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?
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.