All the Numbers

Foreign withholding tax

From the All the Numbers wiki · Investing

When a foreign corporation pays a dividend to a Canadian, the foreign country usually takes some tax before the money is paid out. The United States withholds 30% from foreign investors by default. The Canada-US tax treaty reduces that to 15% on portfolio dividends.[1] Rates for other countries vary; withholding is commonly between 15% and 25%.[2]

The rules

  • No gross-up and no dividend tax credit. A foreign dividend is fully taxable as ordinary income, like interest. Compare Canadian dividends and see marginal tax rates.
  • Non-registered account. The tax withheld is claimed back as a foreign tax credit (Form T2209 federally, T2036 for Ontario), which reduces Canadian tax on that income. The credit is the lesser of the foreign tax paid and the share of Canadian tax that belongs to the foreign income.[3] Ontario has its own credit on the same basis.[4] On income from property, such as dividends, the creditable amount is capped at 15% of the income; withholding above that is deducted from income instead.[5]
  • No carryover. A credit that cannot be used in the year is lost.[6]
  • RRSP and RRIF. Under the treaty, US dividends paid into these are exempt from withholding. See RRSP room.
  • TFSA. The treaty does not exempt a TFSA, so the 15% is withheld and there is no Canadian tax against which to claim a credit.

What the engine does

  • Takes the foreign tax paid as a figure on a fund or trust distribution in a non-registered account, adds the gross foreign income to taxable income, then applies the federal and Ontario credits within the limits above.
  • Claims the credit first, and deducts only the part above the 15% cap.[7]
  • Treats the 15% treaty rate as reference only.[2] The amount withheld is an input, because rates differ by country and by account.

What it deliberately does not

  • It does not look up a country's rate or work out which holdings are foreign.
  • It does not deduct the tax instead of crediting it, which only helps when Canadian tax is near nil.
  • It does not model more than one foreign country in a year, foreign business income, or currency conversion.
  • All the Numbers' own accounts do not split their return into dividends, so no foreign withholding appears in a plan unless it is entered.

See also

  • Capital gains and the adjusted cost base · Selling an investment for more than its adjusted cost base is a capital gain, and half of it is added to taxable income in the year of the sale. Growth that has not been sold is not taxed.
  • Combined marginal tax rates · The marginal rate is the federal and Ontario tax on the next dollar of income. In 2026 it runs from 19.05% to 53.53% on ordinary income, and the top rate is lower on capital gains and dividends than on interest.
  • Expected returns and fees · The default return is 6.35% a year, nominal and net of fees, for an 80/20 stock and bond portfolio. It is an expected long-run average, not a forecast, and an account's own rate replaces it.
  • How dividends are taxed · Canadian dividends are grossed up by 38% (eligible) or 15% (other), taxed as income, then reduced by a federal and Ontario dividend tax credit. The credits make dividends tax less than interest at the same income.
  • RRSP room, deduction and withdrawals · Room accrues at 18% of earned income up to the annual cap, contributions earn a deduction refunded the following April, and withdrawals are taxed as income. The plan assumes you start with no carried-forward room unless you say otherwise.
  • TFSA contribution room · Room starts accruing the year you turn 18, not the year you open an account, and it never expires. Withdrawals come back the following January. Limits past 2026 have not been announced, so the plan projects them by the rule the Act sets and says so.
  • The alternative minimum tax · A parallel tax calculation that applies a flat rate to a wider measure of income, so someone with a large capital gain cannot owe almost nothing. The higher of the regular and minimum tax is paid, and any extra is carried forward as credit.

References

  1. ↑Convention between Canada and the United States, Art. X(2)(b), Art. XXI(2) · Canada–US Convention: most withheld on portfolio dividends (Art. X(2)(b)); RRSP/RRIF-type trusts exempt (Art. XXI(2)), TFSAs not. Reference only — withholding is a supplied fact · 15% · effective 1985-01-01
  2. ↑TaxTips — foreign withholding; FTC-recoverable in non-registered accounts only · Default treaty withholding on foreign dividends (the US treaty rate; varies by country) · 15% · effective 2026-01-01
  3. ↑Form T2209 (2025) line 2 and notes (2)–(4); ITA 126(1); Folio S5-F2-C1 ¶1.3, ¶1.74 · Federal non-business foreign tax credit per country: lesser of foreign tax paid and net foreign non-business income ÷ net income × basic federal tax, where basic federal tax = line 42900 PLUS the federal dividend tax credit and net income = line 23600 minus net capital losses of other years claimed · See the source · effective 2025-01-01
  4. ↑Form T2036 (2025) lines 1–5 and note (4) Ontario; Form ON428 (2025) lines 70–83 · Ontario foreign tax credit: lesser of (foreign non-business tax − federal credit) and net foreign non-business income ÷ net income × Ontario tax otherwise payable (ON428 line 81 with lines 70 and 72 at zero); applied at line 82 after the tax reduction, before LIFT · See the source · effective 2025-01-01
  5. ↑ITA 20(11); 126(7) "non-business-income tax" excludes 20(11)/(12) amounts; T2209 note ("cannot be more than 15% of your net income from that property"); S5-F2-C1 ¶1.22 · Foreign tax creditable on income from property (other than real property) is capped at this share of that income; the excess is deductible from income under 20(11) (line 23200) · 15% · effective 1972-01-01
  6. ↑Income Tax Folio S5-F2-C1 ¶1.24 · Unused non-business foreign tax credit cannot be carried to another year · See the source · effective 1972-01-01
  7. ↑ITA 126(1), 20(11), 20(12); T2209; our convention · Foreign non-business tax on property income is claimed as the 126(1) credit, and the part over the cap is deducted under 20(11); the 20(12) election to deduct instead of crediting is never taken · effective 2026-09-18