Q: I have a TFSA and have read a lot about investing within a TFSA, but one area is still a question mark in my mind— investing in equities or funds that are on an exchange from outside of Canada or equities that are listed on the TSX or Venture exchanges but have out-of-country holdings. So my question is:
What would be the tax be implications to a TFSA be, if any, for the following scenarios?:
- An equity listed on a U.S. stock exchange that doesn’t pay a dividend
- An equity listed on a U.S. exchange that pays a dividend
- An American Depositary Receipt (ADR) that doesn’t pay a dividend
- An ADR that pays a dividend
- An equity listed on Japan or European exchange that doesn’t pay a dividend
- An equity listed on Japan or European exchange that pays a dividend
- An equity listed on a Canadian exchange that has all or part of the company holdings in the U.S. and doesn’t pay a dividend
- An equity listed on a Canadian exchange that has all or part of the company holdings in the U.S. and pays a dividend
- An ETF listed on Canadian exchange that has all or part of the company holdings in the U.S. and pays a dividend
- An ETF listed on a US exchange that pays a dividend
- A Canadian mutual fund company’s global fund
A. Wow, that’s a detailed question, Chris. Check the TFSA Guide and you’ll see the list of TFSA “permitted investments” which include cash, mutual funds, securities on a designated stock exchange, GICs, bonds, and certain shares of small business corporations.
The guide defines a “non-qualified investment” as any property that’s not a qualified investment. (Very helpful.)
So, are the investments you’re considering listed on the approved list of designated exchanges? If so then you’re good as long as they remain listed. If an investment becomes delisted and moved to over-the-counter (OTC) then it no longer qualifies, with the exception being Canadian public companies, which can become OTC and still be considered a qualified TFSA investment.
When you contribute foreign funds to a TFSA the value will be converted to Canadian dollars and that value will be used to calculate the amount of the contribution. Watch your exchange rate calculations because if you are off, you’ll run the risk of making an over-contribution and facing a penalty.
Also, dividend income from a foreign country may be subject to foreign withholding tax. For example, dividend income from a U.S. investment will be subject to 15% withholding tax.
Consider your situation. Would a U.S. dividend-paying investment make more sense in your RRSP, RRIF, or open account, where you can recover the U.S. withholding tax?
The penalty for holding a non-qualifying investment is a one-time tax equal to 50% of the fair market value of the investment at the time of purchase, or when it became non-qualified. Expensive!
It is possible to have the penalty, or one-time tax, refunded, which you can read about on page 20 of the aforementioned TFSA guide, but don’t put yourself in that position.
Chris, in my opinion, there are enough well-qualified investments in the Canadian marketplace that you don’t need to risk a penalty by accidentally placing a non-qualifying investment in your TFSA.
Allan Norman is a Certified Financial Planner (CFP) and Chartered Investment Manager (CIM) with Aligned Capital Partners. You can reach Allan at [email protected]. This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers investment advisory services and products through ACPI.
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