Home Investing Tax implications For Canadian Buyers Shopping for U.S. Shares

Tax implications For Canadian Buyers Shopping for U.S. Shares

Tax implications For Canadian Buyers Shopping for U.S. Shares


Up to date on Might seventeenth, 2023

For Canadian buyers, having publicity to the US inventory market is essential. There are a variety of explanation why.

First, the US is the most important inventory market on the planet. With the intention to keep away from residence nation bias and have a globally diversified funding portfolio, publicity to American shares is required.

Second, there are particular sectors which can be underrepresented within the Canadian inventory market. Examples embody healthcare, know-how, and shopper staples. Apparently, these sectors are among the many strongest within the U.S. market.

To spend money on shares from the US, Canadian buyers want to grasp how this may affect their tax payments.

This text will focus on the tax implications for Canadians that spend money on U.S. shares, together with examples of dividend- and non-dividend-paying shares held in each taxable accounts and nontaxable accounts.

Desk of Contents

Whereas we suggest studying this text in its entirety, you’ll be able to skip to a specific part of this text utilizing the desk of contents beneath:

Capital Good points Tax

There are two forms of investing taxes that Canadian buyers can pay if they’re investing outdoors of a tax-free retirement account. The primary is capital features tax, which might be mentioned first.

A capital achieve happens when a safety is bought for greater than its buy worth. Conversely, a capital loss comes from promoting a safety for lower than it was bought for.

Canadian buyers are compelled to pay capital features tax on 50% of their realized capital features. The tax price for these transactions is an identical to the person’s marginal tax price.

Marginal tax charges are composed of a federal part (which is paid in the identical quantity by all Canadians) and a provincial part (which varies relying on which province you reside in).

In line with the Canada Income Company, present federal tax charges by tax bracket are:

  • 15% on the primary $50,197 of taxable earnings, +
  • 20.5% on the subsequent $50,195 of taxable earnings (on the portion of taxable earnings over $50,197 as much as $100,392), +
  • 26% on the subsequent $55,233 of taxable earnings (on the portion of taxable earnings over $100,392 as much as $155,625), +
  • 29.38% on the subsequent $66,083 of taxable earnings (on the portion of taxable earnings over $155,625 as much as $221,708), +
  • 33% of taxable earnings over $221,708.

As talked about, provincial tax charges range by province. Examples on this article will use Ontario’s tax charges, as it’s Canada’s most highly-populated province. Ontario tax charges by tax bracket are proven beneath:

  • 5.05% on the primary $46,226 of taxable earnings, +
  • 9.15% on the subsequent $46,228, +
  • 11.16% on the subsequent $57,546, +
  • 12.16% on the subsequent $70,000, +
  • 13.16% on the quantity over $220,000

So how do capital features taxes range for holders of U.S. shares?

Fortuitously, the capital features tax paid on investments in U.S. shares is an identical to the capital features paid on Canadian securities. The one minor distinction is that capital features have to be expressed in Canadian {dollars} for the aim of calculating an investor’s tax legal responsibility.

An instance will help us perceive capital features tax from U.S. shares within the context of those Canadian tax brackets. Let’s assume that you’re a Canadian investor who has executed the next trades:

  • Bought 100 shares Johnson & Johnson (JNJ) for US$100 at a time when the USD to CAD alternate price was 1.25
  • Bought your Johnson & Johnson shares for US$125 at a time when the USD to CAD alternate price was 1.15

You’ll pay capital features on the distinction between your buy worth and your sale worth, expressed in Canadian {dollars}. The next desk will help us to grasp the right technique to calculate the CAD-denominated capital achieve. Though in a roundabout way calculated within the picture above, the capital achieve for this transaction – expressed in U.S. {dollars} – is US$2,500. Nevertheless, that’s irrelevant for the aim of calculating capital features tax as a result of capital features tax is predicated on transaction costs expressed in Canadian {dollars}. What actually issues is the CAD$1,875 capital achieve proven within the backside proper cell of the desk.

That is the quantity used to calculate capital features. As talked about beforehand, half of this quantity can be taxed on the investor’s marginal tax price. We’ll assume for simplicity’s sake that the investor is within the highest tax bracket, which is 46.16% for Ontario residents.

The next desk breaks down the capital features tax calculation for this hypothetical funding in Johnson & Johnson (JNJ).

This calculation was fairly concerned and demonstrates how difficult the calculation of capital features tax will be for Canadians.

Fortuitously, capital features tax will be prevented solely if U.S. shares (or shares from every other nation) are held in Canadian retirement accounts. We focus on the 2 forms of Canadian retirement accounts (TFSAs and RRSPs) in a later part of this text.

For now, we’ll transfer on to discussing the taxation of dividends paid to Canadian buyers from U.S. companies.

Dividend Tax

Not like capital features taxes (that are calculated in the identical means for U.S. shares and Canadian shares), the taxes that Canadian buyers pay on worldwide inventory dividends are completely different than the taxes they pay on home dividends.

This is because of a particular kind of dividend tax referred to as “withholding tax.” Not like different taxes paid by Canadian buyers, these taxes are withheld at supply (by the corporate that pays the dividend) and remitted to their very own tax authority – which, for United States firms, is the Inside Income Service (IRS).

Dividend withholding taxes meaningfully scale back the earnings that Canadian buyers are in a position to generate from U.S. shares. Fortuitously, this impact is partially offset by a particular tax treaty between the US and Canada (referred to as the Conference Between Canada and the US of America). The U.S. withholding tax price charged to international buyers on U.S. dividends is often 30% however is diminished to fifteen% for Canadians because of this treaty.

How does this evaluate to the typical withholding tax of nations throughout the globe?

Even after accounting for the particular tax treaty, the U.S. continues to be an unfavorable marketplace for Canadian buyers from the attitude of tax effectivity. In line with Blackrock, the weighted common international withholding tax on worldwide inventory dividends is 12%. Even after accounting for the tax treaty, Canadians nonetheless pay a 15% withholding tax — 25% increased than the weighted common dividend withholding tax around the globe.

Canadian buyers might be completely satisfied to listen to that this international withholding tax is ready to be reclaimed come tax time. The Canada Income Company permits you to declare a international tax credit score for the withholding tax paid on United States dividends. This prevents buyers from paying tax twice on their dividend earnings.

Nonetheless, U.S. dividends are usually not as tax environment friendly as their Canadian counterparts. The rationale why is considerably difficult and is said to a Canadian taxation precept referred to as the “dividend tax credit score.” The dividend tax credit score meaningfully reduces the taxes that Canadians pay on dividends, and causes dividend earnings to be the one most tax-efficient type of earnings out there to Canadians.

In line with MoneySense:

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

Our advice for Canadian buyers on the lookout for publicity to U.S. shares is to carry their U.S. shares in retirement accounts, which concurrently reduces their tax burden and dramatically reduces the tax complexity of their funding portfolios. We focus on dividend taxes in retirement accounts within the subsequent part of this text.

Dividend Tax in Retirement Accounts

One of the best ways for Canadian buyers to achieve publicity to U.S. shares is thru retirement accounts.

There are two main retirement accounts out there for Canadian buyers:

Each supply tax-advantaged alternatives for Canadians to deploy their capital into monetary belongings. With that stated, there are essential variations as to how every account features.

The Tax-Free Financial savings Account (TFSA) permits buyers to contribute after-tax earnings into the account. Funding features and dividends held throughout the account are topic to no tax and no tax is incurred upon withdrawal from the account. TFSAs are functionally much like Roth IRAs in the US.

The opposite kind of retirement account in Canada is the Registered Retirement Financial savings Plan (RRSP). These accounts permit Canadian buyers to contribute pre-tax earnings, which is then deducted from their gross earnings for the aim of calculating annually’s earnings tax. Revenue tax is paid later, upon withdrawals from the RRSP. RRSPs are functionally equal to 401(okay)s inside the US.

Each of those retirement accounts are very engaging as a result of they permit buyers to deploy their capital in a really tax-efficient method. Usually, no tax is paid on each capital features or dividends as long as the shares are held inside retirement accounts.

Sadly, there may be one exception to this rule. The withholding tax paid to the IRS on dividends from United States companies continues to be paid inside TFSAs. Because of this, U.S. shares shouldn’t be held inside a TFSA if doable.

As a substitute, the RRSP is one of the best place to carry U.S. shares (not MLPs, REITs, and many others.) as a result of the dividend withholding tax is waived. In truth, no tax is paid in any respect on U.S. shares held inside RRSPs. Because of this Canadian buyers ought to maintain all dividend-paying U.S. shares inside their RRSPs if they’ve ample contribution room. U.S. shares that don’t pay dividends must be held in a TFSA. Lastly, Canadian shares must be held in non-registered accounts to reap the benefits of the dividend tax credit score.

Ultimate Ideas

This text started by discussing a number of the advantages of proudly owning U.S. shares for Canadian buyers earlier than elaborating on the tax penalties of implementing such a technique. After describing the tax traits of U.S. shares for Canadians, we concluded that one of the best practices are to:

  • Maintain dividend-paying U.S. shares inside an RRSP
  • Maintain non-dividend-paying U.S. shares inside a TFSA
  • Maintain Canadian shares in a taxable account — particularly dividend-paying Canadian shares, to reap the benefits of the dividend tax credit score

If you’re a Canadian dividend investor and are fascinated by exploring the U.S. inventory market, the next Certain Dividend databases include a number of the most high-quality dividend shares in our funding universe:

  • The Dividend Aristocrats: S&P 500 shares with 25+ years of consecutive dividend will increase
  • The Dividend Achievers: dividend shares with 10+ years of consecutive dividend will increase
  • The Dividend Kings: thought-about to be the best-of-the-best in relation to dividend progress, the Dividend Kings are an elite group of dividend shares with 50+ years of consecutive dividend will increase

Alternatively, it’s possible you’ll be seeking to tailor a really particular group of dividend shares to satisfy sure yield and payout traits. If that is certainly the case, you can be within the following databases from Certain Dividend:

One other technique to strategy the U.S. inventory market is by setting up your portfolio in order that it owns firms in every sector of the inventory market. Because of this, Certain Dividend maintains 10 databases of shares from every sector of the market. you’ll be able to entry these databases beneath.

Thanks for studying this text. Please ship any suggestions, corrections, or inquiries to [email protected].


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