# withholding tax on dividends earned from US index fund in TFSA



## JC NewGrad (Jun 2, 2009)

hi all,

i have brought up this topic a few times now -- on MDJ, tax resource blogs and elsewhere, so bear with me, but i still don't have a definite answer (keep getting conflicting info)...

i opened a mutual fund TFSA at TD last year, converted to e-series, and have purchased US index fund units within that TFSA (along with other fund units). so far, i have received dividends and i have not received any notice of any withholding taxes (no slips, etc.). i checked the amounts distributed and it appears as though i received the full dividends. am i missing something?

i know that US dividends are subject to withholding tax in non-registered accounts and that US dividends are exempt from US withholding taxes within RRSPs because of the treaty, but what's going on with my TFSA? is tax not being withheld because the securities aren't held directly? has tax been withheld and it just doesn't show up anywhere? is this whole situation different with mutual funds? what's going on?

if your answer is that the taxes were withheld at source, so i won't get notice: does this mean that my e-series units held within my RRSP aren't getting their full dividends?


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## cardhu (May 26, 2009)

JC NewGrad said:


> i still don't have a definite answer (keep getting conflicting info)


That is what happens in online forums, blogs, etc., there is no escaping it ... I have no doubt whatsoever that somewhere along the line, you were provided with a correct answer ... unfortunately, it was likely hidden among various shades of incorrect answers. 

Tax is being withheld, you can be sure of that ... a Canada-based mutual fund is a “non-resident alien”, in IRS parlance, and is not an exempt entity, so any US-sourced dividends paid to it are subject to withholding ... you won’t get any notice of this withholding because your fund units are held in a registered account .... they don’t issue tax slips for registered accounts (why would they?)



> does this mean that my e-series units held within my RRSP aren't getting their full dividends?


Yes.


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## CanadianCapitalist (Mar 31, 2009)

Agree with cardhu. Anytime you purchase a Canadian mutual fund or ETF that owns US stocks, the fund/ETF pays the withholding tax. You cannot recover this tax if you hold the fund / ETF in a RRSP / TFSA account.

This is not an issue for TFSA accounts because you would have paid the withholding tax anyway. But it is an issue for RRSP accounts because if you held the US stock directly, there won't be any withholding.


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## bean438 (Jul 18, 2009)

Very interesting. I always assumed that a fund held in an RSP was witholding tax exempt.


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## JC NewGrad (Jun 2, 2009)

ditto, bean.

but thanks for the clarification cardhu and CC.

...at least i don't have to worry too much about where my units are, if the tax is withheld in both TFSA and RRSP.


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## bean438 (Jul 18, 2009)

I guess one more reason to not but mutual funds. 
I am very surprised this is not mentioned as a negative along with high MER's, etc. 
I am not surprised the MF industry doesn't make mention of this.


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## billiam (Aug 24, 2009)

To further the discussion and clarify why ETF's and mutual funds holding US securities are still subject to withholding tax when held in a RRSP account you have to look at the language found in Article XXI paragraph 2 of the Canada - US Tax Convention. I suspect it is because the cannot meet the "operated exclusively to administer or provide pension, retirement or employee benefits" condition.


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## cardhu (May 26, 2009)

Correct ... I meant to say in my earlier post that mutual funds are NRAs *and* they are not exempt under the treaty, therefore withholding tax applies ... somehow the “and” part got omitted. (now edited upthread) Thanks for the clarification.


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## HaroldCrump (Jun 10, 2009)

cardhu said:


> Correct ... I meant to say in my earlier post that mutual funds are NRAs *and* they are not exempt under the treaty, therefore withholding tax applies ...


Can that be worked around by holding a similar US listed ETF/fund inside a Canadian RRSP?
So instead of TD eSeries index fund, hold a Vanguard ETF for example.
Dividends shouldn't be withheld because it is a US registered security and the RRSP is covered under the treaty, correct?
Disregard the forex conversion and fees for the moment....


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## bean438 (Jul 18, 2009)

Harold, aren't Vangaurd ETF's regulated in the US also?
I would think an ETF is the same as a US stock.. RSP= no withholding TFSA/non reg = withholding.


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## HaroldCrump (Jun 10, 2009)

bean438 said:


> Harold, aren't Vangaurd ETF's regulated in the US also?
> I would think an ETF is the same as a US stock.. RSP= no withholding TFSA/non reg = withholding.


Yes, I meant within RRSP.
If you hold Canadian ETF invested in US stocks within your RRSP, your dividends will get withheld, but if you hold US ETF invested in US stocks within RRSP then no with-holding?


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## billiam (Aug 24, 2009)

Harold,

You work around (i.e. hold US Listed ETF's in an RRSP) is correct in avoiding w/h taxes on dividends.

I'm not so sure you can purchase US domiciled mutual funds within an RRSP hence my response above.


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## HaroldCrump (Jun 10, 2009)

billiam said:


> Harold,
> 
> You work around (i.e. hold US Listed ETF's in an RRSP) is correct in avoiding w/h taxes on dividends.
> 
> I'm not so sure you can purchase US domiciled mutual funds within an RRSP hence my response above.


Why not?
If we ignore forex conversion fees charged by the brokerage, I don't think there's anything stopping us from buying US listed funds, ETFs or stocks inside a CAD$ RRSP.
The foreign content rules no longer apply.

The brokerage will simply convert the value of the holding to CAD$ using whatever rate for the purpose of printing the statements.


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## billiam (Aug 24, 2009)

Harold,

I'm not sure I understand your question. 

I said w/h tax does not apply to US ETF's held in an RRSP to answer your earlier question, so they are okay, after all they trade on an exchange like stocks.

I also said I don't believe you can purchase a US domiciled mutual fund directly for your RRSP as they are not offered through the RRSP provider which is possibly due to regulation although there could be other reasons. The old foreign content rules or currency conversion has nothing to do with the issue.

Does the brokerage where you have your RRSP account allow you to buy a US domiciled mutual fund such as those offered by Legg Mason as an example?

http://www.leggmason.com/individualinvestors/products/index.aspx

Anybody else able to buy a US domiciled mutual fund in their RRSP to add to this discussion?


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## cardhu (May 26, 2009)

HaroldCrump said:


> Why not?


Because you can’t buy US-domiciled mutual funds in Canada … period … no Canadian broker will sell them … it has nothing to do with RRSP rules.

I don't know whether its securities law, or IDA rules, or something else that prohibits it, but you can’t buy them here.

ETFs are not a problem.


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