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Does Your Broker Know What the Canada Revenue Agency Is Up To?

By David Dittman on December 6, 2011

The Canada Revenue Agency (CRA) has introduced a new rule that requires residents of countries with which Canada has a tax treaty to certify that they are resident in that country in order to continue to have non-resident tax withheld from dividends paid by Canada-based corporations at the “tax treaty” rate.

The Convention Between the United States of America and Canada with Respect to Taxes on Income and Capital, first executed in 1980 and updated most recently in 2008, generally reduces withholding on dividends paid by Canada-based corporation to US-based investors to 15 percent, with some qualifications.

This marks a change from the previous CRA view that merely residing in such a country was sufficient to qualify for the treaty tax rate.

Failure to provide the verification the CRA requires will result in withholding on all distributions paid on or after Jan. 1, 2012, at 25 percent as opposed to the 15 percent “tax treaty” rate. So clearly this new rule, issued sometime in mid-2011, is of potentially great consequence for US-based investors who hold dividend-paying Canadian corporations.

Practically speaking, if you’re an investor who holds dividend-paying corporations in accounts with major brokerages such as Fidelity and including niche brokerages such as Pennaluna & Company, it’s unlikely you’ll be affected by this new rule.

Fidelity and Pennnaluna, hold stock for you, the “beneficial owner,” in “street name.” They are more likely than not already in possession of the information and equipped with the means to provide the CRA in Canada the verification it requires.

The CRA has issued its rule, which is available here, and provided a form for “Canadian payers” to submit, which can be found here. (“Canadian payers” in this context refers to Canada-based dividend-paying corporations, which are required to remit the appropriate tax withheld to the CRA. This is accomplished through the Canada-based company’s transfer agent.)

Ambiguity arises, however, because the new rule does not specifically require use or submission of the form. US firms would prefer to maintain current procedures for verification through US-based Depositary Trust Corporation (DTC), for example, that utilizes their own account opening and certification procedures and the documentation resulting therefrom.

When you opened your account with Fidelity or with Pennaluna, you provided a significant amount of identifying information that can be repurposed to satisfy CRA. Fidelity and Pennaluna both clear transactions through Fidelity-owned National Financial Services Inc (NFS), the third-largest securities transaction clearing corporation in the US.

NFS is currently evaluating the new regulation and its requirements. NFS, along with peers through the Securities Industry and Financial Markets Association (SIFMA), a securities industry trade group represents broker/dealers, banks and asset management companies in the US and Hong Kong, have sought clarification of the rule and how it will be able to satisfy it.

US-side firms are also seeking an extension of the Jan. 1, 2012, effective date in order to provide time to craft a single solution usable across US-based firms.

The bottom line is that if you have an existing account, your brokerage probably has enough information and sufficient means to provide the verification the CRA in Canada requires. Of course there may be particular account types or specific CRA requirements that dictate a different registration procedure depending upon discrete circumstances. In the main, however, this should take place with nary a ripple on “beneficial owners” portfolios.

At this point it’s probably not necessary to contact your broker to make sure they’re on top of this issue. Brokerages, transfer agents and clearing houses on the US side of the border are aware of the issue and at this point there’s no reason to question the fact that their interest lies in keeping their US clients happy.

There is a separate group of shareholders for whom this new CRA rule may have different implications: registered shareholders. You’re a registered shareholder if the stock you own is registered in your name on the underlying company’s books, which is kept by the company’s transfer agent, and you’re in physical possession of a certificate that represents your ownership interest. Beneficial owners’ shares are held in what’s called “street name” because their stock is registered in the name of their brokerage firm on the issuer’s books. Such brokerage holds stock in “book entry” form.

Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE), for example, issued a press release last week and notified its shareholders of the impending change, a proactive step it took because of the fact that a significant proportion of its shareholder base is comprised of individual investors as opposed to institutions. According to Penn West:

Registered non-resident shareholders whose names appear on the records of the registrar and transfer agent of Penn West will receive a form directly from Penn West’s transfer agent requesting information to confirm tax treaty eligibility. Until such form is completed and returned to Penn West’s transfer agent, any applicable Tax Treaty Rate will not be applied. To qualify for any applicable Tax Treaty Rate on Penn West’s fourth quarter dividend of $0.27 per share payable on January 13, 2012, registered non-resident shareholders must return such form to Penn West’s transfer agent on or before December 30, 2011.

Non-registered, non-resident shareholders’ eligibility for any applicable Tax Treaty Rate will be determined by each shareholder’s broker and not by Penn West or its transfer agent. Non-registered shares are generally held in a brokerage account and are thus registered in the name of the investor’s broker or a depositary. Certain brokers may require additional information or certifications in order to determine a non-registered shareholder’s eligibility for any applicable Tax Treaty Rate. Non-resident, non-registered shareholders are encouraged to contact their brokers or other tax, legal or financial advisors in the event that they have any questions or concerns in this regard.

Registered shareholders of Penn West stock should complete and remit this form as soon as possible. If you are a registered shareholder of any other Canada-based dividend-paying corporation, whether it was ever a trust or not, complete any such forms if they’ve already been forwarded to you. If you are a registered shareholder of a dividend-paying Canadian corporation and haven’t received such notification as Penn West has provided, it might be a good idea to send an e-mail or phone an investor relations representative at the relevant company.

We’ve contacted the Canada Revenue Agency for clarification of the status of deadline-extension discussions with SIFMA and will provide updates for Canadian Edge subscribers via Flash Alert if necessary and in any case in the December issue, which will be published Friday, Dec. 9.

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  1. avatar
    Jhall Reply December 29, 2011 at 10:12 AM EDT

    Do dividends from Canadian trusts have 15% Canadian taxes withheld? If so are US investors required to file Canadian income tax returns and secondly are the Canadian taxes paid (or withheld) used as a credit on US form 1040 personal tax returns?

  2. avatar
    Dr. Ronald Hill Reply December 20, 2011 at 4:16 PM EDT

    Contacted Vanguard two months ago, they said they can’t do anything and will continue to withhold funds as in the past years. I have Penn-West and Pembina, both with good monthly dividends……now what?