Tax planning for Canadians who invest in the U.S.

Any U.S. tax withheld on other sources of investment income is eligible to claim as a foreign tax credit. This generally reduces the Canadian tax otherwise payable dollar for dollar, and avoids double taxation. 

U.S. dividends, interest, and capital gains must be reported in Canadian dollars based on the applicable foreign exchange rate. Most people use the average rate for the year to convert their income to Canadian dollars, but it is also acceptable to use the rate on the date of the transaction. 

Capital gains are a little trickier than dividends and interest because you have at least two exchange rates to determine: the exchange rate on the date of purchase, and the exchange rate on the date of sale. Because exchange rates fluctuate, it is possible that the shift in exchange rates causes a much different capital gain or loss in Canadian dollars than in US dollars. 

If an investor has purchased shares at different times, there is even more work involved. You need to figure out the exchange rate for each purchase in Canadian dollars to determine the adjusted cost base. This can be particularly challenging for someone who has a stock savings plan with a U.S.-based employer where they buy shares with each paycheque, for example. 

Canadian-listed ETFs and Canadian mutual funds that own U.S. stocks are themselves considered to be Canadian residents, just like an individual taxpayer. They will be subject to withholding tax before a dividend is received by the fund. This withholding tax is generally reported on a T3 slip (or sometimes a T5 slip, depending on the fund) and can likewise be claimed for a foreign tax credit in Canada. 

So far, these comments apply to non-registered, taxable investment accounts. There are slightly different implications if a Canadian buys U.S. stocks or ETFs in a different account. 

Registered investment accounts

Tax-free savings accounts (TFSAs), Registered Education Savings Plans (RESPs), and registered disability savings plans (RDSPs) generally have the same withholding tax implications by the IRS as a taxable account. However, because these accounts are tax-free or tax-deferred, there are no tax implications for a Canadian beyond the withholding tax. 

Does this mean you should not own U.S. stocks in a TFSA, RESP or RDSP? No, but it does mean there is a slight cost to doing so, albeit for the benefit of holding a more diversified investment portfolio. 

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