Tax implications For Canadian Investors Buying U.S. Stocks

Up to date on September 2nd, 2024 by Kay Ng

For Canadian traders, having publicity to the USA inventory market is essential. There are a selection of the reason why.

First, the USA is the most important inventory market on the earth. So as to keep away from house nation bias and have a globally diversified funding portfolio, publicity to American shares is required.

Second, there are specific sectors which can be underrepresented within the Canadian inventory market. Examples embody healthcare, expertise, and client staples. Apparently, these sectors are among the many strongest within the U.S. market.

To put money into shares from the USA, Canadian traders want to grasp how it will impression their tax payments.

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

Desk of Contents

Whereas we advocate studying this text in its entirety, you may skip to a selected part of this text utilizing the desk of contents under:

Capital Positive aspects Tax

There are two sorts of investing taxes that Canadian traders can pay if they’re investing exterior of a tax-deferred retirement account. The primary is capital features tax, which can be mentioned first.

A capital acquire 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 traders should pay capital features tax on no less than 50% of their realized capital features. The 2024 Federal Funds introduced a rise within the capital features inclusion charge from 50% to 2 thirds on the portion of capital features realized within the 12 months that exceed $250,000 for people, for capital features realized on or after June 25, 2024. The $250,000 threshold applies to capital features realized by a person web of any capital losses realized within the present 12 months or carried ahead from prior years. The tax charge for capital features is an identical to the person’s marginal tax charge.

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

In response to the Canada Income Company, present federal tax charges by tax bracket are:

15% on the primary $55,867 of taxable revenue, +
20.5% on the subsequent $55,866 of taxable revenue (on the portion of taxable revenue over $55,867 as much as $111,733), +
26% on the subsequent $61,472 of taxable revenue (on the portion of taxable revenue over $111,733 as much as $173,205), +
29% on the subsequent $73,547 of taxable revenue (on the portion of taxable revenue over $173,205 as much as $246,752), +
33% of taxable revenue over $246,752.

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 under:

5.05% on the primary $46,226 of taxable revenue, +
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?

Happily, 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 should be expressed in Canadian {dollars} for the aim of calculating an investor’s tax legal responsibility.

An instance may also 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 trade charge was 1.25
Offered your Johnson & Johnson shares for US$125 at a time when the USD to CAD trade charge 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 may also help us to grasp the right approach to calculate the CAD-denominated capital acquire. Though indirectly calculated within the picture above, the capital acquire for this transaction – expressed in U.S. {dollars} – is US$2,500. Nonetheless, 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 acquire proven within the backside proper cell of the desk.

That is the quantity used to calculate capital features. As talked about beforehand, no less than half of this quantity can be taxed on the investor’s marginal tax charge. We are going to 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). So, the capital features tax can be no less than $432.75.

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

Happily, capital features tax may be tax-free or tax-deferred if U.S. shares (or shares from every other nation) are held in Canadian retirement accounts. We focus on the 2 sorts 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 traders from U.S. companies.

Dividend Tax

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

This is because of a particular sort of dividend tax referred to as “withholding tax.” Not like different taxes paid by Canadian traders, 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 revenue that Canadian traders are capable of generate from U.S. shares. Happily, this impact is partially offset by a particular tax treaty between the USA and Canada (referred to as the Conference Between Canada and the USA of America). The U.S. withholding tax charge charged to international traders on U.S. dividends is often 30% however is decreased to fifteen% for Canadians attributable to this treaty.

How does this examine to the common 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 traders from the attitude of tax effectivity. In response to 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% greater than the weighted common dividend withholding tax all over the world.

Canadian traders can be joyful to listen to that this international withholding tax is ready to be reclaimed come tax time. The Canada Income Company lets you declare a international tax credit score for the withholding tax paid on United States dividends. This prevents traders from paying tax twice on their dividend revenue.

Nonetheless, U.S. dividends should not as tax environment friendly as their Canadian counterparts. The rationale why is considerably difficult and is expounded 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 revenue to be the one most tax-efficient type of revenue obtainable to Canadians.

In response to MoneySense:

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 nations if they’ve filed a type W-8 BEN with the brokerage the place they maintain the investments.

Our suggestion for Canadian traders 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 traders to realize publicity to U.S. shares is thru retirement accounts.

There are two main retirement accounts obtainable for Canadian traders:

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

The Tax-Free Financial savings Account (TFSA) permits traders to contribute after-tax revenue into the account. Funding features and dividends held inside 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 USA.

The opposite sort of retirement account in Canada is the Registered Retirement Financial savings Plan (RRSP). These accounts permit Canadian traders to contribute pre-tax revenue, which is then deducted from their gross revenue for the aim of calculating every year’s revenue tax. Revenue tax is paid later, upon withdrawals from the RRSP. RRSPs are functionally equal to 401(ok)s inside the USA. In different phrases, revenue earned in RRSPs at tax-deferred.

Each of those retirement accounts are very engaging as a result of they permit traders to deploy their capital in a 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. For that reason, U.S. shares that pay out massive dividends shouldn’t be held inside a TFSA if attainable.

As a substitute, the RRSP is the most effective place to carry U.S. dividend shares (however not MLPs, REITs, and many others.) as a result of the dividend withholding tax is waived. The truth is, no tax is paid in any respect on U.S. shares held inside RRSPs.

Because of this Canadian traders ought to maintain all dividend-paying U.S. shares inside their RRSPs if they’ve enough contribution room. U.S. shares that don’t pay dividends may be held in a TFSA.

Lastly, Canadian dividend shares ought to be held in non-registered accounts to reap the benefits of the dividend tax credit score.

Remaining Ideas

This text started by discussing among the advantages of proudly owning U.S. shares for Canadian traders earlier than elaborating on the tax penalties of implementing such a method. After describing the tax traits of U.S. shares for Canadians, we concluded that the most effective practices are to:

Maintain dividend-paying U.S. shares inside an RRSP
Maintain non-dividend-paying or low-yielding U.S. shares (which can be anticipated to have greater development prospects) 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 serious about exploring the U.S. inventory market, the next Certain Dividend databases include among 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 on the subject of dividend development, the Dividend Kings are an elite group of dividend shares with 50+ years of consecutive dividend will increase

Alternatively, chances are 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 approach to strategy the U.S. inventory market is by developing your portfolio in order that it owns firms in every sector of the inventory market. For that reason, Certain Dividend maintains 10 databases of shares from every sector of the market. you may entry these databases under.