How to soothe withholding tax pain on U.S. dividends

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I pay a 15-per-cent withholding tax on U.S dividends in my non-registered account. Is there any way to get the money back?

You may be able to claim the U.S. tax withheld as a foreign tax credit on your Canadian return, which will reduce your Canadian taxes otherwise payable.

For example, say you own one share of a U.S. company that declares a dividend of $1 (U.S.). You would convert the dividend to Canadian dollars – about $1.26 (Canadian) at the current exchange rate – and declare it as foreign income on your Canadian tax return. As such, the full amount of the dividend would be taxable at your marginal rate.

But since you've already paid U.S. tax of 15 per cent, you could claim this amount – again, converted to Canadian dollars – as a foreign tax credit on your return to prevent double taxation. (If you received multiple dividend payments, you can make your life easier by using the average exchange rate for the year.)

If you're doing all of this by hand, there's some paperwork involved, but it should be relatively straightforward if you're using tax software. Because foreign tax can be a complex topic, I recommend you consult a tax professional if you have extensive foreign holdings.

Want to avoid the hassles of withholding tax altogether? Consider holding your U.S. stocks in a registered retirement savings plan, registered retirement income fund or other retirement account. Retirement plans are exempt from withholding tax under the Canada-U.S. tax treaty. The same is not true, however, of tax-free savings accounts or registered education savings plans. Not only will you pay a 15-per-cent withholding tax on U.S. dividends in a TFSA or RESP, but you won't be able to claim a foreign tax credit for the amounts.

I have been following your articles about Enbridge (ENB). Wouldn't it make more sense to sell soon and wait for a major pullback rather than holding these shares through an inevitable correction, which could be extremely painful? This stock market is just dying to come back down to earth.

Please let me know when this "major pullback" or "inevitable correction" is coming. Next week? Early in 2018? If you could be more specific, we could both make lots of money.

Sorry to be facetious, but I think it's dangerous to make investing decisions based on speculation about where the market in general may be heading. How long have people been predicting an imminent correction in the U.S. market? Sure, it'll happen one day, but so far, those predictions have been wrong.

That's why, if you're thinking about buying or selling an individual stock – whether it's Enbridge or any other company – I believe you're better off focusing on the long-term outlook for the particular business.

Enbridge has a $31-billion slate of projects planned for 2017 through 2019. Assuming these projects come to fruition – and there are always risks, particularly with pipelines – Enbridge's cash flow is poised to rise substantially. However, in the short term, the company is facing questions about its dividend outlook, credit ratings and how it will fund its growth.

The company has said it will provide more clarity at its annual investor days scheduled for Dec. 12 in New York and Dec. 13 in Toronto. Could the shares fall further? It's certainly possible. Could the shares rally if Enbridge announces some positive news? That's possible, too. It's worth pointing out that Enbridge's shares have already had a "major pullback" – they're down about 18 per cent this year – which indicates a lot of pessimism is already baked into the stock price. As an Enbridge shareholder myself – I own the stock personally and in my Yield Hog Dividend Growth Portfolio – I am willing to ride out the current volatility. A lot of people aren't, obviously. You'll have to make that decision for yourself.

What's the point of having ETFs in your model portfolio?

There are a couple of reasons. One is diversification: My model Yield Hog Dividend Growth Portfolio doesn't hold any individual energy producers or materials stocks, for example, but I get exposure to both sectors through the iShares S&P/TSX 60 Index ETF (XIU). XIU also holds several growth stocks such as Dollarama and Alimentation Couche-Tard that I don't own directly. Similarly, my U.S. ETF – the iShares Core Dividend Growth fund (DGRO) – provides exposure to a broad basket of U.S. stocks such as Microsoft, Apple, Johnson & Johnson and Procter & Gamble. Both ETFs have very low management expense ratios – 0.18 per cent for XIU and 0.08 per cent for DGRO – which is a small price to pay for the extra diversification they provide.

Another reason to hold ETFs is convenience. Reinvesting dividends is one of the keys to successful investing, and buying a few more shares of an ETF is a simple, low-stress way to put my dividend cash to work if I can't decide which stock to buy.

Globe Unlimited subscribers can view the complete Yield Hog Dividend Growth Portfolio at tgam.ca/dividendportfolio.