Dear Nancy,
I have been really enjoying your columns - keep up the good work. I want to buy some U.S. stocks for my TFSA to take advantage of the strong loonie, but I've heard that I may still have to pay tax on their dividends. If this is the case, should I stay clear of them altogether and just buy Canadian? And what type of investments do you most recommend for TFSAs overall? Signed, Mildred
Dear Mildred,
Income from a U.S.-based company is subject to non-residency withholding tax for investments held in any account other than an RRSP or RIF account. Canada has a tax treaty that excludes the withholding tax for only accounts that are meant for retirement purposes. That means that the TFSA is not included since it could be used for reasons other than specifically retirement.
Ideally, if you are going to invest in American companies the first place to hold them is within a registered account. Otherwise, be prepared to have 15 per cent of the income taken to pay to the US government.
Be sure to sign a W8-BEN form to declare yourself a Canadian resident, otherwise the withholding tax will be 30 per cent.
As for a type of investment for a TFSA, if you need to increase your bond/GIC/stripped coupon portion of your asset mix, then be sure to put these interest bearing investments in the TFSA or a RRSP/RIF. That will shelter them from taxation. If you are going to buy a growth stock that you are planning on holding for the long term, then, buy them within the TFSA.
This is the type of account that is ideal for an index ETF that you would own with a buy and hold strategy. Even consider part of your contribution plan to continue to add more shares each year. You will be surprised at the amount of wealth you will accumulate.
Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment advisor with RBC Dominion Securities Inc. To ask her a question, send an e-mail to asknancy@rbc.com or visit her web site at nancywoods.com
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Nancy Woods