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investor clinic

By parking your stocks in your RRSP, you can eliminate the pain and confusion associated with looking up exchange rates and calculating gains and losses.Susana Gonzalez/Bloomberg

For the past two weeks, I've been discussing the, um, joys of tracking currency exchange rates and determining capital gains and losses on U.S. stocks. Based on the feedback I received from readers, this is one of those tasks that, on the pleasure scale, ranks right up there with plucking nose hairs.

Well, guess what folks: There's an easier way to own U.S. stocks. The method I'm about to show you will not only relieve the pain and confusion associated with looking up exchange rates and calculating gains and losses, but it will also eliminate taxes on your U.S. stocks.

The solution? Keep them in your RRSP.

I've never held a U.S. stock anywhere but in my registered retirement savings plan. As an investor, and as a human being in general, I like to avoid extra work when possible. I also enjoy saving money. Keeping U.S. stocks inside my RRSP accomplishes both of those goals.

Let me explain.

With an RRSP, there are no taxes on capital gains, so there's no need to track your adjusted cost base (ACB) or to calculate your proceeds when you sell a U.S. stock (or any stock for that matter). If you hold your U.S. shares in a non-registered account, on the other hand, you'll need to calculate your ACB and your proceeds – both in Canadian dollars – to determine your capital gain or loss when you ultimately sell.

Another benefit of RRSPs is that there are no taxes on income, so your dividends from U.S. stocks will be tax-free. Not so in a non-registered account: Because U.S. dividends do not qualify for the Canadian dividend tax credit, they will be taxed at your marginal rate, just like interest or other income. Moreover, in a non-registered account, most U.S. dividends are subject to a 15-per-cent withholding tax. You can usually recoup this amount by claiming a foreign tax credit against your Canadian taxes but, again, that involves work.

RRSPs aren't the only accounts with advantages when it comes to U.S. stocks. Under the Canada-U.S. tax treaty, accounts that provide pension or retirement income – including RRSPs, registered retirement income funds (RRIFs) and locked-in retirement accounts (LIRAs) – are exempt from U.S. withholding tax, so the entire U.S. dividend will land in your account. Tax only comes into play when you make withdrawals from these registered plans.

Many investors assume that tax-free savings accounts (TFSAs) and registered education savings plans (RESPs) are also exempt from U.S. withholding tax, but that's not true. Because TFSAs and RESPs are not specifically for pension or retirement purposes, U.S. dividends received in these accounts are still subject to withholding tax. What's more, you can't claim the 15-per-cent U.S. tax withheld as a credit on your Canadian return; that money is gone. But at least you won't pay any further tax on the U.S. dividends.

Let me stress: If you already hold U.S. stocks in a non-registered account – or in a TFSA or RESP – there's no reason to panic. People's tax situations vary, as does their tolerance for plugging numbers into their tax software, so what works for me may not work for you.

Another factor to consider is the type of U.S. stocks you own. For example, if a U.S. company pays only a modest dividend – consider Starbucks, which yields 1.4 per cent – you might actually be better off leaving it in a non-registered account and using your finite RRSP room to shelter a higher-yielding Canadian (or U.S.) stock in order to maximize your tax savings. Determining the optimum location for stocks in your portfolio is a complex process that involves a variety of factors – including tax rates, yields and expected returns.

I like to keep things as simple as possible. If I can eliminate taxes on my U.S. stocks and reduce headaches at the same time, those are two compelling reasons to keep them in my RRSP.