According to SelectUSA.gov, United States hosts the most developed, liquid, flexible and efficient financial markets in the world. These factors entice not only US residents, but also non-residents to invest in the United States. As is the case for earning any type of income, investment income also gives rise to tax implications.
Here we discuss the US tax implications that Canadian residents need to adhere to if they make investments in the US. We also point out some related Canadian tax obligations.
Stocks
In most cases a Canadian who invests in stocks listed on US exchanges is only subject to a US withholding tax on dividends received. Although the standard rate on this withholding tax is 30 percent, the investor can reduce it to 15 percent by filing form W-8 BEN with their investment brokerage.
Any capital gain realized by a Canadian on the sale of stocks is not taxable in the US. The exception to this rule applies to US citizens. US citizens residing in Canada are required to report their capital gains (net of capital losses) on their US tax return form 1040 schedule D. In addition, dividend income is to be reported for US tax purposes.
Real estate
Tax implications with respect to US real estate vary depending on whether the Canadian investor owns a personal-use property or a rental property.
A personal-use property normally does not have any annual tax filing requirements in the US. To the contrary, rental income is to be reported on both the Canadian and US tax returns. Both countries allow the offsetting of certain rental expenses against the respective rental income. The Canadian’s tax obligation to the IRS is to file form 1040-NR.
When a capital gain is realized on the sale of a US property the Canadian investor is subject to a 15% US withholding tax on gross proceeds. Like the dividend withholding tax, this tax can be reduced by filing a withholding certificate prior to the closing of the property sale.
Any US tax payable can be claimed as a foreign tax credit on the Canadian tax return.
Foreign assets costing more than $CAD100,000
If a Canadian owns foreign assets, including US stocks, rental property, or any other investments costing more than $CAD100,000, they need to file form T1135 with CRA. Failure to do so can result in hefty penalties levied by the CRA.
For professional accounting and tax advice contact Alpha Accountzy, Accounting & Tax Solutions.
