Investing with a Foreign Broker and Buying Canadian Shares
Foreign brokers can attract Canadian investors, perhaps because of low
management fees. The foreign broker may purchase some Canadian shares
(either on a foreign exchange or on the TSX). These shares should be
treated as Canadian for the purposes of dividend tax credits and foreign
tax credits (FTCs), but as foreign for the purpose of form T1135
filings; this counterintuitive treatment can lead to errors.
Consider first form T1135, because this form has large penalties for missed filings, and possibly for errors as well. The CRA's view
(question 19 on the website) is that shares in Canadian companies held
through a foreign broker are subject to the T1135 filing, like all
specified foreign property, because they are "situated, deposited or
held outside Canada" (subsection 233.3(1)). The issue is that the
brokerage account is foreign, even though the shares are not.
(Interestingly, the location of the stock exchange on which the shares
were purchased is not relevant; thus, even if the foreign broker bought
the Canadian shares on the TSX, form T1135 would still have to be
Dividend tax credits are available for dividends on these Canadian
shares because the dividends are from Canadian corporations
(section 121). It is easy to forget to claim these credits because the
foreign broker would not likely issue a T5 slip to the Canadian
As for FTCs, there is no definition of foreign-source income in the Act.
The closest reference to a definition of income from a source can be
found in section 4, but that section does not specifically address
income from a foreign source. Therefore, one must look at the CRA FTC
For dividends, paragraph 1.59 of the folio states that dividends
received from a company that is not resident in Canada would normally be
considered as foreign-source. Presumably, one could make the negative
inference that foreign-source income would not include dividends
received from a Canadian-resident corporation, and therefore this income
should not be included in the calculation of foreign tax credits.
For capital gains, the situation is more complicated. The general treaty
rule is that capital gains on stocks and bonds are taxed only in the
jurisdiction of the taxpayer's residence (see article XIII(4) of the
Canada-US tax treaty). Thus, the gains would be tax-exempt income,
according to the definition in subsection 126(7). Tax-exempt incomes are
not qualifying incomes (subparagraph 126(9)(a)(iii)) and are not
eligible for FTCs (subparagraph 126(1)(b)(i)).
Henry Shew and Randa Galloway
Cadesky Tax, Toronto