Withholding taxes

When you earn foreign-source income, a non-resident withholding tax will typically be deducted before the payment is received. For example, when you, as a foreign person, receive a dividend from a US corporation, a 30% tax will be automatically withheld at the source. This rate can be reduced if the country you are a tax resident of has a tax treaty with the US (ex: 15% for Canadian residents, see WTH taxes in US).

Unfortunately, the WTH tax is non-refundable. However, you may be able to claim a foreign tax credit to offset double taxation when you file your domestic tax return. Also, if the tax was withheld by mistake (ex: by a US client even though your service/product was not US-sourced) or at an incorrect rate (ex: a general rate was applied instead of a reduced rate based on a tax treaty), you could file a foreign tax return to claim a refund (ex: Form 1040-NR in US).

The WTH tax is deducted from foreign-source payments such as dividends, interest, and royalties. Rental income (along with REITs) is often subject to the standard WTH tax that can't be reduced by a tax treaty (ex: 30% in US). Capital gains and directors fees may also be subject to WTH tax.

The rate of withholding also depends on the type of investment account (margin, registered, etc.) (see taxes on investments). Unfortunately, there may be multiple levels of WTH taxes (ex: divs from a US-listed ETF that holds international stocks). Level 1 WTH tax is levied by the foreign country where the corporation is domiciled and is often non-recoverable, while Level 2 WTH tax is levied by the country where the security is listed. For a US/Canada perspective, see this white paper.

Workarounds for WTH taxes

1. Invest in contries with a zero or low non-resident WTH tax

2. Move to a country with a lower WTH rate based on a tax treaty

3. Invest in domestic companies

4. Earn capital gains

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