Readers of my site likely know by now I’m a fan of investing in dividend paying stocks and indexed Exchange Traded Funds (ETFs) to fund my financial freedom.
I invest in dividend paying stocks for a few key reasons:
- I like it when companies pay me money every month or quarter,
- In many cases, these companies increase their dividends every year, providing some inflation protection, and
- In a non-registered account, the Canadian stocks I own qualify for the dividend tax credit.
I invest in indexed ETFs for a few key reasons:
- To achieve market performance less minuscule money management fees,
- To provide great diversification, beyond Canadian stocks and ETFs, and
- To somewhat “set and forget” part of my retirement portfolio.
Beyond my Canadian dividend paying stocks, I also hold a few U.S. dividend paying stocks but only in my RRSP. The TFSA is OK for U.S. stocks and U.S.-listed ETFs but not an ideal location since any dividends received from these U.S. investments get hit with 15% withholding taxes in the TFSA and cannot be recovered. This brings me to my investing rule of thumb about foreign investments:
I hold investments that attract the most tax, including all my foreign investments that pay dividends, inside my RRSP. I do this to defer taxes for as long as I can.
Thanks to a reader question, I’ll cover a few tax considerations associated with holding U.S. stocks or U.S. ETFs outside registered accounts today.
First, popular investments that attract the most tax are as follows: cash, Guaranteed Investment Certificates (GICs), money market funds, individual bonds and bond ETFs, and foreign stocks that pay high dividends. This means you should consider keeping those investments inside registered accounts.
Second, popular investments that attract the least tax are as follows: Canadian stocks (dividend payers and non-dividend payers), Canadian ETFs, and foreign stocks and foreign ETFs that pay little to no dividends. Since these investments don’t attract very much tax, these are your main investing choices outside registered accounts.
Where should you hold your U.S.-listed investments? I cannot answer that question for you but maybe you should consider asset allocation in your decision-making. If your registered accounts like the RRSP and TFSA are maxed-out (well done by the way), and these accounts already have a healthy dose of fixed-income products that attract the most tax, then you could consider holding U.S. securities non-registered. If you decide on that be aware U.S. investments held in a non-registered account are hit with withholding taxes but you can claim a credit for that when filing your annual tax return. You can read more about Federal Foreign Tax Credits here thanks to Canada Revenue Agency. Keeping U.S.-listed investments outside registered accounts like the RRSP and TFSA simply makes things a bit tricky, tax-wise so consider consulting a tax professional before doing so to ensure this is an effective strategy for you. You can read more about making some smarter asset location decisions here on Dan Bortolotti’s site.
For my account, I will continue to hold U.S. stocks and U.S.-listed ETFs in my RRSP and will only consider holding U.S. securities in other accounts at the time of retirement.
What account do you hold your U.S. stocks or U.S.-listed ETFs?