US ETF and Cryptocurrency Basics

As a Canadian investing in U.S.-based ETFs and cryptocurrencies, it's crucial to understand the associated tax implications to ensure compliance and optimize your returns. When you receive dividends from U.S. ETFs, a 15% withholding tax is applied if you submit IRS Form W-8BEN; without this form, the tax rate can jump to 30%. Interest income from these investments is typically exempt from U.S. withholding taxes when the form is filed. While capital gains from selling U.S. ETFs aren't taxed by the U.S., they must be reported and taxed in Canada. For cryptocurrency investments, profits are treated as capital gains or business income and must be declared on your Canadian tax return. When cryptocurrency transactions are extensive or business-like, profits may be treated as business income and taxed at the marginal tax rate. Additionally, if the total cost of your foreign investments exceeds $100,000, you are required to file Form T1135 to report these holdings and avoid potential penalties.

Dividends

Canadian residents receiving dividends from U.S. ETFs are generally subject to a 15% withholding tax under the Canada-U.S. Tax Treaty, provided they file IRS Form W-8BEN to confirm their foreign status. Without this form, the withholding tax can be as high as 30%. These rules derive from the Canada-U.S. Tax Treaty, which grants reduced withholding rates upon proper documentation.

Interest

Interest income from U.S. sources is generally exempt from U.S. withholding tax for Canadian residents, again contingent on submitting IRS Form W-8BEN to the U.S. financial institution. By doing so, investors avoid U.S. withholding tax on interest, a benefit confirmed by the Canada-U.S. Tax Treaty.

Capital Gains

Capital gains from the sale of U.S. ETFs by Canadian residents are not usually subject to U.S. withholding tax. However, these gains must be reported on the Canadian tax return and taxed in Canada. Maintaining accurate records of transactions is critical for compliance with Canadian tax laws.

Reporting and Compliance

All foreign income, including dividends, interest, and capital gains from U.S. ETFs, must be reported on the Canadian tax return. Investors may claim a foreign tax credit for any U.S. withholding taxes paid, reducing their Canadian tax liability. This ensures no double taxation, consistent with the principles of the Canada-U.S. Tax Treaty.

IRS Form W-8BEN

Filing IRS Form W-8BEN is essential to benefit from lower withholding tax rates under the Canada-U.S. Tax Treaty. This form confirms the investor’s eligibility for treaty benefits, allowing reduced withholding rates on dividends and exemptions on interest income.

Cryptocurrency Investments

In Canada, cryptocurrencies are considered commodities. Profits from buying and selling cryptocurrencies are subject to capital gains tax and must be reported as such. Investors should keep detailed records of dates, values, and transaction purposes. When cryptocurrency transactions are extensive or business-like, profits may be treated as business income and taxed at the marginal tax rate. Determining whether cryptocurrency falls into the business category depends on the investor’s level of activity and specific circumstances.

Specified Foreign Property Reporting Requirements

Under section 233.3 of the Canadian Income Tax Act, Canadian residents holding foreign property, including U.S. ETFs and certain cryptocurrency investments, must file Form T1135—Foreign Income Verification Statement if the cost exceeds $100,000 during the tax year. Cryptocurrency is considered “funds or intangible property” and may be specified foreign property if it is held or deposited outside Canada and not used exclusively in an active business. U.S. ETFs are also considered specified foreign property if they represent shares of capital stock of a non-resident corporation as defined in subsection 233.3(1) of the Act. Maintaining proper records and filing Form T1135 on time is crucial to avoid penalties.

Reduced Withholding Tax on Dividends from Canadian Corporations to Non-Residents

The general withholding tax rate on dividends paid to non-residents by Canadian corporations is 25%, but certain tax treaties reduce that rate. Under the Canada-U.S. Tax Treaty, U.S. residents who are beneficial owners of the dividends can reduce the withholding tax to 15%. If they own at least 10% of the voting stock, the rate can drop to 5%.

THE INFORMATION PROVIDED IN THIS ARTICLE IS FOR GENERAL INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. FISZMAN TAX LAW RECOMMENDS CONSULTING A QUALIFIED LAWYER FOR ADVICE PERTAINING TO YOUR SPECIFIC SITUATION.