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Bank of Montreal Message Board

  • lion_den lion_den Mar 25, 2012 6:21 PM Flag

    Is anyone a US Citizen buying BMO ?

    Is this a problem ?

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    • U.S. tax laws provide for a credit for foreign taxes paid that help mitigate the impact of withholding taxes on foreign dividends. Some key points related to foreign tax credit are:

      An individual investor can file for tax credit on Form 1040 if the shares are held in a regular brokerage account and the investor received a Form 1099-Div form which lists the foreign taxes paid.
      An individual claims a dollar-for-dollar credit (and not an income deduction) for the foreign taxes paid.
      The amount is a credit against any U.S. taxes paid. Thus, even if foreign taxes were withheld but no U.S. taxes are owed then a refund cannot be claimed. This may not be important for most investors with active employment and salary but could be serious for retired investors living, for example, on social security income.
      An individual can claim foreign tax credit of up to $300 ($600 for married filing jointly) directly on Form 1040.
      Amounts greater than $300 (or $600) require use of Form 1116. This form is also required if the investor is carrying forward/backward any foreign taxes.
      Foreign tax credit cannot be more than the total U.S. tax liability multiplied by a fraction. The fraction is = (income from foreign sources) / (total taxable income from U.S. and foreign sources).
      There is a rather simple and easy to read topic about Foreign Tax Credit on the IRS website. Further detailed information is available on the IRS page for Foreign Tax Credit.

    • I am buying BMO stock for both price appreciation and dividend (over 4%). The Canadian banks are among the highest rated in the world. They have passed the Swiss banks. Let's discuss.
      I am also buying Thompson Reuters (TRI)!!Check it out.

    • Canada charges a 15% tax on dividends held in non-taxable accounts. But due to a policy change in 2009, dividends and interest income are exempt from this 15% tax if the investments are held in IRA or 401(K) accounts. So U.S. investors can hold Canadian banks or other dividend-paying stocks like in their IRAs for the long-term without worrying about taxes on dividends.
      Under the Canada-US income tax treaty, interest and dividends received from investments in companies held inside an IRA or 401(k) are exempt from Canadian withholding taxes.
      First, ensure that you invest in companies that are structured “legally” as a corporation, especially if you intend to hold investments inside an IRA or 401(k). Withholding taxes will be applied to distributions of non-corporate investments and there is no tax credit available on withholding taxes.

      Second, you should avoid investing in any sort of investment trusts (income trusts, real estate investment trusts [REIT], or Canadian mutual funds). US law has some strict reporting requirements with respect to investments in trusts resident outside the US. And while the reporting rules were never intended to capture publicly traded investment vehicles, the rules could be applied at any time.

      Finally, be aware of any foreign investment inside an IRA or 401(k) that trades as an ADR on a US exchange. Withholding tax will always be applied and is not covered by treaties.

      I hope this helps.

      • 1 Reply to pswilson93
      • Thanks, but the last paragraph of your post seems to be the proverbial nail in the coffin.

        The Canadian stocks I bought (BMO and TRP) are clearly corporations, not investment trusts or mutual funds. However, my guess is that when I purchased those shares, I purchased the ADRs, since I purchased my shares on-line through a US-based broker (Ameritrade or Schwab). If so, that answers my question as to why Schwab would not stop withholding the Canadian 15% tax from my Canadian holdings, even though they were held in a non-taxable account, i.e., a 401(k).

        Does anyone know how to buy shares of Canadian stock directly on a Canadian exchange without buying an ADR on a US exchange or using a broker? I suppose I could call up a broker and make sure that he doesn't buy the ADRs, but then I would surely be assessed a higher commission than the on-line commission, which would defeat the whole purpose. Is there a way a US citizen using a US-based brokerage account can be sure that when purchasing shares on line, he/she is buying the shares on the foreign exchange and not the US-traded ADRs?

    • I believe US/Canada tax agreement allows for dividends of stocks from each others' countries held in tax deferred retirement accounts to be held exempt from withholding tax.

    • Yes. No. The 15% tax on the dividend is automatically withheld.

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