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 as per author and investor Herman VanGenderen. Read on!

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.  

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 as far as I know at the time of this post:

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, including the experience of the author and investor above.  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

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.