Expert Q&A: Investing U.S. Dollars

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Question: When considering tax rates on investments what is the best plan for investing U.S. dollars (registered, non-registered, or TFSA)? – Michèle W.-B.

Gordon Pape answers: There will be some taxation no matter what you do. Let’s look at the three alternatives.

Registered retirement plans (RRSPs, RRIFs, etc.): If you put your U.S. securities in these plans, there is no withholding tax on dividends and capital gains are tax-free. But when the money is withdrawn, it will be taxed at your full marginal rate. The advantage is that you will enjoy years of tax-sheltered growth. But in the end, this option attracts the most tax because there are no breaks of any kind when the money comes out of the plan.

Non-registered accounts: You’ll be hit with the 15% U.S. withholding tax on dividends but you can recover some or all of that by claiming a foreign tax credit. U.S. dividends will be taxed as ordinary income at your marginal rate. Half of any capital gains will be taxed at your marginal rate but the rest are yours to keep.

TFSAs: Because they are not considered to be retirement plans, U.S. dividends paid into TFSAs are subject to a 15% withholding tax and there is no way to recover that. So in this sense at least, a Tax-Free Savings Account is not tax free. The good news is that the 15% withholding on dividends is the only tax you’ll ever pay on your American investments. So when everything is taken into account, the TFSA is the most tax-effective way to hold U.S. securities.

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