Should you treat U.S. stocks differently?

Tax breaks on Canadian dividend stocks are applied differently to U.S. stocks.

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From the December/January 2012 issue of the magazine.

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By this point you no doubt realize that the tax break on dividends only applies to Canadian stocks, not U.S. stocks. As a result, you need to treat the two differently when fitting them into your portfolio.

The standard advice is to put Canadian stocks in non-registered accounts, and put fixed income investments, such as bonds and GICs, inside RRSPs and TFSAs. Tax rates are lower on the Canadian dividend income and capital gains you get from stocks than they are on the interest income you get from bonds and GICs, so keep your stocks outside your RRSP where taxes matter, and then hold your bonds and GICs inside.

U.S. equities are more complicated. Dividends from U.S. stocks are taxed in Canada at regular rates, just like interest income. But capital gains on U.S. stocks—which you trigger when you sell a stock at a profit—are taxed favorably just like capital gains on Canadian stocks. So it makes sense to hold U.S. stocks that pay little or no dividends inside your non-registered accounts alongside Canadian stocks. On the other hand, U.S. stocks that pay handsome dividends probably fit better in your RRSP.

There is an added U.S. tax wrinkle here: the Internal Revenue Service levies a 15% withholding tax on dividends on U.S. stocks held by foreign investors (these are deducted automatically). If a stock pays a 3% dividend, then, the withholding tax would reduce it to 2.55%.

Fortunately, if you hold U.S. stocks in non-registered accounts, you get a credit for the amount withheld that you can apply against Canadian income taxes, so in most cases that leaves you square—providing your Canadian tax rate is at least 15%.

In the case of RRSPs and other retirement accounts, Canada has a tax treaty with the U.S. that exempts you from the withholding tax. But if you hold U.S. stocks in a TFSA or an RESP, you’re dinged the 15% levy and you can’t get it back. As a result, you’re best off holding U.S. stocks that pay hefty dividends inside your RRSPs, and keeping them outside of your TFSAs and RESPs. Who knew?

Keep in mind that dividend withholding tax amounts and treatments vary among other countries, so don’t count on the advice for U.S. stocks applying to stocks from overseas.

5 comments on “Should you treat U.S. stocks differently?

  1. This is a great article. I didn't know the TFSA wrinkle, for one.

    However, I would like more details. How about foreign investments on non-U.S. exchanges, like in Europe or other countries. Are those dividends treated exactly the same as U.S. dividends? Do we need research on every country we might invest in?

    Also, if I buy a foreign ETF that is listed on the New York Stock exchange, how does this work? Are the dividends given the same treatment as U.S. securities, or as the foreign securities, or as a combination of the two?

    I know this is complicated, but I would really like to know.

    Reply

    • Chris,maybe you should learn how to use the interweb….or you could pay me a fee

      Reply

  2. Very helpful. Since the dividends from U.S. stocks are treated as interest one might expect that capital gains or losses were not subject to the deductions allowed for Canadian stocks. Why hasn't the CRA stated in their commonly available documentation that for capital gains and losses U.S. stocks are treated the same as Canadian? I had conflicting stories about this from individuals that I felt should know and because I thought there might be a rather complicated reporting requirement I wrote, later faxed, CRA asking for their ruling in writing so I could be sure I understood it and would have something in writing in case any questions arose later. I also wanted to be able to forward their response to some others who might be in a similar situation. After more than a month I've not even had an acknowledgement from the CRA. Thank you very much.

    Reply

  3. sorry this is so late, but i feel it applies here.

    your article says "…U.S. stocks—which you trigger when you sell a stock at a profit—are taxed favorably just like capital gains on Canadian stocks."

    does the capital gains tax goto canada or do i have to file an american return? It seems to me if i own US real estate and sell it I owe the US govenment its tax, but if I sell US stocks (lets say an REIT) at profit i must pay canada instead? something is amiss!

    Reply

  4. Great read David Thanx for the article… and the answer is yes.. we should treat differently to US stocks.

    Reply

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