Pay Attention to Your Withholding Tax

Do you buy stocks which are listed in American Exchange? If you do, you might want to double check the statements from you broker and make sure you have been charged for proper amount of withholding tax.

The withholding tax is the tax to be withheld by the paying country on dividends and interests paid to residents of the other country. Normally, the withholding tax rate is 30%. But because of the agreement between US and Canada, if the security holder (You) has certified himself/herself as a Canadian resident, only 10% and 15% withholding tax rate will apply for the interests and dividends you received from US investments, respectively.

For example, if you, as a Canadian, buy the Bank of America shares listed on New York Stock Exchange, for every dollar dividends you received from BAC, there will be 15 cents tax withheld. When you file your tax at the end of the year, you can claim the credit for foreign tax paid, but up to 15% withholding tax level. And then you includes the grossed-up amount (100% of the interest or dividend payment) on Canadian tax returns, and calculates federal and provincial taxes in the normal way. It is important to make sure you are charged for withholding tax at the maximum 15% level instead of 30%. Otherwise, you will be double taxed.

It goes like this: You paid 30% up front, only able to get back maximumly 15%, file the tax, pay whatever tax you owe on the interest/dividend you received from US investment, say 20% of the interest/dividend, based on your income level. How much you have been tax actually? 35% (30%-15%+20%).

So if you invest in the US securities, it is important that you are taxed properly.