If you invest in US-listed stocks or foreign stocks that trade on U.S. exchanges as American Depository Receipts (ADRs), you need to be aware of some tax implications:
- If you hold American stocks in your investment account, you will be subject to a 15% withholding tax on dividends (for Canadian residents; Check with your broker that you are correctly classified.). You will be paying your marginal tax rate on dividend income because it does not qualify for favourable treatment available to dividends from your Canadian stock holdings. You do get a credit for the withholding tax when filing your Canadian taxes.
- American stocks held in your RRSP account are not subject to a US withholding tax on dividends. Since the account is tax-deferred, no Canadian taxes are owed either. That’s why U.S. dividend stocks are best held in RRSP accounts.
- When ADRs (foreign stocks that trade on U.S. exchanges) that pay a dividend are held in a taxable account, a withholding tax is levied that depends on the tax treaty that Canada has with the country where the stocks is domiciled. For example, Nokia (NOK), which is domiciled in Finland, attracted a 28% withholding tax (if I recall correctly) on its dividends.
- For ADRs held in RRSP accounts, the situation is murky as the withholding tax depends on the tax treaty with Canada. Since Canada’s tax treaty with Finland does not distinguish between dividends paid to taxable and RRSP accounts, the same withholding tax of 28% is levied even when Nokia (NOK) is held in a RRSP account.
Thanks to Million Dollar Journey’s comment for this post idea. You can find a lot of discussion on the Financial Web Ring Forum on the thoroughly confusing subject of withholding taxes.