Canadian Money Forum banner
1 - 15 of 15 Posts

·
Registered
Joined
·
246 Posts
Discussion Starter · #1 ·
I read that TFSA should be last place where you buy US dividend paying stocks and I agree with the reasons. But few questions -


  1. Is there withholding tax for US stock based ETFs that pay dividends (e.g Vanguard ETFs)?
  2. I have an account with Questrade. I read that I need to sign W8-BEN form to declare yourself a Canadian resident if I am buying US stocks. That way, they will withhold 15% on dividends instead of 30%. Is anyone aware of this? Not sure if I have done this.
Ref: http://www.theglobeandmail.com/glob...i-earn-us-dividends-in-a-tfsa/article4403324/

  1. What if I have to buy dividend paying US Stocks and no RRSP room and lots of TFSA room (forget other investments for a moment). In that case, should I deliberately buy it in non-reg and let go the TFSA room.
I guess I am not looking for an answer rather I am looking to check if I am comparing the right things or missing some factors?

Letting go the 15% on a say 3-4% div yield AND retain your gains in TFSA
VS
Making the 15% on the 3-4% yield count as your capital gains tax
 

·
Registered
Joined
·
211 Posts
1) Yes
2) Yes
1) Yes, but I would put in the TFSA regardless. Depending on the percentage of earnings your stocks pay out. For instance, if your stocks pay out 100% of earnings, then it's better to put in the non-register account. However, if your company is paying out less than 50% of earnings and re-invest the remaining for growth. Then your stock price will appreciate. If you could avoid capital gains tax, then paying that 15% dividend withholding tax is worth while.
 

·
Registered
Joined
·
155 Posts
US dividends are taxed at your marginal rate, right? Only Canadian dividends get preferential tax treatment as I understand it. So it seems to me that unless your marginal rate is less than 15% you're better off putting US equities in the TFSA than holding it in a taxable account.

The fact that you don't pay capital gains taxes on US equities held in a TFSA just makes it even better.
 

·
Registered
Joined
·
678 Posts
US dividends are taxed at your marginal rate, right? Only Canadian dividends get preferential tax treatment as I understand it. So it seems to me that unless your marginal rate is less than 15% you're better off putting US equities in the TFSA than holding it in a taxable account.

The fact that you don't pay capital gains taxes on US equities held in a TFSA just makes it even better.
Thats a good point except for one proviso.

If you are paying Canadian income tax, then you may well be able to use the US taxes paid to lower your Canadian taxes by claiming a federal and provincial "foreign tax paid" credit. You will haver to fill in a separate form for each

If you want more info go to CRA.GC.CA and search for foreign tax credits. The forms you will need are T2209, and T2018.

Its a pain, but not that hard to do, just follow the directions.
Good luck
 

·
Registered
Joined
·
155 Posts
Thats a good point except for one proviso.

If you are paying Canadian income tax, then you may well be able to use the US taxes paid to lower your Canadian taxes by claiming a federal and provincial "foreign tax paid" credit. You will haver to fill in a separate form for each

If you want more info go to CRA.GC.CA and search for foreign tax credits. The forms you will need are T2209, and T2018.

Its a pain, but not that hard to do, just follow the directions.
Good luck
This is true, but I think that you still lose unless your marginal rate is below 15%? The way I look at this is:

In the TFSA you pay a 15% tax to the US government, you get no credit in Canada but you pay no taxes on the dividend. In a taxable account you pay a 15% tax to the US government, taxes at your marginal rate to the federal government but you get a tax credit for the 15% withholding tax, so if your marginal rate is t then you pay a tax to the Canadian government at an effective rate of (t - 0.15). Therefore if your marginal rate is greater than 15% you pay more taxes to the Canadian government (you can't do anything about the withholding tax to the US unless you can hold the equities in an RRSP). It does look like you win if your marginal rate is less than 15%, but paying taxes on capital gains may well overwhelm this minor advantage.
 

·
Registered
Joined
·
246 Posts
Discussion Starter · #7 ·
This is true, but I think that you still lose unless your marginal rate is below 15%? The way I look at this is:

In the TFSA you pay a 15% tax to the US government, you get no credit in Canada but you pay no taxes on the dividend. In a taxable account you pay a 15% tax to the US government, taxes at your marginal rate to the federal government but you get a tax credit for the 15% withholding tax, so if your marginal rate is t then you pay a tax to the Canadian government at an effective rate of (t - 0.15). Therefore if your marginal rate is greater than 15% you pay more taxes to the Canadian government (you can't do anything about the withholding tax to the US unless you can hold the equities in an RRSP). It does look like you win if your marginal rate is less than 15%, but paying taxes on capital gains may well overwhelm this minor advantage.
I seem to understand what you are saying.

So if my MTR is 40%, then cap gain tax should be 20%. And I would end up paying 15% to US and 5% to Canada. In TFSA, I would just have 15% to US and nothing to Canada.

My MTR is 34% so, its only slightly better in TFSA. Thank you Rysto.
 

·
Registered
Joined
·
899 Posts
I seem to understand what you are saying.

So if my MTR is 40%, then cap gain tax should be 20%. And I would end up paying 15% to US and 5% to Canada. In TFSA, I would just have 15% to US and nothing to Canada.

My MTR is 34% so, its only slightly better in TFSA. Thank you Rysto.
The 15% US withholding tax only applies to US dividends. Capital gains in a TFSA are tax free.
 

·
Registered
Joined
·
5,597 Posts
I've started to change my thinking a bit...maybe...on this...

Instead of always keeping my U.S. stocks in the RRSP, then RRIF for income withdrawal, what about a U.S. $$ TFSA??


Given US dividends are taxed at your marginal rate, treated like employment income, what if a retiree wanted to keep say > $100k of their U.S. dividend paying stocks?

Could a solution be to open up at U.S. $$$ TFSA account and put the U.S. stocks in there? This way, the U.S. $$ could be withdrawn tax-free.

Yes, the retiree would lose 15% via withholding taxes but it seems to me unless your tax rate in retirement is lower than 15%, you're doing the right thing.

Keeping your U.S. dividend stocks in your U.S. $$ TFSA, you have passive U.S $$ income.

Another benefit?
Securities held in these registered Canadian accounts are exempt from foreign income reporting: RRSPs, TFSAs, RESPs, RRIFs, LIRAs, LRIFs and RPPs. With a non-registered account, you're not so lucky and must report foreign income over $100,000 CDN.

Thoughts? Just want to hear more on this subject....thanks CMF.
 

·
Registered
Joined
·
301 Posts
[*]I have an account with Questrade. I read that I need to sign W8-BEN form to declare yourself a Canadian resident if I am buying US stocks. That way, they will withhold 15% on dividends instead of 30%. Is anyone aware of this? Not sure if I have done this.
Get out of QT....they are horrible and incompetent. Unless you have <=$25k, they are not worth the hassle to save a few cents per share.
 

·
Registered
Joined
·
246 Posts
Discussion Starter · #13 ·
Get out of QT....they are horrible and incompetent. Unless you have <=$25k, they are not worth the hassle to save a few cents per share.
@MoA: Thanks for the insight.

@gt23: I have <25K. But I would like to know, they are incompetent in terms of what? It would help many of us here...
 

·
Registered
Joined
·
11,215 Posts
^^^

A bit of searching on CMF or with Google will find a lot of comments.

One of which that I recall was that despite filling out all of the paperwork requested to show the account holder was Canadian, a W8-BEN was not setup. If I recall correctly, when the investor called to find out why 30% was being withheld on US stock, the process to correct this took three or four calls with conflicting info.


To be fair, I've also seen posts saying they have improved so make sure you consider how long ago the post was from.


Cheers
 

·
Registered
Joined
·
301 Posts
@MoA: Thanks for the insight.

@gt23: I have <25K. But I would like to know, they are incompetent in terms of what? It would help many of us here...
I was with them for about a year before I transferred out. I don't recall everything, but here are some things that come to mind (I will post again if I think of any additional):

1) Their margin rates suck compared to bank-owned
2) Their customer service sucks compared to bank-owned: if you have an issue they will usually give you a BS answer on the chat, and if you still not satisfied (most cases), they will create a ticket a say they will respond via email in 2-3 days. In my experience with them, I had to follow up roughly 50% of the time as I had not received an email response by day 3. With BMO IL, I get my issues taken care of right away (no delay at all)
3) I found a lot of issues with their market/economic data on their IQ and web trading platforms (i.e. incorrect data compared to the exchange)
4) They were constantly screwing up my ACBs, so P/Ls were always going off (especially true when adding to current positions). You need to contact them directly each time to have your ACBs fixed.
5) They had weird tax withholding policies: they started withholding tax on one of my names in a Non-Reg account, even though I confirmed with the issuer that the source of income had not changed and the transfer agent was not withholding from dividends (I started a thread on this forum on this topic if you're interested the name is MST.UN.TO, although they also appear to be doing it for HR.UN.TO). When I contacted QT they gave me some BS answer that what they were doing was a STREET initiative led by the big brokers, such as BMO. However, I later confirmed that BMO is not withholding on these names - so they probably had no idea what they were talking about and made it up.
6) I had standing orders that would mysteriously get cancelled from time to time
7) They charge for mutual fund trades: therefore, there is no way to invest your overnight or short-term cash efficiently in HISAs.
8) They charge data fees on top of commissions for non-limit orders, which increase your total transaction costs above the 4.95 rate.
9) If they make a mistake, they make you wait till March of the following year to credit your account. Bank-owned will make you whole immediately and not let their internal issues impact you.
10) When I set up my accounts, I IM'd them to see if I need to fill out a W8 to reduce withholdings on U.S. dividends. I was told very clearly that I DID NOT, since my residency status was part of my account application set-up and they had me down as Cdn residency (per the copy of my driver's license which was provided at set-up) and they would automatically withhold 15% per the Cda-US tax treaty. Sure enough, when I received my first U.S. div, they withheld 30%. I never ended up having to fill out a W8, but it still took a few more chats to get them to fix it. It's one thing to not know the answer to a question, but the BSing seems to be common with them.

It's not a bad place to start when you're building up capital and trading <$2500 per trade, but I too had heard that they sucked and went in knowing I wouldn't be staying long (i.e. not setting up a bunch of accounts that would later be costly to transfer, I think BMO covered the cost on my RRSP transfer). I found myself IMing with them 1-2 times per week and eventually reached a point where the $5 was no longer worth the hassle.

You get watcha pay for....very true in this instance. Hth
 
1 - 15 of 15 Posts
Top