# US tax treatment for Short-term capital gains?



## andrewf (Mar 1, 2010)

The US treats short-term capital gains differently than long-term capital gains, taxing them as income. Does this only apply for US residents, or for Canadians as well? Are there any differences between how these are treated for Canadians in non-registered accounts vs. RRSP?

Do you have to file taxes in the US if you have income on US-listed securities? 

I'm sure at least some people here have non-registered accounts holding US securities and know how this works. I'm not there yet, but I'm sure this is good information for Canadian investors to know. My searches over the last little while haven't yielded any clear explanations, unfortunately.


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## CanadianCapitalist (Mar 31, 2009)

I own US securities in my taxable and RRSP accounts. My accounts are with TD Waterhouse. The US tax treatment of short-term capital gains does not apply to us. 

When you hold US-listed stocks and ETFs in a taxable account, there is a withholding tax on dividends at the rate of 15%. Canadian residents receive a foreign non-business tax credit for the taxes withheld. Capital gains are treated the same way as Canadian stocks. Canadian residents do not have to file US taxes. Note that what I've described above is true for plain vanilla stocks and ETFs.


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## andrewf (Mar 1, 2010)

Good news! I was worried that Canadians would get punished for the US's crazy short-term capital gains tax. No withholding on interest, either?


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## warp (Sep 4, 2010)

There is no withholding on interest from US BONDS.....

HOWEVER there IS withholding tax if you own US BOND ETF's....even though all they hold are bonds, and all they pay out is interest....I found this ridiculously stupid, but thats the way it is.

ALSO: If a US ETF pays out "short term capital gains distribuitons", they will withhold taxes.......if they distribute " long term capital gains"..they will not withhold taxes.

With ANY government, when it comes to taxes, it seems they just have to make it as complicated as possible.


If you buy then sell a US stock or ETF , as a Canadian you will just have either a capital gain or capital loss....there is no distinction here between short term or long term capital gains.


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## cardhu (May 26, 2009)

andrewf said:


> Good news!


Note however that a taxable account is usually the worst place to house US-based dividend paying equities. By “worst” I mean least tax-efficient. 

Note also that if the equities are held in a taxable account, Canadians receive a foreign non-business tax credit for SOME of the taxes withheld ... not necessarily all ... depending on one’s income, it may not be a full dollar-for-dollar credit ... the implication being, of course, that if an investor is in a low tax bracket – say 20% marginal – they could end up paying 22%, or 24%, or 26% tax on such dividends received in taxable account ... and that is before any program clawbacks come into play. 

If you have room, US dividend payers are usually best held in RRSP, second in TFSA (if necessary), with non-reg taking a far distant third.


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## andrewf (Mar 1, 2010)

It's not an issue for me at the moment, as I have plenty of RRSP room that I need to chew through first, but I was curious.

I'll note that there are many US listings that pay little to no dividends, and it might be more tax-efficient to hold capital gain investments in a non-registered account than an RRSP.


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## cardhu (May 26, 2009)

Depends on the intended use of the money … if the intended use is to generate an income in retirement, then for most people, its more tax efficient to hold capital gain investments in an RRSP than a non-reg account.


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## warp (Sep 4, 2010)

cardhu said:


> Note however that a taxable account is usually the worst place to house US-based dividend paying equities. By “worst” I mean least tax-efficient.
> 
> Note also that if the equities are held in a taxable account, Canadians receive a foreign non-business tax credit for SOME of the taxes withheld ... not necessarily all ... depending on one’s income, it may not be a full dollar-for-dollar credit ... the implication being, of course, that if an investor is in a low tax bracket – say 20% marginal – they could end up paying 22%, or 24%, or 26% tax on such dividends received in taxable account ... and that is before any program clawbacks come into play.
> 
> If you have room, US dividend payers are usually best held in RRSP, second in TFSA (if necessary), with non-reg taking a far distant third.


CARDHU:

Holding US dividend payers in a TFSA is exactly the WRONG idea.
Your advice here couldn't be more wrong.

The reason is quite simple. A TFSA is not a registered account...therefore any US dividends you receive in a TFSA will have withholding taxes, and you will have NO WAY of ever recovering those taxes. The money is gone forever.( getting divs from other foreign international stocks can be even worse, where withholding taxes can be as high as 35%)

In a cash account you will at least get to make use of the "foreign taxes paid" tax credit to recover most if not all of theese taxes paid...(assuming you actually pay canadian taxes on your level of income)

It is correct that registered accounts are best ,since, due to our tax treaty with the US, there are NO withholding taxes on US divs paid into registered accounts.

Be careful because sometimes people on these boards make errors, ( even me), so double check any info.


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## HaroldCrump (Jun 10, 2009)

warp said:


> In a cash account you will at least get to make use of the "foreign taxes paid" tax credit to recover most if not all of theese taxes paid...(assuming you actually pay canadian taxes on your level of income)


The last part of your statement is key....dividend taxes, esp. after the gross up, can be quite punitive at high income levels.
So you gotta weigh the witholding taxes in TFSA vs. what you _net _in non-registered account after all credits and taxes are paid.
In case several securities are involved, you should also account for the PITA associated with non-registered accounts.


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## cardhu (May 26, 2009)

Warp, my advice here is correct ... US dividend payers are usually best held in RRSP, then in TFSA (if necessary), with the taxable account taking a far *FAR *distant third. Placing US dividend payers in a taxable account solely to preserve one’s ability to claim the foreign tax credit (FTC) is very much like paying a dime to save a nickel ... and that makes no sense at all ... I’d rather keep my dime and let the nickel go, and at the end of the day I’ll be richer for having done so. All those who paid the dime will be poorer.

The reason is simple ... in a taxable account, income is taxable, and in a TFSA its not ... you face the same withholding taxes in a taxable account, that you would in a TFSA, and you will have NO WAY of ever recovering those taxes either way. The money is gone forever. The FTC may, in some cases, enable you to avoid paying additional Cdn taxes on top of the US withholding, but it will not, under any circumstances, ever refund those withheld amounts to you. 

Some further housekeeping items... 


Yes, of course a TFSA is a registered account. 
It is true that other country’s withholdings can be higher than 15% ... in fact, US withholdings can be 30% if you haven’t completed the necessary paperwork to keep it to 15 ... and in such cases the taxable account comes in last by an even greater margin.
If you don’t ordinarily pay any Canadian taxes on your level of income, then you aren’t entitled to claim any foreign tax credit.


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## CanadianCapitalist (Mar 31, 2009)

I agree with cardhu on this one. If you hold an US dividend payer in a TFSA, you pay 15% withholding tax that is not recoverable. But if you hold it in a taxable account, dividend income is taxed at marginal rates which could be as high as 46%. You pay less tax by holding the dividend payer within the TFSA, therefore it is preferable.


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## warp (Sep 4, 2010)

cardhu said:


> Warp, my advice here is correct ... US dividend payers are usually best held in RRSP, then in TFSA (if necessary), with the taxable account taking a far *FAR *distant third. Placing US dividend payers in a taxable account solely to preserve one’s ability to claim the foreign tax credit (FTC) is very much like paying a dime to save a nickel ... and that makes no sense at all ... I’d rather keep my dime and let the nickel go, and at the end of the day I’ll be richer for having done so. All those who paid the dime will be poorer.
> 
> The reason is simple ... in a taxable account, income is taxable, and in a TFSA its not ... you face the same withholding taxes in a taxable account, that you would in a TFSA, and you will have NO WAY of ever recovering those taxes either way. The money is gone forever. The FTC may, in some cases, enable you to avoid paying additional Cdn taxes on top of the US withholding, but it will not, under any circumstances, ever refund those withheld amounts to you.
> 
> ...


We will have to agree to disagree........

First of all....a TFSA is NOT, I repeat NOT, a registered account

Secondly, your posts are overly simplistic. If you pay canadian taxes, the foreign tax credit will lower that amount by the amount of canadian taxes payable. Also if you can't recover all the foreign taxes paid on your federal canadian taxes, you can then use the Provincial forms to try and recover the rest. I do this myself, so to say that these foreign taxes are not recoverable in a cash account is just plain wrong.

US div stocks should just not be held in a TFSA, period
In a TFSA, these foreign taxes are indeed gone forever.

What all this back and forth shows me is that whichever one of us is right or wrong...there can be little argument that the tax system itself is ridiculously complicated, and it really shouldn't be.


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## cardhu (May 26, 2009)

Warp … its not a matter of agreeing or disagreeing … it is a matter of correct vs. incorrect … your understanding of FTC is incorrect, and your advice here is dead-wrong. 

CC has already shown you an example of someone who would pay 46% in a non-registered account, but only 15% in his TFSA. Clearly, if this guy had taken your advice, he’d be feeling some pain. 

The FTC does not result in any “recovery” of amounts withheld by foreign countries … that money is lost forever … all the FTC does is reduce the amount that you send to Ottawa for that income … but if you’re sending any more than ZERO to Ottawa for that income, then you’re paying more tax than you otherwise would have, had you kept those US stocks in a TFSA. 

It is mathematically impossible for the use the FTC to result in paying less tax in a non-reg account than in a registered TFSA. Some might pay the same, but most would pay more. 



warp said:


> a TFSA is NOT, I repeat NOT, a registered account


Repetition of a false statement doesn’t make it any less false.


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## HaroldCrump (Jun 10, 2009)

The Registered nature of an account for the purposes of foreign tax coordination is different than registered in broad Canadian terms.

In Canada, RRSP, RESP and TFSA are all considered registered accounts in a broad sense.
However, for tax coordination with the US, only the RRSP is considered registered.

I think warp is referring to the latter definition and cardu is referring to the former.


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## cardhu (May 26, 2009)

Harold … the latter definition doesn’t exist … there’s no such thing as _“the registered nature of an account for the purposes of foreign tax coordination”_ … the reason that RRSPs are exempt from US withholding while TFSAs are not, arises from the fact that RRSPs are trusts or arrangements operated exclusively to administer retirement benefits … registered or otherwise has nothing to do with it.


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## Square Root (Jan 30, 2010)

This discussion is quite interesting. For me it raises the question of whether it makes any sense to hold dividend paying US stocks in a non registered account? In Alberta the tax difference would be a little over 20% which in relation to someone who relies on dividends for retirement income seems huge. I agree that there are many very high quality US companies paying good dividends but in my view the 20% tax disadvantage negates the diversification benefit.
I thought it might be a good way to generate some US dollar income(to be spent there) but at 20% that's one hell of a "conversion commission".

What do you guys think?


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## humble_pie (Jun 7, 2009)

root your numbers are always so gigantic that anybody replying has to disconnect from everyday life as we know it & try to imagine existence where people talk frivolously of dropping 1 mil upon a 4th house ...

with respect to non-registered, i think you would find with your income that all of the foreign tax withheld would be eligible for the canadian foreign tax credit. I don't know if alberta grants any additional foreign tax creds when 100% has already been blotted up on the federal cra return.

the greater punishment by far imho is the 100% taxation in non-registered to which those US dividends will be subject. Income that's taxed at 100% is to be avoided like the plague.

you could put those US stocks in your rrsp & work the wash if this is at tdw. You could even buy US stks w divs for your rrsp that have dividend drips, so in rrsp you would be receiving US divs net of both withholding taxes & net of FX fees.

since the maximum contribution to date to a tfsa is still 15k & since you don't seem to be a big binger in speculative stocks that might go to the moon, i'm assuming your tfsa is still relatively modest. Therefore a few US tax dollars in it should not really matter for you, right.

turning now to non-registered accounts, the only way i know of to avoid the 100% taxable US dividend hoo-ha is to hold option strategies on sound US underlying stocks in US account, while not holding the div-paying stocks themselves. These are strategies of moderate to considerable complexity involving at least a pair of opposing options. The strategies i do are only moderate. Quite humble in fact. The pie has a limited brain. You should be able to manage better, being a banker & all.

the diagonal spreads i hold pay an average return of 14-15% per annum, all in tax-favoured 50% taxable capital gains. They are far more volatile & far more fun than holding plain stock.

best of all for someone like yourself, who should be concerned with the possibility of a sizable US non-resident estate tax bite, they cost far less in actual dollars, and they are worth far less in actual dollars, than the underlying stock. Meanwhile they govern, through their leverage, a substantial US stock portfolio.


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## Square Root (Jan 30, 2010)

Thanks for the thoughtful reply Humble. Since capital preservation is a major objective, I don't feel comfortable with your option suggestion. I have no reason to believe it isn't valid or successful though and perhaps as a small niche strategy would make sense for me. However, I am not looking for excitement(at least in this way)though and your returns suggest excitement in spades. Agree that paying income tax at full rates(39% in Alberta) makes holding the actual stock a poor decision.

I think the issue is a valid one regarless of "the numbers" Thanks again.


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## humble_pie (Jun 7, 2009)

yes, i actually did not think you would like it.

i do hope you realize that the risk is far less than if one held the US dividend-paying stocks themselves, though. Please notice these are opposing options, in pairs or trios or even quads. They hedge each other. Plus the amount of money involved is far less.

one could hold futures also. But i for one see absolutely no way out of paying income tax @ 100% on US dividends unless one holds proxy positions through leveraged strategies which themselves are taxed as cap gains @ 50%.

would a US charitable foundation work ? maybe it could have an AZ house as head office. US divs should not be taxable. You know how i've always believed someone in your position should do a lot for charity


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## warp (Sep 4, 2010)

cardhu said:


> Warp … its not a matter of agreeing or disagreeing … it is a matter of correct vs. incorrect … your understanding of FTC is incorrect, and your advice here is dead-wrong.
> 
> CC has already shown you an example of someone who would pay 46% in a non-registered account, but only 15% in his TFSA. Clearly, if this guy had taken your advice, he’d be feeling some pain.
> 
> ...



You seem immune to the possibility that you are mistaken.

Call your brokerage and simply ask them if a TFSA is a registered account
Then post their answer here.
Keep in mind that the term "registered", here ,means in relation to tax withholding.

If I am wrong I will admit to it....

Again you talk simplisticly........You are right that you will never "recover" taxes paid to a foreign, ( eg US ) country.

However if those foreign taxes paid are used to lower the amount of taxes you will pay to the Canadian government,,,why should you care?
All you should care about is HOW MUCH taxes you pay, period, ( or better put, how much you keep in your own pocket)
If this wasn't the case, why would there be a line for "foreign taxes paid" , on your tax return at all?

The problem, as HUMBLE has stated is that foreign dividends are consiered as regular income here, as opposed to candaian dividends that get favouable tax treatment. However for diversification reasons...an investor should and must have some US and international equity exposure.


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## cardhu (May 26, 2009)

Immune? No, of course not. A case of pot calling kettle black, though, perhaps? 



warp said:


> Keep in mind that the term "registered", here ,means in relation to tax withholding.


I’ve already addressed this ... there is no such thing as _“registered in relation to tax withholding”_. 



warp said:


> All you should care about is HOW MUCH taxes you pay, period, ( or better put, how much you keep in your own pocket)


I agree completely ... but surely you realize that this statement directly contradicts your earlier argument ... paying less tax (or better put, keeping more money in your pocket) is precisely why placing US dividend payers in a TFSA is preferable to placing them in a taxable account ... as I explained earlier, it is mathematically impossible to pay more tax on US dividends in a TFSA than you’d pay in a taxable account. 

I portray this as a simple matter because it IS simple. 

The reason there is a line for “foreign taxes paid” on your return is to prevent double taxation ... it doesn’t (it can’t) reduce the tax you’d otherwise pay.


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## cardhu (May 26, 2009)

Squareroot ... from a tax-efficiency point of view, a non-registered account is definitely the worst type of account in which to hold US dividend payers. Sure you’d qualify for the foreign tax credit, but in your case and for the situation you’re describing, the foreign tax credit is immaterial - it neither helps you, nor harms you. If you held US stocks in a TFSA, the tax disadvantage would reduce from 20% to 15%, but with the kind of money you’re used to dealing with, the TFSA is too small to make any meaningful difference. When you refer to generating US$ for spending in the States, I suspect that the dividend income flowing out of a tiny $30,000 TFSA wouldn’t come close to what you have in mind. 

Having said all that, there is the matter of risk vs. reward. Even within your Cdn portfolio, there has to be some variation in yield. If so, then you’re already accepting a lower net cash flow from some stocks than from others, in the interest of diversification. The disadvantage doesn’t happen to be tax-driven in that case, but cash flow is cash flow. Keeping in the cash flow frame of mind, if you compare a Cdn company yielding 3% versus a comparable risk US company also yielding 3%, then obviously you’d net 20% less, after tax, from the US shares. But if there were a US company of comparable risk that was yielding 4% instead of 3%, then the cash flow disadvantage shrinks to near zero, and if you think of the cash flow differential as a “currency conversion cost”, then that, too, would shrink to near zero. So I suppose it depends on which particular stocks you’re pairing up. It may make sense in some cases to hold the US stocks directly, despite the tax-efficiency disadvantages. 

Another option that may not appeal to you, given your comments above, is the selling of cash-covered puts. I generate a modest US$ cash flow this way, which is taxed favorably as capital gains. 

And one final thought .... there are a handful of Canadian companies that pay their dividends in US$. I own a few, although in some cases their yields are microscopic (AGU currently yields 0.14%, I don’t know why they bother). They’re still treated as eligible dividends for tax purposes, but they arrive in your account as US$, without any forex interference.


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## Investment Seeker (May 16, 2011)

I found this forum by searching about taxes on Capital gains for U.S. stocks. I'm learning a lot from this forum. I subscribe to a U.S. newsletters that tell you what stocks are good to invest in (including Canadian mining stocks). I also bought a U.S. dividend stock for the first time with my TSFA account and noticed the withholding tax. I asked my broker (Scotia) about it and they said it's between 15 to 19% (mine was 19%). 

I also recently bought U.S. dividend paying stocks in my RRSP account and have not received a dividend yet but am glad from reading these forums, I won't be dinged for taxes when I do receive dividends from them.

Thanks for the interesting disscusion and teaching me something.


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## warp (Sep 4, 2010)

cardhu said:


> Immune? No, of course not. A case of pot calling kettle black, though, perhaps?
> 
> 
> I’ve already addressed this ... there is no such thing as _“registered in relation to tax withholding”_.
> ...


CARDHU:

I am getting my head around what you mean here....

There is some abstract logic to your thinking.....

In a TFSA the MOST you will ever pay on US dividends is 15%, but you will indeed pay all of 15%

If you are in a taxable account, the US dividends will be taxed at your marginal tax rate, which will be higher than 15%, if you pay any tax at all.
However by using the "foreign tax paid" credit, both federally, and provincialy, you will be able to 'recover most, if not all the tUS taxes withheld against candian taxes otherwise payable.

If you are in a non-tax income level , you can NOT recover the US withholding tax from the US government, so again you will pay 15%, 

In a RRSP...you will pay NO withholding on dividend payments, but you will pay tax at your marginal tax rate when the money is withdrawn from your RRSP..( although these dividend payments will be growing tax deferred once paid into your RRSP )

So in a way , you are right, and I have no regret in admitting it.

This is why I am on this forum....you can learn from all the ideas and points of view posted here.


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## Investment Seeker (May 16, 2011)

I do my own online trading with ScotiaMcleod Direct investing. I phoned ScotiaMcleod and asked them about not having to pay the withholding taxes on dividends on U.S. stocks and the person I spoke to on their customer line said that he was not aware that witholding taxes are not applicable on RRSP accounts. 

I bought 2 dividend paying U.S. stocks in March and have not received a dividend yet but the broker customer service rep. said that as far as he knows, theirs a 15% withholding tax on all accounts.

He told me I will know for sure when I get paid the dividend. If there is a withholding tax on the dividend in my RRSP account, is there any recourse to get it back?

Another question: If I sell my U.S. stocks down the road at a higher price then I paid for them, will there be a withholding tax on the difference between what I paid and my gains?

Thanks for any answers.


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## humble_pie (Jun 7, 2009)

i do believe that the representative misinformed you. It does happen. Perhaps it was a new agent. There is a truly staggering amount of knowledge that discount broker representatives need to know, & the surprising thing imho is that they slip up so seldom.

could you call back & press the point. I'm fairly sure your US dividends in rrsp will not be subject to NR withholding tax.

on a related matter, had you considered dripping your US divs in rrsp, if the underlying security is drippable. This will prevent any FX fees from being charged on your US dividend income in rrsp.

turning now to the gains question, no, the US will not levy any withholding tax upon capital gains in your rrsp. Nor in any other account you may have.


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