# Best Place to hold ADRs



## heffer (Feb 21, 2010)

Which is the best vehicle to buy ADRs in? Non-registered, TFSA, or RRSP? I know the answer is it depends, so I'll create a specific, hypothetical example.

Buy shares of Telefonica, (NYSE:TEF)
One time purchase to keep things simple, (will not buy more later) 
Dividend $2.7USD/share (before the 19% Spain withholding tax)
Assume dividend is sustainable and dividend growth is 3% per year
Assume stock price to grow at 5% per year
Buy and hold strategy (not planning to use the money for 20+ years)
Will DRIP the dividends if possible
30%, current marginal tax rate
25%, expected future marginal tax rate when slowly realizing gains

Personally, I think non-registered would be the best place. You can't escape the 19% Spain withholding tax no matter what. The 15% US withholding tax you can get back next year so that doesn't matter. Using a TFSA would be bad idea though because you can't claim your 15%. So I think non-registered is the way to go. Sure you pay 30% taxes on the dividends but once you consider the capital gains as well, it's probably better to leave it outside of the RRSP. Unless I'm missing something?

Thanks.


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## kcowan (Jul 1, 2010)

I think it depends on how much capital gains you are expecting. Saving 15% in tax all along in the RRSP is very appealing. So it depends on how much annual stock appreciation you expect.


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## cardhu (May 26, 2009)

Non-registered is a non-starter ... almost certainly the worst choice among the three, except for people whose income is so low that they don’t pay any taxes at all ... your hypothetical guy is not one of those people. 

There may not be any US withholding tax (there’s no US-sourced income in your example) but even if there is, you’d certainly pay less tax by holding it in your TFSA than in non-reg, given your assumptions. 

The effectiveness of RRSP depends on a number of things, but given your assumptions, it is the clear winner ... when the tax rate is lower on withdrawal than on contribution, as it is for most people and as it is in your hypothetical example, RRSP outperforms both TFSA and non-reg for just about any investment, regardless of whether they produce interest (or interest-equivalent foreign dividends), eligible dividends, or capital gains. The fact that you’re sure to avoid US withholding tax is the icing on the cake.


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## heffer (Feb 21, 2010)

Looks like it's going in RRSPs. That's what most people are telling me. Thanks for the feedback.


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## Guest (Jan 14, 2011)

Hi Heffer ... I have a question on those US dividends. I've taken US dividends outside an RSP (painful experience), but not inside an RSP. How are such dividends taxed? Thanks


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## andrewf (Mar 1, 2010)

The US and Canada have a tax treaty such that the 15% withholding tax is not applied to dividends earned on stock held in RRSPs. Same does not hold for TFSA.


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## m3s (Apr 3, 2010)

How is this any different from a RRSP vs non-reg debate?

I hold TEF in my RRSP but I question the advantage, if any, and I might be opening a non-reg anyways from lack of room. For all I know taxes could go way up in the future, but I know cap gains are taxed less today


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## heffer (Feb 21, 2010)

rikk said:


> Hi Heffer ... I have a question on those US dividends. I've taken US dividends outside an RSP (painful experience), but not inside an RSP. How are such dividends taxed? Thanks


Like andrewf mentioned when you get US dividends inside your RRSP there is no withholding tax on the dividends. 

@mode3sour
I think you may be right depending on your situation. Here are my calculations below for the example person in the opening post, assuming an equal amount of dividends to cap gain ratio, lets say $100 in dividends and $100 in cap gain over the years.

In Non-Reg 
$100 dividend - 19% Spanish withholding tax - 15% US withholding tax + 15% foreign tax credit, if you fill out the T2209? - 30% tax on foreign dividends since our marginal tax bracket is 30% + $100 capital gain - $15 capital gains tax = *$146.70* of after tax profit

In TFSA
$100 dividend - 19% Spanish withholding tax - 15% US withholding tax + $100 cap gain = *$168.85* of after tax profit

In RRSP
( $100 dividend - 19% Spanish withholding tax + $100 cap gain ) - 25% because that's the expected tax bracket at retirement when you take out the money= *$135.75* of after tax profit

Non-Reg is by far the most complicated to deal with, and if you don't file a foreign tax credit form you end up with $138.20 which is pretty much the same as having it in an RRSP. However if the dividend is twice as much as the cap gain, like $200 dividends to $100 cap gain, then RRSP would be better than Non-reg for this particular person's situation based on my numbers above. Of course my calculation methods could be wrong though, especially considering that I didn't factor in the tax return one would get from contributing to an RRSP.


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## warp (Sep 4, 2010)

All these questions and answers just shows AGAIN how convoluted, complicated and incomprehensible our tax system is to a regular taxpayer.

This question is just the tip of the iceberg...try calling the CRA and getting a straight answer!

The whole thing is a mess and a disaster, and just gets worse every year as the govt makes changes that complicate it further.

There HAS GOT to be a better way!

Flat Tax anyone?


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## liquidfinance (Jan 28, 2011)

*ADR's and Tax implications*

Firstly I would just like to say hello to everyone. Have been reading the boards for a couple of days and found some very useful information on here.

However I could do with some clarification of one issue.

So for this example I would like to use Telefonica

NYSE:TEF 

Currently yielding around 7%

Am I correct in my understanding that if I hold these shares then of the $0.90 19% will get with held by the Spanish government and then 15% will get with held by the US when it is paid to me bringing the actual payment received down to $0.594 per share.

I understand that if this was held in a non registered account I could offset the US 15% but if this was in a TFSA would the effective tax rate of holding this ADR be 34%

I appreciate any clarification on this issue.

Thanks in advance.

Shaun


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## humble_pie (Jun 7, 2009)

liquid, for canadian holders of TEF, there are, one might say, 2 levels of foreign taxes.

canadians holding tef adrs won't directly pay any NR tax to the government of spain.

canadians holding this adr will be subject to the US NR tax rate of 15% when the security is held in non-registered accounts. Canadian taxpayers can usually claim some or all of this back with a non-resident foreign tax credit claim on their income tax returns.

when this security is held in rrsp registered account, no non-resident tax will be withheld, as has been mentioned upthread.

if this security should be held in tfsa registered, the 15% withholding tax will be withheld AND the taxpayer will not be able to claim any foreign tax credits for the NR taxes. It's obvious that holding US stocks or US adrs in a tfsa is not a wise strategy.

as for the govt of spain, any non-resident tax it might levy will be remitted by the ADR creators, probably the bank of new york in NYC. The binding tax convention will be the one between spain and the US of A. This will have nothing whatsoever to do with canadian taxpayers who happen to own TEF. Canadian TEF holders won't be able to readily identify any spanish NR tax, nor will they able to claim such tax as a foreign tax credit.

price to be paid for TEF adr on new york is net of any spanish NR tax. Canadians can receive that juicy dividend either 1) without 15% withholding in rrsp; however at most brokerages they will pay an FX currency fee when each dividend is converted to canadian dollars (save & except handful of brokerages with true USD rrsps); or 2) subject to 15% US withholding if held in non-registered, which amount will be eligible for CRA foreign tax credit.


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## I'm Howard (Oct 13, 2010)

You will still pay Taxes, Here or in U.S, in many cases paying the taxes in the U.S is the better way to go.

There is no free lunch.


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## liquidfinance (Jan 28, 2011)

humble_pie said:


> price to be paid for TEF adr on new york is net of any spanish NR tax. Canadians can receive that juicy dividend either 1) without 15% withholding in rrsp; however at most brokerages they will pay an FX currency fee when each dividend is converted to canadian dollars (save & except handful of brokerages with true USD rrsps); or 2) subject to 15% US withholding if held in non-registered, which amount will be eligible for CRA foreign tax credit.



Thanks. I think this is the answer that I was looking for. That of the $0.90 I would only see 15% be removed from it. 

I appreciate that there is no free dinner it's just about making it as tax efficient as possible. Also trying to establish if the way to trade is the ADR or buying on the Spanish market. 

I appreciate the clarification of the above. 

Thanks


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## Eclectic12 (Oct 20, 2010)

liquidfinance said:


> Firstly I would just like to say hello to everyone. Have been reading the boards for a couple of days and found some very useful information on here.
> 
> However I could do with some clarification of one issue.
> 
> ...


Based on what I google'd and my understanding/experience, with a non-registered account:

a) as of Jan 1st, 2010, Spain will apply 19%.

b) the US will apply 30% withholding unless your/your broker files an IRS form ( W8BEN?) which identifies you are a Canadian resident and reduces the tax to 15%. I mention this as I've seen several posts (and have personally experienced) where this didn't happen automatically.
Example:
http://www.canadiancapitalist.com/check-your-withholding-tax/

c) on your Canadian taxes, the foreign tax credit can be claimed to offset the US 15%.

For the TFSA, it is not recognized by the US-Canada tax treaty so the 15% will be charged and as it is Canada tax free, the foreign tax credit can't be claimed.
http://www.canadiancapitalist.com/withholding-tax-tfsa-investments/


For an RRSP, the US-Canada tax treaty recognizes it so there should be zero US with-holding tax and zero Canadian tax, leaving only the Spanish withholding tax.


Cheers


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## cardhu (May 26, 2009)

liquidfinance said:


> Thanks. I think this is the answer that I was looking for. That of the $0.90 I would only see 15% be removed from it.


NO ... Spain will take its 19% regardless of where you hold TEF (non-reg, RRSP, or TFSA), and there may or may not be an additional 15% US withholding on top of that ... the US withholding tax applies to US-sourced income, and Telefonica is not a US source ... but having said that, there are conflicting accounts and I know there are some people who claim to have had US withholdings applied to ADR dividends, while others have not. 

Either way, in a taxable account, you can claim a 15% foreign tax credit, because the Spanish withholding alone exceeds the 15% limit for the credit, and the excess withholding (beyond 15%) can be taken as a deduction. But the entire dividend is taxed as ordinary income. Foreign dividend-paying ADRs are best held in RRSP, then TFSA (if necessary), and a non-reg account is obviously the worst place to hold them. 

This report addresses your question of whether its preferable to foreign shares directly, or through their ADR. 



rikk said:


> I have a question on those US dividends. I've taken US dividends outside an RSP (painful experience), but not inside an RSP. How are such dividends taxed?


US dividends are treated very much like interest payments … in a non-reg account, they are taxed as ordinary income in the year received, and inside the RRSP they are tax deferred ... the key differences are that (1) in a non-reg account or TFSA, the US dividend is subject to US withholding tax, while interest is not, and (2) in a non-reg account, low income earners pay more tax on US dividends than they would on interest, because they do not get dollar-for-dollar recovery from the foreign tax credit. 

A non-reg account is about the worst place to hold a US dividend payer, unless your income is so low that you pay no taxes to begin with ... TFSA is preferable to non-reg, and RRSP is preferable to TFSA. 



mode3sour said:


> I hold TEF in my RRSP but I question the advantage, if any, and I might be opening a non-reg anyways from lack of room. For all I know taxes could go way up in the future, but I know cap gains are taxed less today


The majority of the population would enjoy significant advantage by holding TEF, or any other dividend-paying capital gain producer for that matter, in their RRSP, versus non-reg. Once you’re run out of RRSP/TFSA contribution room, and have to begin building a parallel non-reg account, then the question shifts ... its no longer a question of whether an asset performs better inside or outside, its now a question of which assets will be punished the least by taxes, in the non-reg account … I don’t know what your portfolio is composed of, but foreign dividend payers would rarely if ever float to the top of that list. 

Future tax hikes are a possibility of course, but the question is how high are they likely to go? ... and how soon? … could tax rates double? ... could they triple? … for most people, the RRSP can withstand some degree of future tax rate increases, without killing its inherent advantage over non-reg investments ... there are uncertainties, of course ... there always are ... but if the magnitude of the change required to derail any particular approach is so great that it is difficult to imagine it happening in our lifetime, then the probabilities remain pretty solidly in favour of that approach.


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