Tax planning for Canadians who invest in the U.S.

There are good reasons for Canadians to invest in the U.S., including portfolio diversification. Just keep these tax-planning and compliance requirements in mind. The post Tax planning for Canadians who invest in the U.S. appeared first on MoneySense.

Tax planning for Canadians who invest in the U.S.

It’s no surprise that many Canadians invest south of the border—both in stocks and real estate. On the world stage, economically speaking, we’re small potatoes.

As of May 31, 2021, Canada’s country weight within the was less than 3%. By comparison, U.S. stocks represented almost 58%. 

The average Canadian home price in April 2021 was $695,657. In Canadian dollars, the average price of a U.S. home was significantly less expensive, at $535,194 (US $435,400). 

But before you jump into U.S. investments, know there are both Canadian and U.S. tax implications for a Canadian investor to keep in mind. 

Stocks and ETFs

When a non-resident invests in U.S stocks or U.S.-listed exchange traded funds (ETFs), the standard withholding tax on dividends is 30%. A Canadian resident is entitled to a lower withholding rate of 15% under a treaty between the two countries if they have filed a form with the brokerage where they hold the investments.

The 15% withholding tax is generally the only tax obligation a Canadian investor has to the Internal Revenue Service () unless they are a U.S. citizen. (U.S. citizens who reside in Canada must file U.S. tax returns as well as Canadian tax returns.) 

If a Canadian resident who is not a U.S. citizen sells a U.S. stock or ETF for a profit, realizing a capital gain, they do not pay tax on that gain to the U.S. government. 

Dividends, interest, capital gains and other investment income

U.S. dividends, interest, capital gains and other sources of investment income are taxable on a Canadian resident’s T1 tax return because Canadians pay tax on their worldwide income. 

Interest income earned in the U.S. generally has no withholding tax for a Canadian resident.

Any U.S. tax withheld on other sources of investment income is eligible to claim as a foreign tax credit. This generally reduces the Canadian tax otherwise payable dollar for dollar, and avoids double taxation. 

U.S. dividends, interest, and capital gains must be reported in Canadian dollars based on the applicable foreign exchange rate. Most people use the average rate for the year to convert their income to Canadian dollars, but it is also acceptable to use the rate on the date of the transaction. 

Capital gains are a little trickier than dividends and interest because you have at least two exchange rates to determine: the exchange rate on the date of purchase, and the exchange rate on the date of sale. Because exchange rates fluctuate, it is possible that the shift in exchange rates causes a much different capital gain or loss in Canadian dollars than in US dollars. 

If an investor has purchased shares at different times, there is even more work involved. You need to figure out the exchange rate for each purchase in Canadian dollars to determine the adjusted cost base. This can be particularly challenging for someone who has a stock savings plan with a U.S.-based employer where they buy shares with each paycheque, for example. 

Canadian-listed ETFs and Canadian mutual funds that own U.S. stocks are themselves considered to be Canadian residents, just like an individual taxpayer. They will be subject to withholding tax before a dividend is received by the fund. This withholding tax is generally reported on a T3 slip (or sometimes a T5 slip, depending on the fund) and can likewise be claimed for a foreign tax credit in Canada. 

So far, these comments apply to non-registered, taxable investment accounts. There are slightly different implications if a Canadian buys U.S. stocks or ETFs in a different account. 

Registered investment accounts

(TFSAs), (RESPs), and registered disability savings plans (RDSPs) generally have the same withholding tax implications by the IRS as a taxable account. However, because these accounts are tax-free or tax-deferred, there are no tax implications for a Canadian beyond the withholding tax. 

Does this mean you should not own U.S. stocks in a TFSA, RESP or RDSP? No, but it does mean there is a slight cost to doing so, albeit for the benefit of holding a more diversified investment portfolio. 

A (RRSP) or similar tax-deferred retirement savings account gets special treatment by the IRS. There is generally no withholding tax if you own U.S. stocks or U.S.-listed ETFs. However, if you own a Canadian-listed ETF or Canadian mutual fund that owns US stocks, the tax is withheld before it gets to the fund or to your RRSP. 

For a Canadian taxpayer, the tax implications are identical whether you have an account in Canada or the U.S. The physical location of the account does not matter. 

Real estate

Canadians who invest in U.S. real estate face different implications depending upon whether the property is for personal use or is a rental property. 

A personal-use property generally has no annual tax filing requirements, whereas a rental property must be reported in both Canada and the U.S. each year. 

Rental income and expenses should be reported on both a Canadian and a U.S. tax return. A Canadian resident with a U.S. rental property must file a tax return to report the U.S. source income to the IRS. Any U.S. tax payable can generally be claimed in Canada as a foreign tax credit to reduce Canadian tax otherwise payable. 

Upon sale, there may be a capital gain or loss in Canada and the U.S. The Canadian gain or loss depends on the purchase price in Canadian dollars and the sale price in Canadian dollars, based on the exchange rates in effect at the time of each transaction. Purchase and sale costs, as well as any renovations, may reduce a capital gain (or increase a loss). 

A Canadian is generally subject to 15% withholding tax on the gross proceeds of U.S. real estate, unless they file for a withholding certificate prior to closing to reduce the tax based on the estimated capital gain. U.S. capital gains tax paid is eligible to claim in Canada as a foreign tax credit. 

If a Canadian taxpayer has more than $100,000 in foreign assets, including U.S. stocks, ETFs, rental real estate, or other investments, they need to file the form with their Canadian tax return. The $100,000 limit relates to the cost, in Canadian dollars, for the investments. Personal-use foreign real estate, as well as tax-sheltered RRSPs or tax-free TFSAs, do not need to be reported. 

These are just some of the basic tax implications for a Canadian investor who owns U.S. assets. Investing in U.S. stocks, ETFs or real estate can help diversify a portfolio, but comes with additional complexity and tax-compliance requirements as well. 

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.


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2 "Strong Buy" Penny Stocks That Could Rally to $10 (or More)

Let’s take a moment to talk about opportunity, share price, and risk/reward considerations. These are some of the factors investors must consider when moving into penny stocks – and we Read More... The post 2 "Strong Buy" Penny Stocks That Could Rally to $10 (or More) appeared first on TipRanks Financial Blog.

2 "Strong Buy" Penny Stocks That Could Rally to $10 (or More)

Let’s take a moment to talk about opportunity, share price, and risk/reward considerations. These are some of the factors investors must consider when moving into penny stocks – and we haven’t even touched on the fundamental soundness of the company or its business model.

Penny stocks – as their name suggests, they once traded for just a pennies per share, but these days are considered those equities trading at less than $5 – are a challenging market niche. The penny stock critics make valid points when defending their stance. Sure, the price tag may look like a steal, but the fact that shares are trading at such low levels could reflect overwhelming headwinds or weak fundamentals.

That being said, the fans offer up a solid argument as well. Not only does the low price mean you get more shares for your money, but hefty returns are also on the table. Even seemingly insignificant share price appreciation can result in colossal percentage gains that other more well-known or expensive names aren’t as likely to deliver.

The nature of these investments presents somewhat of a dilemma. How are investors supposed to separate the penny stocks that are ready to take off on an upward trajectory from those set to remain down in the dumps?

To help with the due diligence process, we used TipRanks’ database to zero in on only the penny stocks that have received bullish support from the analyst community. We found two that are backed by enough analysts to earn a “Strong Buy” consensus rating. Not to mention each offers up massive upside potential, as some analysts see them climbing to $10, or more. 

Aptinyx, Inc. (APTX)

We’ll start with Aptinyx, a company in the biopharma industry. Aptinyx works on the treatments for brain and nervous system disorders, developing new synthetic small molecule medications for commercialization. The company has a proprietary NMDA receptor modulator discovery platform, which enables a novel approach to the targeted disorders. 

Aptinyx’s research pipeline currently has three compounds in the clinical stages, all in Phase 2 trials. NYX-458 is a potential treatment for Parkinson’s disease and Lewy body dementia, two serious central nervous conditions of aging. Preclinical and Phase 1 studies showed robust activity in rodent models and favorable safety tolerance in human patients; the Phase 2 clinical trial will focus on patients with mild levels of cognitive impairment and dementia.

NYX-783, the second compound in the pipeline, is being studied for its efficacy in treating post-traumatic stress disorder. A Phase 2 exploratory study showed positive results in symptom reduction in just 4 weeks of treatment, and the FDA has granted this drug a Fast Track designation.

Finally, NYX-2925, the lead drug candidate in the pipeline, is under study as a treatment for two conditions: fibromyalgia, and diabetic peripheral neuropathy (DPN). These are both chronic, painful, conditions, and NYX-2925 has demonstrated reduced pain levels in patients during earlier stage testing. The DPN study, like NYX-783 above, has FDA Fast Track designation.

Based on the potential of the company's drug candidates, and its $2.84 share price, several members of the Street believe that now is the time to get in on the action.

Among the bulls is Leerink Analyst Mark Goodman who sees a string of catalysts ahead to boost the stock.

“The stock has been trending lower during the past several months mainly due to the lack of near-term catalysts, but we believe that investors will start to get much more focused on the name moving into 2H21 ahead of the multiple data points in 2022. We continue to have a positive view of Aptinyx's focus on NMDA receptor modulators and its pipeline opportunities… Aptinyx has a strong drug discovery platform plus a library of >1,000 identified compounds, which should enable continued pipeline expansion and sustain long-term growth,” Goodman explained.

To this end, Goodman rates APTX an Outperform (i.e. Buy) along with a $12 price target. Investors could be pocketing gains of 324%, should Goodman's thesis play out as expected. (To watch Goodman’s track record, )

It’s not often that the analysts all agree on a stock, so when it does happen, take note. APTX’s Strong Buy consensus rating is based on a unanimous 7 Buys. On top of this, the average price target is $10.67, suggesting robust growth of ~277% from current levels. (See APTX stock analysis on TipRanks)

Axcella Health (AXLA)

The next penny stock we’re looking at, Axcella, is another biotech company. Axcella is using endogenous metabolic modulators (EMMs) as a jump-off to approach new treatments for complex diseases, including non-alcoholic steatohepatitis (NASH, or fatty liver disease), along with overt hepatic encephalopathy (OHE). These are both serious liver conditions, and can have cascading consequences on the whole body.

For both tracks, Axcella has completed early clinical studies and is beginning Phase 2 trials. AXA1125, the drug candidate under development to treat NASH, started the EMMPACt Phase 2b clinical trial in May of this year. The study will enroll a total of 270 patients, and will stratify them by the presence or absence of type 2 diabetes, and important complicating factor.

Also in May, Axcella announced positive clinical data on AXA1665, the drug being studied as a treatment for OHE. The data showed that two different drug doses proved safe and well-tolerated, and showed positive results when compared to placebo. Both AXA1665 and AXA1125 have had their IND application cleared by the FDA.

AXLA's strong pipeline has scored it substantial praise from Chardan analyst Keay Nakae.

“We view Axcella's leading asset, AXA1665, as likely to exceed the benefits provided by the current standard of care therapies lactulose and rifaximin in HE, due to its clean safety/tolerability profile and ability to target more aspects of HE than simply blocking ammonia absorption in the gut. Beyond AXA1665, we also anticipate success for AXA1125 in NASH; the NASH market is crowded with potential therapeutics but is also a very large commercial opportunity that we anticipate will allow for the success of multiple market entrants. We expect AXA1125 to thrive as a base-level therapy due to its impressive safety/tolerability profile as a result of its mechanisms of action, with potential to move forward in pediatric NASH sooner than competitors due to this safety profile,” the 5-star analyst noted. 

In line with his optimistic approach, Nakae gives AXLA shares a Buy rating and his $10 price target suggests ~186% potential upside for the coming year. (To watch Nakae’s track record, .)

Other analysts are on the same page. With 3 additional Buy ratings, the word on the Street is that AXLA is a Strong Buy. The shares are priced at $3.50, and the $11.25 average price target suggests it has ~222% upside ahead of it. (See AXLA stock analysis at TipRanks)

To find good ideas for penny stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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