Mind you, this would involve negotiations with the U.S. and other
countries. With the contentious NAFTA talks still in progress, the
resumption of Trans Pacific Partnership discussions, plus the seemingly
endless softwood lumber dispute, Canada may be getting a little thin on the
ground when it comes to finding skilled representatives to present our
So I don’t expect the frustrations of investors to be addressed anytime
soon. But that doesn’t mean we should forget about the problem. Someone in
Ottawa should put it on their to-do list for future follow-up.
The issue is the application of withholding tax on dividends/distributions
earned from foreign securities. Unless you’re a chartered accountant, it’s
unlikely you have any clue about how much tax you’ll pay, if any.
Let’s start with a simple example – dividends from a U.S. corporation. They
are subject to a 15% withholding tax if paid into a non-registered account.
That amount can be reclaimed as a foreign tax credit.
But suppose the account is registered. Here’s where it gets tricky.
Payments made to an RRSP or RRIF are tax-exempt under the Canada-U.S. Tax
Treaty, as they are considered to be “retirement plans.” But payments made
to a TFSA or RESP don’t have this protection. Although these plans are
supposed to be tax-sheltered, the 15% dividend withholding tax applies.
Moreover, there is no mechanism for recovering it. Since the money was paid
into a registered plan, the foreign tax credit does not apply.
This is just the tip of the iceberg. Different rules apply if the security
you own is not shares in a corporation. For example, many people are
attracted by the high yields offered by U.S. master limited partnerships.
These mainly invest in the resource sector, but they can be involved in
other industries as well, such as amusement parks and financial services.
NGL Energy Partners (NYSE: NGL) has a current yield of 14%. And
Energy Transfer Partners (NYSE: ETP) yields 12%, while
American Midstream Partners (NYSE: AMID) generates a yield of 9%.
Those are mouth-watering numbers to income-oriented investors. But there’s
a good reason why I have never recommended them: The tax consequences are
onerous. Canadian investors in these partnerships are subject to a
withholding tax of almost 40%. Worse, Canadians who own shares in
these securities are considered to be doing business in the U.S. and are
supposed to file a tax return with the IRS as a result. That rule is rarely
enforced, but it is not something you want to get involved with!
Those are just a couple of the problems related to U.S.-based cash flow.
Money from other jurisdictions also creates difficulties.
For example, a reader asked recently if he should avoid putting units of
Brookfield Energy Partners (TSX: BEP.UN) in a TFSA because he was worried about losing the 15% withholding tax.
However, BEP is not a U.S. company (it is a limited partnership based in
Bermuda), so different rules apply. Moreover, it’s impossible to tell from
one year to the next what the tax consequences will be.
Jeff Finkelstein of RBC Dominion Securities has several clients who have
positions in BEP. He says RBC withholds 15% of the amount of the
distribution that is considered “foreign income.” However, no withholding
tax has been levied on distributions from Brookfield Energy Partners,
because they are regarded as “return of capital.” But there is no guarantee
that will continue in the future. The composition of the distribution can
change from year to year, so there could be withholding down the road.
A sister partnership to BEP does have some withholding applied, but not on
the entire amount.
Brookfield Infrastructure LP (TSX: BIP.UN) has a small foreign income component in its distribution mix. The amount of
withholding is minuscule, however – in 2016 it was about $0.05 in tax on
every $100 of distribution. Of course, that could change this year.
The bottom line is that you should not make any assumptions about the
taxation of foreign payments in your accounts. Check with your broker on
withholding before making a purchase and remember that past history does
not necessarily mean the same situation will apply going forward.
It would be great if Ottawa could negotiate taxation uniformity for foreign
payments to Canadians. But until that happens, it’s buyer beware.
Gordon Pape is one of Canada’s best-known personal finance commentators and
investment experts. He is the publisher of
The Internet Wealth Builder and The Income Investornewsletters, which are available through the Building Wealth website.
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Notes and Disclaimer
© 2017 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned carry risk of loss, and no guarantee of
performance is made or implied. This information is not intended to provide
specific personalized advice including, without limitation, investment,
financial, legal, accounting, or tax advice. Always seek advice from your
own financial advisor before making investment decisions.
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