Canadians Investing in the US

Many people decide to invest in the U.S. but don’t know the rules.  There are 2 ways that people invest in the U.S., directly and indirectly.  Investing directly means that you invest personally, or through an entity, in the U.S.  Investing indirectly is when you invest through a broker and they put you into U.S. investments, partially or wholly.  Investing directly in the U.S. allows you to crystallize the type of passive income you will receive.  As discussed in other blogs, different types of income are taxed differently.  Of course investing in the U.S. brings more complication so you should know at least the basics before investing in the U.S.  Capital Gains is typically the best type of passive income you can receive from U.S. investments as, just like in Canada, only 50% of the gain is taxable.  Unlike Canadian dividends, dividends from a U.S. corporation or trust are considered non qualifying dividends.  This means there is no tax credit associated with the dividend, so you pay the full tax on the dividend income, just as you do on interest income.  Sometimes dividends earned from the U.S. show up on a Tslip as other income.  When reporting U.S. investment income on your Canadian return you must exchange the U.S. income to Canadian dollar income.  The acceptable exchange rates include the average for the calendar year the income was earned, or the exchange rate on the day the income was received.  The best place to get the acceptable exchange rates is from the Bank of Canada website.  There is typically no need to file a U.S. tax return or pay U.S. taxes on your U.S. investments when you are not a U.S. citizen (living in Canada), however there are exceptions.  One such exception is the sale of Real Estate, where there will be an amount held back for U.S. income tax.  In this case you need to file a U.S. tax return to ensure you don’t get double taxed in both Canada the U.S.  In my next blog we will discuss some of the basic ins and outs of purchasing and selling real estate in the U.S.