Overview

Non-resident withholding taxes are income tax obligations that foreign governments, most often the United States (US), collect. This tax usually results from owning US dividend-paying assets in your portfolio.

When US assets pay dividends, Canadians are taxed on those dividends when held in a TFSA, FHSA, RESP, or non-registered account. However, these dividends aren't subject to non-resident withholding taxes when the US assets are held in qualifying Canadian retirement trusts (RRSP, RRIF, LIRA, and LIF) because of a tax treaty between Canada and the US.

Non-resident withholding tax on American Depository Receipts (ADRs)

Keep in mind that the tax exemption in qualifying Canadian retirement trusts applies only to US companies and not to American Depository Receipts (ADRs). ADRs are securities that represent shares in non-US companies but trade on US exchanges. Dividends from ADRs are subject to non-resident taxes withheld at source, even when held in an RRSP, RRIF, LIRA, or LIF. The withholding tax rates for international stocks vary by country.

Non-resident withholding tax on Canadian-listed ETFs

If a Canadian-listed ETF holds US equities, the withholding occurs at the fund level and cannot be recovered, even when the fund is held in a qualifying retirement trust.

Non-resident withholding tax reporting

Even though this tax exists, you don't have to file any forms with the US Internal Revenue Service (IRS). When you first open an account with us, you'll be asked to sign a W-8BEN form (for individual accounts) or a tax treaty statement (for corporate accounts). This lets us reduce the non-resident tax for our Canadian-resident clients, generally from 30% to 15%. Your tax treaty claims are valid for 3 years (this timeline is set by the IRS), so we'll provide a new copy for you to sign as the expiry date approaches.

How to minimize non-resident withholding taxes

Generally, there are still advantages to owning US assets, despite this withholding tax, because of the diversification benefits. Because of this, US assets make up a significant portion of Wealthsimple portfolios. The US assets in Wealthsimple's managed portfolios are strategically selected to minimize the total cost of ownership, including withholding taxes.  

Here are three strategies to consider for minimizing your US withholding taxes:  

• Hold US dividend-paying securities in qualifying Canadian retirement trusts: Consider holding US-listed dividend-paying securities in your RRSP, RRIF, LIRA, or LIF account. US dividends received in these accounts are generally subject to zero withholding taxes. However, the same dividends received in a TFSA, FHSA, RESP, or non-registered account are subject to the 15% withholding tax.

• Claim foreign tax credits for non-registered accounts: You can offset Canadian taxes dollar-for-dollar by claiming foreign tax credits for US withholding taxes paid on non-registered accounts. Details on withholding taxes are typically included on T5 tax slips (Box 16) and T3 tax slips (Boxes 33 and 34) and can be claimed as foreign tax credits on Line 40500 of the T1 Canadian tax return.

  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 tax treaty form on the website by going to Documents and filtering for Account documents.

  Tip: We automatically surface a new W-8BEN for your signature when your existing statement expires (every 3 years).

Please keep in mind that there may be other important factors to consider before moving assets. Depending on your situation, these may include transaction fees, contribution and withdrawal limitations, and capital gains implications.