With the strong Loonie, there’s a lot of Canadians investing in US real estate. But US real estate is not the only investment Canadians are making south of the border. A lot of Canadians are investing in US brokerage accounts to buy and hold US securities.
Believe it or not, US tax laws pertaining to Canadians investing in US stocks and bank accounts are actually very favorable. How favorable you wonder. Well, how about tax free if you meet the right circumstances.
If you are a non-resident alien for tax purposes, then you may be in luck when it comes to the tax applied to your US investment income.
In particular, as a non-resident alien, Uncle Sam exempts you from tax on the following US investment income:
- bank interest (excluding interest from mutual funds)
- capital gains (excluding capital gain distributions from mutual funds, investments in real estate investment trusts and certain other types of non-stock assets)
Therefore, if you were in the United States for less than 183 days during the tax year, then your US interest income and capital gains are tax-exempt, unless they are effectively connected with a trade or business in the United States during your tax year.
As we all know, US tax law is complex, and there are certain issues to be aware of when it comes to claiming tax exemption on your US investment income.
First, if you are a non-resident for tax purposes in a given year, but you spend 183 days or more in the U.S., then all your interest income and capital gains are subject to a 30% flat tax. This would apply to, for example, a Canadian student studying in the US (always a non-resident alien for tax purposes) who has stayed in the U.S. over 183 days in a calendar tax year.
Second, dividends paid by the US stocks owned by a foreign person are taxed at a flat 30% rate. Under the US-Canada tax treaty, however, this rate is reduced to 15%.
Lastly, you’ll want to be aware of US estate tax on your US investments. A foreign person who dies owning US stock or bank accounts is subject to estate tax based on the value of the portfolio at the time of death. As a Canadian resident, the US-Canada treaty allows you only a portion, based on a special formula, of the full estate tax exemption available to US tax residents. Therefore, without the right planning, your estate could end up owing Uncle Sam a lot of money.
If you are a Canadian or foreign investor looking to invest in the US, contact Gedeon Law & CPA today for assistance with your tax obligations on US investment income.