Taxation of U.S. stocks for Canadian investors – Master Limited Partnerships

As a follow-up to my post about the tax treatment of U.S. stocks and Exchange Traded Funds (ETFs) in registered and non-registered accounts for Canadians, I thought I’d walk you through a case study – owning some Brookfield stock – where one such company is a limited partnership at the time of this post.

A reminder – this is not tax advice. Just my own case study.

A few weeks back, I received some U.S. tax forms from Brookfield Renewable Partners (BEP).  BEP is a Bermuda-based limited partnership that is treated as a partnership for U.S. and Canadian tax purposes; it is not a corporation or a trust.

Brookfield Renewable Partners is a publicly traded partnership that does not earn active business income unlike many common stocks.  Instead, BEP receives various types of investment income, such as interest, dividends and return of capital, from subsidiary corporations that carry on business in various jurisdictions.  Confused (and concerned) about the U.S. tax form I contacted the Brookfield investor relations department and our own Canada Revenue Agency.

This was the essence of my discussion with Brookfield and our CRA:

  • I hope you can help me. Recently, I got a Schedule K-1/Form 1065 in the mail.  This led me to believe that I might need to file a U.S. tax return with the Internal Revenue Service (IRS), in addition to any Canadian tax filing obligations.
  • We are Canadian residents. We have no business activities or ties to the U.S.
  • We keep our U.S. stocks (like Brookfield) in registered accounts only (such as RRSPs).

MLPs can be a lucrative investment since distributions from many MLPs are steadily north of 5% or 6% (and you can earn capital gains on top of that).  However buyer beware.  MLPs have similar characteristics as former Canadian income trusts – that is the amount of interest, dividends and return of capital that is earned is allocated to unitholders.  The consequences for the investor are withholding taxes depending upon the asset owned, and the interest, dividends and return of capital flows-through to investors for tax reporting purposes.  I got a form from the IRS – which begged my question to Brookfield and the CRA – am I required to file a U.S. tax return?

Thankfully not.

According to Brookfield’s site for the company in question (and the investor relations representative who wrote me back), in the United States “units of Brookfield Renewable Energy Partners qualify for IRA and 401(k) accounts. In Canada, Brookfield Renewable Energy Partners is a qualified investment for RRSPs, deferred profit sharing plans, RRIFs, registered education savings plans, registered disability savings plans and TFSAs.  After the end of Brookfield Renewable Energy Partner’s taxation year (December 31), the U.S. and Canadian taxable income of Brookfield Renewable Energy Partners is determined and allocated to all unitholders that are in turn required to report such income on their respective tax returns. The allocation of U.S. taxable income will be communicated using Schedule K-1 (not a Form 1099). The allocation of Canadian taxable income is communicated using Form T5013 (not a Form T5).”

Brookfield companies are required by law to use reasonable efforts to send a Schedule K-1 to all unitholders (not just U.S. residents) for tax reporting obligations regardless of entity, taxability, or residency. Consequently, some Canadian unitholders may receive a Schedule K-1 in addition to Form T5013 when holding Brookfield assets.

Because non-U.S. resident unitholders like myself in Canada, a Canadian investor in Brookfield companies, with no ties to the U.S. or U.S. income to declare, may not require use of this form.  Further, I did not get a Canadian Tax Form T5013 from my brokerage for tax filing purposes (because my assets are held in registered accounts), I would have for a taxable investment.  The answer to my question:  there is no U.S. tax filing obligation.

Going forward, I will continue to hold U.S.-listed stocks and ETFs, including Brookfield companies, inside my RRSP. 

The benefits of this are many:

  • I will continue to earn dividends from established companies, who tend to grow their dividends regularly, to reinvest dividends or accumulate as I please.
  • I will avoid withholding taxes for U.S.-listed stocks and ETFs inside this account.
  • I can continue to earn my U.S. dollar dividends from Brookfield companies, increasing my U.S. dollar currency over time.
  • I don’t need to worry about (Canadian or U.S.) taxation for years to come, holding assets inside this tax-deferred account.

The tax implications with some investments are sometimes complex, and tax laws are not always easy to wrap your head around.  I encourage you to reach out to the investor relations departments of the companies (or ETFs) you invest in, discuss tax issues with our Canada Revenue Agency when you are unsure of any tax filing obligations, and discuss your concerns with a financial professional whenever in doubt.

Disclaimer:  My Own Advisor is not a tax professional and this post is not tax advice.  Please consult a financial professional before making any major changes/decisions regarding your investment plan.

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and I'm now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Subscribe and join the newsletter! Follow me on Twitter @myownadvisor.

12 Responses to "Taxation of U.S. stocks for Canadian investors – Master Limited Partnerships"

  1. Hi Mark,
    Quick question, I owned SPH which is an MLP in my TFSA last year 2020 for about 6 months, and recently i received a Schedule k-1. I’ve been looking all over to find information if i have to file taxes in the US based on what i received. Does your information above apply for all MLPs?

    Reply
    1. Thanks for your email. I can’t speak to SPH specifically but I can say for certain that I didn’t need to file a U.S. tax return because I owned Brookfield in my RRSP. Brookfield by law was required to send a Schedule K-1 to all unitholders who are U.S. residents or who may have U.S. tax reporting obligations. After further review, that didn’t apply to me.

      I can potentially assume if you hold this asset in your RRSP you are fine but again, this is not tax advice so you might want to discuss with a professional tax accountant just in case who deals with such matters. I wouldn’t say my information applies to all MLPs, only what I learned by holding Brookfield only.

      Thanks for visiting the site!

      Reply
        1. Not sure to be honest. I recall RBC had a white paper about this (withholding taxes and more) and I found it here:
          https://ca.rbcwealthmanagement.com/documents/380894/380910/Website+Tax+Implications+of+Investing+in+the+U.S.+2016.pdf/f722e20c-3b1c-42d1-8e87-535d892b8eec

          Could be just 15% or up to 35% withholding taxes for an MLP inside the TFSA, but unclear about the K-1 submission filing to the IRS. I don’t think so but I can’t be sure since I haven’t looked into it.

          Reply
  2. Sorry to vent my frustration here but I bought MMP in an RRSP and RBC direct investment calls me saying the are taking almost 50% withholding tax. I am powerless that I cannot argue with them without a formal instruction from Canada Revenue. This looks like a grey area that even some accountants are not able to answer.

    Reply
  3. I also do own BPY.UN and BEP.UN but in my non-registered account. I thought these are Canadian companies? Do you own the same ones or the same companies are also traded in the US markets? I did get the T5013 but nothing from the US.

    Reply
    1. They are Canadian companies Kevin but based out of Bermuda, for tax-advantaged purposes. BPY.UN and BEP.UN are also interlisted companies that trade on the NYSE under BPY and BEP respectively. Both companies pay dividends in U.S. dollars. If you got nothing from the U.S., that’s probably because you hold Canadian-listed stocks and not the U.S.-listed ones.

      Reply

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