# US stocks and taxation



## SkyFall (Jun 19, 2012)

If i make capital gain on a US stock do I pay any tax to the U.S. gouv? And what about dividends? Ive been investing in the stock market both canadian and us market for two year but this year was the first time i sold some so made some capital gain now i am wondering about the taxation. i know in canada, quebec you have to pay tax on %50 of your gain at your marginal tax pourcentage but what about the us do i pay any? And what if its in a tsfa talking about the us stock cuz i know that in canada i aint paying any tax on a tsfa. sorry noob here


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## kcowan (Jul 1, 2010)

If you are a Canadian citizen, and your holdings are in a Canadian brokerage account, then you pay taxes in Canada according to our rules. If you hold US stocks in a TFSA, then all transactions are taxable in the US. But the chances of them becoming an issue are remote. What will be an issue is the withholding tax that the US retains. It is lost to you.


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## SkyFall (Jun 19, 2012)

kcowan said:


> If you are a Canadian citizen, and your holdings are in a Canadian brokerage account, then you pay taxes in Canada according to our rules. If you hold US stocks in a TFSA, then all transactions are taxable in the US. But the chances of them becoming an issue are remote. What will be an issue is the withholding tax that the US retains. It is lost to you.


Oh wait I don't get the US part !?


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## lonewolf (Jun 12, 2012)

SkyFall, excellent question


Is the with holding tax just on the dividend or on capital gains also ? 
Whats the withholding tax rate ?
What are the possible taxes beyond holding tax i.e., the rate & what determines if they are applied ?

Thanks


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## kcowan (Jul 1, 2010)

Withholding taxes are spelled out in the Cda-US Tax Treaty. Currently 15%. Only RRSPs are exempt.


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## Robillard (Apr 11, 2009)

Here is my understanding on withholding tax. Withholding tax applies on interest, dividends, rents and royalties. The entity paying out these forms of income has the obligation to withhold the tax and remit it to the relevant government. For example, if a Canadian investor owns a US corporate bonds in their brokerage account (in Canada), the bond issuer that is paying the interest, through their transfer agent, has an obligation to withhold the tax. Alternatively, the Canadian brokerage may hold the bonds in trust for the Canadian investor through an account in the US, in which case, the brokerage may have the obligation to withhold the tax. To my knowledge, there is an exemption if the Canadian investor holds the US corporate bonds in an RRSP. It is my general understanding that capital gains from the disposition of US investments are not subject to withholding tax, though I am not clear on whether they might be subject to US income tax or not. For the Canadian investor, they claim a foreign tax credit for the amount of withholding tax paid, so that the income is not subject to double taxation. 

If this is a big issue, you should discuss it with an accountant or lawyer better versed in the intricacies of international taxation.


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## SkyFall (Jun 19, 2012)

So I shouldn't care about it cuz they automatically withhold the tax!


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## Eclectic12 (Oct 20, 2010)

SkyFall said:


> So I shouldn't care about it cuz they automatically withhold the tax!


Well as this post indicates, it's good to check so that you aren't being dinged for the full 30% the IRS assigns to foreigners instead of the Canada-US tax treaty that resets the dividends withholding tax at 15% for US stocks held by a Canadian in either a taxable account or TFSA.

http://www.canadiancapitalist.com/check-your-withholding-tax/
http://www.canadiancapitalist.com/withholding-tax-tfsa-investments/

[ You'd almost think I was making a plug for CC's blog ... grin*]


Cheers


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## Robillard (Apr 11, 2009)

Assuming that you are holding US stocks through a taxable account at a Canadian brokerage, the brokerage should issue to you a T5 (I think this is correct form), which should indicate any foreign tax that has been remitted on your behalf. The amount of dividends that are credited to your account throughout the year should be net of the withholding tax.

Likewise, if you own US stocks through a mutual fund trust, the fund manager will issue to you a T3 indicating the amount of foreign tax withheld at source. 

This is all automatic. The brokerage and the fund manager have an obligation to track and report this information to the CRA and you, the invstor.


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## lonewolf (Jun 12, 2012)

Kcowan, Roballard, Electric 1
Thanks for the info much appriciated.

Canadian Capitalist, excellent work

Iam most concerned with capital gains & not dividends & from what I read it does not mention capital gains being taxed but I cant find anything that says capital gains have a holding tax.


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## Eclectic12 (Oct 20, 2010)

lonewolf said:


> ...I am most concerned with capital gains & not dividends & from what I read it does not mention capital gains being taxed but I cant find anything that says capital gains have a holding tax.


I have only read of capital gains on US stocks held by a Canadian being reported on one's Canadian tax return and paid to the CRA.

The US with-holding tax on dividends (or similar income) is typically taken by the source company (ex. US company or Mutual Fund etc.) before any dividends are forwarded to the brokerage (or individual). This is just like the Canadian with-holding tax on dividends for US citizens that buy Canadian investments (ex. stocks, MFs, etc).


So it is my understanding that there won't a capital gain to report to the IRS. 

This matches up with the US tax return I had to file when working for the US branch of the company I worked for - there were no questions from the company provided resources about my investments.


Cheers


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## lonewolf (Jun 12, 2012)

Thanks ,Electric12

The knowledge on this site often amazes me.

Around the 80s or 90s I sent money to the United states & opened up a lindwalldock account because the lower commisions. I only had capital gains & or losses never had dividends. Back then I dont think any taxes were taken off. The firm doing my taxes told me I just had to pay the Canadian taxes.

I since then closed the account. Now I do not think I can open up a trading account with an American firm. Back then the spread between the 2 countries commisions were huge & it was way cheaper to do buissnes with some of the American firms.


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## humble_pie (Jun 7, 2009)

lonewolf said:


> The firm doing my taxes told me I just had to pay the Canadian taxes.



it must have been one of those zoroastrian firms that U like to frequent each:

but not to worry, you are here now & we will keep you on the right track


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## lonewolf (Jun 12, 2012)

Humble_ pie

Thanks, appriciate it

I like to take responsibility & try to watch my own back but I do appriciate it when I have friend that watches out for me & points out the thinking I have failed to do.


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## cardhu (May 26, 2009)

kcowan said:


> If you hold US stocks in a TFSA, then all transactions are taxable in the US.


Not true. Transactions in a TFSA do not trigger any US tax. 



Robillard said:


> For the Canadian investor, they claim a foreign tax credit for the amount of withholding tax paid, so that the income is not subject to double taxation


Not really true … SOME, but not all, Canadians can claim a foreign tax credit for the amount of foreign tax withheld … for most Canadians in the first federal tax bracket, the credit (for US withholdings) would usually be less than the amount of foreign tax withheld … the combined tax paid is not as much as “double”, but it is certainly more than “single”. 



lonewolf said:


> Iam most concerned with capital gains & not dividends & from what I read it does not mention capital gains being taxed but I cant find anything that says capital gains have a holding tax.


Capital gains derived from selling shares for a higher price than you bought them for, are not subject to US withholdings.
Capital gains distributions from a US-sourced mutual fund, ETF, trust, REIT, etc. are subject to US withholdings.


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## Robillard (Apr 11, 2009)

@cardhu
You're right, I should have added the caveat that a Canadian taxpayer needs to be in a higher tax bracket than the withholding tax rate to actually benefit from foreign tax credits. Effectively, the foreign tax credit system ensures that the investor effectively pays the higher of the two marginal tax rates applicable to the investment income. If the marginal rate tax rate levied by the foreign government is higher than the Canadian rate, then the Canadian government effectively does not get to charge any additional tax on that income. This means that the taxpayer will get a foreign tax credit that covers all the Canadian tax they would have otherwise paid. If the foreign withholding tax rate is lower than the Canadian rate, then the foreign tax credit will give the tax payer some credit against the Canadian tax, but there would still be Canadian tax that applies, which raises the effective tax rate up to the Canadian marginal rate. 

Here is an example (for general reading, not directed at you, cardhu)

For example, suppose a Canadian investor holds US stocks through a taxable Canadian brokerage account, and the bonds pay $4,000 in dividends in the current taxation year. Suppose the Canadian investor has a combined federal and provincial marginal tax rate of 30%. Meanwhile, the US withholding tax on the interest income is 15%. The brokerage will ensure that the $600 in US withholding tax is remitted to the IRS if it is not withheld by the US stock issuer. The Canadian investor's account is credited with $3,400. The brokerage sends the investor a T5, showing that the investor received $4,000 in "other" income and paid $600 in US tax. When the Canadian investor files their tax return, in general, they effectively pay an additional $600 in Canadian income tax on the dividends, brining the effective marginal tax rate up to 30%. 

It should be noted that when a taxpayer claims foreign tax credits (the relevant forms are the T2209 and the T2036), they claim a credit equal to the lesser of the foreign tax paid, and the proportionate amount of basic federal (or provincial) tax (proportionate to the ratio of foreign income to total income) they are paying. So, suppose that the investor paid $600 in foreign tax on $4,000 of foreign income, and the foreign income made up 4% of their taxable income of $100,000. Suppose also that their marginal tax rate for their current bracket is 30%, and their average tax rate at this point is 25% (paying $25,000 in Canadian tax). Then the foreign tax credit that the investor claims is the lesser of $600, and 4% of $25,000 ($1,000). Therefore, their Canadian tax bill is reduced by $600. Effectively, on the $4,000 of foreign dividend income, they have paid $600 in US tax, and Canadian tax equal to $4,000*30%-$600=$600. Therefore, the effective marginal tax rate on the $4,000 of foreign income is 30%.


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## kcowan (Jul 1, 2010)

cardhu said:


> Not true. Transactions in a TFSA do not trigger any US tax...


Can you expand on that cardhu?


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## Robillard (Apr 11, 2009)

kcowan,
I think what cardhu meant is that investments held in a TFSA are still subject to US withholding tax on interest, dividends and other types of distributions, but if you trigger capital gains from trading, the capital gains are not subject to US withholding tax or US income tax.


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## humble_pie (Jun 7, 2009)

robillard i think we have to look at what he said & not bother fantasizing about what we think he should have meant

the fact is that the irascible auld storm trooper likes to blast through cmf forum from time to time, insulting left right & centre as he goes, but unfortunately he leaves quite a few mistakes in his wake

for example the mistake about FX on US dripped dividends

looks like he's wrong about "transactions in a TFSA do not trigger any US tax" also

bottom line
take what the auld storm trooper says w a grain of salt


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## kcowan (Jul 1, 2010)

Thanks for the comments. I agree that there is no withholding tax on capital gains on any investment account wherever it is based. Whether there is tax owing is a function of tax treaties/jurisdiction.


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## cardhu (May 26, 2009)

Robillard ... your description suggests that the worst case scenario for foreign investment income is to pay either (1) the foreign withholding rate, or (2) the applicable Cdn marginal rate, whichever is higher ... that is not true ... the FTC mechanism results in many Cdns paying *more than* the higher of those two rates ... for most Canadians in the lowest tax bracket, and many in the next bracket up, foreign investment income is effectively taxed at *worse-than-ordinary-income* rates ... that is what I was referring to upthread.

Re: your example ... there is no US withholding on bond interest ... but if you were to substitute US dividends, then it’s a good example, although I’ve never met anyone whose average rate was 25% while their marginal rate was 30% ... your example doesn’t reflect the “worse than ordinary income” treatment that can occur, because the average tax rate is more than the withholding rate. 

In the case where the average tax rate is less than the foreign withholding rate, whatever amount of the withholding that cannot be offset with a credit, can be deducted ... determining the applicable proportion of credit to deduction is an iterative process, because every time you put in a deduction, the allowable credit drops ... which gives you more to deduct ... which reduces your credit ... which gives you more to deduct ... which reduces your credit ... and so on . 

Of course, it goes without saying that US dividend payers should ideally be held in an RRSP, and if that isn’t possible, then a TFSA is the next best choice ... a non-reg account is obviously the worst type of account in which to hold foreign dividend payers.


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## cardhu (May 26, 2009)

kcowan ... the OP was asking about capital gains on US stocks ... you said “*ALL*” transactions (in a TFSA) are taxable in the US ... I said otherwise.

I consider transactions to involve buying/selling ... stock dividends or ETF distributions are not in that category.

Since this is a Canadian forum, I assumed the OP is Canadian, and is asking from a Canadian point of view ... can you expand on why treaties/jurisdictions should make any difference?


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## cardhu (May 26, 2009)

haughty pie ... don’t be such a troll.

I don’t know who you think you’re fooling ... everyone knows that among this forum’s membership you are “most.likely.to.hurl.hostility.and.insults”... not to mention most likely to whine that others are casting insults when they are not ... your post upthread, which exists for no other reason than as a platform for yet another of your trademark personal attacks, is a perfect illustration of both items. What a hypocrite. 

A grain of salt or a pound of salt, makes no difference to me ... my posts stand up to scrutiny just fine ... you, on the other hand, leave far more mistakes in your wake than I ... by a country mile ... for example your mistake about FX on US dripped dividends ... I challenge you to find more than two or three minor mistakes in all of the content of all of my posts ... happy hunting, you’ve never [correctly] identified any before, including in your slanderous outburst upthread ... in all the times you’ve tried to disprove something I’ve posted, your batting average is still 0.000. 

Whether I check in every day, or every other day, or once a month, is none of your business ... quality of content is what that matters, not quantity, you know.


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## Eclectic12 (Oct 20, 2010)

kcowan said:


> > from *cardhu*:
> > _Not true. Transactions in a TFSA do not trigger any US tax ... _
> 
> 
> Can you expand on that cardhu?



It seems simple enough ... in a taxable account, there's only the capital gains due to the CRA on a US stock & US withholding tax on dividends.

A TFSA has not capital gains tax to pay to the CRA & any US withholding tax will be taken *before* the dividends are paid to the TFSA. 

I suppose one could argue that the US company paying the dividend is a "transaction", however there won't be any tax owing as only the net dividend is delivered to the TFSA.


Then too - if one's broker did not register the TFSA properly with the US as a Canadian account by filing a W8-BEN form, then the US will take 30% off the dividends instead of 15%.


Cheers


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## Eclectic12 (Oct 20, 2010)

kcowan said:


> Thanks for the comments. I agree that there is no withholding tax on capital gains on any investment account wherever it is based. Whether there is tax owing is a function of tax treaties/jurisdiction.


Huh?

My understanding is that the US company will be required to deduct the applicable IRS taxes at source - so unless there is a mistake where the US company deducts less than 15% on the dividend for a Canadian (or less than 30% for others), there shouldn't be any taxes owing to the IRS.

I've never bought a US MF so I can't comment on the capital gains distributions as I've only had US dividends. For the case of dividends, I can confirm that the US withholding tax is sliced off *before* I'm sent the dividends. So the only tax implication for me is the foreign tax credit on the Canadian tax return.


Cheers


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## humble_pie (Jun 7, 2009)

cardhu said:


> ... my posts stand up to scrutiny just fine


little. hitlers. are. still. hitlers ...


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## Robillard (Apr 11, 2009)

@cardhu,
I stand corrected. You are right about the withholding tax on interest income from debt securities. That was eliminated whe the fifth protocol came into effect in 2008. I will correct my example.

On the issue of calculations of the effects of foreign tax credits. I'm not clear how a taxpayer's average tax rate can be higher than their marginal tax rate, or how foreign tax credits can result in effective marginal taxation of foreign investment income higher than the taxpayer's own domestic marginal tax rate. Could you please provide a simplified sample calculation?

I agree with the last point on the optimal allocation of US dividend-paying securities.


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