Quite a few Canadian companies listed on the Toronto Stock Exchange declare dividends in U.S. dollars, including Magna International Inc., Brookfield Asset Management Inc. and Algonquin Power & Utilities Corp. What are the tax implications of owning these stocks? Do they qualify for the dividend tax credit? Must I report the income as converted to Canadian dollars or do banks do that?
Canadian-listed companies that derive a big chunk of their revenue in U.S. dollars often choose to pay dividends in U.S. currency. In addition to the above names, the list includes several gold miners (Goldcorp Inc. and Barrick Gold Corp., among others), technology companies (Constellation Software Inc. and Open Text Corp.), energy companies (Encana Corp.) and fertilizer producers (Potash Corp. of Saskatchewan Inc. and Agrium Inc.)
In most cases, dividends paid in U.S. dollars by Canadian companies are eligible for the dividend tax credit. If you are interested in a particular security, you should confirm this by visiting the investor relations section of the company's website or reading its latest dividend announcement. All of the companies mentioned here designate their dividends as "eligible dividends" for tax purposes. This is an important consideration, because the tax rate on dividends that qualify for the enhanced dividend tax credit is significantly lower than the tax rate on regular income.
Not all U.S. distributions get the same tax treatment, however. For example, Brookfield Infrastructure Partners LP – a subsidiary of Brookfield Asset Management – declares distributions in U.S. dollars. But in 2015, Brookfield Infrastructure's distributions included foreign dividend and interest income, capital gains and Canadian interest, but no Canadian eligible dividend income. Another subsidiary, Brookfield Renewable Energy Partners LP, designated about 59 per cent of its distributions in 2015 as eligible dividends.
Just because a dividend is declared in U.S. dollars doesn't mean you'll receive it in U.S. dollars. In some cases, the broker will convert the U.S. currency to Canadian dollars on the payment date before depositing the money into the shareholder's account. This is a source of irritation for some investors, because brokerages build in a profit – usually 1 per cent to 2 per cent – when converting currencies for retail customers.
You may be able to avoid – or at least delay – the brokerage's currency spread if you request to have the shares "journalled" to the U.S. side of your brokerage account. In this case, the U.S. dividends should land in your account without being converted to Canadian dollars. You can choose this option even for U.S. dividend payers, such as Algonquin, that trade only on a Canadian stock exchange (many Canadian-listed U.S. dividend payers also trade on a U.S. exchange). Note, however, that for registered accounts such as RRSPs, not all brokers permit you to hold U.S. dollars, although in recent years the number of brokers offering U.S. dollar RRSPs has been increasing.
Taking your dividends in U.S. dollars gives you more control over your cash. You can reinvest the money in a U.S. security without paying foreign exchange costs, spend it on a U.S. vacation or convert it to Canadian dollars at a later date when you consider the exchange rate to be more favourable.
Before deciding to hold shares on the Canadian or U.S. side of your account, however, you should contact your broker and the investor relations department of the company. Some companies (Agrium, for example) specify that, for Canadian investors who hold their shares in a brokerage account (on the Canadian side), the dividend will be paid in Canadian dollars by the company based on the Bank of Canada's noon exchange rate on the record date. This eliminates the cost of the broker converting the dividend to Canadian dollars on the payment date. Depending on the company, there may be different currency options available to registered shareholders (whose shares are held in the investor's name with the transfer agent).
As for how the dividend is reported on your tax slip, my broker, BMO InvestorLine, indicated that – regardless of the currency in which the dividend is paid – the actual amount of the dividend, the grossed-up dividend and the dividend tax credit are all reported on the T5 in Canadian dollars. You will receive a tax slip only if you hold the shares in a non-registered account, of course. If you're investing in Canadian-listed stocks that pay U.S. dividends, it's wise to do your homework so that you're getting the full value of your dividend – and avoiding unpleasant surprises.