ADR Foreign Tax Withholding in IRA - Interactive Brokers

[watsa_is_a_randian_hero]

Any tax experts on here?  Any knowledge of whether foreign taxes are supposed to be withheld on Canadian ADR's within an IRA?

 

I believe Interactive Brokers has been improperly withholding taxes on Canadian ADR's held within IRAs.  Shares held within my etrade and ameritrade accounts have never been withheld on, but IB has been withholding on my Canadian ADRs. 

 

I have read different things on different websites; it appears it may depend on the corporate structure.  That said, FRFHF was not withheld on at Etrade while FFH.TO was withheld on at IB.

 

I'd like to bring this up to IB, but like I said, I've read different things on different websites, and would appreciate the advice of anyone with tax expertise that knows the answer to this question definitively.

[watsa_is_a_randian_hero]

really...nothin?  bumping...

[DoddDisciple]

I'm curious about any information regarding foreign stocks in IRAs as well. I thought the rule of thumb was typically to only hold ADR/pink foreign stocks in IRAs if you could, and save the international trades for taxable. However, it looks like a lot more people are investing overseas in their IRAs in more than just mutual funds, which typically avoid any sort of withholdings if I recall.

[muscleman]

Any tax experts on here?  Any knowledge of whether foreign taxes are supposed to be withheld on Canadian ADR's within an IRA?

 

I believe Interactive Brokers has been improperly withholding taxes on Canadian ADR's held within IRAs.  Shares held within my etrade and ameritrade accounts have never been withheld on, but IB has been withholding on my Canadian ADRs. 

 

I have read different things on different websites; it appears it may depend on the corporate structure.  That said, FRFHF was not withheld on at Etrade while FFH.TO was withheld on at IB.

 

I'd like to bring this up to IB, but like I said, I've read different things on different websites, and would appreciate the advice of anyone with tax expertise that knows the answer to this question definitively.

 

Do you mean the dividend tax withholding or the capital gain tax withholding?

Wow, I didn't know that they withhold foreign tax in IRA accounts! :o

I was thinking about creating an IRA in IB, because they can trade international stocks nicely, but now I have to think twice.

[watsa_is_a_randian_hero]

Any tax experts on here?  Any knowledge of whether foreign taxes are supposed to be withheld on Canadian ADR's within an IRA?

 

I believe Interactive Brokers has been improperly withholding taxes on Canadian ADR's held within IRAs.  Shares held within my etrade and ameritrade accounts have never been withheld on, but IB has been withholding on my Canadian ADRs. 

 

I have read different things on different websites; it appears it may depend on the corporate structure.  That said, FRFHF was not withheld on at Etrade while FFH.TO was withheld on at IB.

 

I'd like to bring this up to IB, but like I said, I've read different things on different websites, and would appreciate the advice of anyone with tax expertise that knows the answer to this question definitively.

 

Do you mean the dividend tax withholding or the capital gain tax withholding?

Wow, I didn't know that they withhold foreign tax in IRA accounts! :o

I was thinking about creating an IRA in IB, because they can trade international stocks nicely, but now I have to think twice.

 

I'm referring to dividends.

 

Many jurisdictions all brokers (not just IB) will withhold taxes in.  I thought Canada/US had some sort of tax treaty though.  For now I just hold almost all foreign stocks in my taxable account, not my IRA.  However, I want to figure this canada issue out with certainty.

[SharperDingaan]

US residents will suffer a 15% withholding tax on any cash dividends received from Canadian investments, if those investments are not in tax sheltered accounts. There is no withholding tax if the dividend is paid in stock.

 

Little advertised is that some well known Canadian blue-chips offer DRIPs with the DRIP shares bought at 95% of MV. To avoid the withholding tax in a non tax sheltered account, simply take shares over cash, and sell the shares  ;)

 

SD

 

 

[muscleman]

US residents will suffer a 15% withholding tax on any cash dividends received from Canadian investments, if those investments are not in tax sheltered accounts.

 

But what about withholding tax for IRA accounts?

[muscleman]

I sent IB a message about your question, and here is their reply. It seems like the tax withholding from CAD stock dividends should be exempt. Did you have this problem recently, or it happened a lot time ago?

 

 

==========================================================

Thank you for your patience during the review of your issue and claim. While the inquiry should have been acknowledged, the issue was being addressed.

 

The current tax treaty between the US and Canada does afford a great benefit to IRA holders. This means that the non-resident tax withholding is exempt. Since IB implemented the change, we do not directly withhold the tax from IRAs. For this reason, a claim of withholding warrants a review.

 

It turns out that in some instances CAD taxes can be withheld by the depository prior to remittance of the distribution to IB and the subsequent credit of the net distribution to the accounts of any U.S. persons. Accordingly, IB has no ability to reverse or reclaim the withholding on behalf of its clients. In addition, as IB did not remit the withholdings to the tax authority, we do not report such withholdings to either the tax authority or clients on their year-end tax forms.

 

Any CAD taxes withheld in your IRA would have been withheld at the source on each payment. This was not applied by IB nor remitted by IB to the Canadian Revenue Agency. I would be happy, however, to review any specific transactions.

 

Non- US tax withholding is applied in two situations. Either IB will withhold taxes or the depository, paying agent. If IB withholds the taxes, then IB can reverse the taxes and/or issue tax reports for non-IRA accounts. If the depository withholds the taxes, then IB cannot reclaim exempt taxes nor issue tax forms on the withholding. This applies to IRA accounts and non-IRA accounts.

 

Why would this type of withholding at the source take place?

 

Many countries may impose a withholding tax on income (dividends) paid to entities domiciled outside of the country. IB is domiciled in the United States. The tax withheld is usually "withheld at the source" when the non-resident entity receives payment.

 

What are your options?

 

You may wish to contact a qualified tax advisor about this situation. Or, refer to the IRS Publication 514, Foreign Tax Credit for Individuals, and the IRS instructions Form 116, Foreign Tax Credit for guidance applicable to your personal situation.

 

How can this be avoided in the future?

 

Positions in such dividend paying stocks should be closed prior to the ex-dividend date or not held in the account.

 

 

Although no situations have occurred since IB implemented the current treaty exemption, I would prefer to review any specific transaction in your account. If you have any particular payments, please let me know.

 

Regards,

 

Kawone H

Retirement Accounts and Tax Reporting

[watsa_is_a_randian_hero]

thanks muscleman - I actually have been going back and forth with IB - I got a reply from the same Kawone rep that was very similar.  I responded though saying if this was an instance where the depository withheld (and not IB) then why does the dividend on FRFHF come through tax-free to my managed IRA accounts at other brokers (etrade, ameritrade, etc)?  They have not yet responded to my last question.

 

At this point, the only solution I see is to avoid trading canadian stocks in an IB IRA.

[watsa_is_a_randian_hero]

Received this reply:

 

Dear Mr. XXX,

 

While we do value our relationship with you, I do understand your conclusion. Traders should consider all factors with regard to transactions. In this case, the favorable withholding rate may not be available for your investment.

 

No firm can truly explain why or how other firms process some transactions. In the case of the foreign dividend processing and withholding, brokers do have various methods to choose. Whatever practice is elected, the customers feel the effects either in broker pricing or a preferential non-resident tax withholding rate.

 

Since dividend processing varies from one firm to the next, particularly among non-US firms and/or US firms with non-US subsidiaries, there are other factors which may allow a treaty rate to be applied. Some firms are able to request treaty waivers and do process a significant amount of manual processing. On another side, some brokers do not disclose their beneficial owners or rely on a heavy amount of manual processing.

 

IB relies on electronic processing for many transactions, including dividend processing. Some of our attempts to request treaty rates for customers electronically could not be completed due to requirements for a manual format.

 

I hope that sheds some light on a very complex and varied system of dividend processing. We do our best to obtain the best overall services for our traders.

 

Regards,

 

Kawone H

Interactive Brokers LLC

[watsa_is_a_randian_hero]

I replied with:

 

"That is unfortunate IB is claiming there is nothing further they can do on this issue. I've always thought of IB as the best broker in many categories. However, the costs of paying unnecessary taxes in an IRA account is too significant of a cost to ignore; this leaves me no choice but continue to avoid trading foreign dividend-paying stocks within an IRA at IB and use other brokers for that service."

 

Does anyone else think IB's handling of this and their response is really weird?  Does anyone think there is a chance they are lying and this actually was a mistake on their end to withhold foreign taxes incorrectly within IRAs?

[watsa_is_a_randian_hero]

In the case of the foreign dividend processing and withholding, brokers do have various methods to choose. Whatever practice is elected, the customers feel the effects either in broker pricing or a preferential non-resident tax withholding rate.

 

I guess this is the part that I think is really weird.  Why would they choose a practice that results in improper withholding rates?

 

I just followed up with prior response with this as well:

 

I guess this is the issue I have: you responded "In the case of the foreign dividend processing and withholding, brokers do have various methods to choose. Whatever practice is elected, the customers feel the effects either in broker pricing or a preferential non-resident tax withholding rate." What I don't understand is why IB is deliberately using a business practice that they know results in improper tax withholding in IRAs? This doesn't seem like a matter of choosing among multiple appropriate optional business practices as your response implies. It seems to me that if improper tax withholding is a result of the business practice, then that business practice is inappropriate and IB should correct it. Note that I have not had this issue with any other broker in my experience; IB is the outlier.

[nodnub]

Received this reply:

 

Dear Mr. XXX,

 

While we do value our relationship with you, I do understand your conclusion. Traders should consider all factors with regard to transactions. In this case, the favorable withholding rate may not be available for your investment.

 

No firm can truly explain why or how other firms process some transactions. In the case of the foreign dividend processing and withholding, brokers do have various methods to choose. Whatever practice is elected, the customers feel the effects either in broker pricing or a preferential non-resident tax withholding rate.

 

Since dividend processing varies from one firm to the next, particularly among non-US firms and/or US firms with non-US subsidiaries, there are other factors which may allow a treaty rate to be applied. Some firms are able to request treaty waivers and do process a significant amount of manual processing. On another side, some brokers do not disclose their beneficial owners or rely on a heavy amount of manual processing.

IB relies on electronic processing for many transactions, including dividend processing. Some of our attempts to request treaty rates for customers electronically could not be completed due to requirements for a manual format.

 

I hope that sheds some light on a very complex and varied system of dividend processing. We do our best to obtain the best overall services for our traders.

 

Regards,

 

Kawone H

Interactive Brokers LLC

 

Sounds like they have chosen an automated dividend processing method that is much cheaper (but which makes some errors with foreign withholding tax).  This would greatly lowers their processing costs and allows them to provide cheaper service than other brokers.  As you yourself said, the best solution may be to hold those shares at another broker.

[muscleman]

In the case of the foreign dividend processing and withholding, brokers do have various methods to choose. Whatever practice is elected, the customers feel the effects either in broker pricing or a preferential non-resident tax withholding rate.

 

I guess this is the part that I think is really weird.  Why would they choose a practice that results in improper withholding rates?

 

I just followed up with prior response with this as well:

 

I guess this is the issue I have: you responded "In the case of the foreign dividend processing and withholding, brokers do have various methods to choose. Whatever practice is elected, the customers feel the effects either in broker pricing or a preferential non-resident tax withholding rate." What I don't understand is why IB is deliberately using a business practice that they know results in improper tax withholding in IRAs? This doesn't seem like a matter of choosing among multiple appropriate optional business practices as your response implies. It seems to me that if improper tax withholding is a result of the business practice, then that business practice is inappropriate and IB should correct it. Note that I have not had this issue with any other broker in my experience; IB is the outlier.

 

 

Ok. So does this only affects IRA accounts? Is there any similar tax issues for regular accounts?

It seems like I should just keep my 401k in Fidelity. :) I was thinking about moving to IB to get a rollover IRA, but it doesn't seems to be needed now.

[DoddDisciple]

So was there tax withholding on FFRHF or FFH.TO? I don't see how or why there would be withholding on FFRHF since its an OTC/US stock.

 

In regards to Fidelity, does anyone have experience on when the $50 foreign ordinary shares trading fee will be charged? I'm trying to avoid any gotchas if I continue to hold IRAs at Fidelity instead on IB as a result.

[eggbriar]

In regards to Fidelity, does anyone have experience on when the $50 foreign ordinary shares trading fee will be charged? I'm trying to avoid any gotchas if I continue to hold IRAs at Fidelity instead on IB as a result.

 

TTTDodder,

 

I've had pretty good luck with Fidelity not charging the $50 fee.  The only time I've seen it charged is awhile back when I tried to buy BYDDF.

[watsa_is_a_randian_hero]

So was there tax withholding on FFRHF or FFH.TO? I don't see how or why there would be withholding on FFRHF since its an OTC/US stock.

 

In regards to Fidelity, does anyone have experience on when the $50 foreign ordinary shares trading fee will be charged? I'm trying to avoid any gotchas if I continue to hold IRAs at Fidelity instead on IB as a result.

 

Both.  they are both the same stock; Common Subordinate Voting Shares in Fairfax.  You can buy the shares at IB through US FRFHF and sell them in canada through FFH.to (I've done that)...its the same paper.  It makes no difference to IB in terms of withholding treatment which exchange you purchased the stock from. 

 

edit: ironically though, though it is the same paper, it does make a difference in how much margin they will allow in your account.  They will lend more against FFH.to then FRFHF.

[krazeenyc]

Ultimately if IB did not withhold it... it's not their fault. You can bring it up directly with the CRA. I'm an American in the US  -- but have had to deal with them before regarding some Canadian positions. They are quite helpful. I forgot the names of the people I talked to up there but they were quite knowledgeable and helped me out quite a bit regarding some Canadian dividend withholdings. Visit their website I think that's how I was able to find my way around to find the right people.

[watsa_is_a_randian_hero]

Ultimately if IB did not withhold it... it's not their fault. You can bring it up directly with the CRA. I'm an American in the US  -- but have had to deal with them before regarding some Canadian positions. They are quite helpful. I forgot the names of the people I talked to up there but they were quite knowledgeable and helped me out quite a bit regarding some Canadian dividend withholdings. Visit their website I think that's how I was able to find my way around to find the right people.

 

I view it as IB's value if they are the only broker (out of a half dozen I have experience with) that is withholding on Canadian dividends incorrectly.  I'll take my business elsewhere. 

 

Not worth my time to battle CRA...much easier to just keep another ira account at another broker for purposes of of these types of trades.

[muscleman]

Ultimately if IB did not withhold it... it's not their fault. You can bring it up directly with the CRA. I'm an American in the US  -- but have had to deal with them before regarding some Canadian positions. They are quite helpful. I forgot the names of the people I talked to up there but they were quite knowledgeable and helped me out quite a bit regarding some Canadian dividend withholdings. Visit their website I think that's how I was able to find my way around to find the right people.

 

I view it as IB's value if they are the only broker (out of a half dozen I have experience with) that is withholding on Canadian dividends incorrectly.  I'll take my business elsewhere. 

 

Not worth my time to battle CRA...much easier to just keep another ira account at another broker for purposes of of these types of trades.

 

What about non-IRA accounts?

[morningstar]

It's much less of an issue in taxable accounts since you can generally claim a US credit to offset excessive foreign withholdings. This doesn't work for tax-advantaged accounts (i.e. you can't take the credit).

[muscleman]

It's much less of an issue in taxable accounts since you can generally claim a US credit to offset excessive foreign withholdings. This doesn't work for tax-advantaged accounts (i.e. you can't take the credit).

 

The credit is only up to $500, right? If our account grow too big someday, it will become a problem, no? :)

[watsa_is_a_randian_hero]

muscleman, morningstar...you guys are missing the point.  This issue cannot possibly be a problem for taxable accounts (because withholding is not improper); and any US credit to offset is impossible to get for taxes withheld within the ira.

[bookie71]

I don't believe that there is a limit on the credit (but it can't be more than the income tax).

[DoddDisciple]

I may not be understanding correctly, but the problem is this is a foreign stock held in an IRA that should have a tax treaty in place, yet they are withholding taxes?

 

I looked a little more into the foreign tax credit and it honestly looks like a lot of hassle in most cases. Does anyone have any ideas on what to keep in mind for this? We are supposed to have tax treaties with these countries: Australia, Austria, Bangladesh, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Japan, Luxembourg, Mexico, the Netherlands, New Zealand, Portugal, Slovenia, South Africa, Sweden, Switzerland, and the United Kingdom.

 

I'm not worried as much about taxes on dividends as I am on taxes on say cash distributions/company liquidations. I wouldn't have a problem paying more on dividends if I'm saving the $100 brokerage fees at Fidelity. The 2% of AGI to itemize (and I think it's per country) is something I'll probably never meet.