Canadian Government Complaint - Canada charging 15% tax on American IRA investments

Review by gls on 2005-03-19
CANADA -- The main problem I am writing about tonight is that Canada has started taking a 15% tax on dividends Canadian Energy Trust companies pay it's American IRA shareholders. My brokerage company list this tax as a foreign tax. It does make a difference if the investment is made through a taxable accourt or a tax deferred IRA. I have invested in several of these energy trust through my self directed IRA and starting February my brokerage company started witholding "foreign taxes". I have talked to some investor relations people in Canada and the lady told me she thought that Canadian citizens had to pay taxes on their American investments. This may be true on investments made outside of a tax deferred retirement account, I don't know. According to Roger Conrad's utility and income investment advisory publication below. America does not tax investments Canadian citizens make through their tax deferred retirement accounts. If this is true then I think the Canadian government should not be taxing American investors dividends made through IRA tax deferred accounts. If Canada won't back off it's taxing of the American elderly I suggest America start taxing Canada's elderly. These funds could be earmarked to fund Social Security.
The IRS tax code says--generally, amounts in your IRA, including earnings and gains, are not taxed until they are distributed. Maybe the Canadian government could wait, like the United States government, to collect their 15% taxes on these dividends until they are distributed.


There's good news and bad news for owners of Canadian royalty and
income trusts, which I analyzed in the February 4,2005 edition of
Utility & Income.

The good news is accounting giant KPMG has provided further
verification of my view that almost all trusts should be considered
"qualified corporations" for US tax purposes. That means their
distributions should be considered "qualified dividends" and they
should be taxed at a maximum rate of 15 percent. KPMG's opinion is
right in line with what the Internal Revenue Service has had to say
on the subject, and it also matches the opinions of the individual
trusts themselves.

This is an extremely important opinion because many brokerages have
been sending out 1099s incorrectly classifying trust dividends as
"ordinary income." I don't know if the KPMG view will force the
offenders to get it straight. But it does mean that investors now
have a strong leg to stand on when they file their own taxes--which
should ignore the 1099s when incorrect and instead classify trust
distributions as "qualified."

The bad news on the tax front is that Canadian authorities are now
withholding a flat 15 percent of trust distributions due to US
investors who hold trusts in IRAs and other tax-deferred retirement
accounts. They had previously been withholding only dividends paid
to trusts not held in IRAs.

Any IRA withholding prior to January 1, 2005 can still be recovered
by filing a Form NR7-R with Revenue Canada. But from now on, US
investors who hold trusts inside an IRA will see their dividends
docked 15 percent before they receive them, either at the clearing
corporation level or by brokerages in conjunction with the clearing

Some have protested this taxation as being against the law, since
US authorities don't tax the retirement accounts of Canadian
residents who hold US stocks. But for now, US investors who hold
trusts will be assessed, whether they're holding inside or outside
an IRA. Note that investors who hold trusts outside an IRA can
still recover the withholding dollar for dollar when they file
their US taxes.

-------------------------------------------------I suggest everyone who might be concerned about this lopsided arrangement between the U.S. and Canadian government write and or call their elected congressman to get laws passed to help protect the older people of United States.
Comments:3 Replies - Latest reply on 2006-08-10
Posted by sweets on 2005-08-20:
IF you buy anything or invest on anythin in canada there is a 15% sale tax. If a canadain buys or invest on anything in the U.S we have to pay what ever that tax is . It might not be fair but that is how it is
Posted by Tax Fraud Alert on 2006-08-08:
GLS is right. There is a Blockbuster fraud and negligence coverup in the financial industry concerning Canadian Withholding in US retirement accounts.

Canadian Dividends are exempt from taxation in US IRA accounts, yet American custodians have instructed depositories to withhold millions on these exempt investments for the past 20 years.

Why?? Some brokerage firms (custodians) were ignorant of the tax treaty provisions that changed the rules in the early 1980's and some didn't want the additional expense burden of segregating non-taxable (retirement) vs. taxable (retail) shares and the additional administrative costs.

Bottom Line: Millions have been wrongfully taken from US retirement accounts and sent to Canada for the past 20 plus years.

I worked for a Florida brokerage house that did just that. I tried to work within the system to fix the problem and recover as much needless tax as possible. I was forced to resign for my efforts. I filed a complaint with the SEC in Jan 2003 hoping they would champion the cause to get retirement funds back to their owners - nothing happened. Not even a call to inquire.

Please contact me if you have been affected. I have information that will help you recover those funds.

John Hughart
6865 14th Way S
Saint Petersburg, FL 33705
Posted by Tax Fraud Alert on 2006-08-10:
The US-Canadian tax treaty ratified in the early 1980's bilaterally exempted retirement income from taxation between the two countries. RETIREMENT ASSETS ARE EXEMPT PERIOD.

The problem lies in a lazy or ignorant brokerage firm(s) that doesn't know the treaty provisions, or doesn't want to spend $$ on the additional operational costs involved.

Some of the brokerage firms that are savy to the foreign tax rules are participating in depository programs to stop the taxation "at source" or when the dividend becomes payable by the investment's dividend paying agent.

GLS has a right to complain. He and millions of other IRA investors in Canadian securities are victims of brokerage negligence in this country.

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