Starting this month we will be issuing a weekly Q&A notes by bringing to your attention the most interesting (common? but not too boring) in our opinion question raised during the previous week. If you have a burning question, please send it to us via email and perhaps it will make it the next week’s list.
Q: I am considering investing into a US publicly traded partnership through my RRSP. Do you think it is a good idea?
A: No, I don’t find it being a good tax strategy. US interest and dividend income (both known as periodic income or “FDAP”) earned in an RRSP is exempt from US tax under the US – Canada income tax convention (the “Treaty”). The Treaty exemption does not however extend to partnership’s business income, known as effectively connected income with US trade or business (“ECI”). The partnership will be required to withhold tax at source at the rate of 39.6% on ECI income paid to a US non-resident investor. In addition, a withholding agent often errs by applying the ECI rate of withholding to FDAP income thus even further increasing the burden of US tax cost. Considering that RRSP income is tax deferred under the Canadian domestic tax law, there is no mechanism to recover US withheld tax. The tax ends up to be a pure cost to the RRSP owner and deteriorates the current year’s distributive partnership income by up to 40%. The same income will be subject to another level of taxation in Canada, when it is distributed out from the RRSP and reported on the Canadian income tax return. If you wish to invest in US publicly traded partnerships, do so through your non-registered portfolio.
