Q. I own U.S. stocks and Canadian stocks in my RRSP and RESP accounts for my kids. I do all the investing myself. I get annual performance statements from the bank that holds my RRSP online account and it shows about $200 in withholding tax. What is this? How can I claim it when I file taxes, and how can I get it back? I heard there was a form called W8 that can help. Is this accurate?
Hi Malay. RRSPs are exempt from U.S. withholding taxes but RESPs and TFSAs are not. This is because the U.S. does not recognize them as tax-deferred registered accounts. Therefore, foreign taxes paid withheld in an RESP or TFSA cannot be recovered.
If these withholdings were in non-registered accounts, you could reduce your taxes on the foreign income paid to Canada by filing for a foreign tax credit using Schedule 1. This ensures that you don’t pay tax on the same income in both Canada and the foreign jurisdiction. That option, however, is not available when the foreign income is within a registered account for the reasons mentioned above. In a non-registered account, Form W8 can also be filed to reduce the amount of withholding from U.S. dividends.
However, foreign taxes paid in an RRSP will reduce the amounts of money available for distribution to you on your retirement, so you will pay less tax on the total accumulations when building your pension income. Bottom line—no need to report anything for the foreign taxes paid in your RRSP now, and there is no immediate recovery of the tax, either.
Another question people in your situation have is whether the capital must be reported on Form T1135 Foreign Income Verification Statement. Here’s what you need to know: this form must be filed each year if you own foreign assets with a cost base in excess of $100,000 CAN. However, you don’t have to include the assets if any of the following apply:
- The property is used primarily for personal use—that is, more than 50% of the time (e.g. a winter getaway)
- The property is held as part of an active business venture (note, some day traders may be exempt based on this rule, but this is determined case-by-case)
- The assets are held in a foreign retirement plan or in a Canadian registered plan such as RPPs, PRPPs, RRSPs, RRIFs, RESPs, RDSPs, or TFSAs
- The assets are held within a Canadian-registered mutual fund
So, by virtue of the third bullet, your foreign investments in your RRSP and your children’s RESP do not have to be reported on T1135.
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