By Samuel Taube Here at Investment U, we tend to focus on American stocks. But we know that many of our readers are buying them in Canadian dollars – not greenbacks.
Perhaps we’ve been a bit neglectful of investors from the Great White North. Today, we hope to remedy that with an FAQ article for our Canadian readers.
We recently reached out to Eric Roseman, president and CIO of the Montreal-based asset management firm ENR, with some common questions about buying American stocks from the other side of the Great Lakes. You can read his answers below.
Can Canadian investors buy U.S. securities directly? Are there any accreditations or permissions required?
Provided these securities trade on a U.S. exchange, there are no restrictions. Canadians can also purchase units of a U.S. limited partnership with no restrictions from a Canadian tax perspective.
Should Canadian investors have exposure to U.S. equities?
Considering Canada represents just 3% of the world’s stock market capitalization (according to Morgan Stanley Capital International), it would be wise and profitable for Canadians to diversify outside of their home domicile.
The United States represents 60% of the MSCI World Index; therefore, Canadians should maintain a sizable allocation to U.S. stocks for long-term capital growth and income. The Canadian market is heavily weighted by natural resources and financials; the U.S. broader market is far more diversified and provides greater domestic and international exposure.
Forty percent of the S&P 500’s earnings are derived from overseas markets. In contrast, the Canadian stock market is far more insular and not as diversified.
For Canadians, are there tax implications to investing in U.S. stocks? How can Canadians minimize their tax liabilities from U.S. investments?
The United States IRS requires tax withholding on certain types of income based on the country of residence of a foreign person. Canada and the U.S. have a tax treaty called the Convention Between Canada and the United States of America, mutually signed in 1980, with various protocols (amendments) since then.
The treaty requires 15% tax withholding on dividends and 10% tax withholding on interest. If a Canadian resident owns a U.S. stock, there is a 15% withholding tax on any dividends earned. If a Canadian resident owns a U.S. bond, there will be a 10% withholding tax on any interest earned.
Importantly, the investment management company or financial institution where you own your U.S. investments should request you complete a Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting.
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Without this form, the default withholding tax rate for a foreign person earning dividends or interest in the U.S. is 30%. However, you do get to claim the foreign tax already withheld by the U.S. government. Canada Revenue Agency (CRA) allows you to claim a foreign tax credit for foreign tax paid in order to avoid double taxation of the income.
To minimize or reduce taxation on withholdings, Canadians should ideally hold U.S. securities vis-à-vis an RRSP (Registered Retirement Savings Plan). It is also important to note that registered accounts like RRSPs have an exemption from U.S. withholding …read more
Source:: Investment You
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