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Video instructions and help with filling out and completing foreign withholding form
Global diversification is universally accepted as beneficial to investors but forward withholding tax is a tricky little detail that can eat into your investment returns when a foreign company pays a dividend to a Canadian investor the company's home country will often impose a tax on the dividend the amount of tax withheld by the foreign government depends on the arrangement between the two countries for example the US government keeps 15% of any dividend paid by a US company to a Canadian resident investor these taxes are withheld before the dividend is received in your investment account so it's easy to miss for withholding tax can have a significant negative impact on returns if it is not managed properly in many cases the impact can be greater than the management expense ratio on most ETFs I'm Ben Felix associate portfolio manager at PWL capital in this episode of common sense investing I'm going to tell you about form of holding tax Music the amount of damage that foreign withholding tax will do Tia returns depends on the structure of the vehicle that you are using to invest and the type of account that the vehicle is owned in in the world of ETFs there are three main structures that a Canadian investor will see a u.s. listed ETF a Canadian listed ETF that gets its exposure to the market by holding US listed etf or a Canadian listed ETF that gets its exposure to the market by holding stocks directly depending on how the ETF is structured you may be subject to two levels of withholding tax in their 2021 white paper titled Form withholding taxes my PWL colleagues Justin bender and Dan Burton Lahti explained it this way you can think of level one form of holding tax like a departure tax that you pay when taking a flight to Canada from any foreign country level two withholding tax is tax that you pay to the US government when an overseas flight has a layover in the US level one withholding tax is the tax levied by any foreign country including the US on dividends paid to a Canadian investor level two withholding tax is an additional 15 percent withheld by the US government on dividends paid to a Canadian investor by a Canadian listed ETF that owns a u.s. listed ETF taxes are first withheld when the dividend is paid from a foreign company to the u.s. listed ETF and then again when the u.s. listed ETF passes that dividend on to a Canadian investor the type of account matters for a few reasons first US securities held in an RRSP or other retirement account like a riff or lira do not have any tax withheld by the US on dividends this is part of the Canada u.s. tax treaty based on this a u.s. listed ETF of US stocks will not have any tax withheld on dividends paid in an RSP the same special treatment.