Canadian investors should be aware that a lot of financial advice published online is tailored for the U.S. market.agrobacter/iStockPhoto / Getty Images
We’re getting a growing amount of financial information online and by now, we know the risks. But Canadians face an extra obstacle when it comes to social-media money posts: trying to figure out if they’re intended for us or our American neighbours.
As someone who focuses on cross-border wealth planning, I see this confusion all the time. Many financial social-media posts created for Americans range from misleading to problematic for Canadians who stumble across them.
Let’s start with the overall risks.
The reality is that plenty of financial advice found online is written for the U.S. market. And while we share many qualities with our southern neighbours, our financial and tax systems are quite different. Think Dragons’ Den and Shark Tank, similar but also fundamentally different. So what may be good strategy for a U.S. taxpayer could be bad advice for a Canadian following along online.
Here’s a more concrete example. One of the most popular topics on financial social media surrounds maximum yield products. These are typically exchange-traded funds that invest in either an index or single stock and use derivative strategies to add supplemental income. In some cases, they are pitched with attractive double-digit yields, which are extremely enticing for income-hungry investors.
A quick YouTube search shows dozens of videos touting maximum-yield ETFs for investors. Scan Reddit on any given day and you will see five to 10 posts on maximum-yield products and their place within a portfolio. Almost none of these posts and videos were produced with our tax rules in mind, but it’s easy to see how Canadian investors would buy them for the income benefits they tout, while being ignorant of the tax impact in Canada.
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Income earned by Canadians from U.S.-listed investments is subject to a minimum 15-per-cent withholding tax at the source, when received outside of an RRSP or RRIF. Come tax time, this income is not eligible for the dividend tax credit, which means it’s fully taxed income. That means your after-tax returns can drop significantly, depending upon your marginal tax rate.
Withholding tax on U.S.-source dividends does create foreign tax credits, which may reduce your taxes owing here in Canada. However, if you own the investment inside your TFSA, FHSA or RESP, you lose at least 15 per cent of your dividend and generate no foreign tax credits.
There’s also an often-overlooked administrative burden for U.S. investments that could double your U.S. withholding tax to 30 per cent. The 15-per-cent minimum I mentioned above is the applicable rate in the U.S.-Canada Tax Treaty, but it only applies if you’ve filed the IRS form W-8-BEN.
Forget to file this form and you’re stuck paying the 30-per-cent withholding rate.
Because these products have attracted billions of U.S. investor dollars, the hype around them on social media is attracting more attention from non-U.S. investors as well.
Canadian versions have started to come to market. The JPMorgan Equity Premium Income ETF now has a clone for Canadians with the same ticker symbol, JEPI. This just adds to the confusion for investors trying to make the right choices for their portfolio.
How can you know which advice is targeted at a U.S. audience only?
The obvious giveaway is the ticker symbol used. A quick search for the symbol on Globe Investor can tell you if the product is traded on a Canadian market or a U.S. market. If it’s traded on the NYSE or Nasdaq, consider the tax implications of owning that product.
The other sign is the language used in the video. Words such as short-term gains or cost basis are uniquely American and refer to the U.S. tax code and how investment products are taxed. A Canadian viewer could easily misinterpret what they are hearing.
Canadians need to approach social-media advice with a critical eye to make sure the content reflects their own financial reality and the person offering it has recognized qualifications or fiduciary obligations. The Canadian Securities Administrators’ adviser search site and the U.S. regulator FINRA’s Broker Check site are a good place to start.
The rise of financial influencers has made information more accessible, but that does not mean it’s applicable and accurate. When looking at a viral catchy video or investing post, knowing which side of the border the advice is coming from could end up saving you a lot of money and time.
Sam Rook is a certified financial planner and portfolio manager with Bird’s Eye Wealth in Toronto.
