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Cdn Stocks in Roth IRA

 
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bruce



Joined: 02 Apr 2005
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PostPosted: Sun Sep 09, 2007 10:58 am    Post subject: Cdn Stocks in Roth IRA Reply with quote

As a Cdn resident (dual citizen) with a Roth IRA, I'm trying to figure out the best investments to have in it given that earnings are only taxed in Canada. I'm thinking that Cdn stocks interlisted on the NYSE might be the best bet (e.g. large Cdn bank/resource stocks). But here's the question: Is there any problem receiving the Canadian Dividend Tax Credit on a Canadian stock purchased in USD, on the NYSE, in a US Roth IRA, where (presumably) dividends are also paid in USD?
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bruce



Joined: 02 Apr 2005
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PostPosted: Wed Sep 19, 2007 12:43 am    Post subject: Reply with quote

I'm not sure if my question was unclear or not. I might have made it too complicated or specific to my situation so let's forget about the Roth for a second. Here's my rephrased question....

Question: Can a Canadian resident claim the Canadian dividend tax credit for dividends received on a Canadian interlisted stock that they hold in a US brokerage account, bought on a US exchange, denominated in USD?

[If the answer to that question is true, then I'm certain that it would still be true for that same stock when held in a Roth IRA account since CRA sees though the Roth structure.]

Thanks.
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nelsona



Joined: 27 Oct 2004
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PostPosted: Wed Sep 19, 2007 8:31 am    Post subject: Reply with quote

I weas letting someone else have a go at this, but since no one else has, I'll give my *opinion*.

As long as the dividend would qualify if it were paid out on the 'Cdn' stock (rememebr, not all dividends paid out by Cdn corps qualify for the tax credit) then you can calculate your own tax credit.

Normally, but not always, a T receipt would indicate your credit. Your IRA will not be receiving a T form obviously, but CRA does allow one to calculate the credit even without the reciept.

A problem you will face however, is that there already will be Cdn tax withheld on the dividends paid to your IRA (this is the case for any Cdn corps trading on US markets), so you may have a complicated time accounting for the tax already paid (although, simply including it with all your other withheld tax should suffice, with a note).

So, you will likely have to first determine if the Cdn-sourced dividends are eligible for the credit, then gross up your dividends accordingly (there is one rate for eligible and one for non-eligible), and then take the credit you calculate. 'Normal' Cdn residents simply use the figures provided on their T form. You will simply add any Cdn tax withheld by the IRA to your other withholding (your paycheck withholding for example).
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bruce



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PostPosted: Wed Sep 19, 2007 9:20 am    Post subject: Reply with quote

Thanks for the reply. I'm surprised Canadian taxes are withheld from Cdn dividends paid in a US IRA (even a Roth). Are US taxes withheld from US stock dividends paid to an RRSP? For some reason I thought holding in a retirement account made the withholding go away (by treaty?).
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nelsona



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PostPosted: Wed Sep 19, 2007 10:20 am    Post subject: Reply with quote

"Are US taxes withheld from US stock dividends paid to an RRSP?"

Yes, and this has been a bigger and bigger problem over the years. There are cumbersome remedies.

This doesn't harm you though, since your account doesn't have such protection (except for the fact that the withheld tax reduces your Roth).
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bruce



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PostPosted: Wed Sep 19, 2007 10:36 am    Post subject: Reply with quote

Very interesting. I learn something new every day!

This tells me some very important general tax planning rules for holding stocks in tax sheltered plans... wherever possible I should try to:

1) Keep US stocks in US plans (401k or traditional IRA)
2) Keep Cdn stocks in RRSP (or unsheltered for tax credit purposes)
3) Roth is a problem no matter what you put in there. US stocks = less paperwork but higher taxes. Cdn stocks = paperwork to calculate Cdn tax credit but (likely) lower taxes on Cdn return

Does this sound like a reasonable summary of how to minimize overall taxes? Seems like a shame to pay extra taxes through withholdings from a tax sheltered plan unless they can offset taxes elsewhere (like Cdn taxes withheld from a Roth).
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Norbert Schlenker



Joined: 21 Nov 2004
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Location: The Dry Side of the Wet Coast

PostPosted: Fri Sep 21, 2007 4:59 pm    Post subject: Reply with quote

bruce: "Are US taxes withheld from US stock dividends paid to an RRSP?"

nelsona: "Yes, and this has been a bigger and bigger problem over the years. There are cumbersome remedies."

As far as I know, this is not true. A Canadian broker holding an RRSP which collects a dividend on a US stock position will not withhold or remit taxes to the IRS. Paragraph 2 of Article XXI forbids taxation of either interest or dividends.

The Article is neutral with respect to direction, so a Canadian dividend paid into an IRA would be similarly exempt from Canadian tax. A US broker who withholds is making a mistake and should be pointed at the treaty if it persists.

A Roth IRA is a different animal. Canada considers a Roth to fall outside the protections of Article XXI, so withholding would likely apply.
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bruce



Joined: 02 Apr 2005
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PostPosted: Sun Sep 30, 2007 2:32 am    Post subject: Reply with quote

Hi Norbert,

Thanks for helping clarify this one. I was really surprised at nelsona's answer about withholdings from RRSPs as it seemed contrary to what I had always understood. Great to have a second opinion!

In terms of the Roth, is the Canadian withholding tax due to a) having Canadian stocks in the Roth, b) having a Canadian address on the account, or c) both? The reason I ask is because as a US citizen holding Canadian stocks in a US tax shelter, I'm surprised that a Canadian address would be enough to trigger Cdn withholding???

Given the difficulty of claiming the dividend tax credit (as nelsona discussed), I wonder if it would make more sense to hold EWC in the Roth for canadian content. This is certainly easier and would allow me to simply forget about trying to claim the DTC. It would also mean no more need to try to prove/claim that Canadian withholding came out. Alternatively, I suppose I could hold a US index (like VTI or SPY) and get the Canadian content in my traditional IRA. Just thinking out loud... any thoughts are appreciated. Thanks!
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nelsona



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PostPosted: Mon Oct 01, 2007 12:03 am    Post subject: Reply with quote

While the treaty offers protection from such taxation, such protection must be requested, thru W8BEN. It does indeed happen all to frequently that RRSP are withheld.

http://forums.canadianbusiness.com/thread.jspa?threadID=7679&tstart=0

As I said, once withheld, reversing this withholding is very cumbersome, since (a) the funds are no longer in your RRSP, and (b) they have been remitted by the broker to the IRS, in your name, so they can't get it back, you must apply for it.

Ask 20 Self-directed RRSP holders if they have submitted a W8BEN, you might get one 'yes'. Therein lies the chances of withholding.
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bruce



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PostPosted: Mon Oct 01, 2007 1:04 am    Post subject: Reply with quote

My understanding is that the W8BEN is only necessary if you don't have a valid SIN on file. If you have a valid SIN, all you need is a photocopy of drivers licence. Here's the requirements from Etrade. I've seen these same requirements posted by other Cdn brokers.

https://www.canada.etrade.com/signup/forms.shtml
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