The first point to recognize is that investing abroad is not a way to escape taxes. Canadian residents are taxable on their worldwide income, including all their foreign income and gains, which probably means taxes to pay unless protected by registered accounts.
- retirement-related accounts like RRSPs, LIRAs, RRIFs, LIFs do not pay any Canadian income taxes while the foreign holdings and associated profits received from sales, dividends and interest remain in the account. That's very convenient as it means there is no tax reporting or tracking to do.
- TFSAs and RESPs do not pay any Canadian tax while the funds/holdings are inside and so there is no reporting or tracking for them either ... but unlike the retirement accounts above they are subject to 15% non-resident withholding taxes levied by the USA on any dividends or fund distributions (see Canadian Tax Resource's TFSA & Non-Resident Withholding Taxes), which cannot be claimed or recovered.
A general rule is that for tax purposes, everything must be calculated in Canadian dollars when transactions occur, or in the case of trades, when they settle, normally three days after the trade date.
- Capital Gains and Foreign Currency - when buying and selling foreign securities (stocks, ETFs and bonds) on foreign exchanges like the NYSE, AMEX and NASDAQ, it is necessary to track and report both the currency conversion in and out, and the actual trades. Canadian Tax Resource (who is an accountant) walks through an excellent example in Exchange Rates, Investments and Income Tax. To be able to report this you will have to keep records of the Adjusted Cost Base (the CRA term for the running total of an asset in Canadian dollars) for each foreign security. The brokerage Book Value cost cannot be relied upon as accurate (through no fault of their own) if there are dividend reinvestments, capital gains distributions and return of capital as explained in a previous post ETFs and Mutual Funds - Calculating Capital Gains. A spreadsheet is a convenient way to track this - CanadianFinancialDIY has a model - go to the bottom of the blog to the My Main Portfolio Google docs spreadsheet and click on the Cost Base tab.
- Foreign Currency Rate - CRA accepts either a Bank of Canada rate, or the actual one applied by the broker.
- Foreign Dividends and Tax Credit - all dividend income is treated as ordinary income and taxed at the highest marginal rate like interest by the CRA. It does not benefit from the lower tax rates on dividends from Canadian companies (which excludes those Canadian-traded funds mentioned below). The US and most countries have tax treaties with Canada that result in a 15% withholding tax being deducted from distributions. To avoid double taxation, the CRA allows a Canadian taxpayer to claim a tax credit for this amount - TaxTips.ca explains how this works in Foreign non-business income tax and foreign tax credit
- Foreign Interest - the CRA taxes such income as ordinary income at the highest marginal rate, just like Canadian interest. The US does not levy any withholding tax on interest from investments. For both interest and dividends, the foreign currency rate to be applied is when the funds are received, though the CRA does allow an annual average rate from the Bank of Canada to be used.
- Canadian-traded Investments in Foreign Countries - there are many ETFs and mutual funds which hold foreign securities and part of their attraction is that they trade in Canadian dollars, which means the fund companies do all the foreign currency conversion and thus they report to you the investor, with tax slips and the like, in Canadian dollars. There is still the job of tracking the ACB since the funds sometimes distribute Return of Capital (e.g. as did in 2008 the Claymore International Index ETF, TSX symbol: CIE). An alternative to doing one's own spreadsheet for Canadian-traded securities is to subscribe to ACB Tracking Inc., which covers some 700 Canadian income trusts, closed-end funds and ETFs. It is still necessary to enter one's buys and sells.
- US Estate Taxes - high net worth investors (US$1 million plus) with US holdings may be subject to US estate taxes even if not resident or citizens of the USA. Taxtips.ca explains in US Estate Tax May Be Payable by Canadians.
- Fixed income is best in a registered account
- Equities are best in a taxable account to take advantage of the foreign tax credit and the capital gains treatment