Withholding Tax On U.S. Dividends
U.S. (and other foreign) dividends do not qualify for the Canadian dividend tax credit. Therefore, these foreign dividends are taxed at your marginal tax rate, similar to interest income.
In order to avoid double taxation, you can claim the 15% U.S. tax withheld as a foreign tax credit. If more than 15% U.S. tax was withheld, Canada Revenue Agency is of the opinion that you should file a U.S. tax return to obtain a refund. One should ensure that the maximum tax withheld on U.S. dividends is 15%, in accordance with the Canada-U.S. Tax Treaty.
When reporting the foreign income and foreign tax withheld, one should convert these amounts to Canadian dollars using the Bank of Canada exchange rate in effect on the transaction date.
If there are multiple transactions, Canada Revenue Agency will allow you to use the Bank of Canada’s average exchange rate for the year.
The U.S. withholding tax does not apply to U.S. stocks held in a registered retirement savings plan, registered retirement income fund, or other retirement accounts. However this exemption, which is part of the Canada-U.S. tax treaty, does not apply to tax-free savings accounts (TFSAs) or registered education savings plans (RESP’s). Also, no foreign tax credit can be claimed for the tax withheld on foreign stocks within a TFSA or RESP.
For more information of taxation on U.S. dividends please contact the professional tax accountants at Hogg, Shain & Scheck at 647 557 7591.