Get U.S. income from British ADRs tax free

Get U.S. income from British ADRs tax free

The best things in life are said to be free.

The second-best things in life when it comes to investing are tax free.

In a recent post on my site, I told readers they can get some healthy U.S. dollar income from owning Canadian stocks.  Any why not…?!  The benefits are a plenty.

Benefits

Holding Canadian stocks that pay U.S. dollar dividends, in a taxable account after your RRSP is full, is a good way to generate ongoing U.S. income for any foreign travel.  While Canadians earning U.S. dividends in their non-registered account (taxable account) will have 15% withholding taxes deducted, they can recover that withholding tax by filing for a foreign tax credit (upon filing their tax return).

Even if you don’t take any U.S. dividends in cash for spending purposes, regardless of the account held, you can let those U.S. dollars earned accumulate over time.  Saved up U.S. dollars can be used to invest in more U.S. stocks or ETFs.

You can also build up the U.S. cash and then convert it to Canadian dollars when the CDN-U.S. exchange rate might become more favourable.  I do a combination of these things in my portfolio.

Well, similar benefits can apply to owning British American Depository Receipts (ADRs) – that pay dividends in U.S. dollars.  Even better, you can earn tax free U.S. dollar income from owning British ADRs.

Wait, what is an ADR?

This means you can purchase shares in a foreign company through a U.S. stock exchange (e.g., NYSE). By buying an ADR you are indirectly buying the underlying shares listed in the company’s home country.

Tax implications inside the TFSA

Unlike holding U.S. stocks or U.S.-listed Exchange Traded Funds (ETFs) inside the U.S. $$ portion of your Tax Free Savings Account (TFSA), whereby 15% withholding taxes apply on your U.S. dividends paid, British ADRs are not subject to any withholding taxes inside your TFSA – you get the full meal deal with your dividends.

This is an approach that author and investor Herman VanGenderen practices and highlighted throughout his book – an interview here on my site.  I reached out to Herman to get this thoughts:

Yes, as outlined in my book, “Stocks for Fun and Profit ~ Adventures of an amateur Investor,” I am a big believer in international diversification, but don’t like when foreign governments keep 15% of my dividend income. I do my best to avoid these taxes. The UK doesn’t withhold any taxes on dividends paid to Canadians in any type of account, whereas the US only waives these taxes on retirement accounts. Therefore, having the international portion of a TFSA invested in UK stocks, works well in conjunction with an RRSP that holds US companies, entirely avoiding these nasty taxes.  

If however the TFSA is your only account, I think some US exposure is necessary as outlined in my blogpost, “Sorting through the Mumbo Jumbo.” If this were my situation, I would select US blue chip companies with lower dividends so that corporate success manifests as capital growth rather than dividends, once again reducing portfolio drag from withholding taxes. Berkshire Hathaway would be a terrific US company for a TFSA, if it’s your only account.

Some might be concerned about the effect of Brexit on UK holdings. While it’s impossible to know how it will turn out, I think the current drama around Brexit is already factored into UK stock pricing. The companies mentioned below tend to be large international companies further reducing Brexit risk. The UK market is currently trading at a discount to the US market on both a price to book, and price to earnings ratio.

As well, the British Pound has been as weak as the Loonie, relative to USD. A confusing item to understand is that while you are transacting in US dollars, you are really buying UK stocks in British Pound values. Therefore don’t worry about the strength of the U.S. dollar, it’s the price change of the stocks purchased, and any change in CAD to Pound that will impact your returns in CAD. The beauty of U.S. based ADRs like Mark’s list below is the simplicity of buying on U.S. exchanges, which all internet brokers allow.

Lots of details there to consider but if you made it this far here’s a toast to you with one of Diageo’s fine products. A Johnnie Walker perhaps! It’s one of my favorites on the list, and has performed well in my TFSA. Right then, I’m off…

Great stuff Herman.

Like Herman, I’m not a fan of withholding taxes.

So, for now, I keep my Canadian dividend paying stocks in my non-registered account and TFSA.  I keep my U.S. equities/dividend paying stocks inside my RRSP.  You can read more about what I invest where on this page.  I am considering putting some British ADRs inside my TFSA for 2019.

There are lots of great things to do with your TFSA (for more than a savings account) here.

Here is my list of some selected British ADRs that can be bought on an U.S. exchange, put in your TFSA, to pay out the full dividends in U.S. dollars:

COMPANY US

SYMBOL

Payment FREQUENCY
AstraZeneca AZN:US Semi-Annual
Barclays BCS:US Semi-Annual
BHP Billiton BBL:US Semi-Annual
BP BP:US Quarterly
BT Group BT:US Semi-Annual
Diageo DEO:US Semi-Annual
GlaxoSmithKline GSK:US Quarterly
HSBC HSBC:US Quarterly
Intercontinental Hotels IHG:US Semi-Annual
Lloyds LYG:US Semi-Annual
National Grid Transco NGG:US Semi-Annual
Pentair PNR:US Quarterly
Rio Tinto RIO:US Semi-Annual
Royal Bank of Scotland RBS:US Semi-Annual
Royal Dutch Shell – B Shares RDS-B:US Quarterly
Smith and Nephew SNN:US Semi-Annual
Unilever UL:US Quarterly
Vodafone VOD:US Semi-Annual

Disclosure:  I do not (yet) own any of these companies above.  These are not recommendations for purchase.  Dividend information and tax information above is based on my own research and experiences.  It is not professional advice.  Before making any major investment decision all investors are advised to complete their own research, ensuring decisions are aligned to their goals and risk tolerance.

Any discrepancies in the table above, specifically, are appreciated via comments and sources for your data; to keep this post current and accurate for all. Thanks!

What are your thoughts on this approach when it comes to investing?  

Mark Seed is the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio to over $500,000 - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement. Subscribe and join the journey!

20 Responses to "Get U.S. income from British ADRs tax free"

    1. Just what Herman said David. As easy as you buy a CDN stock or U.S. stock, you can use your existing discount brokerage to buy the British ADR that is listed on a U.S. stock exchange (e.g., NYSE). Before any purchase however, for any asset, please do your own due diligence and confirm how any trade/buy/sell might be handled with your brokerage. They are usually just a phone call away!

      These are not recommendations for purchase but rather posts for information purposes. Thanks for being a fan.

      Reply
  1. Good summary Herman.

    Seems like a worthy idea Mark, especially if you’re less interested in investing more broadly internationally in an ETF. The semi annual nature of some payers is different but a minor issue.

    I would hold all those co’s in small amounts in VXUS. In my IDV etf UK represents 25% of holdings 19 of 98. Of those on your ADR list and in IDV I see AZN is largest holding (6.5%) yield 3.48%, RDSA 4th y6.38%, GSK 7th y5.27, then further down the list NGG y5.93, BP y6.09, HSBC y6.11, BT y6.07, VOD y8.82. Some big payers, but didn’t do anymore digging than that!

    Reply
    1. Yeah, looking at IDV you have a number of British ADRs in there near the top:

      AZN ASTRAZENECA PLC Health Care United Kingdom 6.13 253,115,990.73
      MQG MACQUARIE GROUP LTD DEF Financials Australia 4.28 176,897,695.38
      CBA COMMONWEALTH BANK OF AUSTRALIA Financials Australia 3.24 133,817,525.72
      RDSA ROYAL DUTCH SHELL PLC Energy United Kingdom 3.00 123,898,641.77
      SALM SALMAR Consumer Staples Norway 2.61 107,908,587.08
      GFRD GALLIFORD TRY PLC Industrials United Kingdom 2.11 86,991,286.49
      GSK GLAXOSMITHKLINE PLC Health Care United Kingdom 2.06 85,042,870.41
      CM CANADIAN IMPERIAL BANK OF COMMERCE Financials Canada 2.02 83,307,113.00

      I don’t really like the P/Es of GSK and AZN but long-term I see these as cash cows and I suspect I could be rewarded. I dunno. Decisions and decisions for 2019!

      Reply
  2. I had DEO for quite a while in my RRSP and sold it last year. Very regretted I sold it. There was no withholding tax but a very small fee. I checked last April I got $77.4 dividend and $0.66 fee. I also had MMP for a while in my RRSP, this one had a NR Tax Withheld which I don’t know exactly what it is. Anyway, I got $93.75 dividend, but $34.69 deducted. So I just sold it.

    Thanks for the list. Definitely worth to consider.

    Reply
  3. Hi Mark,
    Good comments. Another one that should be on the list is BTI:US (British Tobacco). They bought out Reynolds last year. One thing of note is that there is a small ADR charge from the processing bank, usually a couple of cents per share.

    Cheers,
    MG

    Reply
  4. Hey Mark,
    Great work and thanks for bringing these ideas to pur attention. This article is TFSA focused but is it safe to say the same tax saving would benifit a regular taxable account without NR fees of any sort?
    Cheers,
    JB

    Reply
  5. love this post mark.

    ive always wondered how to buy uk stocks in a tfsa. Now i know.

    azn or gsk maybe nice diversification since canada doesnt have good healthcare companies with dividends. (havent looked into them)

    Unilever would be great, but aren’t they debating switching to a german exchange? They are one i would deifnately consider, as we use alot of their products.

    cheers and thanks!

    Reply
    1. Indeed, now you know 🙂 Not tax advice of course but at least a starting point to consider how to get more U.S. income from British ADRs, considerations for RRSP USD $$ income, etc.

      Thanks for being a fan and all the social media support.
      Mark

      Reply
    2. UL was considering moving to the Dutch exchange but for now is staying in the UK (at least my latest understanding). But even if they move, Holland is planning on eliminating dividend withholding taxes, I think in 2020. However, I always test the waters a bit to see if it applies to me before going whole hog, as tax plans and politics can change. I own RDS.A (the Dutch listing) in my non-registered account so will know when the WH taxes are no longer applicable, which will green-light Dutch listings for our TFSA’s.

      Reply
  6. I have bought 400 shares of BPY.UN today in order to increase my USD dividend income. With CAD so low, I am not sure now it’s a good time to exchange CAD to USD so that I can buy US or UK stocks. That’s why keeping eyes on CA stocks that I can buy in CAD and still get USD dividends.

    Reply
    1. Wise on the currency perspective. Also the ~52 wk. low for BPY buy looks to be a decent opportunity too.

      I have more USD income than needed and periodically gambit this to CDN. ideally when advantageous- recently and probably more in early in 2019.

      Reply
      1. Big fan of the BPY to BPY.UN or vice-versa gambit. CDN stocks that pay dividends in USD $$ are great for that.

        I will likely buy more of VYM + Brookfield companies in 2019. The best of both worlds.

        Reply

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