U.s. taxes for canadian investors what you need to know – sure dividend sure dividend f gas regulations ireland

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Fortunately, the capital gains tax paid on investments in U.S. stocks is identical to the capital gains paid on Canadian securities. The only minor difference is that capital gains must be expressed in Canadian dollars for the purpose of calculating an investor’s tax liability.

You will pay capital gains on the difference between your purchase price and your sale price, expressed in Canadian dollars. The following table can help us to understand the proper way to calculate the CAD-denominated capital gain. Although not directly calculated in the image above, the capital gain for this transaction – expressed in U.S. dollars – is US$2,500. However, that is irrelevant for the purpose of calculating capital gains tax because capital gains tax is based on transaction prices expressed in Canadian dollars. What really matters is the CAD$1,875 capital gain shown in the bottom right cell of the table.

This is the amount used to calculate capital gains. As mentioned previously, half of this amount would be taxed at the investor’s marginal tax rate. We will assume for simplicity’s sake that the investor is in the highest tax bracket, which is 46.16% for Ontario residents.

Fortunately, capital gains tax can be avoided entirely if U.S. stocks (or stocks from any other country) are held in Canadian retirement accounts. We discuss the two types of Canadian retirement accounts (TFSAs and RRSPs) in a later section of this article.

This is due to a special type of dividend tax called “withholding tax.” Unlike other taxes paid by Canadian investors, these taxes are withheld at source (by the company that pays the dividend) and remitted to their own tax authority – which, for United States companies, is the Internal Revenue Service (IRS).

Dividend withholding taxes meaningfully reduce the income that Canadian investors are able to generate from U.S. stocks. Fortunately, this effect is partially offset by a special tax treaty between the United States and Canada (called the Convention Between Canada and the United States of America). The U.S. withholding tax rate charged to foreign investors on U.S. dividends is normally 30% but is reduced to 15% for Canadians due to this treaty.

Even after accounting for the special tax treaty, the U.S. is still an unfavorable market for Canadian investors from the perspective of tax efficiency. According to Blackrock, the weighted average foreign withholding tax on international stock dividends is 12%. Even after accounting for the tax treaty, Canadians still pay a 15% withholding tax – 25% higher than the weighted average dividend withholding tax around the world.

Canadian investors will be happy to hear that this foreign withholding tax is able to be reclaimed come tax time. The Canada Revenue Agency allows you to claim a foreign tax credit for the withholding tax paid on United States dividends. This prevents investors from paying tax twice on their dividend income.

Still, U.S. dividends are not as tax efficient as their Canadian counterparts. The reason why is somewhat complicated and is related to a Canadian taxation principle called the “dividend tax credit.” The dividend tax credit meaningfully reduces the taxes that Canadians pay on dividends, and causes dividend income to be the single most tax-efficient form of income available to Canadians.

Our recommendation for Canadian investors looking for exposure to U.S. stocks is to hold their U.S. stocks in retirement accounts, which simulataneously reduces their tax burden and dramatically reduces the tax complexity of their investment portfolios. We discuss dividend taxes in retirement accounts in the next section of this article.

The Tax-Free Savings Account (TFSA) allows investors to contribute after-tax income into the account. Investment gains and dividends held within the account are subject to no tax and no tax is incurred upon withdrawal from the account. TFSAs are functionally similar to Roth IRAs in the United States.

The other type of retirement account in Canada is the Registered Retirement Savings Plan (RRSP). These accounts allow Canadian investors to contribute pre-tax income, which is then deducted from their gross income for the purpose of calculating each year’s income tax. Income tax is paid later, upon withdrawals from the RRSP. RRSPs are functionally equivalent to 401(k)s within the United States.

Both of these retirement accounts are very attractive because they allow investors to deploy their capital in a very tax-efficient manner. In general, no tax is paid on both capital gains or dividends so long as the stocks are held within retirement accounts.

Instead, the RRSP is the best place to hold U.S. stocks (not MLPs, REITs, etc.) because the dividend withholding tax is waived. In fact, no tax is paid at all on U.S. stocks held within RRSPs. This means that Canadian investors should hold all dividend-paying U.S. stocks within their RRSPs if they have sufficient contribution room. U.S. stocks that don’t pay dividends should be held in a TFSA. Lastly, Canadian stocks should be held in non-registered accounts to take advantage of the dividend tax credit.

This article began by discussing some of the benefits of owning U.S. stocks for Canadian investors before elaborating on the tax consequences of implementing such a strategy. After describing the tax characteristics of U.S. stocks for Canadians, we concluded that the best practices are to:

Another way of approaching the U.S. stock market is by constructing your portfolio so that it owns companies in each sector of the stock market. For this reason, Sure Dividend maintains 10 databases of stocks from each sector of the market. you can access these databases below.