# Canadian investing in US



## willow1044 (Jan 30, 2012)

I'm a Canadian with US$ to invest in a non-registered account and a TFSA.

I believe that if I invest on a US exchange, even in my TFSA, there are withholding taxes applied. Correct?

Also, in my non-registered account, does it make any difference what type of investment I hold? For example, I know that in Canada bonds are fully taxed and should therefore be held in the registered account. Also monies received from preferred shares are a capital gain and are preferentially treated from a taxation point-of-view and therefore should be held in a non-registered account. Would any of this apply to similar investments in the states?

Thanks,


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## Eclectic12 (Oct 20, 2010)

From the IRS point of view, a non-registered and TFSA accounts are the same - so the 15% withholding tax on dividends (assuming your broker correctly registered the account as Canadian to reduce the 30% withholding tax) will be taken for US domiciled stocks, ETFs, MFs, ADRs etc.

If you are buying the US stock of a Canadian domiciled company (ex. TD bank shares trading on a US exchange), it is a Canadian that won't be subject to the US withholding taxes.

Since the TFSA is Canadian tax free - the capital gains on the US stock (same as a Canadian stock) will be tax free.


My understanding is that in a non-registered account, the capital gains will be the same for a Canadian or US stock as well. For dividends, there will be the 15% withholding tax the IRS takes, plus one pays their marginal tax rate on the dividends as they won't qualify for the more favourable tax treatment of Canadian dividends. You will get some or all of the 15% US withholding tax back when filing a Canadian tax return.

http://www.canadiancapitalist.com/tax-implications-of-foreign-dividend-investing/


As for "monies received from preferred shares are a capital gain" - I don't believe this is true. 

My understanding is part of what makes a preferred share attractive is a higher dividend rate than common shares - which by definition dividends are paid. If t's a US stock, as mentioned earlier there is both the 15% US withholding tax plus paying one's marginal tax rate on the dividends (which is usually higher than the capital gains tax rate). Monies received from *selling the preferred shares* (or common shares) will be a capital gain or loss, on the other hand.


Getting back to your question of type of investments to hold in a non-registered account - it depends on what you want to achieve. If one chooses to hold a US stock that does not pay dividends - there is only the capital gain to pay taxes on. If one hold a Canadian stock that pays eligible dividends, there will be capital gains taxes with dividend taxes but for most people, the dividends taxes will be cheaper than it would be on a US stock.


Cheers


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## Guban (Jul 5, 2011)

I agree with what Eclectic12 said, and would like to emphasize that you won't get the 15% US withholding tax back for investments in a TFSA. The tax situation is pretty messy, but see these great links for a comprehensive disccusion about mutual funds/ETF's:
http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/
http://canadiancouchpotato.com/2012/09/20/foreign-withholding-tax-which-fund-goes-where/


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## Eclectic12 (Oct 20, 2010)

Guban said:


> I agree with what Eclectic12 said, and would like to emphasize that you won't get the 15% US withholding tax back for investments in a TFSA. ...


Agreed ... though some in the higher marginal tax rates will argue that where there is no more RRSP room, the TFSA is a better choice than a non-registered account (i.e. taxable), even if one can't get the 15% US withholding tax on dividends back.

Someone in the upper Ontario tax bracket holding a US stock in their non-registered account may get the 15% US withholding tax on dividends back but would also be subject to 28.82% Canadian non-eligible dividend taxes as well as capital gains taxes.
http://www.taxtips.ca/taxrates/on.htm

In a TFSA, the 15% is lost but 13.82% dividends taxes are avoided as well as the capital gains taxes. Or if they are in a higher tax bracket which charges 32.57%, they save 17.57% plus capital gains. 

Or in Quebec, one only needs to be have a taxable income over $87,123 to be saving 18.22% in the TFSA.
http://www.taxtips.ca/taxrates/qc.htm


Cheers


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## Robillard (Apr 11, 2009)

@willow1044
Correction: Canadian preferred share dividends are generally taxed as eligible (or non-eligible) dividends, and if you make a capital gain on them, that gain is taxed as a capital gain. Both dividends and capital gains receive preferential tax treatment compared to "other income", which includes interest on Canadian bonds. 

With respect to US and international investments, it is generally preferable to hold them in a registered account, such as RRSP or TFSA. The reason is that generally any kind of distribution or dividend on a foreign investment is taxed as "other income", which is taxed at your highest marginal rate if held in a non-registered account. Sure you do get to claim a foreign tax credit but generally one's marginal tax rate is higher than the applicable withholding tax rate, so it is advantageous to hold foreign investments in a TFSA or RRSP, even though you will lose the foreign tax credit. If you hold foreign investments in a non-registered account, and you earn capital gain income, that income generally still gets capital gains treatment in Canada.


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## willow1044 (Jan 30, 2012)

wow, that is a lot of information. I think I need to simplify my question:

Being a CDN citizen, living in Canada, having a sum of money in US$, in a non-registered account at TD CanadaTrust, is there a tax advantage in holding some US investments over others?

Bonds vs. stocks for example.

Thanks,

N


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## cainvest (May 1, 2013)

willow1044 said:


> Being a CDN citizen, living in Canada, having a sum of money in US$, in a non-registered account at TD CanadaTrust, is there a tax advantage in holding some US investments over others?


Simple answer, No.


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## GoldStone (Mar 6, 2011)

Ummm, I disagree. There is an advantage to holding US equities that don't pay dividends. You get preferential treatment of cap gains while avoiding taxation of US dividends


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## cainvest (May 1, 2013)

GoldStone said:


> Ummm, I disagree. There is an advantage to holding US equities that don't pay dividends. You get preferential treatment of cap gains while avoiding taxation of US dividends


To me that reads opposite of what is stated above, can you expand on that?

Whether in a CDN or US $ account US equities would be subject to the same cap gains tax as CDN equities right? 
For US dividends, you get taxed at your full tax rate and lose the 15% withholding tax right?

I've only done CDN cap gain/loss, dividend claims so this is new to me as well.


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## humble_pie (Jun 7, 2009)

GoldStone said:


> Ummm, I disagree. There is an advantage to holding US equities that don't pay dividends. You get preferential treatment of cap gains while avoiding taxation of US dividends



i agree w goldstone. In non-registered accounts it is better to harvest capital gains on US securities while avoiding US dividend income. Assuming, of course, that this pleasant outcome can be arranged.

canadian capital gains/losses are based on global gains/losses. The favourable 50% taxable gains rule applies to all global gains.

myself, i don't just look for US stocks without dividends. I shear off their dividends by holding US securities in non-registered account only as long-term diagonal call spreads. These are similar to stock buy-writes except that the long leg is a LEAPs option instead of the stock itself.

these critters are handy for estate purposes, or sometimes for staying under the $100k foreign declaration on tax returns, but always for using leverage to reduce the amount of capital that could plunge in a 2008/09 market collapse.


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## My Own Advisor (Sep 24, 2012)

So humble,

You put your U.S. stocks in a non-reg. CDN $$ account?

Don't you pay 15% withholding taxes (recoverable) + taxes at your marginal tax rate?

Then, you have cap gains @ 50% on the securities when you sell them?


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## humble_pie (Jun 7, 2009)

advisor it's the exact opposite. I hold zero US stocks in non-reg'd accounts.

what i said is that i hold their options only, in paired spreads. These generate tax-favoured capital gains only, as opposed to US dividends that are highly taxed in non-reg'd accounts.



> I shear off their dividends by holding US securities in non-registered account only as long-term diagonal call spreads. These are similar to stock buy-writes except that the long leg is a LEAPs option instead of the stock itself


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## lonewolf (Jun 12, 2012)

Humble

Do you find it best if the long call is in the money & base how far to go in the money based on a set delta ? The call that is sold is it @ or out of the money ?

For playing the downside if volitility has been low is it better to do the opposite for the long put & have the long put out of the money to go long vega (increase in volatility) What about the short put in terms of being in or out of the money?


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## My Own Advisor (Sep 24, 2012)

humble_pie said:


> advisor it's the exact opposite. I hold zero US stocks in non-reg'd accounts.
> 
> what i said is that i hold their options only, in paired spreads. These generate tax-favoured capital gains only, as opposed to US dividends that are highly taxed in non-reg'd accounts.


Thanks for clarifying...I was unsure why on earth you'd do that


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## humble_pie (Jun 7, 2009)

lonewolf said:


> Humble
> 
> Do you find it best if the long call is in the money & base how far to go in the money based on a set delta ? The call that is sold is it @ or out of the money ?
> 
> For playing the downside if volitility has been low is it better to do the opposite for the long put & have the long put out of the money to go long vega (increase in volatility) What about the short put in terms of being in or out of the money?


good questions. What i buy is a bit quirky, because they are expensive. I buy faraway LEAPs (right now farthest out are 2015s, but i have some leftover 2014 spreads still running) that are nearly always extremely DITM.

the reason is that, if a horrifying crash does occur, my long legs - the LEAPs - are so low in strike price that i probably will always have something to sell that will be at least slightly above their strike price.

a good example would be my 2 aapl 2015 400 calls. I bought these when aapl itself was in the high 600s. Who knew.

so always, with the long leg pegged at 400, i've had some short calls to sell at higher strikes that did in fact earn capital gains, while still allowing some kind of profit if the structure were to be wound up due to assignment of the short side.

on the other hand, if i had bought the 2015 600s, it's true that they would have been much cheaper. But, given what has happened to aapl stock, right now i'd have nothing to sell against the long 600s. Near-term 600s/625s/650s have joke premiums. In such a scenario, one would have to sell 500 or 525 to earn any decent premium. But look at the trap that then opens! long 600 call, forced to sell if short call gets assigned at 500, ouch.

for those long-term LEAPs, i look to buy DITMs that are 100 delta or very close. They are so DITM that they have almost no premium. Perhaps i'm quite wrong, but thusly i say to myself that i am purchasing a 2-year lien on the underlying stock itself at close to zero cost.

the short-term call that gets sold is always out of the money. How much out depends on how i view things ... all kinds of things, including how close we are to expiration date of the long leg. For example, with the 2014s that are still running, i'm now looking for lower strikes that are closer to the money, ie less aggressive (of course, these 2014s have been running since 2012, so they have already harvested considerable premium.)

in puts i've only done 3. The long puts were also deep ITM. It truly hurt to buy em. Rather incredibly, all 3 paid off. One was first solar, one was LULU a few years ago, & the 3rd was some restaurant internet reservation service that had no earnings but i started my put structure when its stock was north of $100. Duh. When i wound the thing up stk had plunged to $47.

i find these spreads much more volatile than the underlying stocks themselves. A serious handicap for some people would be the fact that some diagonals will be insanely successful while others inevitably fail. When they fail, the 2-year time span means that losses are big. As t.gal would say, these are not for the faint of heart.


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## GoldStone (Mar 6, 2011)

cainvest said:


> Whether in a CDN or US $ account US equities would be subject to the same cap gains tax as CDN equities right?


Yes.



cainvest said:


> For US dividends, you get taxed at your full tax rate...


Yes.



cainvest said:


> ... and lose the 15% withholding tax right?


No. You can claim foreign tax credit on your Canadian tax return.


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## cainvest (May 1, 2013)

GoldStone said:


> Yes.
> 
> 
> Yes.
> ...


And the foreign tax credit basically covers the 15% withholding tax making the end results a wash right?


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## GoldStone (Mar 6, 2011)

Yes


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## humble_pie (Jun 7, 2009)

cainvest said:


> And the foreign tax credit basically covers the 15% withholding tax making the end results a wash right?


no. 

whether or not taxpayer gets to deduct all of his foreign tax depends upon the structure of taxpayer's investment income.

also, "net income" is calculated without foreign tax credit, ie foreign income such as US divs are reported 100% in net income.

in some tax calculations - amt, some provincial returns, etc - additional taxes & fees are based on net income & do not recognize foreign tax credits, which are only calculated & subtracted close to the end of a tax return.


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## lonewolf (Jun 12, 2012)

Thanks, Humble

Its nice to see a player that has a solid understanding of the dynamics that effect option prices.


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## cainvest (May 1, 2013)

humble_pie said:


> no.
> 
> whether or not taxpayer gets to deduct all of his foreign tax depends upon the structure of taxpayer's investment income.


Care to expand on this with regards to the average long term investor?

With the collective knowledge on CMF is it out of the realm of possibility (with long term investing in mind) to create a simple tax roadmap FAQ covering the 3 basic account types (RRSP/TFSA/Non-REG) vs capitol gains/dividends for domestic and foreign?


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## humble_pie (Jun 7, 2009)

cainvest said:


> 1.Care to expand on this with regards to the average long term investor?
> 
> 2. With the collective knowledge on CMF is it out of the realm of possibility (with long term investing in mind) to create a simple tax roadmap FAQ covering the 3 basic account types (RRSP/TFSA/Non-REG) vs capitol gains/dividends for domestic and foreign?




1. could not - as u know - comment on your own case or anyone else's case.

here is form t-2209, the federal foreign tax credit schedule. You'd have to calculate, perhaps using 2012 figs, to see how your own situation would have worked out.

http://www.cra-arc.gc.ca/E/pbg/tf/t2209/

provincial returns usually have foreign tax credit calcs that are based on the federal figures obtained in t-2209.


2. i think it's beyond the realm of possibility. This is what those $400/hr tax lawyers & CAs are for, to hand-tailor a bespoke program for an individual taxpayer. 

otherwise, poor plebs & pies have to swot up their own knowledge ...


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## cainvest (May 1, 2013)

No problems humble_pie, just thought there might be some helpful generalizations for the masses. I'm not in this tax situation, well currently anyways, but might take a quick peek at the T2209 for interest sake.


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## Eclectic12 (Oct 20, 2010)

^^^^

If you want the general case, there's a bunch of threads on CMF about this or web/news/magazine articles.

They generally boil down to something like:
a) RRSP account - income, US dividends stocks to avoid the 15% withholding tax (i.e. income, dividends and capital gains - Canadian or Foreign)
b) TFSA account - income, growth stocks except US dividend paying stocks (i.e. income and capital gains - Canadian or Foreign)
c) taxable account - stocks (i.e. dividends and capital gains - Canadian)


As usual - the details change the picture. 

If one has a high tax rate, the TFSA is claimed to work out better than the taxable account for a US dividend paying stock because the rate charged on foreign dividends is higher and there is no capital gains tax to pay.


Cheers


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## andrewf (Mar 1, 2010)

I think we can all agree that the existence of $400 an hour tax lawyers demonstrates that our tax system ought to be simpler. This is a profession that adds zero value to society.


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## humble_pie (Jun 7, 2009)

Eclectic12 said:


> As usual - the details change the picture



i think we can safely assume that there are always going to be $400/hr solicitors & CAs, just as there are always going to be $300/hr financial planners. Because there is a need for them. Because people will pay for them.

however, nothing prevents poor pies & plebs from mastering the information themselves. Eclectic is a living illustration of this. I sometimes find myself wondering if there is anything that Eclectic does not know. Time & again, he shows us that, although there may be tricky details lurking in every corner of the dodocahedron, nevertheless it is possible for an ordinary retail investor to swot up the answers.

for example, there is a category of US ADRs that pay dividends in USD but these are not subject to the famous 15% withholding tax. These stocks are therefore suitable for tfsa, where they would serve to augment USD & increase diversification in a tax-free account.

what are they? i'm tempted to joke that'll be $$/hr billable in 15-minute increments but the grunt-in-the-kitchen side of me says ADRs from countries that don't withhold to the US of A. Countries like great britain & hong kong, therefore stocks like british vodaphone or hong kong china mobile ...


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## cainvest (May 1, 2013)

Eclectic12 said:


> If you want the general case, there's a bunch of threads on CMF about this or web/news/magazine articles.
> 
> They generally boil down to something like:
> a) RRSP account - income, US dividends stocks to avoid the 15% withholding tax (i.e. income, dividends and capital gains - Canadian or Foreign)
> ...


Thanks Eclectic12!

Again, in general,
a) RRSP account - income, US dividends stocks to avoid the 15% withholding tax (i.e. income, dividends and capital gains - Canadian or Foreign)
b) TFSA account - income, growth stocks except US dividend paying stocks (i.e. income and capital gains - Canadian or Foreign)
b1) True or false, can generally claim foreign tax credit for US dividends? 
c) taxable account - stocks (i.e. dividends and capital gains - Canadian)
c1) True or false, can generally claim foreign tax credit for US dividends? 

Also, when using any of the self directed accounts listed above with US holdings, do people need to fill out a W-8BEN form or is this normally done when the accounts are openned?


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## Guban (Jul 5, 2011)

cainvest said:


> Thanks Eclectic12!
> 
> Again, in general,
> a) RRSP account - income, US dividends stocks to avoid the 15% withholding tax (i.e. income, dividends and capital gains - Canadian or Foreign)
> ...


b1) False
c1) True

A W-8BEN can be filled out afterwards if you've forgotten to do so earlier, but recovering the withholding above 15% is a pain.


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## Eclectic12 (Oct 20, 2010)

Guban said:


> cainvest said:
> 
> 
> > ... b) TFSA account - income, growth stocks except US dividend paying stocks (i.e. income and capital gains - Canadian or Foreign)
> ...


+1.

That's the trade-off in the TFSA. If a US dividend paying stock is held, the 15% is taken *and* the foreign tax credit (FTC) can't be claimed (as there are no Canadian taxes for the credit to apply to).

So the question for the TFSA will be is the 15% without the FTC with no foreign dividend taxes or capital gains taxes ends up cheaper than 15% + FTC (which reduces the taxes owing) + foreign dividend taxes based on one's income + capital gains taxes?

Or perhaps a clearer way of thinking about it - is the TFSA's flat tax of 15% cheaper than the three taxes with whatever FTC credit?


Only the investor can reasonable estimate this based on their income with the help of provincial tax tables such as:
http://www.taxtips.ca/taxrates/qc.htm
Note that the foreign dividends tax ranges from a bottom end of 11.74% (Canadian eligible dividends at 5.64% at that income level) to a high of 38.54% (where at that income level, Canadian eligible dividends at 35.33%).



Guban said:


> cainvest said:
> 
> 
> > ... c) taxable account - stocks (i.e. dividends and capital gains - Canadian)
> ...


+1.

Another factor is that I believe others have posted that like other tax credits - there is a point where the credit is less than what is charged. I haven't investigated so I'm not where where this is as I've only had small amounts of US dividend paying stock in a taxable account.




Guban said:


> cainvest said:
> 
> 
> > ... Also, when using any of the self directed accounts listed above with US holdings, do people need to fill out a W-8BEN form or is this normally done when the accounts are openned?
> ...


I don't recall filling one out but there was a ton of paperwork so I might have missed it. The general feedback is that Canadian brokers are good at making sure the accounts are correctly setup.

I've seen complaints for where the US stock has been held directly or where there was an exception. If you are concerned - the best thing is to confirm with your broker. The next best is to make sure you reconcile the dividends received to be sure the correct amount is taken (30% instead of 15% should be relatively easy to spot).


Cheers


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> i think we can safely assume that there are always going to be $400/hr solicitors & CAs, just as there are always going to be $300/hr financial planners. Because there is a need for them. Because people will pay for them ...


+1 ... I expect there will always be those with a big enough stash who don't want to look at the possibilities themselves.



humble_pie said:


> ... however, nothing prevents poor pies & plebs from mastering the information themselves. Eclectic is a living illustration of this. I sometimes find myself wondering if there is anything that Eclectic does not know. Time & again, he shows us that, although there may be tricky details lurking in every corner of the dodocahedron, nevertheless it is possible for an ordinary retail investor to swot up the answers.
> 
> for example, there is a category of US ADRs that pay dividends in USD but these are not subject to the famous 15% withholding tax. These stocks are therefore suitable for tfsa, where they would serve to augment USD & increase diversification in a tax-free account ...


Thanks for the compliments but the US ADRs not subject the 15% withholding tax are news to me.

If one lives and learns what one can at one's own pace - over time, there's lots of opportunities to at least protect oneself and at best, profit.


Cheers


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## cainvest (May 1, 2013)

Thanks Eclectic12 and Guban, 

I think that paints a pretty clear general tax picture for most.


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