Thread: US Brokerage Withholding Tax

Ed

Speaking of Canadian stocks in your account that pay divedends, can you file a form 1040NR and get all your withholding from Canadian dividends as well? Also how about British or Aussie stocks???....

If this is the case, next time the market crashes I gonna buy a part of my portfolio some high yield dividend paying stocks..

In this uncertain world, it just might be the way to go instead of always trading.

I have reached the conclusion that the IRS incorrectly paid it back to me.

The best seems to be the sell the ETF/Stock the day before the ex-dividend day and buy it back the next day. On an average the security will drop by 90 % of the dividend, which is less than a 30 % tax.....

Originally Posted by BEL-AIR

Speaking of Canadian stocks in your account that pay divedends, can you file a form 1040NR and get all your withholding from Canadian dividends as well? Also how about British or Aussie stocks???....

Why do you say that ED?

Maybe you are right before, just that everything I every read does not say that, but perhaps foreign stocks are different.


So there is a 30% with holding tax, and you can't get it back regardless of a form 1040NR and if it is a foreign stock?

This is what I always read anyways. But like what you said maybe non USA stocks you can get it back even though they withhold it first, but I always thought this was not the case, that is why I never did the dividend investing strategy thing..

Which is due to the 30% tax that they would withhold...

Not yet, I'm "preparing the field" since I moved here recently.

So I'm doing everything to cut ties. So far, I only have 2 bank accounts (one that I'll close soon), my driver's licence (waiting my residence to change for a Panamanian one), my CMA membership and my RRSP in Canada.

So they are all considered secondary ties except the driver's licence (which won't be a problem soon)

I'm just waiting my residency here to contact the CRA because you can be consider a non-resident on the latest of the dates on which:

-the individual leaves Canada
-the individual's spouse or common law partner and/or dependants leave Canada (if applicable)
-the individual becomes a resident of the country to which he or she is immigrating.

Anyway, I don't have any revenue (salary) so far here in Panama and I'm just "accumulating" personal base deduction for this year since it's prorated according to the time we are resident vs non-resident.

They probably ask for a proof of residency since:

"14. Where an individual leaves Canada and purports to become a non-resident, but does not establish significant residential ties outside Canada, the individual's remaining residential ties with Canada, if any, may take on greater significance and the individual may continue to be resident in Canada. However, the fact that an individual establishes significant residential ties abroad does not, in and by itself, mean that the individual is no longer resident in Canada, as the Courts have held that it is possible for an individual to be resident in more than one place at the same time for tax purposes (see ¶s 24 to 26)."

IT-221R3 (Consolidated) Determination of an Individual's Residence Status

Be careful, if you become a non-resident, your assets are deemed sold and you have to pay tax on your capital gains.

There's also 2 forms (NR 73 - Leaving Canada) and (NR 74 - Entering Canada) to declare non-residency (or gain it).

Residency - Individuals

Guys,

Are you sure about the with holding tax reimbursement for dividends from companies outside USA? I'm really surprised because for the gov., it's a dividend and all dividends are tax the same way regardless of their source no ? (just asking, I don't know...)

To Bel-Air and TheGreatoggy: The best strategy you can do is send them proof that you live in Panama (a copy of an apartment rental can do the trick -- if you have a residency it's even better). Send a Fedex to CCRA and tell them that "Thank you so much for everything you've done for me. But, I will no longer need your services."

Guys,


I have always read and known that the government in the USA, will put on a with holding tax of an automatic 30% on all dividends paid to a non resident alien in the USA brokers account unless a tax treaty between countries can reduce that to a lower rate, just do a google search, so many articles, I have however never seen a case were a person can get his dividends with holding tax back, unless it is reduced by a tax treaty....

I have also never filled a 1040NR either, since as a non resident you do not need to, however if you want you could, but you do not need to, you just need to file a W-8BEN, unless you have other reasons to file a 1040NR...

Now if someone can show me in writing the opposite, other wise I have always read about the with holding tax on dividends....

Capital Gains Tax Exemption for Non-Resident Traders in the U.S. - Offshore Advisor


Path: Home › Blog › Going Offshore › Capital Gains Tax Exemption for Non-Resident Traders in the U.S.
Capital Gains Tax Exemption for Non-Resident Traders in the U.S.


Capital Gains Tax (CGT) Exemption in the U.S.

Capital gains are probably the major part of trading income. Under the general rule capital gains of non-residents received from U.S. sources are not taxed with the U.S. This rule should also apply to Forex ordinary income with IRC 988 and short-term capital gains from securities.


Basically, you are considered to be nonresident if you didn’t meet the green card test or the substantial presence test for the calendar year (January 1 – December 31) for individuals, and if you don’t have a U.S. office, business place or relationship that can be classified as a permanent residence for legal entities.
U.S. Interests and Dividends are Subject to Withholding Tax at a Flat 30% Rate

The other income including interests and dividends is subject to different taxation depending on whether it is Effectively Connected Income (ECI) or not.


According to the IRS, “if your only U.S. business activity is trading stocks, securities, or commodities (including hedging transactions) through a U.S. resident broker or other agent, you are not engaged in a trade or business in the United States”. It means that this part of your income is not effectively connected.


“Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate”. Since there is no double tax treaty in our case, the 30% tax rate is applicable to interests and dividends income.


“Nonresident aliens are taxed based on the source of their income and whether or not their income is effectively connected with a U.S. trade or business”. It means that your taxes on interests and dividends are subject to withholding by the paying agent – U.S. broker.


Same tax rulings should apply to foreign entities including your offshore company.
You Don’t Have to File a Tax Return in the U.S.

You don’t have a permanent establishment in the U.S. nor your income is treated as effectively connected. As a result you don’t need to furnish a taxpayer identification number (TIN) nor employer identification number (EIN).


As this is your only U.S. source income, you do not have to file a tax return in the U.S., because your U.S. tax liability is satisfied by the withholding of tax.


However, you must provide Form W8-BEN (instructions for form W-8BEN) to establish that you are a non U.S. person and claim that you are the beneficial owner of the income for which Form W-8BEN is being provided. Your broker is to request it from you and you are to provide it to the broker, not to the IRS, before you are paid or credited. Failure to provide Form W-8BEN may lead to backup withholding rate.




Invest FAQ: Tax Code: Non-Resident Aliens and US Holdings


A "non-resident alien" (NRA) is the U.S. government's name for a citizen of a country other than the U.S. who also lives outside the U.S. Confusingly, the term is also used for citizens of a non-U.S. country who are temporarily residing in the U.S., like students.



Non-resident aliens with U.S. holdings must comply with U.S. taxation rules, as enforced by the U.S. tax authority, the IRS. Thanks to the U.S. Congress, the tax laws are complicated, and nonresident aliens must look carefully to find a tax advisor who understands all the issues. Here's an overview.



Basically a person is considered non-resident for U.S. tax purposes in the years when that person is in the US fewer than 183 days. The exact rule is complex and takes prior years into account; see IRS

publication 519 for all the details (link at the bottom). Anyhow, in the years when a non-US citizen is considered a non-resident for tax purposes, that person files the US tax return on form 1040 NR, instead of a typical 1040 form, and pays tax on investment income according to the following special rules.

• No tax on bank interest. This exemption covers regular accounts with credit unions, savings and loans, etc.; it specifically excludes interest from mutual funds.

• No tax on portfolio interest. It's not always easy to figure out what bond interest qualifies as "portfolio interest", though. Some readers have reported that brokerage firms are confused on this issue, unfortunately.

• No tax on capital gains. This includes short-term or long-term capital gains from selling stocks. This means that a brokerage should withhold nothing when selling shares. This also includes short-term and long-term capital gains realized by a mutual fund or other regulated investment company. A mutual fund company may report short-term gains as dividends; see the discussion below.
• 
  Caveat on the capital-gains tax exemption: if the alien is a non-resident for tax purposes in a given year, but spends 183 days or more in the U.S., all capital gains are also subject to the 30% flat tax. For example, this applies to foreign students (always non-resident aliens for tax purposes) who have US-source income such as a scholarship and have stayed in the U.S or intended to stay 1 year or more.

• A 30% flat-rate tax on dividends. This includes interest-related dividends. This rate may be reduced by a tax treaty with the NRA's country of residence. Progressive taxation does not apply to NRAs; i.e., the first and last dollars are taxed at the same rate.

• A 30% flat-rate tax on interest that neither is paid by a bank nor qualifies as "portfolio interest." This rate may be reduced by a tax treaty with the person's country of residence.

• No personal exemption or deductions can be applied against investment income (which is, technically, "income not effectively connected with your US trade or business"). Further, according to the IRS, "if your sole U.S. business activity is trading securities through a U.S. resident broker or other agent, you are not engaged in a trade or business in the United States" so the income is not effectively connected with a US trade or business

Tax treaties are very important. If the individual's country of residence has an agreement (tax treaty) with the US government, those rules pretty much supersede the standard rules set by the Internal Revenue Code. In particular, they often reduce the tax rate on interest and dividend income.



While you are a non-resident alien, you are supposed to file Form W-8BEN (it replaces older Forms W-8 and 1001) with each of your mutual funds or brokers every 3 or 4 years, so that they will automatically withhold tax from your investment income. Since you have to indicate your country of residence for tax purposes on this form, the investment income payor will know what tax treaty, if any, applies. In the spring, the payor will send you a form 1042-S reporting your income, its type, and the tax withheld.



If Forms W-8BEN have been filed and the appropriate tax has been withheld, you won't need to send any money to the IRS with your 1040 NR in April; in fact, you won't even need to file 1040 NR at all if you don't have other US-source income. Note also that as a non-resident you will not be eligible to claim standard deduction, or to claim married status, or file form 1116 (foreign tax credit).

I just wanted to add that since Panama does not have a tax treaty with the USA, you are stuck with the 30% rate on dividends....

But if you are a resident in some countries, it can be reduced to 15% to 20% depending on the country through a tax treaty they negotiated.

In the Philippines or Thailand it is 15% tax rate only...

Because of the tax on dividends I never bought stocks that paid them, I bought either growth or value stocks. The growth stocks with no dividends usually go up faster, and value stocks with no dividends were a better value...

But if the law was ever changed, my strategy would also change, but I doubt the law will ever be changed.

To Bel-Air and TheGreatoggy: The best strategy you can do is send them proof that you live in Panama (a copy of an apartment rental can do the trick -- if you have a residency it's even better). Send a Fedex to CCRA and tell them that "Thank you so much for everything you've done for me. But, I will no longer need your services."

I liked that Matt, I gonna do that if they ever ask... That one is a classic.