Withholding Tax

Withholding tax is a tax that a foreign government takes off the top before investment income reaches you. If you own US stocks or US-listed ETFs that pay dividends, the US government automatically withholds 15% of those dividends before they land in your account. You receive the remaining 85%.

How it works in Canada

Thanks to the Canada-US tax treaty, the standard US withholding rate for Canadian investors is 15% (instead of the default 30%). This applies to dividends from US companies, whether you hold individual stocks or ETFs that contain US stocks.

Where you hold the investment matters. In an RRSP, US withholding tax is waived entirely because of the tax treaty. In a TFSA or non-registered account, the 15% withholding still applies. In an RESP, it also applies. This is one of the few cases where a TFSA doesn’t offer full tax protection.

The structure of your ETF also matters. A Canadian-listed ETF that holds US stocks directly may handle withholding differently than one that holds a US-listed ETF as a wrapper.

Why it matters

Example

Say you hold $40,000 in U.S. dividend stocks inside your TFSA, and they pay 2% in annual dividends, which comes to $800. The U.S. government withholds 15%, so $120 disappears before the dividends reach your account. You receive $680 instead. If those same stocks were in your RRSP, you’d get the full $800 because the tax treaty waives the withholding.

Withholding tax is easy to overlook because it happens automatically. You never see a bill. But on a portfolio with significant US holdings, 15% of your dividend income being skimmed off every year adds up. If you hold US dividend-paying investments, it’s worth knowing which account type minimizes this cost. Our US dividend withholding tax guide breaks down the details by account type and ETF structure.