A dividend deposit can be smaller than expected even when the company hasn’t cut its payment. For Canadians holding ordinary U.S. shares, withholding tax commonly removes 15% before the money reaches their account.
Whether that money can offset your Canadian taxes depends on where you hold the investment. A taxable account, tax-free savings account and registered retirement savings plan don’t receive the same treatment.
There’s also a distinction worth understanding before choosing a stock. A Canadian company can earn money in the United States without its dividend becoming a U.S. dividend. Bank of Montreal (TSX: BMO) is a useful example.
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Follow the full dividend
Suppose ordinary U.S. shares pay you $1,000 in dividends in a taxable account. With the usual treaty documentation in place, 15% withholding leaves $850 in your account. Your Canadian return generally reports the $1,000 gross dividend, including the $150 already withheld.
Now assume Canadian tax on that income would otherwise be $300, and the full $150 foreign tax credit is available. You owe another $150 in Canada. Total tax is $300, leaving $700. Without that credit, the combined taxes would leave only $550. The credit prevents that extra tax in this example. Your broker doesn’t refund the withholding, but the credit reduces your Canadian tax bill.
The available credit is generally limited to the lower of eligible foreign tax paid and Canadian tax attributable to the relevant foreign income. Someone owing little Canadian tax might not recover the full amount. Federal calculations use Form T2209, with provincial treatment handled separately and a different process in Quebec.
Inside a tax-free savings account, U.S. withholding generally can’t be claimed as a personal foreign tax credit. Direct holdings of ordinary U.S. shares in a qualifying RRSP generally receive treaty protection from that withholding. Canadian funds holding U.S. investments can have different results because withholding may occur inside the fund.
A Canadian dividend
BMO gives investors exposure to Canadian and U.S. banking through a Canadian company. Its U.S. operations don’t turn its shareholder dividend into foreign income. BMO designates its common-share payments as eligible Canadian dividends. In a taxable account, those receive Canadian dividend-tax-credit treatment, which is separate from the foreign tax credit.
Its quarterly dividend is $1.71 per share, or $6.84 annualized. At a closing price of $235.18, the yield was approximately 2.9%. A $10,000 budget bought 42 whole shares for $9,877.56 before fees. At an unchanged dividend, those shares generate $287.28 annually, paid quarterly.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | ANNUAL DIVIDEND | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| BMO | $235.18 | 42 | $6.84 | $287.28 | Quarterly | $9,877.56 |
A Canadian resident holding those shares directly doesn’t lose 15% to U.S. withholding. Canadian tax may still apply in a taxable account. That makes dividend investing simpler here, but it doesn’t automatically make BMO the better investment.
Considerations
BMO’s third-quarter adjusted earnings reached $3.96 per share, up 22% from a year earlier. The $1.71 dividend used approximately 43% of that amount, leaving a reasonable earnings cushion.
Reported earnings were lower, at $2.38 per share, partly because of a goodwill charge tied to the announced sale of financing businesses. The dividend used about 72% of reported earnings. Tuesday’s price was roughly 14.8 times earnings.
BMO’s opportunity is improving U.S. profitability while growing its Canadian businesses. The risk is that expansion costs, weaker borrowing demand or higher credit losses interrupt that progress. The dividend looks supported. At this price, though, BMO is a reasonable long-term income holding, without being an obvious bargain solely because its tax treatment is convenient.
Bottom line
BMO offers a Canadian dividend and meaningful U.S. business exposure. Its earnings coverage supports the payout, but tax efficiency should strengthen a sound investment decision, not substitute for one.
