Avoiding US dividend taxes for Canadians

[beerbaron]

I have never realized that Canadians get taxed 15% for US dividends and that the dividends must be treated as interests (All my previous investments were in my RRSP).

 

http://www.ctv.ca/generic/generated/static/business/article1580827.html

 

Besides using your RRSP how are you guys manage to avoid the 15% and interest treatment?

 

It seems unfair to me that a Mutual Fund can invest however it wants and transfer the dividends without taxes and that an individual gets different treatment.

 

BeerBaron

[Cardboard]

The answer is in the article:

 

"But the 15-per-cent withholding tax would qualify for a foreign tax credit on your Canadian return. So, for most investors, the net result is that U.S. dividends held in a non-registered account will be taxed at the same rate as interest income. "

 

Dividends you receive from U.S. corporations will be considered foreign income and as mentioned, taxed at the same rate as interest income. The 15% will be reimbursed to you in full on line 405 or your Federal tax return.

 

It still remains more advantageous to receive Canadian dividends than U.S. ones due to the tax credit on Canadian dividends. However, sometimes you have to buy some U.S. stocks because they are more attractive. The tax difference on the dividends is a consideration for your overall rate of return calculation, but has never been enough of a factor to detract me from going ahead and buying a U.S. stock.

 

Cardboard

 

 

[ourkid8]

Quick question, is there anything special I need to do to be reimbursed in full on line 405 or your federal tax return?  I file my taxes myself and I never knew there was a way to receive a reimbursement of the withholding tax... Please elaborate!  :) 

 

 

Dividends you receive from U.S. corporations will be considered foreign income and as mentioned, taxed at the same rate as interest income. The 15% will be reimbursed to you in full on line 405 or your Federal tax return.

 

Cardboard

[beerbaron]

Humm yes please elaborate. How does the deduction get calculated, is it treated like an investment expense (like comission fees)? Or is the US tax fully reinbursed and then treated as interest income?

 

Regards

BeerBaron

[Cardboard]

You have to file this form, attach to your return and then enter the amount on line 405 which will match the amount of foreign tax (the 15%) that was withheld in your brokerage account. There are special cases where the 15% will not be reimbursed entirely, but not for what you are describing.

 

http://www.cra-arc.gc.ca/E/pbg/tf/t2209/t2209-09e.pdf

 

Cardboard

[StubbleJumper]

I have never realized that Canadians get taxed 15% for US dividends and that the dividends must be treated as interests (All my previous investments were in my RRSP).

 

http://www.ctv.ca/generic/generated/static/business/article1580827.html

 

Besides using your RRSP how are you guys manage to avoid the 15% and interest treatment?

 

It seems unfair to me that a Mutual Fund can invest however it wants and transfer the dividends without taxes and that an individual gets different treatment.

 

BeerBaron

 

Buy BRK....it doesn't pay a dividend.

[ERICOPOLY]

Instead of buying the shares, one can write cash-covered deep-in-the-money puts on certain stocks that you intend to own for at least the period of time as the contract.  The options market will generally roll the expected dividends into the options premium -- so you are effectively converting the dividend payments of up to the first couple of years of ownership into capital gains (you get assigned the shares when they get put to you, but no tax is due until the shares are sold).

 

There are potential limitations though (like the stock runs up too far and you don't get assigned but instead owe capital gains tax).  Depends on how deep-in-the-money the contract is.

 

[Uccmal]

Any reasonable tax software should include these calculations.

 

The main problem is not the 15% but the treatment of dividends as income which is at a higher tax rate than capital gains, or Canadian dividends. 

[SharperDingaan]

 

Hold a global dividend &/or bond fund. Sell out the position around mid-late Dec, & buy it back 32 days later. The fund administrator/broker will scream, but keep in mind that they actually work for you ..... the 'investor'.

 

Witholding liabilities incurred by the fund over the entire year, are typically spread over all unit holders as at year-end, with each unit holder receiving a hit on their tax forms. If you're not there at year-end there's no hit, & if you re-buy > 30 days there is no frequent trading penalty. Target a smaller (& often US) fund with weaker support systems, & in most cases you'll also get full fund value for the dividend (vs 85%).

 

Of course it is not fair, but very little about a funds administration is actually fair.

ie: Soft $ comp on deal flow to brokers, legal, etc.

 

SD

 

 

[scorpioncapital]

Buying US dividend stocks on margin can be one way to shield some of the tax to pay in Canada. You are allowed to substract carrying costs (which include interest) from the dividend/interest received which allows you to carry more of your investment than you would otherwise be able to.

[beerbaron]

What about if I subscribe to the dividend reinvesting plan? Do I still get the Canadian and US tax on the dividend?

 

BeerBaron

[scorpioncapital]

I would think so, dividend reinvestment means a dividend was paid (and taxed) and then reinvested.