Can you get 100% of the US Dividend Withholding Tax Back when you file your Canadian Tax Return?
As a Canadian most of us have at least some exposure to US Equities in our investments, including the US Dividend Withholding Tax. When we hold US securities that pay dividends but are not residents of the US, the US withholds tax on the payments. Normally the amount is 30% withholding tax, but Canada and the US have a tax treaty where that amount is reduced to 15%. In order to reduce your withholding tax from 30% to 15% you must fill out a W-8 BEN form with your brokerage firm. Some Brokerage firms like Questrade do not require you to do so as long as when you signed up you demonstrated you are a Canadian resident (as they will automatically reduce the withholding to 15% for you). It is always good to double check with your brokerage firm as rules and systems are always changing.
Now we have established that if you are Canadian you will generally have a 15% withholding tax on US Dividend Withholding Tax, the question is can I get this back and how do I get this back?
To answer the first question: The good news is you can get some or all of your US Dividend Withholding Tax back when you file your Canadian tax return. The bad news is you may not get the entire 15% withholding tax back. The amount you get back will depend on your income levels and how much income tax you pay.
Unless your average tax rate is greater than the withholding tax rate, you will not get the entire amount back. For a 15% withholding tax your average tax would need to be 15% or greater in order to get back all the withholding tax. If your average tax rate is less than 15% you will get less than the full amount back.
The quick and dirty trick to estimate how much tax you will get back is as follows:
Estimate amount Recoverable = (Average tax rate/Withholding tax rate) x Withholding Tax Amount
- Average Tax Rate = Total Income tax Paid/Total Income
- Withholding tax rate = withholding tax % that was withheld (for US Dividends it is normally 15%)
- Withholding tax amount = $ amount of tax that was withheld
Note: The amount of dividends received and the amount of withholding tax is reported on your T3 Slips.
Example:
- You Earned 30,000 in net income last year and you paid 3,000 total in both federal and provincial tax.
- You were paid a $20 in US dividend but because of the 15% witholding tax you only received $17 and $3 was withheld.
Your average tax rate is 10% (3,000/30,000). Since you average tax rate is 10% and the withholding tax rate was 15% you with only get back 2/3 of the withholding tax (10%/15%) or $2.
(Average tax rate/Withholding tax rate) x Withholding Tax Amount
(10/15)*3 = $2
In order to get back some or all of the withholding tax When it comes tax in Canada you will file your taxes by Filling out a T2209 form.
The above was the quick and simple way to estimate how much you will get back so it will not be 100% accurate but will be a very good estimate. Below I will quickly go over the actual calculation.
The exact amount you will get back which for tax purpose is know as Your Federal non-Business Foreign Tax Credit (FTC) and Provincial Foreign Tax Credit (PTC).
Note: I am assuming the only foreign non-business income you have is dividend income from US securities, if you have other types of foreign non-business income then the calculation is more complex and I will not go over that in this guide.
FTC is the lessor of:
- Total Withholding tax Amount (in our example $3)
- Dividend Income/Net Income x Your Basic Federal Tax Rate
PTC is the lessor of
- Total withholding tax amount – your FTC (Calculated above)
- Dividend Income / Net income x Provincial tax otherwise payable
The sum of FTC and PTC is the amount you will get back.
See T2209 Tax form guide for more details on the federal tax credit amount.
See T2306 Tax form guide for more detail on the provincial tax credit amount.
If you hold US securities that pay Dividends in Registered accounts like TFSA, RRSPs etc then there are a couple more things to be aware of. This includes if you hold a ETF listed on a Canadian stock exchange but for which the underlying securities are listed on the US stock exchange. An example of list is VFV.TO which replicates the S&P 500.
Situation 1: If you hold US listed Securities directly or a US listed ETF that holds US securities
- if you hold these in a taxable account (such as a margin account) then the US withholding tax is recoverable
- If you hold these in an RRSP then there will be NO withholding taxes as Canada and US have a tax treaty where RRSPs are not subject to withholding tax
- If you hold these in a TFSA then US withholding tax is NOT recoverable.
Situation 2: If you hold a Canadian Listed ETF that holds US Securities or a Canadian Listed ETF that hold US listed ETF
- if you hold these in a taxable account (such as a margin account) then the US withholding tax is recoverable
- If you hold these in a TFSA or RRSP* then US withholding tax is NOT recoverable.
*The Reason for this is because the Canadian ETF will automatically withhold the 15% withholding tax and because it is in an RRSP there is no way for you to recover it. For this reason it is best not to hold Canadian listed ETFs that hold US securities in your RRSP account.
Now if we Add international securities (rather than just US securities) you get the following.
Situation 3: A Canadian ETF that hold US or International securities directly
- if you hold these in a taxable account (such as a margin account) then the US withholding tax and internationally withholding tax is recoverable
- If you hold these in a TFSA or RRSP then US withholding tax is NOT recoverable.
Situation 4: Us listed ETF that holds international Securities and US securities
- if you hold these in a taxable account (such as a margin account) then the US withholding tax are recoverable but, internationally withholding tax is NOT recoverable
- If you hold these in an RRSP then there will be NO withholding taxes on US dividends, but there will be withholding tax on international securities and these are NOT recoverable
- If you hold these in a TFSA then US withholding tax is NOT recoverable and International withholding tax is also NOT recoverable.
For the reasons above it is best to:
- TFSA: Hold Stocks and ETF that do not pay dividends
- RRSP: Hold US dividends paying stocks or US dividend paying ETFS directly on the US stock exchange.
- Non-taxable Account: Hold anything but be aware of the withholding tax and how much you will get back at tax time when filing out your Foreign Tax Credit T2209.
In Summary US Dividend Withholding Tax :
- TFSA: You can NOT recover Withholding tax
- RRSP: There is NO US Withholding tax on Directly owned US ETF and US Securities
- Non-taxable account: You can recover the US withholding tax but the amount recoverable depends on your level of income and tax rate. You can recover the amount equal to your average tax rate divided by the withholding tax rate.
