement accounts out there for Canadian buyers:

Each supply tax-advantaged alternatives for Canadians to deploy their capital into monetary property. With that mentioned, there are vital variations as to how every account capabilities.

The Tax-Free Financial savings Account (TFSA) permits buyers to contribute after-tax revenue into the account. Funding good points and dividends held throughout the account are topic to no tax and no tax is incurred upon withdrawal from the account. TFSAs are functionally just like Roth IRAs in the US.

The opposite sort of retirement account in Canada is the Registered Retirement Financial savings Plan (RRSP). These accounts enable Canadian buyers to contribute pre-tax revenue, which is then deducted from their gross revenue for the aim of calculating every year’s revenue tax. Revenue tax is paid later, upon withdrawals from the RRSP. RRSPs are functionally equal to 401(okay)s inside the US.

Each of those retirement accounts are very engaging as a result of they permit buyers to deploy their capital in a really tax-efficient method. On the whole, no tax is paid on each capital good points or dividends as long as the shares are held inside retirement accounts.

Sadly, there’s one exception to this rule. The withholding tax paid to the IRS on dividends from United States companies remains to be paid inside TFSAs. Because of this, U.S. shares shouldn’t be held inside a TFSA if potential.

As an alternative, the RRSP is the perfect place to carry U.S. shares (not MLPs, REITs, and many others.) as a result of the dividend withholding tax is waived. In actual fact, no tax is paid in any respect on U.S. shares held inside RRSPs. Which means that Canadian buyers ought to maintain all dividend-paying U.S. shares inside their RRSPs if they’ve adequate contribution room. U.S. shares that don’t pay dividends needs to be held in a TFSA. Lastly, Canadian shares needs to be held in non-registered accounts to reap the benefits of the dividend tax credit score.

Last Ideas

This text started by discussing a number of the advantages of proudly owning U.S. shares for Canadian buyers earlier than elaborating on the tax penalties of implementing such a method. After describing the tax traits of U.S. shares for Canadians, we concluded that the perfect practices are to:

• Maintain dividend-paying U.S. shares inside an RRSP
• Maintain non-dividend-paying U.S. shares inside a TFSA
• Maintain Canadian shares in a taxable account — particularly dividend-paying Canadian shares, to reap the benefits of the dividend tax credit score

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