Withholding Tax Questions - RESP, RRSP, TFSA, RRIF

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Withholding Tax Questions - RESP, RRSP, TFSA, RRIF

Post by peter » 26 Nov 2005 23:54

If I hold US bonds in a RESP account I assume that, unlike in an RRSP, tax will be withheld (15%). Since RESPs are tax-deferred a tax credit for this tax would be useless. Is this correct? Is there a way around this?

I'm asking because I have a 15% allocation to bonds, little room in RRSPs, and would like to buy TLT or IEF instead of Cnd bonds in addition to XBB I already have. Amounts are too small to buy bonds directly.

As an aside, I'm not sure how you go about buying US treasuries directly in Canada, they don't show up in fixed income in my brokerage account.

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Re: withholding tax on US bond interest in RESP account

Post by Norbert Schlenker » 27 Nov 2005 12:26

peter wrote:If I hold US bonds in a RESP account I assume that, unlike in an RRSP, tax will be withheld (15%). Since RESPs are tax-deferred a tax credit for this tax would be useless. Is this correct? Is there a way around this?
Yes, this is generally correct. No, there is no way around this except that, if you buy US federal paper directly, there is no withholding tax.
I'm asking because I have a 15% allocation to bonds, little room in RRSPs, and would like to buy TLT or IEF instead of Cnd bonds in addition to XBB I already have. Amounts are too small to buy bonds directly.
TLT and IEF are likely to have distributions that are considered dividends, i.e. subject to US withholding, whereas a direct position would throw off exempt interest.
As an aside, I'm not sure how you go about buying US treasuries directly in Canada, they don't show up in fixed income in my brokerage account.
Call your broker. Very few show any US$ inventory online.

At one time, you could have bought Treasuries of any kind at auction through a TreasuryDirect account. Looking at the web application form now, it looks like they have become disinterested in enrolling non-residents (probably post-911 restrictions).
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Post by AltaRed » 27 Nov 2005 15:37

At one time, you could have bought Treasuries of any kind at auction through a TreasuryDirect account. Looking at the web application form now, it looks like they have become disinterested in enrolling non-residents (probably post-911 restrictions).

I don't know about that. Here is an exact quote I got less than a month ago from Treasury Direct:

Legacy Treasury Direct allows a person to maintain a non-U.S. mailing address as long as they maintain a bank in the U.S. that will accept direct deposit. New Treasury Direct does not currently allow this.

I haven't followed up on this any further. However, the catch seems to be the ability to direct deposit in USA.

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Re: withholding tax on US bond interest in RESP account

Post by yielder » 27 Nov 2005 15:40

Norbert Schlenker wrote:
peter wrote:If I hold US bonds in a RESP account I assume that, unlike in an RRSP, tax will be withheld (15%). Since RESPs are tax-deferred a tax credit for this tax would be useless. Is this correct? Is there a way around this?
Yes, this is generally correct.
Is it? I thought that there was no withholding on US bonds, either Treasury or corporate.

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Post by Shakespeare » 27 Nov 2005 15:40

However, the catch seems to be the ability to direct deposit in USA
How would the Chinese buy all those T-Bills keeping the US dollar afloat? :wink:
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Post by Bylo Selhi » 27 Nov 2005 16:23

AltaRed wrote:Legacy Treasury Direct allows a person to maintain a non-U.S. mailing address as long as they maintain a bank in the U.S. that will accept direct deposit. New Treasury Direct does not currently allow this.

I haven't followed up on this any further. However, the catch seems to be the ability to direct deposit in USA.
At one time several Canadian banks and trustcos offered US$ accounts with checks drawn on their US-based correspondents, e.g. TD Waterhouse National Bank and, in the case of CT, some Delaware-based bank whose name I've forgotten. Those were genuine US accounts with US-formatted MICR codes on the checks. I had accounts with both. I used the TD account to open an account directly with Vanguard even though I only had a Canadian address.

Then came 911. TD asked me to close my account and CT (pre-merger) sent me new, Canadian-formatted US$ cheques. By the time I asked Vanguard to convert my VTSMX to VTI they were no longer able to do so because they couldn't -- not even for one day -- open a Vanguard Brokerage Services account without a US address. I had to sell VTSMX and then use the proceeds to buy VTI via a Canadian broker. (Fortunately for me, because the US$ had fallen there was a small capital loss, rather than the humongous capital gain I had been fearing.)

AFAIK the only bank that still offers real US accounts is RBC's Centura Bank in the US southeast. I don't know if they'll open an account for Canadians without at least a "snowbird" US address.
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Re: withholding tax on US bond interest in RESP account

Post by Norbert Schlenker » 27 Nov 2005 18:15

yielder wrote:
Norbert Schlenker wrote:
peter wrote:If I hold US bonds in a RESP account I assume that, unlike in an RRSP, tax will be withheld (15%). Since RESPs are tax-deferred a tax credit for this tax would be useless. Is this correct? Is there a way around this?
Yes, this is generally correct.
Is it? I thought that there was no withholding on US bonds, either Treasury or corporate.
It looks like you may be right for anything issued after 1984. I'm doing some more checking.
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Post by peter » 28 Nov 2005 15:59

According to CIBC, US bond ETFs are subject to 15% withholding tax in investment accounts. No withholding tax in RRSPs.

I haven't been able to find out what the case is for RESPs, but since US shares in a RESP are subject to the normal withholding tax for investment accounts I'm not very hopeful.

I looked at some tax documents on the treasurydirect website but these weren't very helpful for Canadians. As others noted, it does not appear to be possible to buy treasuries direct as Canadian.

CIBC turns out to have 1-year or shorter T-bills in their online inventory for very high face values that I missed before. I'll still talk to their fixed income desk.

Strangely, the yield on TLT/IEF/SHY seems significantly higher than the SEC 30 day yield or the yield that seems reasonable based on published treasury yields. The turnover on TLT should be relatively modest, and it might not be so bad to hold outside a registered account, although the tax would still be significantly higher than when losing 15% in a RESP.

All in all, I'm not sure what the best way to proceed is :roll: Maybe simply buy more XBB and wait until the bond allocation is large enough to buy bonds directly.

Added: CIBC confirmed RESPs are treated the same as investment accounts, and are subject to 15% withholding tax on US bond funds. They do have US treasury bonds for sale, but according to their fixed income desk the minimum purchase is $250,000. That sounds strange to me, but it makes them unpractical for RESPs :D

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US Withholding - TDW - First Trust Dividend Leaders FDL

Post by pmj » 02 Jan 2007 23:47

We've received 3 dividend payments on this ETF - but December's was the first to suffer withholding - at 15%. Has this happened to anyone else?
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Post by 2 yen » 03 Jan 2007 08:28

Odd. The 15% sounds right. Maybe an adjustment will appear later for the first 2 payments. Nasty surprises do happen like that. Good luck.

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Re: US Withholding - TDW - First Trust Dividend Leaders FDL

Post by Bylo Selhi » 03 Jan 2007 09:39

pmj wrote:We've received 3 dividend payments on this ETF - but December's was the first to suffer withholding - at 15%. Has this happened to anyone else?
This is an ETF that invests in large, dividend-paying US stocks.

Are you holding this in an RRSP or taxable account? If the former then call TD and ask why they withheld.

If the latter, they should have withheld on the first two distributions. (Your call whether to call and complain ;))
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Post by ETFdude » 03 Jan 2007 10:02

I got some dividend payments too for VGK, VPL and VTI. But TDW automatically deducted the taxes. Is that pretty common? Is the tax rate same as in US or do canadian residents holding US ETF's have to pay higher taxes?

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Post by YogiBear » 03 Jan 2007 17:06

ETFdude wrote:I got some dividend payments too for VGK, VPL and VTI. But TDW automatically deducted the taxes. Is that pretty common? Is the tax rate same as in US or do canadian residents holding US ETF's have to pay higher taxes?
If you are a Canadian resident holding US-domiciled ETFs- such as VGK, VPL, VTI- in a non-registered account, and you are not a US person for the purpose of US tax law, then you will have withholding tax of 15% applied to distributions from those ETFs.

This withholding is carried out by your brokerage firm, which remits the money to the IRS. The withholding tax is mandated by US law, consistent with the terms of the Canada-US Tax Treaty. There is nothing you can do about it, subject to the conditions in the previous paragraph.

You will normally be entitled to claim a foreign non-business income tax credit on your Canadian tax return in respect of the tax withheld in the US, thereby reducing your Canadian tax payable. This will (in part or in whole) offset the taxes paid to the IRS, reducing or eliminating the double-taxation aspect of foreign withholding taxes.

If the Treaty rate does not apply to you for any reason, the distributions will be subject to a 30% withholding tax. If you are a US person, you are usually entitled to request an exemption from withholding tax, since you will be reporting your income and making payment of any taxes due to the IRS every year in the normal way.

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Re: US Withholding - TDW - First Trust Dividend Leaders FDL

Post by pmj » 03 Jan 2007 21:15

Bylo Selhi wrote:Are you holding this in an RRSP or taxable account? If the former then call TD and ask why they withheld.
RRSP - so I intend to call. I was hoping to get some data - am I the only person holding FDL at TDW?
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Re: US Withholding - TDW - First Trust Dividend Leaders FDL

Post by soccerdude » 07 Jan 2007 09:39

pmj wrote:
Bylo Selhi wrote:Are you holding this in an RRSP or taxable account? If the former then call TD and ask why they withheld.
RRSP - so I intend to call. I was hoping to get some data - am I the only person holding FDL at TDW?
I don't hold FDL but I do hold TIP in a margin account and they always hold 30 %.

Does this sound right or should they only be withholding 15 % ?

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Re: US Withholding - TDW - First Trust Dividend Leaders FDL

Post by Bylo Selhi » 07 Jan 2007 10:10

soccerdude wrote:I do hold TIP in a margin account and they always hold 30 %. Does this sound right or should they only be withholding 15 % ?
My understanding is that there's no withholding tax on interest payments (which is what TIP distributes) to Canadian residents. Ask your broker to explain under what basis they're withholding the 30%.

In any case, the "default" US withholding rate (on dividends) is usually 30%. If you fill out a W8-BEN or are otherwise designated as a Canadian resident eligible for a reduction under the Canada-US tax treaty the rate should be 15%.
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Re: US Withholding - TDW - First Trust Dividend Leaders FDL

Post by AltaRed » 07 Jan 2007 11:33

Bylo Selhi wrote:
soccerdude wrote:I do hold TIP in a margin account and they always hold 30 %. Does this sound right or should they only be withholding 15 % ?
My understanding is that there's no withholding tax on interest payments (which is what TIP distributes) to Canadian residents. Ask your broker to explain under what basis they're withholding the 30%.

In any case, the "default" US withholding rate (on dividends) is usually 30%. If you fill out a W8-BEN or are otherwise designated as a Canadian resident eligible for a reduction under the Canada-US tax treaty the rate should be 15%.
I have 2 sources of 'taxable account' interest based income remaining in the USA (with W8-BENs in place) and there has been no withholding tax.
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Re: US Withholding - TDW - First Trust Dividend Leaders FDL

Post by Norbert Schlenker » 07 Jan 2007 12:04

Bylo Selhi wrote:My understanding is that there's no withholding tax on interest payments (which is what TIP distributes) to Canadian residents.
There's no US withholding on federal government paper (or on bank account interest). I wouldn't be so sure that TIP's distributions are 100% interest on federal government bonds. It may very well be the case that withholding is not barred. Questioning the financial institution doing the withholding is worthwhile, of course, but may be ineffective.
AltaRed wrote:I have 2 sources of 'taxable account' interest based income remaining in the USA (with W8-BENs in place) and there has been no withholding tax.
Bank accounts, I'll bet. Other interest should attract withholding - 10% IIRC but I don't have the current treaty at hand.
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Post by soccerdude » 07 Jan 2007 13:04

I went to the iSHARES website and they seem to call the payments both distributions and dividends.

http://www.ishares.com/fund_info/distri ... symbol=TIP

The broker does do a 15% "withholding refund" twice a year, so the total withheld at the end of the calendar year is actually only 15%

Thanks to all for helping me to try and understand this can of tax worms.

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Re: US Withholding - TDW - First Trust Dividend Leaders FDL

Post by AltaRed » 07 Jan 2007 21:57

Norbert Schlenker wrote:
AltaRed wrote:I have 2 sources of 'taxable account' interest based income remaining in the USA (with W8-BENs in place) and there has been no withholding tax.
Bank accounts, I'll bet. Other interest should attract withholding - 10% IIRC but I don't have the current treaty at hand.
One is a bank account but another is a US Dollar Reserve (Gov't) Money Market fund in a brokerage account that still pays a bit better than PH&N US$ MMF.
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Withholding tax lost on foreign investments in RRSPs

Post by Norbert Schlenker » 08 Jan 2007 13:05

There have been mentions of this problem in half a dozen threads (a dozen?) so I thought maybe it was worthwhile to collect the issues and arguments in one place, and perhaps propose a solution.

In a taxable account, the problem does not arise. Whether you hold your foreign investments in the form of shares/ETFs traded overseas or as a Canadian mutual fund, withholding taxes by foreign governments are reported and are generally creditable against Canadian tax liability on a T1.

In an RRSP, everything depends on tax treaties. The most common case is an investment in the US, where special provisions of the Canada-US treaty re retirement plans exempt from withholding taxes on income. That applies to US stocks and US ETFs. Does it apply to US traded ETFs with a portfolio overseas? I invite comments from actual experience with Canadian financial institutions, because I don't think it's settled.

In many cases, the same argument will apply to similar investments that are traded on an exchange in other countries with which Canada has tax treaties. For example, the treaty with France is clear that French investments inside an RRSP are exempt from taxation by France. You do have to check the individual country treaty and the provisions are by no means uniform or easy to understand, e.g. the treaty with the UK looks to me like it exempts RRSPs from withholding on dividends but not interest.

A problem arises, however, if the investment inside the RRSP is a Canadian mutual fund with a portfolio overseas. Such a mutual fund would normally report income and foreign tax withheld, but there is no income reporting for RRSP accounts, so the foreign withholding disappears for all intents and purposes. This creates an automatic disadvantage to e.g. foreign ETFs in an RRSP, because distributions from the ETF will be paid without withholding while distributions from the Canadian fund will have the withholding deducted.

A partial solution to this problem goes as follows (and to be honest, I don't understand why it's not a solution already). There are two financial institutions involved, one holding the RRSP and one running the fund. If they are one and the same - e.g. if your RRSP was held directly by TD Asset Management - then the fund knows it's an RRSP and should not be withholding in the first place. If they are not the same - e.g. if your RRSP is held at TD Waterhouse and you buy, say, an AGF fund - then surely TDWH could inform AGF that the account is an RRSP so that AGF would not be required to withhold. I suspect this information is already being passed, because I occasionally see quarterly statements from trustee and fund company with replicated information.
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Re: Withholding tax lost on foreign investments in RRSPs

Post by adrian2 » 08 Jan 2007 13:30

Norbert Schlenker wrote:A partial solution to this problem goes as follows (and to be honest, I don't understand why it's not a solution already).
My understanding is that the problem is the extra layer between the foreign security paying the dividend and the RRSP. The foreign security does not pay the dividend to a retirement account; it pays it to a mutual fund, hence the withholding tax must be applied. The fund then prepares its financial statements noting the withholding tax, then it issues the corresponding T3/T5 to any taxable unitholder showing the full amount of foreign income and the corresponding tax withheld. For a registered unitholder there is no T3/T5 issued; the plan just gets the net foreign income and the withholding tax is lost. To implement your proposal the fund would have to know the proportion of registered unitholders before preparing the financial statements, plus it will have to be within the letter of the law of the applicable tax treaty - I don't know if it's feasible. A possible solution to the first issue is to create a special RRSP version of the fund which is ONLY available for RRSPs / RRIFs / LIRAs, but not RESPs or non-registered. I don't see a big incentive for the fund companies to do this.

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Re: Withholding tax lost on foreign investments in RRSPs

Post by Taggart » 08 Jan 2007 13:41

Norbert Schlenker wrote: In an RRSP, everything depends on tax treaties. The most common case is an investment in the US, where special provisions of the Canada-US treaty re retirement plans exempt from withholding taxes on income. That applies to US stocks and US ETFs. Does it apply to US traded ETFs with a portfolio overseas? I invite comments from actual experience with Canadian financial institutions, because I don't think it's settled.
There was no dividend withholding tax shown in the statements for TD e-funds International, nor from the U.S. based overseas ETF's we own, in the RRSP's.

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Re: Withholding tax lost on foreign investments in RRSPs

Post by adrian2 » 08 Jan 2007 13:45

Taggart wrote:There was no dividend withholding tax shown in the statements for TD e-funds International, nor from the U.S. based overseas ETF's I own.
You would not see a wihholding tax from a Canadian based MF investing overseas, held in RRSP. This does not mean the fund has not paid it: if you compare it with the same fund held in a non-registered account, you'll see the difference on your tax slip.

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Re: Withholding tax lost on foreign investments in RRSPs

Post by Taggart » 08 Jan 2007 13:55

adrian2 wrote:
Taggart wrote:There was no dividend withholding tax shown in the statements for TD e-funds International, nor from the U.S. based overseas ETF's I own.
You would not see a wihholding tax from a Canadian based MF investing overseas, held in RRSP. This does not mean the fund has not paid it: if you compare it with the same fund held in a non-registered account, you'll see the difference on your tax slip.
Adrian,

I kind of that that would be the case on the Canadian side, but who's to say there's no "hidden" withdrawal on the U.S. side for the overseas ETF's?

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