American/US Stocks in a TFSA (Tax Free-Savings Account)

TFSAs and IRS Dividend Withholding Taxes

This is just a note that if I held a US-based fund/stock in my TFSA, such as a S&P 500 ETF or MSFT that trades in the USA, I, as a Canadian, would still pay IRS withholding taxes on any foreign dividends. This rate should be 15% and not 30%. So, I would lose about 15% of any dividend to the IRS that I wouldn't be able to claim against my Canadian income tax from that holding, since I'm not paying any taxes on that holding because it is in a TFSA. If this holding were in an RRSP, there is a tax treaty that would exclude this IRS withholding.

There is some weirdness with ADRs and non-US/non-Canadian holdings that I'm not even sure of and not going to bother with. If a US-based ETF holds these, I don't have any idea what might happen with withholdings. 

IRS Dividend Withholding Taxes on Non-Registered Accounts

If this holding were in a regular trading account, then I'd pay the withholding tax, but I could credit it against the full income tax that I'd pay on the earnings, which would be at my full marginal tax rate, since foreign dividends are treated as income, unlike eligible Canadian dividends.

Canadian Funds, Registered Accounts and IRS Withholding Taxes

This is also a problem with Canadian-based US ETFs and mutual funds. The funds pay the withholding tax on all of their dividends and can't recover them because your holding might be in an RRSP, because the tax treaty doesn't "see" the holding as being in an RRSP, just a Canadian ETF or mutual fund. For a TFSA, this doesn't really matter, since you'll be paying the 15% either way, but it isn't hidden if you hold the US funds/stocks directly. So it is best for me to not hold these Canadian-based funds in an RRSP, unless I'm okay with the 15% drag on dividends.

Capital Gains & Tax Free Savings Accounts

Capital gains are unaffected by all this, capital gains from a US-based fund or a Canadian one are treated the same way, so that 15% drag may not be very big if the holdings aren't big dividend payers. In other words, capital gains in a TFSA won't be subject to any unrecoverable IRS withholding taxes, nor will they in an RRSP or non-registered account. 

Don't act on any of the above information without further independent advice/conclusions, the above is merely my own thoughts that I'll use to guide my own decisions, you shouldn't base your decision on the information above. 

American/US Stocks in a TFSA (Tax Free-Savings Account) |

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