Tax implications For Canadian Traders Shopping for U.S. Shares

Up to date on February nineteenth, 2025 by Bob Ciura

For Canadian buyers, having publicity to the US inventory market is essential. There are a variety of the reason why.

First, the US is the biggest inventory market on the earth. To be able to keep away from residence nation bias and have a globally diversified funding portfolio, publicity to American shares is required.

On the subject of the very best U.S. dividend shares to purchase, we’ve got compiled a listing of blue-chip shares with 10+ years of dividend will increase.

Blue-chip shares are established, financially sturdy, and constantly worthwhile publicly traded corporations.

Their energy makes them interesting investments for comparatively secure, dependable dividends and capital appreciation versus much less established shares.

This analysis report has the next assets that can assist you put money into blue chip shares:

Useful resource #1: The Blue Chip Shares Spreadsheet Record

This record comprises essential metrics, together with: dividend yields, payout ratios, dividend development charges, 52-week highs and lows, betas, and extra.

There are presently greater than 500 securities in our blue chip shares record.

Second, there are specific sectors which can be underrepresented within the Canadian inventory market. Examples embody healthcare, expertise, and client staples. Curiously, these sectors are among the many strongest within the U.S. market.

To put money into shares from the US, Canadian buyers want to grasp how this can affect their tax payments.

This text will focus on the tax implications for Canadians that put money into U.S. shares, together with examples of dividend- and non-dividend-paying shares held in each taxable accounts and non-taxable accounts.

Desk of Contents

Whereas we suggest studying this text in its entirety, you possibly can skip to a selected part of this text utilizing the desk of contents beneath:

Capital Positive aspects Tax

There are two forms of investing taxes that Canadian buyers pays if they’re investing exterior of a tax-deferred retirement account. The primary is capital positive aspects tax, which might be mentioned first.

A capital achieve happens when a safety is bought for greater than its buy value. Conversely, a capital loss comes from promoting a safety for lower than it was bought for.

Canadian buyers should pay capital positive aspects tax on at the very least 50% of their realized capital positive aspects. The 2024 Federal Finances introduced a rise within the capital positive aspects inclusion fee from 50% to 2 thirds on the portion of capital positive aspects realized within the yr that exceed $250,000 for people, for capital positive aspects realized on or after June 25, 2024.

The $250,000 threshold applies to capital positive aspects realized by a person web of any capital losses realized within the present yr or carried ahead from prior years. The tax fee for capital positive aspects is equivalent to the person’s marginal tax fee.

Marginal tax charges are composed of a federal element (which is paid in the identical quantity by all Canadians) and a provincial element (which varies relying on which province you reside in).

In line with the Canada Income Company, present federal tax charges by tax bracket are:

15% on the primary $55,867 of taxable earnings, +
20.5% on the following $55,866 of taxable earnings (on the portion of taxable earnings over $55,867 as much as $111,733), +
26% on the following $61,472 of taxable earnings (on the portion of taxable earnings over $111,733 as much as $173,205), +
29% on the following $73,547 of taxable earnings (on the portion of taxable earnings over $173,205 as much as $246,752), +
33% of taxable earnings over $246,752.

As talked about, provincial tax charges differ by province. Examples on this article will use Ontario’s tax charges, as it’s Canada’s most highly-populated province. Ontario tax charges by tax bracket are proven beneath:

5.05% on the primary $46,226 of taxable earnings, +
9.15% on the following $46,228, +
11.16% on the following $57,546, +
12.16% on the following $70,000, +
13.16% on the quantity over $220,000

So how do capital positive aspects taxes differ for holders of U.S. shares?

Fortuitously, the capital positive aspects tax paid on investments in U.S. shares is equivalent to the capital positive aspects paid on Canadian securities. The one minor distinction is that capital positive aspects should be expressed in Canadian {dollars} for the aim of calculating an investor’s tax legal responsibility.

An instance might help us perceive capital positive aspects tax from U.S. shares within the context of those Canadian tax brackets. Let’s assume that you’re a Canadian investor who has executed the next trades:

Bought 100 shares Johnson & Johnson (JNJ) for US$100 at a time when the USD to CAD trade fee was 1.25
Bought your Johnson & Johnson shares for US$125 at a time when the USD to CAD trade fee was 1.15

You’ll pay capital positive aspects on the distinction between your buy value and your sale value, expressed in Canadian {dollars}. The next desk might help us to grasp the right method to calculate the CAD-denominated capital achieve. Though circuitously calculated within the picture above, the capital achieve for this transaction – expressed in U.S. {dollars} – is US$2,500.

Nevertheless, that’s irrelevant for the aim of calculating capital positive aspects tax as a result of capital positive aspects tax relies on transaction costs expressed in Canadian {dollars}. What actually issues is the CAD$1,875 capital achieve proven within the backside proper cell of the desk.

That is the quantity used to calculate capital positive aspects. As talked about beforehand, at the very least half of this quantity can be taxed on the investor’s marginal tax fee. We are going to assume for simplicity’s sake that the investor is within the highest tax bracket, which is 46.16% for Ontario residents.

The next desk breaks down the capital positive aspects tax calculation for this hypothetical funding in Johnson & Johnson (JNJ). So, the capital positive aspects tax can be at the very least $432.75.

This calculation was fairly concerned and demonstrates how sophisticated the calculation of capital positive aspects tax could be for Canadians.

Fortuitously, capital positive aspects tax could be tax-free or tax-deferred if U.S. shares (or shares from every other nation) are held in Canadian retirement accounts.

We focus on the 2 forms of Canadian retirement accounts (TFSAs and RRSPs) in a later part of this text.

For now, we’ll transfer on to discussing the taxation of dividends paid to Canadian buyers from U.S. firms.

Dividend Tax

Not like capital positive aspects taxes (that are calculated in the identical approach for U.S. shares and Canadian shares), the taxes that Canadian buyers pay on worldwide inventory dividends are completely different than the taxes they pay on home dividends.

This is because of a particular kind of dividend tax referred to as “withholding tax.” Not like different taxes paid by Canadian buyers, these taxes are withheld at supply (by the corporate that pays the dividend) and remitted to their very own tax authority – which, for United States corporations, is the Inner Income Service (IRS).

Dividend withholding taxes meaningfully cut back the earnings that Canadian buyers are in a position to generate from U.S. shares. Fortuitously, this impact is partially offset by a particular tax treaty between the US and Canada (referred to as the Conference Between Canada and the US of America).

The U.S. withholding tax fee charged to overseas buyers on U.S. dividends is generally 30% however is decreased to fifteen% for Canadians attributable to this treaty.

How does this evaluate to the common withholding tax of nations throughout the globe?

Even after accounting for the particular tax treaty, the U.S. remains to be an unfavorable marketplace for Canadian buyers from the attitude of tax effectivity.

In line with Blackrock, the weighted common overseas withholding tax on worldwide inventory dividends is 12%. Even after accounting for the tax treaty, Canadians nonetheless pay a 15% withholding tax — 25% increased than the weighted common dividend withholding tax all over the world.

Canadian buyers might be completely happy to listen to that this overseas withholding tax is ready to be reclaimed come tax time. The Canada Income Company lets you declare a overseas tax credit score for the withholding tax paid on United States dividends. This prevents buyers from paying tax twice on their dividend earnings.

Nonetheless, U.S. dividends usually are not as tax environment friendly as their Canadian counterparts. The explanation why is considerably sophisticated and is expounded to a Canadian taxation precept referred to as the “dividend tax credit score.”

The dividend tax credit score meaningfully reduces the taxes that Canadians pay on dividends, and causes dividend earnings to be the one most tax-efficient type of earnings obtainable to Canadians.

In line with MoneySense:

When a non-resident invests in U.S shares or U.S.-listed trade traded funds (ETFs), the usual withholding tax on dividends is 30%. A Canadian resident is entitled to a decrease withholding fee of 15% below a treaty between the 2 nations if they’ve filed a kind W-8 BEN with the brokerage the place they maintain the investments.

Our suggestion for Canadian buyers searching for publicity to U.S. shares is to carry their U.S. shares in retirement accounts, which concurrently reduces their tax burden and dramatically reduces the tax complexity of their funding portfolios.

We focus on dividend taxes in retirement accounts within the subsequent part of this text.

Dividend Tax in Retirement Accounts

The easiest way for Canadian buyers to realize publicity to U.S. shares is thru retirement accounts.

There are two main retirement accounts obtainable for Canadian buyers:

Each supply tax-advantaged alternatives for Canadians to deploy their capital into monetary property. With that stated, there are essential variations as to how every account capabilities.

The Tax-Free Financial savings Account (TFSA) permits buyers to contribute after-tax earnings into the account. Funding positive aspects and dividends held throughout the account are topic to no tax and no tax is incurred upon withdrawal from the account. TFSAs are functionally just like Roth IRAs in the US.

The opposite kind of retirement account in Canada is the Registered Retirement Financial savings Plan (RRSP). These accounts permit Canadian buyers to contribute pre-tax earnings, which is then deducted from their gross earnings for the aim of calculating every year’s earnings tax.

Earnings tax is paid later, upon withdrawals from the RRSP. RRSPs are functionally equal to 401(okay)s inside the US. In different phrases, earnings earned in RRSPs at tax-deferred.

Each of those retirement accounts are very engaging as a result of they permit buyers to deploy their capital in a tax-efficient method. Usually, no tax is paid on each capital positive aspects or dividends as long as the shares are held inside retirement accounts.

Sadly, there may be one exception to this rule. The withholding tax paid to the IRS on dividends from United States companies remains to be paid inside TFSAs. Because of this, U.S. shares that pay out massive dividends shouldn’t be held inside a TFSA if attainable.

As a substitute, the RRSP is the very best place to carry U.S. dividend shares (however not MLPs, REITs, and so on.) as a result of the dividend withholding tax is waived. In reality, no tax is paid in any respect on U.S. shares held inside RRSPs.

Because of this Canadian buyers ought to maintain all dividend-paying U.S. shares inside their RRSPs if they’ve ample contribution room. U.S. shares that don’t pay dividends could be held in a TFSA.

Lastly, Canadian dividend shares ought to be held in non-registered accounts to benefit from the dividend tax credit score.

Ultimate Ideas

This text started by discussing a few of the advantages of proudly owning U.S. shares for Canadian buyers earlier than elaborating on the tax penalties of implementing such a method.

After describing the tax traits of U.S. shares for Canadians, we concluded that the very best practices are to:

Maintain dividend-paying U.S. shares inside an RRSP
Maintain non-dividend-paying or low-yielding U.S. shares (which can be anticipated to have increased development prospects) inside a TFSA
Maintain Canadian shares in a taxable account — particularly dividend-paying Canadian shares, to benefit from the dividend tax credit score

In case you are a Canadian dividend investor and are fascinated with exploring the U.S. inventory market, the next Certain Dividend databases include a few of the most high-quality dividend shares in our funding universe:

The Dividend Aristocrats: S&P 500 shares with 25+ years of consecutive dividend will increase
The Dividend Achievers: dividend shares with 10+ years of consecutive dividend will increase
The Dividend Kings: thought of to be the best-of-the-best in the case of dividend development, the Dividend Kings are an elite group of dividend shares with 50+ years of consecutive dividend will increase

Alternatively, it’s possible you’ll be seeking to tailor a really particular group of dividend shares to fulfill sure yield and payout traits. If that is certainly the case, you can be within the following databases from Certain Dividend:

One other method to method the U.S. inventory market is by setting up your portfolio in order that it owns corporations in every sector of the inventory market. Because of this, Certain Dividend maintains 10 databases of shares from every sector of the market. you possibly can entry these databases beneath.