Dear Nancy Woods,
I just read your February 2015 article in the Globe and Mail with some interest. I purchased some U.S. stocks in 2012 when the Canadian dollar was at par or better than the U.S. dollar. These stocks were held in an RRSP account. I decided to sell the U.S. stocks and then convert the U.S. cash to Canadian dollars, all under the RRSP account. I exchanged at a currency rate of 1.3976. Will I pay tax on the money I made from the currency conversion? What about the dividend income I earned on the U.S. stocks? Will that sit untaxed until I convert to a RIF hopefully at a lower tax bracket some time in the future?
Any transactions you do, including the currency exchange that happens inside a registered plan be it an RSP, RIF or TFSA, is exempt from tax. The dividend income paid from a U.S.-based company is exempt from non-residency tax if held inside an RSP or a RIF. It is not exempt if you own the stock in a TFSA account. Canada has a tax treaty with the U.S. that excludes any dividend from an U.S.-based company from non-residency tax paid into an account meant for retirement purposes. That is why the TFSA is not included. It is not specifically meant to be used only as a source of funds during one's retirement. It is important that for non-registered accounts that Canadian residents sign a W8-BEN declaring that they are a resident of Canada. Filing this U.S. form reduces the non-residency tax from 25 per cent normally charged to 15 per cent.
Once you convert your RSP to a RIF, there isn't any tax implications. It simply is a change of retirement account that once "RIF'd" requires you to take out a minimum amount each year. With the RSP, there is not a mandatory withdrawal amount.
I hope this information helps.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to firstname.lastname@example.org. You can also send your questions to email@example.com.