U.S. withholding tax in an RRSP for Canadians

First, U.S. stocks are generally subject to 30% withholding tax on dividends for non-residents. It does not matter where the firm is located that offers and holds the brokerage account. Foreign withholding tax is determined based on residency of the payor and the recipient.

Many countries, including Canada, have tax treaties with the U.S. to ensure a reduced rate of withholding tax. For qualifying Canadian residents, the tax can be reduced to 15%. In a registered retirement savings plan (RRSP), the tax may be reduced to 0%. 

Qualifying to reclaim U.S. withholding tax

In order to qualify for the lower rate, an investor has to fill out the Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) and provide it to their investment firm. These forms are generally valid until the end of the third calendar year after signing, so need to be re-signed every three years.

U.S. stock dividends paid into an RRSP, registered retirement income fund (RRIF) or a similar registered retirement account are generally free from withholding tax for Canadian residents, as the U.S. recognizes the tax-deferred status of the accounts. In non-registered and tax-free savings accounts (TFSAs), the reduced 15% rate generally applies. 

If excess tax is withheld, it can be recovered by filing a U.S. tax return. However, the time and cost may be more than the potential refund unless the withholding tax is significant.

An important point is that Canadian mutual funds and exchange-traded funds (ETFs) that own U.S. stocks are considered Canadian residents and are subject to 15% withholding tax. If you own these in your RRSP, they will not qualify for the 0% withholding tax rate. This is because the mutual fund or ETF is considered the shareholder of the U.S. stocks, not you or your RRSP. (Try MoneySense’s ETF screener tool.) 

EDP dividends for Canadians

In your case, Wanda, you own shares of Enterprise Products Partners, which is a master limited partnership trading on the New York Stock Exchange (NYSE). Based on the current quarterly dividend and stock price, the annual dividend yield is about 7.6%. 

A master limited partnership (MLP) is a U.S. publicly traded entity that is taxed as a partnership, rather than a corporation. Most stocks on U.S. exchanges are corporations paying dividends. 

MLPs do not generally pay income tax, instead distributing their income to the unitholders or “partners,” as opposed to a corporation that pays its after-tax profits to shareholders. However, U.S. MLPs can elect to be taxed as a corporation. 

A Canadian resident unitholder of an MLP, like EPD, is generally considered to be a partner carrying on a trade or business in the U.S. The tax withholding rate is equal to the top U.S. marginal tax rate of 37%, Wanda, unless the partnership elects to be taxed as a corporation in the U.S. 

A Canadian investor who owns an MLP is technically required to file a U.S. tax return to report this U.S.-source income. The U.S. tax reporting (schedule K-1) may not be easy to use to convert the U.S. income for Canadian tax purposes for non-registered accounts. This is a drawback of owning U.S. MLPs.

In addition, if the dividends are subject to 37% withholding tax in a tax-sheltered account like an RRSP. They are also subject to additional Canadian tax payable on a withdrawal in the future, there may be an element of double taxation for Canadians owning MLPs, Wanda. 

So, the moral of the story here is that the high yield of EPD is a bit of a trojan horse for a Canadian investor. There is a high withholding tax rate that applies, potential double taxation, and even tax filing complexities as well. Canadians should think twice about buying U.S. master limited partnerships.

Read more about personal income taxes in Canada:

• How are you taxed when you sell a small business?
• Tax implications of making transfers between registered accounts
• How to calculate the taxable amount for a cashed-in whole life insurance policy
• Can you file multiple years of income taxes together in Canada?

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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