U.S. Withholding Tax on RRSPs: What Canadians Should Know

How much is withholding tax on U.S. dividends?

Wanda, here’s a concise explanation of U.S. withholding tax rules for non-residents and how they apply to dividends, before I address Enterprise Products Partners (EPD) specifically.

By default, dividends from U.S. stocks paid to non-U.S. residents are subject to a 30% withholding tax. This withholding is determined by the country of the payor (the U.S.) and the recipient’s residency, not by where the brokerage account happens to be located.

Many countries, including Canada, have tax treaties with the U.S. that lower that default rate. For qualifying Canadian residents, the treaty rate for most portfolio dividends is typically reduced to 15%. In certain registered retirement accounts—most notably an RRSP—the U.S. generally recognizes the tax-deferred status of the account and will reduce withholding to 0% for eligible holders.

Qualifying to reclaim U.S. withholding tax

To claim the reduced treaty rate or exemption, Canadian investors must provide their broker with a completed Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting). Brokers rely on that form to apply the appropriate withholding at source.

Form W-8BEN certificates are typically valid through the end of the third calendar year after they are signed, so you must re-submit a new form every three years to keep the reduced rate in effect.

Again, dividends paid into an RRSP or a registered retirement income fund (RRIF) are generally eligible for the 0% withholding rate for Canadian residents because the U.S. recognizes the tax-deferred nature of those accounts. On the other hand, non-registered accounts and tax-free savings accounts (TFSAs) are usually subject to the reduced 15% treaty rate.

If too much tax is withheld at source, it can sometimes be recovered by filing a U.S. tax return, but the effort and cost involved may outweigh the refund unless the amount is significant.

One important nuance: Canadian mutual funds and ETFs that own U.S. stocks are treated as Canadian residents. That means the funds themselves face the 15% withholding rate on U.S. dividends, so holding those funds inside an RRSP does not make the underlying U.S. dividends eligible for the 0% RRSP exemption—the fund, not your RRSP, is the registered owner of the U.S. shares.

EPD dividends for Canadians

Enterprise Products Partners (ticker EPD) is a master limited partnership (MLP) listed on the New York Stock Exchange. Based on recent distributions and the share price at the time of writing, the annual yield is roughly 7.6%.

MLPs are structured as partnerships rather than corporations. Unlike most U.S. corporations that pay dividends, an MLP passes through income to unitholders. Because of that structure, the tax rules that apply to MLP distributions are more complex for foreign investors.

For Canadian residents, receiving income from a U.S. MLP like EPD typically means being treated as a partner carrying on a U.S. trade or business. As a result, withholding on distributions from many U.S. partnerships can be applied at rates tied to U.S. income tax brackets—commonly higher than the 15% treaty rate that applies to corporate dividends. The article’s example is a top U.S. rate of 37% as the applicable withholding rate for partnership distributions, unless the partnership elects corporate taxation in the U.S.

That creates several practical complications for Canadian investors. First, owning an MLP can trigger U.S. tax-reporting obligations—such as receiving a K-1—that are difficult for many retail investors to manage. Second, even if distributions are withheld in a tax-sheltered account like an RRSP, there can still be Canadian tax consequences on future withdrawals from the RRSP, potentially resulting in an element of double taxation. Third, the high withholding rate on partnership distributions can significantly reduce the net yield compared with the headline yield.

In short, the attractive yield offered by EPD can be offset by higher U.S. withholding, extra filing complexity and possible double taxation for Canadian investors. For many Canadians, these drawbacks outweigh the appeal of a high-distribution MLP, so it’s wise to carefully consider the tax implications before buying U.S. master limited partnerships.

Read more about personal income taxes in Canada:

• How are you taxed when you sell a small business?
• Tax implications of making transfers between registered accounts
• How to calculate the taxable amount for a cashed-in whole life insurance policy
• Can you file multiple years of income taxes together in Canada?