Read this – if you’re investing in U.S. stocks or ETFs
I’m not a perfect investor but there are some very wise things I’ve learned over the years, when it comes to managing my portfolio, and you should know these things as well.
Read this – if you’re investing in U.S. stocks or ETFs!
- Keep U.S. dividend paying stocks and U.S.-listed ETFs in your RRSP
Canadian dividend-paying stocks receive favourable tax treatment from our government; they are eligible for the Canadian dividend tax credit if held in taxable accounts (outside TFSA and RRSP accounts).
U.S-dividend paying stocks and ETFs do not receive any favourable tax treatment from our Canadian government so by keeping those stocks and ETFs inside an RRSP I avoid paying any withholding taxes. Let me summarize those tax implications:
- U.S. stocks and ETFs held within RRSP or LIRA or RRIF = no withholding taxes.
- U.S. stocks and ETFs held within RESP or TFSA = pay 15% withholding taxes.
- U.S. stocks and ETFs held in non-registered accounts = pay 15% withholding taxes (which is recoverable).
U.S. stocks held inside a TFSA are not eligible for the foreign income tax credit either.
My approach: I only hold U.S. listed stocks and ETFs in my RRSP. See point #2.
- Delay putting U.S. dividend paying stocks and U.S. ETFs in your TFSA
You have read above that U.S. stocks and ETFs held in registered accounts but accounts not designated as “retirement accounts” in the eyes of the U.S.-Canada Tax Treaty are subject to withholding taxes.
However consider this: delay putting your U.S. stocks or ETFs inside your U.S. dollar TFSA. If you find out your tax rate in retirement is greater than 15%, then I believe there is a tax advantage to be had keeping U.S. stocks or U.S. ETFs inside the TFSA.
My approach: I will consider this approach myself, after my RRSP room is maxed out, with mostly U.S. assets; I will consider using the TFSA for U.S. equities in the decades ahead. For now, I will only own Canadian equities inside the TFSA.
- Consider the implications of owning Canadian listed funds that hold U.S. stocks and U.S. ETFs
Instead of worrying about currency exchange rates to buy U.S. stocks or ETFs (from your Canadian contributions), you can own Canadian listed funds that hold U.S. stocks or ETFs. In doing so consider the following:
For a Canadian ETF (example VFV) that holds a U.S. ETF (VOO, a S&P 500 Index Fund), VFV in a taxable account will have withholding taxes applied (15%) but they are recoverable when investors file their tax returns. In an RRSP or TFSA withholding taxes apply and you cannot claim a credit for this.
So, if you don’t have much to invest yet (say under $50,000?) then it might be best to invest in a Canadian ETF (that holds U.S. stocks and simply pay the higher MER accordingly). You’ll avoid currency exchange rate headaches from Canadian to U.S. assets while getting some much needed diversification for your portfolio.
On the contrary, maybe you have a bundle to invest – so it might be best to invest in a Canadian ETF that holds U.S. stocks to avoid U.S. estate taxes. U.S. estate taxes is a complicated beast I won’t get into today because of the complexities involved and more importantly I’m not fully versed on this (yet) – so if you’re looking to protect that huge estate, and keep the IRS away from your wallet, go with Canadian-listed funds to hold your U.S. assets.
Is it worth owning U.S. stocks and ETFs at all?
There are some great advantages in owning some U.S.-listed ETFs over those Canadian-listed ETFs.
- They are often cheaper, especially for international and emerging markets. (Meaning, it’s not unusual for the Canadian versions to have management fees that are twice as high as their U.S. counterparts.)
- They are more tax-efficient. See above. U.S. and international stocks are subject to a withholding tax on dividends. If you hold U.S. or international stocks using a Canadian-listed ETF, these withholding taxes are lost in an RRSP. However, U.S. securities held in an RRSP are exempt from withholding taxes, thanks to a tax treaty between the two countries.
Read this – if you’re investing in U.S. stocks or ETFs summary
Bottom line: if you use U.S.-listed ETFs for your foreign equities in an RRSP you may be able to reduce or eliminate this tax drag.
For the most part, when in doubt, consider sticking to using Canadian-listed ETFs. This is probably always the case for TFSAs, RESPs and taxable accounts.
There are still advantages to using U.S.-listed funds in your RRSP, but only if you are able to convert your currency to U.S. dollars at a low rate and avoid trading stocks or ETFs in the process.