# Question regarding TFSA self-directed trading account + US stocks



## Atreides (Jul 4, 2012)

Hi guys,

Firstly, this is a great forum. I've been a lurker for a while, and have recently taken the jump and opened up a TFSA investing account (CIBC Investor's Edge TFSA). 

I just had a few quick questions regarding using our Canadian TFSA accounts for self-directed stock trading. If I plan to purchase mainly US stocks:

1) I should try to avoid ones which pay dividends due to the 15% tax withholding condition, correct?
2) Is there any "penalty" for buying US stocks which have no dividends? ie: I buy stock X at $10, sell at $15, all profits are net minus broker fee?
3) Should I trade US stocks in US dollars, and Canadian stocks in CAD? Is it more complicated if I plan to use only CAD to do all my stock trading?

Thanks!

A.


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## Eclectic12 (Oct 20, 2010)

For #1 - some say that avoiding the US 15% withholding tax is the most important thing. Others argue that if the investor is in a top tax bracket, the US 15% withholding tax is a small price to pay to avoid a Canadian tax rate of 40% or more. I'd run some scenarios of the taxes to be get a better idea of where you fit.

For #2 - a couple of things come to mind. First, if the stock is being bought on a US stock exchange, the money to buy will likely have to be US dollars. So there might be an extra fee for currency exchange. 

Then too, I've read in the past that some US exchanges will charge an extra fee if the numbers of shares purchased is not a multiple of 100. I haven't bought any US stock directly, so I'm not sure which exchanges or if this is still in effect.

For number 3 - someone else will have to comment but if US dollars are contributed, there may be an exchange rate to apply to the TFSA contribution room (ex. $1 USD = $0.95 CAD likely means more than $500 of TFSA contribution room was used up). If CAD is contributed, the TFSA contribution room tracking is easy but when converted to USD for purchases, there may be currency exchange fees.

There are ways of trading stocks within an RRSP at certain brokerages to exchange CAD for USD with only commissions instead of an exchange fee but I don't recall what was commented about TFSA. A search of CMF should find the threads.


Cheers


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## cardhu (May 26, 2009)

atreides said:


> 1) I should try to avoid ones which pay dividends due to the 15% tax withholding condition, correct?


Not really ... although its true that US dividend-payers are almost always better held in an RRSP than a TFSA, the ubiquitous advice to _“avoid placing US dividend payers in TFSA”_ is misconceived ... if for some reason you can’t hold these stocks in an RRSP, then a TFSA is clearly the next best choice ... try to avoid holding such stocks (or any other foreign dividend payers for that matter) in a non-reg account. 



> _2) Is there any "penalty" for buying US stocks which have no dividends? ie: I buy stock X at $10, sell at $15, all profits are net minus broker fee?_


Capital gains are tax-free, in a tax-free account. 



> _3a) Should I trade US stocks in US dollars, and Canadian stocks in CAD? _


Yes ... But in order to do this, I believe you’ll need to close your CIBC account, and open a new self-directed TFSA at either RBC Direct Investing, BMO Investorline, or Questrade. I think those are the only three discount brokers presently offering US-dollar registered accounts. 



> _3b) Is it more complicated if I plan to use only CAD to do all my stock trading? _


Its not really any more complicated, but it is more expensive due to foreign exchange fees as you flip back and forth between currencies. Try to avoid flipping back and forth between currencies, and you can keep such costs to a minimum. As mentioned, you may need to abandon CIBC in order to accomplish this.


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## corezz (Jul 10, 2012)

Maybe its just me but i still recommend one max out their RRSP contributions before looking to max out their TFSA accounts. But this of course assumes you have plenty of cash to store away for long periods. Maybe your situation is different and you need cash a little more available?


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## Eclectic12 (Oct 20, 2010)

corezz said:


> Maybe its just me but i still recommend one max out their RRSP contributions before looking to max out their TFSA accounts. But this of course assumes you have plenty of cash to store away for long periods. Maybe your situation is different and you need cash a little more available?


In addition to when the money is needed, I'd also consider one's income plus what one believes one's future income will be.

Where one is in a low income (and tax) situation today, it makes more sense to max the TFSA first and save the RRSP tax refunds for when one is in a higher income (and tax) situation. That way, if between retirement income, investment income, CPP and possibly OAS, one is withdrawing from the RRSP at a higher tax rate than today - since it was contributed at a higher tax rate, any impact will be minimized.

The trade off is that delaying contributing to the RRSP means the contributions have less time to grow tax deferred.


Cheers


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## Young&Ambitious (Aug 11, 2010)

Eclectic12 don't forget that you can contribute to an RRSP but not use it as a deduction in the immediate tax year and instead defer the deduction until you are in a higher tax bracket. This then allows for people to begin saving for retirement and also defer profits.


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## Sherlock (Apr 18, 2010)

How is withholding tax paid on US stocks in your TFSA? Do they automatically deduct the 15% from your dividends, or do you have to keep track of it and then pay it at income tax time?


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## Young&Ambitious (Aug 11, 2010)

They automatically deduct it.


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## Spudd (Oct 11, 2011)

You might even say they withhold it.


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## Eclectic12 (Oct 20, 2010)

Young&Ambitious said:


> Eclectic12 don't forget that you can contribute to an RRSP but not use it as a deduction in the immediate tax year and instead defer the deduction until you are in a higher tax bracket. This then allows for people to begin saving for retirement and also defer profits.


True ... but then, if needed the money is difficult to access. IMO, it would be better to max out the flexible TFSA and then if there is money left, contribute to the RRSP where the deduction is saved for later.


Cheers


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## Eclectic12 (Oct 20, 2010)

Spudd said:


> You might even say they withhold it.


Agreed ... though to be clear for Sherlock's benefit - it is the source company that forwards the withholding tax to the IRS. So when the broker receives it, the tax portion has already been taken. Using IBM as an example, IBM will forward the US withholding tax to the IRS and the remainder to the broker.

Where one is in this situation, it is a good idea to spot check the numbers as I've seen others post that their broker missed filing the IRS paperwork so that 30% withholding tax was taken instead of the 15%, which is by tax treaty what a Canadian should pay in a taxable or TFSA account.


Cheers


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## Young&Ambitious (Aug 11, 2010)

Eclectic12 said:


> True ... but then, if needed the money is difficult to access. IMO, it would be better to max out the flexible TFSA and then if there is money left, contribute to the RRSP where the deduction is saved for later.
> 
> 
> Cheers


The TFSA vs RRSP decision depends on numerous factors in the OP's situation such as current tax level and future tax level expectations, future money requirement expectations, and current/future expected required emergency fund levels. 

The OP hasn't given enough info for a blanket statement such as a TFSA is better. If they plan on not touching the money and the intention is retirement savings then holding the US stock within the RRSP would be my pick.


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## Sherlock (Apr 18, 2010)

Spudd said:


> You might even say they withhold it.


He'll be here all week, folks!


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## Eclectic12 (Oct 20, 2010)

Young&Ambitious said:


> The TFSA vs RRSP decision depends on numerous factors in the OP's situation ... The OP hasn't given enough info for a blanket statement such as a TFSA is better ...


Fair enough that there isn't enough information. 


Without that info, the two reasons I'm leaning towards the TFSA are that:

1) a "mistake" contributing to a TFSA can be changed easily compared to similar with an RRSP contribution.

2) the original question was specifically about buying US stock in a TFSA. The RRSP part was posted as a blanket statement in response. Don't get me wrong, it's a good sidebar including the factors to consider that I am sure people are learning from. But as you say, without detail - it is possible that the OP has already maxed their RRSP which prompted the TFSA question.


Cheers


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## cardhu (May 26, 2009)

corezz said:


> Maybe its just me but i still recommend one max out their RRSP contributions before looking to max out their TFSA accounts. But this of course assumes you have plenty of cash to store away for long periods. Maybe your situation is different and you need cash a little more available?


You’re correct that RRSP is still, for most people, the best (“most tax efficient”) retirement savings vehicle that exists in Canada ... but as E points out, there is a timing element in optimizing the RRSP, that isn’t a factor for the TFSA ... the RRSP might be better than TFSA today, but if deferred a few years, could it be better by an even wider margin, perhaps? ... the good news for young people starting out, is that placing funds in a TFSA now does not preclude shifting those funds into an RRSP later on. 



Eclectic said:


> The trade off is that delaying contributing to the RRSP means the contributions have less time to grow tax deferred.


Its not necessarily a trade-off ... there seems to be an almost universal belief that the longest possible tax deferral is the best possible scenario, but that isn’t always true ... with RRSP, the key factor is the differential in tax rates (unfortunately, another near-universal misconception is that RRSP withdrawals are taxed at one’s marginal tax rate, which also isn't true, but that is a topic for another day), and that differential has a significant influence on the optimal degree of tax-deferral ... longer is not always better. 

In any event, corezz’ comments relate to choosing between TFSA and RRSP ... there is no non-reg account involved, so there is no tax-deferral being missed ... “tax-free” in a TFSA is essentially identical to “tax-deferred” in an RRSP . 



Eclectic said:


> Where one is in a low income (and tax) situation today, it makes more sense to max the TFSA first and save the RRSP tax refunds for when one is in a higher income (and tax) situation.


Maybe … but what if one will never be in a higher income (and tax) situation? … then it may make more sense to max the RRSP first, and save the TFSA contributions for when you have run out of RRSP room … or it may make more sense to never use the RRSP at all (although such circumstances are exceedingly rare) … merely having a low income today is not enough information to determine which of TFSA or RRSP will prove to be more profitable. 

I agree, however, with your point that it is easier to correct a mistaken contribution to TFSA, than a mistaken contribution to RRSP. 



Eclectic said:


> 2) the original question was specifically about buying US stock in a TFSA. The RRSP.... is a good sidebar


The fact that the original question was specifically about US stocks in a TFSA is the very reason that the RRSP is not a sidebar at all ... placing US dividend paying stocks in a TFSA, while there is perfectly good RRSP contribution room lying around unused, would usually be a mistake ... the tax-drag produced in the TFSA by the US withholding is probably going to be more of a boat anchor than whatever effect is produced by placing into an RRSP and either deferring the deduction, or taking a deduction at a lower rate than might be available in future 



Y&A said:


> don't forget that you can contribute to an RRSP but not use it as a deduction in the immediate tax year and instead defer the deduction until you are in a higher tax bracket.


With the obvious exception of US dividend payers, if the deduction will not be used right away, then placing the funds in TFSA now, and shifting them to RRSP later accomplishes exactly the same thing, but with fewer restrictions.


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## Eclectic12 (Oct 20, 2010)

cardhu said:


> ... Its not necessarily a trade-off ... there seems to be an almost universal belief that the longest possible tax deferral is the best possible scenario, but that isn’t always true ...
> 
> In any event, corezz’ comments relate to choosing between TFSA and RRSP ... there is no non-reg account involved, so there is no tax-deferral being missed ... “tax-free” in a TFSA is essentially identical to “tax-deferred” in an RRSP .


Good point ... though for the most people who have been willing to share details, longer does tend to be better. And yes, between head and fingers typing the message, I somehow lost sight that it was TFSA versus RRSP. 




cardhu said:


> Maybe … but what if one will never be in a higher income (and tax) situation? … then it may make more sense to max the RRSP first, and save the TFSA contributions for when you have run out of RRSP room … or it may make more sense to never use the RRSP at all (although such circumstances are exceedingly rare) … merely having a low income today is not enough information to determine which of TFSA or RRSP will prove to be more profitable.


Agreed ... but then again, how many will be in that situation? I personally only know of two out of hundreds of friends/co-workers/relatives.





cardhu said:


> The fact that the original question was specifically about US stocks in a TFSA is the very reason that the RRSP is not a sidebar at all ... placing US dividend paying stocks in a TFSA, while there is perfectly good RRSP contribution room lying around unused, would usually be a mistake ...


Perhaps a different wording would have been better - I assumed that since the OP knows about the US 15% withholding tax yet was still focused on US stock in the TFSA meant the RRSP room had already been used up.


Cheers


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