Taxes on U.S. stocks in TFSAs

Are there withholding taxes on dividends from U.S. stocks in a TFSA?

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From the November 2013 issue of the magazine.

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Photograph by Jennifer Roberts

Q: Am I subject to U.S. withholding taxes on dividends from American stocks or ETFs held inside my Tax-Free Savings Account?

—Alan Drinnan, Toronto

A: Canada gave the U.S. Justin Bieber. In return the U.S. gave Canada some Target stores. Hooray for everyone. But when it comes to tax issues the treaty between our two countries is much more complicated. Unfortunately, you are subjected to withholding tax on dividends from your American stocks when you hold them in your TFSA, according to Dave Walsh, partner in Tax Services at Ernst & Young. The standard withholding tax rate for dividends on U.S. stocks is 30%, but it can be lowered to 15% if you fill out a form called a W8-BEN, he says. (Ask your broker for a copy.) The same applies to ETFs and mutual funds holding U.S. stocks. To minimize the hit, you might consider holding U.S. stocks (or ETFs listed on U.S. exchanges) in your RRSP or RRIF instead, because retirement accounts are exempt from these withholding taxes. It is worth having a tax expert give your portfolio the once-over to ensure you’re holding your investments in the most tax-efficient places.

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