Taxation of Interest & Dividends

Interest - In comparing the Canadian versus US taxation of interest, both countries tax it as ordinary income subject to your marginal tax rate.  For non-residents of Canada however, interest from a Canadian bank account is subject to a 10% withholding at source.  Sometimes we have seen a 0% withholding because there is still a Canadian address on the account.  The fact is you still owe the 10% and you must pay this by filing a Part XIII tax return in Canada .  This interest income must also be reported on your US tax return resulting in the potential for double taxation because you are required to report your "worldwide income" on the US return.  There is no withholding on interest from Canadian government obligations such as T-Bills, Canada Savings Bonds, etc. but they are taxable in the US and required to be reported as income. 

Dividends - In comparing the Canadian versus US taxation of dividends, Canada provides a 125% gross-up and the ensuing 13.3% tax credit.  In the US , qualified dividends are taxed at a flat 15% tax rate (5% if in the 15% marginal tax bracket or below), while non-qualified dividends are taxed at your ordinary marginal income tax rates.  For non-residents of Canada , dividends from Canadian mutual funds are subject to a 15% withholding at source.  Again, because no withholding was taken does not mean there is none, you have to file a tax return and remit the 15% as stipulated in the Canada/US Treaty.  Like interest, this income must be reported on your US return as a part of your "worldwide income", resulting in the potential for double taxation.  Proper planning and tax preparation can recapture some or all of this 15% on your US return unlike interest income.