Stop paying excessive taxes on dividends in Canadian brokerage accounts
Most of investors in Canada will hold stocks or ETF listed in US exchanges, and many of those stocks or ETFs pay dividends. Given the (overall) low expected returns on equity, the 2%-3% dividends on broad indices provide non-trivial contribution to the total return. This article is about optimizing the dividend treatment in your Canadian portfolio.
In the ideal world, investors will receive the full dividend sent from stock or ETF / CEF ownership. Unfortunately for Canadian investors, this never happens when investing in non-Canadian (U.S.) instruments in the Canadian brokerage accounts. Probably the most annoying tax is the US foreign dividend tax. By default, the U.S/ taxman deducts 30% of dividends paid to an "alien", for example, on your SPY positions - they are sent directly to IRS. Fortunately, Canada has a tax treaty with U.S., which limits the withholding tax to 15%, but to get that lower rate, a Canadian investor must file the form FW8FEN: https://www.irs.gov/pub/irs-pdf/fw8ben.pdf. However, the brokerage will not file this form for you by default - you have to fill it out and instruct the brokerage to send it out.
Next in line after your dividend dollars is the brokerage. If you have the security settlement currency as CAD, then each dividend is converted from USD to CAD, with the typical brokerage commission of 2%. Most accounts allow USD exposure, however some do not: in particular, in RESP accounts, the Canadian dollar is the only allowed currency and you cannot have USD as a settlement currency there.
Finally, the Canadian tax-man charges the marginal tax rate on the dividends, which is up to 55% under the new budget! In the end, we are left with only 30-35% of the original dividend.
Fortunately, for the most popular U.S. investment index, S&P 500, there is an ETF that avoids the dividend payments altogether by using a Total Return Swap (TRS). The ETF is called HXS.TO, Horizons S&P 500® Index ETF. With the management fee of only 10bps, it offers the total return on S&P500 with no cash flows involved. It can provide the bulk of your portfolio equity "beta" in a very tax-advantageous way. This is a gem of an ETF.
Unfortunately, this is the only such product I could find so far. Other countries and other product types come with fully-taxable dividends. I will be updating this page if I find more tax-efficient ETFs.
References:
https://www.irs.gov/businesses/u-s-tax-withholding-on-payments-to-foreign-persons
In the ideal world, investors will receive the full dividend sent from stock or ETF / CEF ownership. Unfortunately for Canadian investors, this never happens when investing in non-Canadian (U.S.) instruments in the Canadian brokerage accounts. Probably the most annoying tax is the US foreign dividend tax. By default, the U.S/ taxman deducts 30% of dividends paid to an "alien", for example, on your SPY positions - they are sent directly to IRS. Fortunately, Canada has a tax treaty with U.S., which limits the withholding tax to 15%, but to get that lower rate, a Canadian investor must file the form FW8FEN: https://www.irs.gov/pub/irs-pdf/fw8ben.pdf. However, the brokerage will not file this form for you by default - you have to fill it out and instruct the brokerage to send it out.
Next in line after your dividend dollars is the brokerage. If you have the security settlement currency as CAD, then each dividend is converted from USD to CAD, with the typical brokerage commission of 2%. Most accounts allow USD exposure, however some do not: in particular, in RESP accounts, the Canadian dollar is the only allowed currency and you cannot have USD as a settlement currency there.
Finally, the Canadian tax-man charges the marginal tax rate on the dividends, which is up to 55% under the new budget! In the end, we are left with only 30-35% of the original dividend.
Fortunately, for the most popular U.S. investment index, S&P 500, there is an ETF that avoids the dividend payments altogether by using a Total Return Swap (TRS). The ETF is called HXS.TO, Horizons S&P 500® Index ETF. With the management fee of only 10bps, it offers the total return on S&P500 with no cash flows involved. It can provide the bulk of your portfolio equity "beta" in a very tax-advantageous way. This is a gem of an ETF.
Unfortunately, this is the only such product I could find so far. Other countries and other product types come with fully-taxable dividends. I will be updating this page if I find more tax-efficient ETFs.
References:
https://www.irs.gov/businesses/u-s-tax-withholding-on-payments-to-foreign-persons
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