Tax planning for Canadians who spend money on the U.S.

It’s no shock that many Canadians make investments south of the border—each in shares and actual property. On the world stage, economically talking, we’re small potatoes.

As of Could 31, 2021, Canada’s nation weight throughout the MSCI All Nation World Index was lower than 3%. By comparability, U.S. shares represented nearly 58%. 

The common Canadian dwelling worth in April 2021 was $695,657. In Canadian {dollars}, the common worth of a U.S. dwelling was considerably cheaper, at $535,194 (US $435,400). 

However earlier than you soar into U.S. investments, know there are each Canadian and U.S. tax implications for a Canadian investor to bear in mind. 

Shares and ETFs

When a non-resident invests in U.S shares or U.S.-listed trade traded funds (ETFs), the usual withholding tax on dividends is 30%. A Canadian resident is entitled to a decrease withholding charge of 15% beneath a treaty between the 2 international locations if they’ve filed a kind W-8 BEN with the brokerage the place they maintain the investments.

The 15% withholding tax is usually the one tax obligation a Canadian investor has to the Inside Income Service (IRS) except they’re a U.S. citizen. (U.S. residents who reside in Canada should file U.S. tax returns in addition to Canadian tax returns.) 

If a Canadian resident who isn’t a U.S. citizen sells a U.S. inventory or ETF for a revenue, realizing a capital achieve, they don’t pay tax on that achieve to the U.S. authorities. 

Dividends, curiosity, capital beneficial properties and different funding earnings

U.S. dividends, curiosity, capital beneficial properties and different sources of funding earnings are taxable on a Canadian resident’s T1 tax return as a result of Canadians pay tax on their worldwide earnings. 

Curiosity earnings earned within the U.S. usually has no withholding tax for a Canadian resident.

Any U.S. tax withheld on different sources of funding earnings is eligible to say as a overseas tax credit score. This usually reduces the Canadian tax in any other case payable greenback for greenback, and avoids double taxation. 

U.S. dividends, curiosity, and capital beneficial properties should be reported in Canadian {dollars} primarily based on the relevant overseas trade charge. Most individuals use the common charge for the yr to transform their earnings to Canadian {dollars}, however it’s also acceptable to make use of the speed on the date of the transaction. 

Capital beneficial properties are a bit trickier than dividends and curiosity as a result of you will have a minimum of two trade charges to find out: the trade charge on the date of buy, and the trade charge on the date of sale. As a result of trade charges fluctuate, it’s doable that the shift in trade charges causes a a lot completely different capital achieve or loss in Canadian {dollars} than in US {dollars}. 

If an investor has bought shares at completely different occasions, there’s much more work concerned. It is advisable to determine the trade charge for every buy in Canadian {dollars} to find out the adjusted value base. This may be significantly difficult for somebody who has a inventory financial savings plan with a U.S.-based employer the place they purchase shares with every paycheque, for instance. 

Canadian-listed ETFs and Canadian mutual funds that personal U.S. shares are themselves thought-about to be Canadian residents, identical to a person taxpayer. They are going to be topic to withholding tax earlier than a dividend is obtained by the fund. This withholding tax is usually reported on a T3 slip (or typically a T5 slip, relying on the fund) and may likewise be claimed for a overseas tax credit score in Canada. 

Up to now, these feedback apply to non-registered, taxable funding accounts. There are barely completely different implications if a Canadian buys U.S. shares or ETFs in a special account. 

Registered funding accounts

Tax-free financial savings accounts (TFSAs), registered schooling financial savings plans (RESPs), and registered incapacity financial savings plans (RDSPs) usually have the identical withholding tax implications by the IRS as a taxable account. Nevertheless, as a result of these accounts are tax-free or tax-deferred, there are not any tax implications for a Canadian past the withholding tax. 

Does this imply you shouldn’t personal U.S. shares in a TFSA, RESP or RDSP? No, nevertheless it does imply there’s a slight value to doing so, albeit for the good thing about holding a extra diversified funding portfolio. 

A registered retirement financial savings plan (RRSP) or comparable tax-deferred retirement financial savings account will get particular remedy by the IRS. There’s usually no withholding tax in case you personal U.S. shares or U.S.-listed ETFs. Nevertheless, in case you personal a Canadian-listed ETF or Canadian mutual fund that owns US shares, the tax is withheld earlier than it will get to the fund or to your RRSP. 

For a Canadian taxpayer, the tax implications are equivalent whether or not you will have an account in Canada or the U.S. The bodily location of the account doesn’t matter. 

Actual property

Canadians who spend money on U.S. actual property face completely different implications relying upon whether or not the property is for private use or is a rental property. 

A private-use property usually has no annual tax submitting necessities, whereas a rental property should be reported in each Canada and the U.S. annually. 

Rental earnings and bills must be reported on each a Canadian and a U.S. tax return. A Canadian resident with a U.S. rental property should file a 1040-NR tax return to report the U.S. supply earnings to the IRS. Any U.S. tax payable can usually be claimed in Canada as a overseas tax credit score to cut back Canadian tax in any other case payable. 

Upon sale, there could also be a capital achieve or loss in Canada and the U.S. The Canadian achieve or loss relies on the acquisition worth in Canadian {dollars} and the sale worth in Canadian {dollars}, primarily based on the trade charges in impact on the time of every transaction. Buy and sale prices, in addition to any renovations, could scale back a capital achieve (or improve a loss). 

A Canadian is usually topic to fifteen% withholding tax on the gross proceeds of U.S. actual property, except they file for a withholding certificates previous to closing to cut back the tax primarily based on the estimated capital achieve. U.S. capital beneficial properties tax paid is eligible to say in Canada as a overseas tax credit score. 

If a Canadian taxpayer has greater than $100,000 in overseas belongings, together with U.S. shares, ETFs, rental actual property, or different investments, they should file the T1135 International Revenue Verification Assertion kind with their Canadian tax return. The $100,000 restrict pertains to the fee, in Canadian {dollars}, for the investments. Private-use overseas actual property, in addition to tax-sheltered RRSPs or tax-free TFSAs, don’t must be reported. 

These are simply a number of the fundamental tax implications for a Canadian investor who owns U.S. belongings. Investing in U.S. shares, ETFs or actual property may help diversify a portfolio, however comes with further complexity and tax-compliance necessities as effectively. 

Extra from Ask a Planner:

• “The place can we pay earnings tax if we retire overseas?”
• When does it make sense to promote actual property in a bigger metropolis and purchase in a smaller one?
• How a lot to take out of your RRSPs in your 60s
• Tax implications of constructing a laneway suite
• Property planning adjustments in Ontario

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