What are non-resident withholding taxes?
Non-resident withholding taxes are income tax obligations collected by foreign governments, most typically the United States. This tax is usually the result of owning dividend-paying US assets in your portfolio. When US assets pay out dividends, they are subject to a tax for Canadians when those assets are held in TFSA, RESP and non-registered accounts. However, these dividends are not subject to non-resident withholding taxes when the US assets are held in an RRSP because of a tax treaty between Canada and the US.
What are my reporting requirements?
Despite this tax, there is no requirement to file any forms with the IRS.
However, when you first open an account with us, you would be asked to sign a W-8BEN form (for individual accounts) or a W-8BEN-E form (for corporate accounts). These forms allow us to reduce the non-resident tax for our Canadian-resident clients, generally from 30% to 15%. The validity of the W-8BEN and W-8BEN-E forms expire every 3 years (this timeline is stipulated by the CRA & IRS), so once we near that timeframe we re-surface a new copy for you to sign when you log in!
How can I minimize these taxes?
Generally, there are still advantages to owning US assets, despite this withholding tax, because of the benefits of diversification. For this reason, US assets generally make up a notable portion of Wealthsimple portfolios. The US assets in Wealthsimple’s Managed portfolios have been strategically selected to minimize the total cost of ownership, including the impact of withholding taxes.
With that said, there are three strategies you can consider for minimizing your US withholding taxes:
Hold US dividend-paying securities in RRSPs
Consider holding US-listed dividend-paying securities in your RRSP account. US dividends received in an RRSP are generally subject to zero withholding taxes. The same dividends received in TFSA or non-reg accounts are subject to 15% withholding tax.
Claim foreign tax credits for non-registered accounts
US withholding taxes paid on non-registered accounts can offset Canadian taxes dollar-for-dollar, by claiming foreign tax credits. Details on withholding taxes are typically included on T5 tax slips (Box 16) and T3 tax slips (Box 33 and 34) and can be claimed as foreign tax credits on Line 40500 of the T1 Canadian tax return.
Pro Tip: Wealthsimple Tax automatically claims foreign tax credits for you based on the information contained on your tax slips.
Sign a W-8BEN
Ensure you have a valid W-8BEN form in-place at your brokerage. At Wealthsimple you can check the status of your W-8BEN or W-8BEN-E on desktop by navigating to “My documents” and filtering for “Account documents”.
Pro Tip: Wealthsimple automatically surfaces a new W-8BEN for your signature when your existing statement expires (every 3 years).
Please be aware that there may be other important factors to consider prior to moving assets. Depending on your situation these may include transaction fees, contribution and withdrawal limitations, and capital gains implications.