What You Should Know about Foreign Investment Taxes
If you have foreign investments or are thinking of investing, partnering, or expanding your business abroad, it’s important to understand the benefits of having foreign investments and understating the responsibilities of foreign investment taxes.
Economically, Canada is a relatively small country when it comes to investing opportunities. This is why so many of us have a diversified portfolio that includes equities from the U.S. and other first world, developing, and emerging economies.
In addition to diversifying your investing portfolio, foreign investment also helps mitigate risk and allow you to invest in industries that are not available in Canada.
That said, Canadian residents that make money on their foreign investment need to declare that income and pay income tax; in fact, Canadians are subject to Canadian income taxes no matter what country that income is earned in.
Unfortunately, when it comes to preparing your taxes and declaring foreign investments, Canada’s tax code can be confusing. Below are some tax tips that should help clarify the process.
Determine if the Investments Are Foreign
Knowing whether or not an investment you have is foreign or not seems straightforward. But determining liability is not always so easy to determine. It all comes down to a question of residency.
Canadian taxes are based on residency, not citizenship.
If a couple is married and one spouse works and lives in Toronto while the other works on a cruise ship, the spouse working on the ship needs to report their income and file a Canadian tax return.
Similarly, if as a Canadian resident you hold foreign investments, (stocks, bonds, treasuries, etc.) the Canada Revenue Agency wants its share.
Any income, dividends, or capital gains that come from foreign investments needs to be reported to the Canada Revenue Agency and all applicable taxes need to be paid.
Declaring Foreign Investments
For starters, if you hold foreign investments valued at over $100,000, you need to report them, even if you don’t sell them during the tax year.
Canadian tax payers that do not follow the foreign reporting requirements could be hit with a stiff penalty.
This declaration only applies though to foreign investments that are used for business or profit-based purposes; not personal use.
If you own a rental property in Florida or Arizona valued at $250,000, because it is worth more than $100,000 you need to report it on your taxes. If you own the same property but use it as a vacation home, you do not have to declare it.
That said, declaring foreign investments goes well beyond foreign real estate.
It also includes:
- Money and bank accounts held abroad
- Shares of foreign corporations, even if they are held by a Canadian broker
- Shares of Canadian corporations on deposit with a foreign broker
- Other tangible and intangible properties located outside Canada.
It does not include:
- Registered pension fund investments
- Foreign investments held in Canadian-registered mutual funds
- Personal-use properties
- Shares or debt securities of foreign affiliates.
Taxation of Foreign Investments
If you hold foreign investments, such as stocks on the NASDAQ, you are not required to file an income tax return in the U.S. Instead, all income, capital gains, and dividends tied to that foreign investment are reported on your Canadian income tax return.
If, however, the shares are held in a registered account, like an RRSP or RRIF, the gains are taxed as regular income when it is withdrawn. This can provide different tax advantages.
You might want to talk to your tax expert to determine what foreign investments should be held inside or outside an RRSP.
When preparing your foreign investment taxes, you need to convert all income and dividends earned into Canadian dollars. This can be done by converting the exchange rate on the date the foreign dividend or income is received or the average annual exchange rate published by the Bank of Canada for all income and dividends received throughout the tax year.
When it comes to capital gains, the adjusted cost base of foreign stocks also needs to be converted into Canadian dollars. If you bought or sold foreign shares, the purchase or sale price needs to be converted into Canadian dollars using the official exchange rate on the trade date, not the settlement date.
Foreign Tax Credit
If you are hit with double taxation, that is, paying taxes on foreign investments in Canada and hit with taxes by the foreign country in question, you may need to claim a foreign tax credit.
For example, if the foreign income is net of the withheld foreign taxes, you need to “gross-up” the amount of income taxes withheld. If you received a $215 foreign dividend payment ($250 in foreign dividends minus $35 in withholding tax) you need to include the full $250 in your income.
The foreign income is converted into Canadian dollars and the withholding tax can be claimed as a foreign tax credit (with certain restrictions).
FBC, Helping Canadians Reduce Their Tax Burden
The taxation on foreign investments is a very complex area of tax. If you own foreign investments or are thinking of investing outside of Canada, you should speak with the tax experts at FBC.
The tax professionals at FBC can help you determine the best way to structure your investments to minimize both your Canadian taxes and foreign withholding taxes.
Since 1952, FBC has worked exclusively with small business owners, farm operators, and independent contractors.
For more than 65 years, we have helped tens of thousands of clients from across Canada prepare and file their taxes. We also help them take care of payroll, financial planning, and financial statements.
At FBC, we understand that no two clients have the same tax planning needs, that’s why we’re the only accounting firm in Canada that provides a unique service. For a fixed fee, Members get year-round access to our tax planning, tax preparation, consultation, bookkeeping, and financial planning services. FBC also provides all new Members with a review of their previous three years’ tax returns.
For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.