Do you hold U.S. investments in a registered or non-registered account? Depending on the situation, there could be tax implications. Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Greg Bonnell to discuss what Canadians should know, including reporting requirements to keep in mind.
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* Today on Ask MoneyTalk, we answer a question we're hearing around investing in the United States as a Canadian. Nicole Ewing, Director of Tax and Estate Planning, TD Wealth, joins me now to weigh in. So here's the question for you, Nicole: I hold US investments in my registered and non-registered accounts. What are the tax implications for me?
* Well, we'll start with the non-registered accounts, then. So if you are earning US dividend income in your non-registered account, then you will not get the benefit of what we would receive if we had a Canadian dividend-- you won't get the dividend tax credit. So, ultimately, you'll be paying a higher rate of tax overall.
- For capital gains purposes, you'll have the same treatment for a US gain as you would for a Canadian gain. We also want to be mindful, though, that we have withholding taxes on US equities. And so if you are a non-US person, they call us aliens-- if you are a non-resident alien and you're earning this income, then withholding tax may be held on your US source income. Ultimately, depending on the type of account that US equities is held in, you'll have different types of treatments.
- And the withholding tax is 15%. You may or may not be able to get that back. You may have a foreign tax credit that you can use to be able to get credit, at least on your Canadian income taxes, for amounts that have been withheld and, essentially, paid to a foreign jurisdiction, in this case, the US. Now, there are some differences with respect to our registered accounts.
- So for registered accounts, the US treaty with Canada does allow for pension retirement income to not be subject to the rules and allows the money to continue to grow tax free, and you wouldn't have the withholdings. That is not the same for your Tax-Free Savings Account or for your RESPs. Essentially, the US does not recognize a TFSA as a pension or retirement account.
- It does not qualify, and, therefore, you are going to be subject to the withholding taxes. And your RESPs are treated similarly. So it really is important to firstly know which of your assets are invested, whether it's non-registered or registered account. And then even within your registered accounts, whether it's your RRSP or your TFSA, and the type of income that you're earning, whether it's dividend income, or capital gains, or, perhaps, both.
* I can imagine someone in this situation would also be wondering, what are their reporting requirements? What do they need to divulge?
* Right. So, generally speaking, if you are a Canadian person, you are required to report on all of your worldwide income to the Canadian government. So that will need to be included in your income tax returns. You will also have the responsibility to report on your T1135.
- And that is where if the cost base of your foreign assets exceeds $100,000 total, so not each individual asset, $100,000, but collectively, if you have $100,000 of foreign investment property that is defined in a particular way, then you will have to submit that form. And if you don't, there are quite significant penalties and interest that may apply there as well.
- We have, on death, if there is, in the estate, the individual holds at least $60,000 of US income or US assets, they may also need to file a report with the US government, with the IRS, which can take quite a long period of time to get sorted. And if there are significant assets-- so the limit is quite high at the moment-- but you may ultimately owe US estate tax as well to the US government-- so making sure you file that form so they can at least determine what your tax liability is and make sure that you're not paying any penalties for not filing the form.
* Now, as always, Nicole, you've laid it out nice and clear for us and the audience. But again, people's situations are always very specific to them. It sounds like if you're finding yourself with these kind of questions, you want to talk to somebody.
* This is really an area where you want experts to weigh in. And so if you are a Canadian person without any ties otherwise to the US, working with your investment advisors who would be able to help you navigate some of this to the extent you have extensive cross-border interests or, perhaps, a spouse or family member is also a US person, then we really do want to get cross-border experts involved in this to help you ensure that you are maximizing your income and minimizing your taxes and your filing obligations.
* Always insightful, Nicole. Thanks for that.
* My pleasure.
* Nicole Ewing, Director of Tax and Estate Planning at TD Wealth. And if you have a question, send it to moneytalk@td.com.
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* Well, we'll start with the non-registered accounts, then. So if you are earning US dividend income in your non-registered account, then you will not get the benefit of what we would receive if we had a Canadian dividend-- you won't get the dividend tax credit. So, ultimately, you'll be paying a higher rate of tax overall.
- For capital gains purposes, you'll have the same treatment for a US gain as you would for a Canadian gain. We also want to be mindful, though, that we have withholding taxes on US equities. And so if you are a non-US person, they call us aliens-- if you are a non-resident alien and you're earning this income, then withholding tax may be held on your US source income. Ultimately, depending on the type of account that US equities is held in, you'll have different types of treatments.
- And the withholding tax is 15%. You may or may not be able to get that back. You may have a foreign tax credit that you can use to be able to get credit, at least on your Canadian income taxes, for amounts that have been withheld and, essentially, paid to a foreign jurisdiction, in this case, the US. Now, there are some differences with respect to our registered accounts.
- So for registered accounts, the US treaty with Canada does allow for pension retirement income to not be subject to the rules and allows the money to continue to grow tax free, and you wouldn't have the withholdings. That is not the same for your Tax-Free Savings Account or for your RESPs. Essentially, the US does not recognize a TFSA as a pension or retirement account.
- It does not qualify, and, therefore, you are going to be subject to the withholding taxes. And your RESPs are treated similarly. So it really is important to firstly know which of your assets are invested, whether it's non-registered or registered account. And then even within your registered accounts, whether it's your RRSP or your TFSA, and the type of income that you're earning, whether it's dividend income, or capital gains, or, perhaps, both.
* I can imagine someone in this situation would also be wondering, what are their reporting requirements? What do they need to divulge?
* Right. So, generally speaking, if you are a Canadian person, you are required to report on all of your worldwide income to the Canadian government. So that will need to be included in your income tax returns. You will also have the responsibility to report on your T1135.
- And that is where if the cost base of your foreign assets exceeds $100,000 total, so not each individual asset, $100,000, but collectively, if you have $100,000 of foreign investment property that is defined in a particular way, then you will have to submit that form. And if you don't, there are quite significant penalties and interest that may apply there as well.
- We have, on death, if there is, in the estate, the individual holds at least $60,000 of US income or US assets, they may also need to file a report with the US government, with the IRS, which can take quite a long period of time to get sorted. And if there are significant assets-- so the limit is quite high at the moment-- but you may ultimately owe US estate tax as well to the US government-- so making sure you file that form so they can at least determine what your tax liability is and make sure that you're not paying any penalties for not filing the form.
* Now, as always, Nicole, you've laid it out nice and clear for us and the audience. But again, people's situations are always very specific to them. It sounds like if you're finding yourself with these kind of questions, you want to talk to somebody.
* This is really an area where you want experts to weigh in. And so if you are a Canadian person without any ties otherwise to the US, working with your investment advisors who would be able to help you navigate some of this to the extent you have extensive cross-border interests or, perhaps, a spouse or family member is also a US person, then we really do want to get cross-border experts involved in this to help you ensure that you are maximizing your income and minimizing your taxes and your filing obligations.
* Always insightful, Nicole. Thanks for that.
* My pleasure.
* Nicole Ewing, Director of Tax and Estate Planning at TD Wealth. And if you have a question, send it to moneytalk@td.com.
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