The following post is written by Brian So, an insurance advisor and blogger at briansoinsurance.com.
Hi everyone, this is my first of hopefully many posts on the Dividend Ninja. Allow me to introduce myself. My name is Brian So and I have been working with my dad in the financial industry for about 2 years, and helping people with their financial goals. I’ve found my work to be very rewarding and I want to share some of my knowledge with more people. What better way to do this than to guest post on the Dividend Ninja with such a loyal and dedicated following.
Now that the intro is out of the way, let me get into the topic on hand: the implications of having US dividend stocks in your RRSP and TFSA. First off, because there are plenty of posts on the internet about what RRSPs and TFSAs are and how to use them, I am going in another direction with my posts to try to delve a bit deeper into the lesser known facts of these savings vehicles.
Generally, the type of investments you can put in a TFSA is similar to the type of investments you can put in a RRSP. These are known as qualified investments and include:
- Mutual funds
- Securities listed on a designated stock exchange
- Bonds and other debt obligations
- Shares of small business corporation
- Annuity contracts
- Warrants, rights, and options
Generally, the list of qualified investments is similar in the TFSA and the RRSP and so are the rules that govern the tax-sheltering of these investments. The difference occurs when US stocks and US-listed ETFs holding US stocks that pay dividends are held within each account.
The Federal Foreign Tax Credit
Because of treaties between Canada and the United States, dividends paid from American companies are subject to a 15% withholding tax. For non-registered accounts, this is not a problem since the dividend was paid to you directly and you can claim the foreign tax credit (FTC) on your tax return to recover this amount. The treaties also allow for the withholding tax to be waived in accounts used for retirement savings, such as the RRSP.
Because the TFSA can be used for many purposes besides retirement, it is not considered a retirement savings account and the withholding tax will apply accordingly. You cannot claim the FTC on registered accounts. Therefore, the implications of this for TFSA is that 15% of dividends paid from U.S. stocks and U.S.-listed ETFs holding US stocks will be withheld and lost forever.
(The following was added Feb. 24th, 2014)
The rules are slightly different with regards to distributions paid out of Master Limited Partnerships (MLPs). These distributions are not the same as dividends traditionally paid by US companies. As such, treatment of the withholding tax is not reduced by the tax treaty. Distributions are charged a withholding tax of 35% for all accounts.
Although this can be recovered in non-registered accounts via the FTC, withheld amounts from MLPs in RRSPs and TFSAs will not be recoverable. More information about MLPs and their taxation can be found in MLP Taxation in Canadian Accounts.
Canadian ETFs Holding U.S. Stocks
If all of that seems pretty straight forward, good because the rules are different for Canadian-listed ETFs holding US stocks. These seem to be most popular among Canadian investors who want exposure to American companies. In a non-registered account, nothing changes and you can claim the foreign tax credit to recover the withholding tax.
However, tax will be withheld on dividends payable in both a RRSP and TFSA. Withholding tax will not be waived for RRSP containing Canadian-listed ETFs holding US stocks since the withholding tax was paid by the fund and not directly by you. As a result, in both the RRSP and TFSA, the 15% withholding tax will not be recoverable.
Table-1 below summarizes the differences between US stocks and US-listed ETFs holding US stocks (A) and Canadian-listed ETFs holding US stocks (B) in a non-registered account, RRSP and TFSA.
How the Dividends Are Taxed
|Dividend income received||$100||$100||$100||$100||$100||$100|
|Tax withheld||$15||$15||$0 (waived)||$15||$15||$15|
|Claim with foreign tax credit||$15||$15||$0||$0||$0||$0|
|Net income (before tax)||$100||$100||$100||$85||$85||$85|
As you can see from Table-2, from a withholding tax perspective, it is more advantageous to put categories A and B in non-registered accounts and just category A in a RRSP. But it is important to take a look at the big picture. Foreign dividends do not benefit from the dividend tax credit and is treated like income when it comes to taxation in a non-registered account. RRSPs and TFSAs still benefit from tax-sheltering of distributions which can be reinvested automatically. Don’t base your decision on one factor when there are other more important points to consider.
While this post provides general information on situations involving withholding tax of foreign investments, it does not provide tax advice. Please seek a tax professional regarding your tax obligations.
Brian So, CFP, CHS, is an insurance broker and blogger at briansoinsurance.com . Follow him on Twitter for his musings on life insurance and why the Vancouver Canucks will win the Stanley Cup next season (Seriously).
46 thoughts on “In What Account Should Canadians Hold U.S. Dividend Stocks?”
Great post Brian! You’ve covered the tax implications of U.S. holdings in the various accounts nicely!
Thanks, glad I could contribute!
Good info, especially about TFSA accounts.
That information is not quite right according to CIBC where I maintain my investment accounts, both registered and non-registered.
I figured I would keep my US stocks within the RRSP as that eliminates tax paperwork. Guess what? Not all US stocks are created equal. You can buy a foreign owned company on the a US exchange, such as Royal Dutch Shell, and they will be taxed at 15% regardless of where they are held. This is because they are not a US company.
Also limited partnerships, such as KMP – Kinder Morgan Partnership – a MASTER limited partnership, get zapped at 30% even when held in an RRSP.
So in these cases you might want to consider the more tax efficient place to hold them.
Naturally if you made the mistake like I did, a learning process, an bought within your RRSP you can not just transfer the shares out to a non-registered account. It would be subject to withholding tax as you are de-registering those shares. So best to sell them off and re-invest in a non taxed company. AnEND2 example: JNJ is not taxed.in the RRSP
There is an added level of complexity regarding foreign (non-US) stocks listed on a US exchange, which is why I limited this post to just US companies. Perhaps that will be a topic for another post 🙂
It would have been more specific to say ‘US-listed US stocks and US-listed ETFs holding US stocks’ but I thought that would have been too long. In case there is any confusion, the US stocks mentioned in this post are US companies.
There is a great post by the Canadian Couch Potato explaining withholding taxes including international and US here:
Thanks for the reply Brian.
Yes, it is a little confusing especially for the un-initiated like myself.
I just presumed that if you bought it on a US exchange it was classified as a US stock without realizing that foreign companies can also list in the US.
I wonder how BCE would be treated if you bought it as a US stock instead of buying on the TSX?
So after learning my lesson with RDS (Royal Dutch) I checked out KMP, a nice US company in good part owned by KMI. But I learned that limitied partnerships are once again singled out for “special” tax considerations – 30% for KMP, even worst than RDS. Now this is not all bad as KMP pays a higher dividend than KMI so it almost washes out. But if you really want KMP then it might be more tax efficient to hold it in a non-registered account and claim the taxes paid to the US of A.
I bought the US stocks as a way to try to even out curreny fluctuations. I bought with the Can dollar high – $1.03 and so I got a discount on the purchase price and if our $ depreciates then I get a bonus on the dividends and if I sell it.
Dividends from Canadian companies bought on a US exchange will not be subject to withholding tax. These dividends will also be eligible for the dividend tax credit.
So if you bought BCE on the NYSE, it will be as if you bought it on the TSX, except in US dollars.
I think ADP (Americna Depository Receipts) are traditionally the foreign companies listed on American exchanges- is that correct?
Correct. They are typically more convenient to trade since there is no currency risk and trade during American stock exchange hours
Thanks Richard for the info. I ‘m actually thinking of getting some KMP, or KMI shares for my 2013 RRSP.
I have a question. I’ve been researching portfolio tax efficiency lately and am having trouble making it all click. I suspect that either my understanding of something is flawed, or a lot of the advice is aimed at people who have maxed their TFSA and RRSP contribution room and simply must use unregistered accounts – a problem I can only dream of! I am a recent graduate with student loans who is drawing up a plan to get debt-free (while building some emergency savings) and then start aggressively saving and investing. I’m trying to learn all I can in the meantime. For all intents and purposes, my partner and I each have empty RRSPs and TFSAs.
Would I still want to keep a dividend-paying Canadian stock (or ETF) in an unregistered account? Sure, dividends are taxed more favorably than some types of income. But in a TFSA they would not be taxed at all, correct?
As for a US dividend-paying stock, I understand that you can get the 15% FWT waived in your RRSP… but since that only offers a tax deferral, although I’d save 15% now, I’d be taxed fully on it when I withdraw it. With a TFSA, I’d lose the 15% up front, but never be taxed after that… and I can’t imagine my marginal tax bracket being less than 15% (I’m in Ontario, and I used an online calculator, which calculated that any income above $11k makes my marginal rate 20% or more). So wouldn’t the TFSA save me at least 5%? Or do the compounding benefits from the RRSP (of keeping the 15% in the short term so it can grow) offset it (or make it a much more complicated question)? Or is it not taxed at my marginal rate upon RRSP withdrawal?
Finally, as I’m probably looking at the TD e-series funds when I do start in earnest, would I treat those like ETFs and bonds? i.e. TD Canadian Bond Index like a bond (interest income), TD Canadian Index like a Canadian stock (equity), and TD US Index like a Canadian dividend-paying ETF holding US stocks?
Thank you very much for your assistance, and apologies for the long, multi-part question! I hope it makes sense.
Thanks for your comment. Since you are still building an emergency fund, I would suggest using a savings account for that and perhaps moving it in a TFSA to shelter it from tax. Once you have built up a reasonable amount (3-6 months of your income), you can start building up your investment portfolio. Move your emergency funds out of your TFSA and replace it with your preferred investments. Be careful though, because your withdrawn amount won’t be added back to your contribution room until Jan 1 of next year.
As for what type of investment in what account, generally it is most tax-efficient to put interest generating investments (bonds, GICs) inside registered accounts (RRSP, TFSA) and dividend generating investments (stocks) in a non-registered account because of the dividend tax credit. If you’re only going for Canadian dividend stocks though, put it in a RRSP and TFSA first.
I’ll try to answer the other part tonight, as I am about to go for dinner now.
Great article as always, thanks brian!
“As for what type of investment in what account, generally it is most tax-efficient to put interest generating investments (bonds, GICs) inside registered accounts (RRSP, TFSA) ….”
So the TFSA is considered a registered account? I’ve heard some say it was and others that it wasn’t…?
As for the US dividend stock, it would be most advantageous to put it in your RRSP, since you get a tax deduction, the withholding tax would be waived (1) and dividends would be sheltered from tax (2). Let’s pretend you’re in the same tax bracket when you contributed as when you withdraw to make a fair comparison. In a non-registered account, only #1 would apply and in a TFSA, only #2.
You are correct on the TD funds treatment.
Thank you for answering the question which has baffled me for months. 🙂
Manda interesting point on US div stocks in your TSFA over RRSP.
Seems like you would be better off taking 15% haircut in the TSFA than paying your marginal tax rate to take out US dividends out of your RRSP. Sure you loose out on the 15% compounded dividends over time but if you model that out Im guessing you would still be better off putting in the TSFA.
Imagine in 10 years a +200K (2 people) TSFA account that pays out a sizable dividend to supplement your income at 15% tax, cant do that with your RRSP. Someone correct me if we are missing something.
You’re only looking at having the whole RRSP taxable but ignoring the tax deduction you get when you contribute into it.
Assuming you reinvest your tax refund when you contributed into your RRSP and your MTR at contribution and withdrawal is the same for a fair comparison, the RRSP route is the way to go to maximize your return.
An update to US tax with held on limited partnerships is now 39.6%. So that is more than last year. KMI will pay you approx the same value and I don’t think it would be subject to the withholding tax.
So if you are holding any limited partnership shares in an RRSP the IRS will be very happy you have invested in them
I just received my dividends on KMP and for apprx $193 of dividends I get to keep approx $117
SO if you were to purchase KMP today at an approx div payout of 5.9% you would end up with approx 3.6% in your RRSP which would be less than KMI.
Up to you to decide if that is acceptable and also whether KMP is on the on the upswing, stable or heading down. Also where is the Can $ heading? If it is going down then maybe you keep KMP and make a little extra on the exchange.
AHH! The pleasures of buying and selling shares, exchange rates and unfortnately taxes.
I have a TFSA, RRSP and non registered US Investment account. I wasn’t really clear on the best strategy of US investments. Not sure if i went by gut, but I have a few US investments in my RRSP account, and the rest in my Non-registered US Investment account – none in my TFSA.
I did notice that with US holding tax that keeps when paying dividends; glad to hear that we are able to claim this on foreign tax credit. Do we have to keep track of these ourselves or does your self investment broker send you a tax slip in February that summarizes everything?
Your discount brokerage should send you a T5 that summarizes your foreign dividend income
I’m actually pretty familiar with US MLP’s – KMP being one of the biggest (and a great investment btw).
MLPs are set up as limited partnerships that sell portions of the company (called units) on stock exchanges. As such, the MLP itself doesn’t pay income taxes, but each year unit holders receive a statement that shows their share of earned income (form K-1). It’s been my experience that most K-1’s show little or no income (and many show negative income). Thus, I’ve paid very little income tax on the MLP units I’ve owned.
The vast majority of MLPs are in the energy industry. Traditionally, MLPs’ assets were the pipelines used to carry oil and natural gas from the well to the refiners, and they were called “midstream” MLPs (oil goes from the well (upstream) through the pipelines (midstream) to the refineries and gas stations (downstream)). In the past few years, many MLPs have gone public for companies whose assets are the wells themselves. These companies are referred to as upstream MLPs.
MLPs make distributions based on their Distributable Cash Flow (DCF). Most investors, including me, think of these distributions as dividends, but you will always see MLPs report on distributions, not dividends.
Given this K-1 tax filing, you need to be careful about holding a large portfolio of MLPs in a tax-sheltered account. This is because some of the MLPs’ taxable earnings may be considered unrelated business taxable income (UBTI), or income unrelated to the primary purpose of your tax-sheltered account.
If an investor receives more than $1,000 in UBTI in his/her tax-advantaged account in one year, the account could owe federal income tax to the IRS, which defeats the whole purpose of housing your investments in a tax-advantaged account. Each tax-deferred account is allowed a $1,000 deduction on UBTI. After that, UBTI is taxable as ordinary income. That tax bite can reduce returns sharply, especially considering the additional taxes you pay when you withdraw the cash distributions from your account on retirement.
That being said many MLP’s (KMP included) have minimal or even negative annual UBTI.
Lastly, other then the significant quarterly distributions (dividends) is that in a RRSP you lose the benefit of Return of Capital. In most MLP distributions ROC is a large part of each quarterly payment you’ll be receiving. Which means while you may receive a $1.00/share distribution for tax purposes it’s only counted as a .40 or .50 payment – on which you pay tax. The difference is used to reduce the purchase price basis for what you paid for the stock. You’ll pay tax when you sell of course, however if you are holding a MLP for years and years you’ve essentially deferred paying taxes on a large percentage of the income you’ve been previously receiving. It’s a good deal.
Bottom line. Yes, you can own US MLP’s in your RRSP. You will be filing a US tax return – not an easy one. To maximize the benefits of being a limited partner you’re better off keeping these kinds of stocks in your TFSA or regular cash account. Personal preference – anything less then $100K invested in MLP’s the hassle is not worth it as many MLP’s have ‘corporation’ type stocks (KMI,KMR, SE, WMB) that are treated the same as any other US stock.
Thank you, very thorough! 😉
Definitely not in the TFSA I would think, since you would not be able to claim back the FTC (Foreign Tax Credit) in a registered account.
You mention filing a US return…….is that an option for a Canadian? I hold EEP (enbridge energy partners) in my RRSP. If the distribution is my only US income would filing get my tax back? Thanks.
This is something you should ask your accountant. 😉
Hi Dividend Ninja, Brian
Great post found this while investigating putting US dividend stocks in TSFA.
A bit confused why losing the FTC is such a bad thing in the TSFA, when comparing to a non-registered account.If i have a US dividend paying stock that pays 100$ US in my TSFA, that would mean I would get 85$ US income net in the TSFA.
In a non-registered account I would get the full FTC, but I would be then tax on that amount as regular income which is greater than 15%.
So I would be better to keep the US dividend stock in the TSFA despite losing the FTC.
Hi Kevin, thanks for the comment.
While it is generally more advantageous from a tax perspective to hold US dividend stocks in a TFSA as opposed to non-registered account, if you have other investments that generates interest (bonds, GICs, savings), it’s a better idea to put those into a TFSA than US dividend stocks. This is because of preferential tax treatment of capital gains in non-registered accounts.
Good point. Thank you for your quick reply and comments.
I didn’t think about that.
I had this exact question, just trying to make sure I am understanding this correctly…
I would want to keep US dividend paying stocks in my TFSA as opposed to a non registered account, unless I had Canadian dividend stocks that could take the place of the US ones in the TFSA, because of the favourable tax treatment for CDN stocks in a TFSA, the CDN ones would be better off in the TFSA than a registered?
Please see this post written today by Brian So:
Hi, great post and very timely, with the RRSP contribution deadline for 2012 drawing near.
Here is a question that has been gnawing away at me: would withholding taxes apply for US and International index funds with TD e-series (TD US Index – e (TDB902 and TD International Index – e (TDB911), respectively) held in a non-registered account?
I have maxed out my and my wife’s TFSA and RSP accounts and now find myself with extra money to invest. I plan to max out as much of my non-reg portfolio with Canadian index e-series funds (TD Canadian Index – e (TDB900)), but once I max out my Canadian index allocation, should I put US, International index or neither in my non-reg account?
Thanks in advance for any light shed on this.
Withholding taxes would apply but the FTC can be claimed to offset this.
Scroll to section A
I just read your exchange with Manda, where the topic of TD e-series index funds comes up. It might help to clarify my own previous question She wrote:
You replied, “You are correct on the TD funds treatment.” So, does this mean that because TD US e-series index is a Canadian dividend-paying ETF withholding taxes would NOT apply? Woud this also apply to the TD International e-series index?
Thanks again, I just wanted to be sure I covered the exact point.
For both the TD US index fund and TD international index fund e-series, withholding taxes apply for a non-reg account but the FTC can be claimed. The withholding tax will also apply for the RRSP and TFSA, but the FTC can’t be claimed for these. These are the ‘B’ funds that I mentioned in the article.
Thank you for clarifying this.
Hi Brian, thank you for keeping up on the comments, and answering people’s questions. 🙂
Hi Brian and Ninja 🙂
Very interesting topic!
I hold in my LIRA two hedged to CAD$ ETF: ZQQ (nasdaq) and CHB (high-yield US bonds). From the article I understand that it will be more beneficial for me to sell them and buy instead non-hedged , like QQQ instead of ZQQ and JNK instead of CHB. Is it correct?
The problem that I see here – FX rate. SO, if I hold ZQQ and CHB , 15% will be taken from distribution by company without even notifying me, but if I hold ZQQ and JNK , I need to pay FX rate for buying/selling and for every dividend payment (even twice if I DRIP dividends). Would be holding ZQQ and JNK still more beneficial?
QQQ and JNK would be classified as ‘A’ type investments referred to in my post. So you would get beneficial tax treatment with regards to withholding taxes. As for losing out on the exchange rate, I guess that depends on how often you buy/sell to determine if it is worth it to hold those. Also, if you’re bullish on the US dollar, holding QQQ and JNK may end up earning you a higher return than their Canadian counterpart.
even if you only buy and sell once, still you will be paying twice FX rate if DRIPping shares…most likely it will be still less than 15% withholdomg tax, but also should be taken in consideration…
I just checked yields on ZQQ and QQQ, indeed QQQ has higher yield even though both investing practically into same holdings
Hi Brian, thanks very much for the reply. I’d naively thought that I could keep my TD US and International index fund e-series in my RRSP without withholding taxes. I’ll have to re-jig my allocations, if it turns out that the withholding taxes trump the tax-free growth. That is, in a non-registered account my but dividends will be fully taxed as income, and my capital gains will also be taxable. It’s a fine balance, but ultimately there isn’t much of a choice so it looks like keeping TD US and Int’l eseries in an RRSP might still be the best choice overall, at least for now.
Canadian tax laws are about as Byzantine as it gets.
Hi guys this is my first post here. I am going to be buying SDT tommorrow. In the tradition of John Paul Getty (buy when people are selling). Even with the negative publicity SD still has the contractual obligation to punch “x” # of wells. My question is this. I am going to be picking it up in my TFSA account because it is the only one I currently have funded. At a later date will I be able to transfer it out “in kind” to a non-registered account? Or would I have to sell then buy back in using the new non registered account funds.
Hi Death and Taxes,
I don’t get that question a lot. Usually people ask me if they can transfer in kind from non-registered to TFSA.
I don’t believe you can transfer in kind out of a TFSA, but I think it would be best to check with your broker. Even if you have to sell it in your TFSA and repurchase it in a non-reg account, it would only cost 2 transactions. Actually, if your broker allows in kind transfers out of your TFSA, if you’ve made a capital gain, make sure when you sell your stock in the non-reg that the ACB is the price at the transfer and not the original price at the time of the TFSA purchase in order to reduce the capital gains tax payable.
Hope that makes sense.
Yes it makes perfect sense! I was just wondering as I am going to drip this(I picked it up for 14.27 today, missed the bottom of 14.03 as it was super volatile this morning.) I will figure out what I am going to do once both my and my wife’s RRSP and TFSA’s are maxed within hopefully the next year(18months at the latest). Also I want to see how much if any this stocks distributions will be cut. Last distribution was .65/share. Even if it is halved (which I doubt) I think it is still priced nicely at 14/share. If I still like it in 6months I may increase my position as part of my US. Equities energy sector that I have allotted myself.
Thank you for the help, and thank you for posting everything on this topic! This site is like university for DIY!
According to the appendix of CRA tax bulletin IT-320R3, NASDAQ and Canadian OTC exchanges (including TSX Tier 3), are NOT “Prescribed Stock Exchanges” for the purposes of holding them within tax sheltered accounts, i.e.: RRSP, RRIF, RESP, TFSA.
The penalty for holding securities like AAPL, MSFT, etc. is that you must declare their purchase cost as [taxable] income in the year bought. Unless you expect capital gains over twice the tax payable up front, I suggest that NASDAQ-listed equities need to be held in non-registered accounts.
Also, based on years of participation in the employee stock purchase plan of a US parent company, I believe that the traditional volatility of the Canadian dollar vs the USD makes any US security yielding 3% or less to be a risky buy for an income investor, unless you can buy it when the CAD is (well) above par. The ForEx can wipe out a significant portion of gains and dividend value when (not “if”) it goes against you.
Your right about buying U.S. securities when the Canadian dollar is above or at par compared to the U.S. dollar. This is why buying U.S. securities has been so favorable over the last few years. It’s one of the reasons why Canadian investors have been loading up on U.S. stocks.
I noticed over the last month, my U.S. securities have also made small gains with the rise of the U.S. dollar compared to the Canadian dollar.
Another option, if the U.S. dollar was much higher would be to buy a “currency hedged” U.S. index fund. I was specifically thinking of TDB904 TD U.S. Index Currency Neutral.
The Dividend Ninja
Brian has written an additional post today on “MLP Taxation in Canadian Accounts.”
This will help clarify the taxation issues around MLPs, since they receive differential tax treatment to U.S. dividend stocks:
Hope to clarify this. So I was thinking of taking a position in Royal dutch shell soon given the way oil prices are going.
So with its dividend in my RRSP im ok as long as I buy the RDS.A shares vs the B shares. If I put them in my TFSA I’m going to lose the 15% withholding tax. But in my RRSP I’m safe?
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