# non-dividend-paying foreign stocks in TFSA



## vaughn (Mar 29, 2015)

Hi,

Still on my quest trying to figure out how to invest in my TFSA. I was under the impression that no US stocks should be put in a TFSA since they are subject to a withholding tax to the US or whatever government they are issued under. However I have been reading more information on this recently stating that you can actually put US stocks in your TFSA without any taxation issues, providing they are growth stocks and non dividend papyingstocks. May I ask if this is true?

If this is true is there a way to discern if an ETF is strictly a growth stock and not paying any dividends?

Frankly I am finding it difficult to invest anything in a TFSA as most products are recommended for RRSP or non registered. So far all I have are Canadian bonds (which are not recommended due to higher interest rates, Cdn stocks (many in depression) & REITS.


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## Moneytoo (Mar 26, 2014)

Why do you worry about withholding taxes so much? If you buy 10K worth of stock or ETF that yields 1.5-3% (quite average), the 15% withholding tax will be $22.5-$45/a year (automatically deducted, so you don't need to do anything)

In my husband's TFSA, we have almost equal amounts of ZCN (Canadian equities), VFV (US S&P 500 equities) and XEF (international developed countries equities). Their current yields (according to Questrade) are 2.73%, 1.87% and 0.82% respectively. The yields for US and international ETFs reflect withholding taxes deducted from the ETF (i.e. you're just getting a bit less in dividends than if you held a USD ETF in RRSP or non-registered account)

Or you can just buy stocks like Google (that don't pay dividends )


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## 0xCC (Jan 5, 2012)

The withholding tax only applies to dividends from foreign stocks so if you are investing in non-dividend paying stocks the withholding tax isn't an issue.

The advice about not holding dividend paying foreign stocks in a TFSA is really just an optimization. If you have other accounts (RSP is the first choice but non-registered is also an option) and are able to hold the same stock in either the TFSA or the other accounts it is preferable to hold the stock in an account other than your TFSA. This is because as Moneytoo points out, you can save that little bit of money each year. In and RSP this amount will never be withheld and in a non-registered account you will be able to claim the foreign tax withheld as part of your Canadian income tax return and get credit for it (so you don't pay tax twice). In the TFSA neither of these things are true.

If the TFSA is the only investing account you have then you should be more concerned about your overall allocations/investing strategy then whether you are giving up a small portion of your return in withholding tax. If you eventually open other investing accounts you can re-evaluate which investments should be in which accounts.


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## Eclectic12 (Oct 20, 2010)

vaughn said:


> ... Still on my quest trying to figure out how to invest in my TFSA.


I'm not sure I'd sweat it too much compared with deciding what investment to buy. As I understand it, the worst case for Canadian residents who are in Canada is that a foreign country like the US takes a withholding tax off of any dividends paid. 

If one adds it up, it's probably not a ton as a lot of the total gain tends to be from the share price and the amount taken from the smaller dividend return will be small. As an example, for a US stock pays $3 dividends per share - the US 15% withholding tax is going to be $3 x 0.15 = $0.45 per year. 




vaughn said:


> ... I was under the impression that no US stocks should be put in a TFSA since they are subject to a withholding tax to the US or whatever government they are issued under.


Depends on whether the foreign country has a dividend withholding tax (the US does at 30% for a foreigner) and whether there is a treaty that reduces or eliminates the withholding tax (the Canada - US treaty reduces the 30% to 15% but unlike the RRSP, does not eliminate it).




vaughn said:


> ... However I have been reading more information on this recently stating that you can actually put US stocks in your TFSA without any taxation issues, providing they are growth stocks and non dividend papyingstocks. May I ask if this is true?


Yes ... no dividends being paid means there is no US withholding tax to pay. 




vaughn said:


> ... If this is true is there a way to discern if an ETF is strictly a growth stock and not paying any dividends?


Go the to the ETF web site under the investor section and look for the section that lists what the distributions are made up of ... if it includes "dividends" then that part will be subject to the withholding tax. 




vaughn said:


> ...Frankly I am finding it difficult to invest anything in a TFSA as most products are recommended for RRSP or non registered. So far all I have are Canadian bonds (which are not recommended due to higher interest rates, Cdn stocks (many in depression) & REITS.


Tax free is better than taxed so I'm not sure why one would worry too much about what to buy. 

Some will say that a Canadian stock that pays eligible dividends so that the dividend tax credit (DTC) can be claimed is better in a taxable account. The tax advantages are that the taxes on the dividends will be lower plus the capital gain from selling can be deferred until stock is sold. YMMV as the bulk of the gain could be the share price so losing the DTC may be a drop in the bucket.

For example, where one bought Enbridge five years ago - the dividends paid are roughly $9 but the gain from the shares is $30. One loses the DTC to reduce the tax on the dividends paid but since it is the smaller gain - IMO it's not worth worrying about. 

Then too, there's no tax implication to selling ... so if one thinks the market in general is falling (ex. mid-2008) - one can sell part/all near the high and possibly buy back at a lower price. I did this with Agrium where I sold 2/3 about $100 and bought back less than a year later for $50.


Cheers


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## Eclectic12 (Oct 20, 2010)

I should add that IMO, REITs are the investment it's worth checking out carefully.

For example ... when one looks at RioCan's distributions from a tax perspective, somewhere from 33% to 70% of what is paid will be taxed as income, at the highest rate. IMO, this should be in the TFSA (or RRSP). Something like Chartwell Retirement Residences that pays 60% to 100% return of capital (RoC) should be in a taxable account. While the adjusted cost base (ACB) is zero or positive, the cash paid is tax deferred so there is no income to report. Even where the ACB becomes negative and the RoC has to be reported to be taxed yearly ... it is taxed at the tax preferred rate of a capital gain.

The down side of holding the REIT in a taxable account is that there is bookkeeping required (RoC being paid means reducing the ACB, DRIPs or buying more units means increasing the ACB). Some don't like the bookkeeping so they will put the REIT into the TFSA to avoid it. Where one has become familiar with what's required and has a system setup, the bookkeeping can be as little as an hour a year.


Cheers


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## Toronto.gal (Jan 8, 2010)

Eclectic12 said:


> I'm not sure I'd sweat it too much compared with *deciding what investment to buy. *


Indeed.

Like in any other account, taxable/registered or not, the strategy should be spreading the risk accordingly. 

There are no short-cuts. Keep in mind also that growth stocks are riskier, and whatever is lost forever, can't be recovered in a TFSA as account is tax-free, so can't claim capital losses [ditto in RRSP].

With respect to foreign stocks, there are British and other dividing paying ADRs that have no withholding tax. You can find/learn a ton more information about your questions by searching the forum.


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## vaughn (Mar 29, 2015)

Thank you very much for all the information.

So, if my TFSA had ETF's of the following:

25% short term CAD bonds 
25% preferred CAD shares paying dividends
25% CAD REIT's
25% CAD growth stocks

Does that sound reasonable? This is where 50% of my investments would be. My other 50% of investments would be in a non registered account with the following ETF's:

25% US growth stocks
25% foreign growth stocks
25% US or world dividend paying stocks
25% US bonds

My RRSP limit is maxed out by my defined benefit pension.


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## vaughn (Mar 29, 2015)

When i looked up XIU from ishares and clicked the distribution tab it indicates cash distributions. Are cash distributions also called dividends?


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