Can Canadians Have Treasury Direct Accounts?

Is it possible for a Canadian citizen living in Canada to buy U.S. Treasury securities through Treasury Direct? Is the interest taxable? (I'm taxed 15% on U.S. dividends by the Internal Revenue Service.) If Canadians can buy through Treasury Direct, will the U.S. government ship the bonds to a Canadian address?

-- Paul Phillips

Paul,

A spokesman for the Treasury Department's Bureau of the Public Debt says yes, Canadians may open Treasury Direct accounts, which allow investors to purchase U.S. Treasury bills, bonds and notes at auction without incurring brokerage commissions. All the necessary forms can be downloaded from the program's site, and transactions can be done online or over the phone, as well as the old-fashioned way, by mail.

The spokesman says you'll also need to file IRS form W-8, the Certificate of Foreign Status, which you can find on the IRS's Web site.

You must send U.S. dollars as payment for securities, the spokesman says, and it's preferable to have a U.S. bank account for direct deposit of coupon payments and repayment of principal when the securities mature. However, if you don't have a U.S. bank account, the Treasury will make all payments by check.

You can't have the actual bonds shipped to you, though. Treasury Direct doesn't issue paper securities. Everything is kept in electronic book-entry form.

The U.S. will not withhold taxes on the interest payments. Benita Loughlin, a partner in KPMG's international tax group in Vancouver, says the treaty between the U.S. and Canada governing taxation exempts from U.S. tax any interest paid by any government or governmental subdivision to residents of Canada.

You will, however, owe Canadian income tax on your earnings, Loughlin says. The U.S. Treasury will report them to you on Form 1042.

Loughlin also says you'll have to refile the W-8 form every three years and file it separately for every Treasury issue you buy.

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