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.