Tax on Foreign Stock Profits
A number of discount brokers now offer access to foreign stockmarkets. If I make a profit on a European stock will I have a European capital gains tax obligation or do I just have Canadian capital gains tax to worry about?
Thanks in advance,
probably just canadian capital gains tax. All will depend on the particular tax convention between canada & the overseas nation that hosts your company. Some euro countries with active exchanges - luxembourg, switzerland - have limited or no tax treaties, so their tentacles on foreign investors' dividends & gains may be longer & stronger than those of countries like the UK, where rates have been lowered by reciprocal tax conventions.
in most cases i'd expect overseas dividends & interest payments to be subject to withholding tax but capital gains to be released outright to a canadian resident taxpayer. Your broker should have basic information, since their back office is responsible for sending you the applicable tax slips. If the overseas corporation is a large multinational, its website will probably have detailed information for shareholders resident around the globe. In addition, it's possible to query a large multinational's IR for more precise details, if necessary. I have received some helpful citations that way.
if all else fails you could resort to reading the applicable tax convention, although this would mean re-inventing the wheel and i see no reason to set oneself up for so much pain when it can be avoided.
in canada, the investor needs to report his overseas acquisition cost in canadian dollars using the exchange rate at the time of purchase. And he will report his proceeds in CAD using the exchange rate at the time of sale. The standard reference is the Bank of Canada noon rate, which is reported in archives on their website.
one can also elect to use the bank of canada's annual rates (hopefully you haven't been swing-trading the overseas securities since that will complicate the exchange calculations.) Or one could use the monthly currency conversion figures printed on the brokerage statements, so that all transactions in any one month get exchanged at one rate. In any event it's necessary to choose one reasonable and consistent approach and then stick to its discipline.
Thanks HP, this is very useful, Z.
Just to clarify, Canada does tax tax treaties with both Switzerland and Luxembourg.
Also, it's my understanding that Canada more or less treats a capital gain on foreign securities like a domestic capital gain, so long as certain conditions are met (which if not met might result in the capital gain being treated as active business income and being taxed fully). I can't really speak for the taxation of capital gains outside of Canada though. In general, if you do pay foreign tax on capital gains, you should be able to claim a foreign tax credit and reduce your tax up to the amount of the tax that would have been paid in Canada.