Regular reader, Gil, emailed me with a question regarding withholding taxes on U.S securities.
I am wondering if you can provide some insight (to me or as an article for
all of your readers) regarding what the self-directed individual investor
must know with regards to non-resident withholding tax for Canadians
specifically when buying USD ETFs such as Vanguard.
Some topics that are unclear to me include: US Estate Tax, IRS withholding
(15%/30% if you don’t file W-8BEN?) and how capital gains and dividends are
treated for tax purposes.
Great question! Lets start with capital gains and assume that the investments are in a non-registered account. U.S Securities face the same capital gains tax as Canadian securities. That is, if you buy a U.S security and it is sold for $1,000 profit, then $500 is taxable at your marginal tax rate. At 40% MTR, you would owe $200 in taxes on your $1,000 profit.
The biggest difference comes with U.S dividends/interest which face withholding tax. The default withholding tax on those distributions is 30%. But if you fill out a W-8BEN form from your brokerage, the withholding tax will be reduced to 15%. The withheld amount will be used to reduce the tax owed on the distribution. As you can see, the simple act of filling out the W-8BEN from your brokerage can free up 15% of your distribution to be used as you please.
U.S Dividends and interest are taxed at your marginal rate. If you received a $100 U.S dividend, providing that the W-8BEN is completed, the brokerage would take $15 and deposit $85 to your account. When tax season comes around, you would pay tax on the $100 received. Assuming 40% tax bracket, $40-$15 (already paid)= $25 USD would be owed in taxes.
If the U.S stocks are held within an RRSP, the dividends will not face any withholding tax.If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).