ADR Foreign Tax Withholding in IRA - Interactive Brokers

[muscleman]

You can buy the shares at IB through US FRFHF and sell them in canada through FFH.t

 

Could you tell me how to do that in tws? Did you click some controls to convert FRFHF to FFH and then sell it?

[Myth465]

watsa_is_a_randian_hero

 

 

Thanks for your post. I am noticing the same thing.

Thanks for fighting the good fight, this is very disappointing. I own several Canadian companies which feature yield.

Looks like I will be moving those back to Wells Fargo...

[muscleman]

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.

 

I asked them the same question and pointed them to this thread. Here is their reply. It is a little different from yours. IB basically says that if the withholding occurred at the depository source, then they do not do anything to get it for you, but they don't withhold any dividend tax.

But from your replies, it sounds like Fidelity would go to ask the depository source not to withhold tax, right?

 

 

 

Dear Zehua,

 

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