Canadian Money Forum banner

1 - 8 of 8 Posts

·
Banned
Joined
·
2 Posts
Discussion Starter #1
I'm a prospective buyer of some ADR investments in the US. These are alternate listings of non-US corporations on the US stock exchanges. But before I jump in, I have a few questions:

1. What is the tax treatment of ADR investments in TFSA and RRSP, both capital gain and dividend? My understanding is you can make invest in US-headquartered companies listed in the US in your TFSA or RRSP and pay no tax on either capital gains and dividend. Is the same true for ADRs?

2. Are dividends paid in $US or the home currency of the ADR company?

3. Are dividends automatically converted to $CDN when paid out, and will I automatically be charged for the currency conversion?

If anyone has experience or knowledge with making this type of investment, I'd appreciate your insight.
 

·
Premium Member
Joined
·
2,686 Posts
I'm a prospective buyer of some ADR investments in the US. These are alternate listings of non-US corporations on the US stock exchanges. But before I jump in, I have a few questions:

1. What is the tax treatment of ADR investments in TFSA and RRSP, both capital gain and dividend? My understanding is you can make invest in US-headquartered companies listed in the US in your TFSA or RRSP and pay no tax on either capital gains and dividend. Is the same true for ADRs?

2. Are dividends paid in $US or the home currency of the ADR company?

3. Are dividends automatically converted to $CDN when paid out, and will I automatically be charged for the currency conversion?

If anyone has experience or knowledge with making this type of investment, I'd appreciate your insight.
1. US dividends are subject to withholding tax in TFSA but not in a RRSP. ADRs pay withholding taxes on dividends based on what the tax treaty is between Canada and the country its based in whether in a RRSP or a TFSA. There are no taxes on capital gains for ADRs or US stocks in a RRSP or a TFSA.

2. Dividends paid in USD.

3. Yes.

Double check all my answers. I believe they are correct but you may want to double check anyway.
 

·
Registered
Joined
·
2,626 Posts
ADRs pay withholding taxes on dividends based on what the tax treaty is between Canada and the country its based in
Is there an 'easy' list showing this info? I've tried to google this with little luck. I only know the existence or lack of treaties for the countries of ADRs I already own, but that's limited.
 

·
Registered
Joined
·
15,839 Posts
it's such a tiny detail, i wasn't going to post until sampson brought it up again ... but the binding treaty that governs ADR and ADS dividends paid to canadian resident taxpayers is the canada-US tax convention. This is because ADRs and ADSs are legally constituted trading vehicles within the US of A, somewhat analogous to trusts that hold the foreign-traded shares of foreign companies, and they function very much like publicly-traded domestic US corporations.

there are likely to be treaties between the host country of a foreign company and the USA that affect an ADR or an ADS, but any treaty between the host country and canada is largely irrelevant.

while it can be true that there are 2 layers of dividends, one of these is hidden from the view of canadian taxpayers. In full view are the USD dividends on the ADRs/ADSs that are subject to US withholding tax, save and except when these are held within an rrsp. Canadian taxpayers can claim a foreign tax credit for these withheld taxes, thanks to the canada-US tax treaty.

however, if a foreign corporation issues dividends in its own country, these are paid to the new york city-based ADR or ADS. These can be subject to some withholding or other tax in the country of origin. This primary or initial layer of withholding tax is hidden from canadian taxpayer's eyes. I have read that it is possible, by analyzing the foreign corporation's financial statements and also the tax convention between its host country and the USA - and all of these with the finest possible attention to detail - to extrapolate the pro-rated micro-proportion of monies withheld by the country of origin that might be considered to be an individual canadian investor's ultimate portion, and then to file a claim for canadian tax credit for that amount.

would i bother to do such a thing ? certainly not. Life's too short. Those documents are hundreds of pages long. There are 3 currencies involved. In some cases, the tax treaty between the country of origin and the USA may specify additional complications that directly affect the ADR or the ADS in new york city, but only affect canadians indirectly.

at the end of the day, you buys you ADR and you puts up and you shuts up. There's just one word of warning. If you ADR is proposing to pay a huge special irregular dividend, canadian taxpayers could consider selling the ADR for a capital gain just prior to the X date, so as to obtain the favourably-taxed cap gain instead of the 100% taxable foreign dividend.
 

·
Banned
Joined
·
2 Posts
Discussion Starter #6
Thanks for all of the feedback, much appreciated.

So to recap then, capital gains are not taxed in either RRSP's or TFSA's. Dividends in a TFSA or non-tax sheltered account are subject to US withholding tax, if I am understanding humble_pie's post correctly. This is because ADR's are legal US entities, not foreign. The ultimate dividend paid to me as an ADR holder has already been reduced by the foreign witholding tax, and is subject to US witholding tax. Am I reading that right?

In an RRSP, I pay no US withholding tax on dividends due to the US/Canada tax treaty. However, the dividend may be subject to withholding tax by the foreign government, depending on the tax treaty between Canada and that government? Am I reading that right too?

I knew this would be complicated... thanks for the help!
 

·
Registered
Joined
·
15,839 Posts
hello Q&A,

it is indeed complicated. In large part because the taxation consequences of the same investment instrument can be different according to whether it's placed in an rrsp, a tfsa or a non-registered account held in outright ownership.

robillard, i think, is the tax expert here, but since he hasn't signed on to this thread i'll take another humble stab at it.

" ... so to recap then, capital gains are not taxed in either RRSP's or TFSA's."

true. Keep in mind that your rrsp capital gains will eventually be 100% taxable when you wind up this plan towards the end of your life. Which is why advisors generally recommend keeping securities expected to generate capital gains or losses in non-registered accounts, so as to benefit from both the 50% inclusion rate and the chance to make use of capital losses.

" ... dividends in a TFSA or non-tax sheltered account are subject to US withholding tax ... because ADR's are legal US entities, not foreign."

true.

" ... the ultimate dividend paid to me as an ADR holder has already been reduced by the foreign witholding tax ... "

may be true in whole or in part. There may or may not have been a withholding tax imposed by the overseas nation that hosts the foreign corporation. If there is such a withholding, it would be governed by any tax convention that may exist between the US and such overseas nation. It is possible that some tax US-foreign nation (not canada) tax conventions treat this very issue of ADR double withholdings and provide relief for the same but this would depend upon the tax treaty between the US and the foreign nation.

ie any tax treaty between canada and such foreign nation is irrelevant.

" ... in an RRSP, I pay no US withholding tax on dividends due to the US/Canada tax treaty ... "

true, with respect to US dividends from US domestic corporations.

" ... however, the dividend may be subject to withholding tax by the foreign government, depending on the tax treaty between Canada and that government?"

parts of this phrase are ambiguous or false. In an rrsp, although there is no withholding on US dividends from US domestic corporations, i believe that there may be US withholding tax on dividends paid out by a US-based ADR or ADS. Certainly in a tfsa there will be withholding on both US domestic dividends and ADR dividends. In addition, the last part of this phrase ("tax treaty between canada and that government") is false. Please see paragraphs above. With respect to an ADR or an ADS, any primary withholding tax by any foreign country will depend upon the tax convention between that country and the US, if such tax convention does exist. (note: some countries, notoriously tax haven countries, do not sign tax treaties with other countries.)

for canadian taxpayers, for all practical intents and purposes, any withholding tax imposed upon the primary dividend stream - eg from foreign corporation to US ADR - cannot be identified and is non-recoverable.

for my own part, i would include high-dividend large-cap US corporations in my rrsp, since such dividends will not be penalized with a withholding tax. Furthermore, although such dividends or their residue will eventually be 100% taxable when removed from an rrsp in old age, they will benefit from tax sheltering during the working life of an rrsp. Whereas if canadian taxpayer holds such US large caps in a non-registered account, their dividends are subject to both withholding tax and a 100% inclusion rate in current taxable income.
 
1 - 8 of 8 Posts
Top