# US Dividend Tax in TFSA



## kid5022 (Nov 14, 2010)

I am interested in opening a TFSA to invest in Canadian/US securities. I have done some research, and came up with two different answer. Some say i do, some say i dont, so i really dont know any wish someone could point me in the right direction. 

CASE:
Invest in MFC in US, would the dividend/Capital Gain be tax in US? 


Would the answer change if i put it in a TFSA? I do not have to pay any Canadian taxes, but what about US taxes? 

thanks alot ppl~~


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## Eclectic12 (Oct 20, 2010)

kid5022 said:


> I am interested in opening a TFSA to invest in Canadian/US securities. I have done some research, and came up with two different answer. Some say i do, some say i dont, so i really dont know any wish someone could point me in the right direction.
> 
> CASE:
> Invest in MFC in US, would the dividend/Capital Gain be tax in US?
> ...


This is a confusing question because of your example and repetition.

Starting with the original question - yes it is possible to buy US/Canadian securities in a TFSA. 

It is not a good idea for the US securities as the US - Canada tax treaty does not class the TFSA as a pension trust. This means that where RRSPs are exempt from the 15% US withholding tax, the TFSA is not. So if the dividend is $100, the RRSP receives the full $100 where the TFSA receives $85.

As the TFSA is Canadian tax free, the foreign tax credit that is available in a non-registered account can't be claimed. 

http://blog.taxresource.ca/tfsa-non-resident-withholding-taxes/

Now for the confusion.

Point #1:
Your example is to buy MFC from a US exchange.

My understanding is that if the brokerage is on the ball, there should be no US withholding tax as MFC is a Canadian corporation. However, unless you already have US cash, there would be the currency cost of buying the US dollars for the purchase. Then too, if you want the dividends converted to Canadian dollars, there is the currency cost.

Unless there is some factor I'm missing, it would be easier to buy MFC on a Canadian exchange, in Canadian dollars where the dividends will also be paid in Canadian dollars.


Point #2:
Your original question was about buying Canadian/US securities in a TFSA. So the investment *is* in a TFSA. 

Unless you meant an RRSP instead of TFSA?

If so, the RRSP is a pension trust under the tax treaty so there won't be US withholding tax deducted (unless the brokerage makes a mistake) - the same as there won't be Canadian tax while in the RRSP. When the money is withdrawn from the RRSP, Canadian taxes will be assessed and need to be paid.


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## kid5022 (Nov 14, 2010)

Eclectic12 said:


> This is a confusing question because of your example and repetition.
> 
> Starting with the original question - yes it is possible to buy US/Canadian securities in a TFSA.
> 
> ...


thank you Eclectic for replying my question sorry for making it so confusing

what i wanted to do was to arbitrage the two prices of MFC in my TFSA account, it seems it doesn't worth the effort to do so

i will just stick with the MFC in Canada,

thank you once again


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## Eclectic12 (Oct 20, 2010)

kid5022 said:


> thank you Eclectic for replying my question sorry for making it so confusing
> 
> what i wanted to do was to arbitrage the two prices of MFC in my TFSA account, it seems it doesn't worth the effort to do so
> 
> ...


Ahhh ... while this makes more sense, I'd think it would have to be a large difference to make it worth it. But then again, personally, I'm not dealing with big numbers.

If you notice a way to make it work, more power to you.


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## warp (Sep 4, 2010)

ELECTIC:

Please note that this is not a nasty reply.

You seem to have a lot of tax questions.

Taxes and the rules can be, and are , confusing and sometimes complicated.

Might I suggest that you get a few books from the library on canadian taxes.
There are some well written and easy to read ones availiable.

Look for authors such as Eveleyn Jaks, and Tim Chestnick.

Reading yhem will give you a basic understanding...and the rights you have .

Of course for more complicated matters, you might want to talk to an accountant......although it always bothers me that a citizen and taxpayer should have to do that, as the tax code should be easily understandable by pretty well every canadian since it is a legal obligation.

good luck


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## warp (Sep 4, 2010)

that should read Evelyn Jaks!

sorry


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## Eclectic12 (Oct 20, 2010)

warp said:


> ELECTIC:
> 
> Please note that this is not a nasty reply.
> 
> ...


*grin* - this isn't a nasty reply either.

*shrug* - I'm not sure why you think I have a lot of tax questions. 

I was answering kid5022's question about US Dividend Tax in a TFSA. My questions were to clear up details of what kid5022 was asking, as well as trying to figure out what the moves were aimed to do.

As for the books, I have an old copy of "Jacks on Tax" on my bookshelf somewhere and have borrowed KMPG and PwC tax books, among others from the library.


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## humble_pie (Jun 7, 2009)

alas i do beg to differ with some of the answers above.

for an interlisted canadian stock that is purchased in USD in a US account, there would be no US withholding tax upon the dividend. The ruling criterion is always where the head office of a corporation is located. If in canada, it's a canadian corporation.

in some cases it is necessary to verify that the CUSIP number is the same for both the canada-traded and the US-traded security.

generally speaking, dividend-paying canadian stocks purchased on a US exchange should subsequently be journalled back to a canadian account, so that the dividends can be received in canadian dollars in order to prevent currency conversion FX fees. However there are exceptions.

these exceptions are the relatively few canadian corporations that pay their dividends in US dollars in the first place. These are the big miners (although we have only 2 or 3 left), some big energy, some big agriculture and a handful of miscellaneous other companies such as thomson. Why do they pay primarily in US dollars ? because it suits their accounting strategies. Why do we keep these stocks in US dollar accounts so as to receive their dividends in USD ? because if we chose to receive those same dividends in CAD, there will be currency FX exchange fees.

in all cases the brokers will be able to track perfectly which are the canadian stocks. T-5 tax slips rendered for these stocks will be perfect, with the eligible dividend tax credits properly calculated even though the calculations may be in US dollars.

as for capital gains, there will not be any US capital gains taxes or US taxes withheld on US dollar gains realized by a canadian investor. These dispositions are to be reported in canada on canadian tax returns. Both the cost base and the proceeds of disposition (producing the gain or the loss) are to be exchanged at the rate prevailing on the day of each transaction. However the taxpayer can also elect an annual rate for each year that is prepared by the bank of canada and accepted by the CRA.

turning now to the notion of "arbing" mfc in a tfsa, i for one don't believe this can be done. Most tfsas are still too small. Mine is only now approaching $17,000, a decent performance but still not enough to arb a hummingbird.


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## Eclectic12 (Oct 20, 2010)

[/QUOTE]

@humble_pie: Re - alas i do beg to differ with some of the answers above.

Hmmm ... it was a confusing question and there are a lot of related bits I threw in. 

humble_pie: "for an interlisted canadian stock that is purchased in USD in a US account, there would be no US withholding tax upon the dividend."

My original message: "My understanding is that if the brokerage is on the ball, there should be no US withholding tax as MFC is a Canadian corporation."

So unless you are are disputing that a brokerage can make a mistake, it seems there is agreement.

As for the mistakes, I posted a link from an accounting firm warning that some of their clients with US stocks in an RRSP did have the withholding tax applied. The message was if you don't correct this asap, the taxes are gone for good. Similarly, for non-registered accounts, there's this link:
http://www.canadiancapitalist.com/check-your-withholding-tax/

Since MFC is a Canadian company, I'd hope the chances of a mistake are less but then again, I've had Canadian company dividends in a CAD account be missed, incorrect or paid as *four* separate transactions.


humble_pie: " ... dividend-paying canadian stocks purchased on a US exchange should subsequently be journalled back to a canadian account, so that the dividends can be received in canadian dollars in order to prevent currency conversion FX fees. However there are exceptions."

So what you are saying is that if MFC only pays CAD dividends, whether it's bought on the US or Canadian exchange, the dividends will be sent to the Canadian account automatically? Interesting.

This removes the currency conversion for the dividends side but leaves the currency conversion for the original purchase.


humble_pie: " in all cases the brokers will be able to track perfectly which are the canadian stocks. T-5 tax slips rendered for these stocks will be perfect, with the eligible dividend tax credits properly calculated even though the calculations may be in US dollars"

In a perfect world, yes. However, mistakes do creep in once and a while so it's always good to check.


humble_pie: " ... as for capital gains, there will not be any US capital gains taxes or US taxes withheld on US dollar gains realized by a canadian investor ... "

As MFC is a Canadian company that's what is expected. 

Part of the confusion for me at least was that the title was around "US Dividend Tax in TFSA". I focussed too much on the TFSA and dividend tax while ignoring the capital gains plus the non-registered account bits.

So my point #2 is really off topic.

Your points about a non-registered account and MFC being Canadian are on the money to say there would be no US capital gain. 


humble_pie: " ... turning now to the notion of "arbing" mfc in a tfsa, i for one don't believe this can be done. Most tfsas are still too small. Mine is only now approaching $17,000, a decent performance but still not enough to arb a hummingbird."

I don't believe "arbing" MFC would work either. Then again, I also didn't think to contribute $100K to my TFSA, pay the 1% per month penalty, wait for the $100K to double, extract the $90K over-contribution and have the proceeds, say $109K growing tax free. Now that the rules have changed on the penalties, this isn't profitable anymore.


Cheers


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## humble_pie (Jun 7, 2009)

eclectic you are right it does get a little wild when shares are cross held or cross traded.

i've arrived at the place where i have canadian shares in canadian account, canadian shares in US account, US shares in US account, canadian options on canadian shares in canadian account, US options on canadian shares in US account, US options on US shares in US account, and taxes & dividends in all directions.

it did take me a few years to grow into a relationship of solid comfort with this. I needed to increase complexity in baby steps, being careful to live & breathe at each level before moving on to the next.

reading your post, i realize how fortunate i've been with the 2 bank online discounters where i have accounts. Not once have they ever made the tiniest mistake. Every dividend and every tax penny gets added or subtracted in exactly the right amount, in exactly the right account, and at exactly the right time. Every T-5 has been perfect.

it's not popular to say this in a forum where so many favour the smaller, cheaper, privately-owned deep discounters. But i think the cross-currency mistakes you mention may be largely occurring with these onliners.


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> eclectic you are right it does get a little wild when shares are cross held or cross traded.
> 
> [ ... ]
> 
> ...


I haven't experienced the cross-held or cross-traded yet but I've run into a lot of things that didn't work as simply as I expected. Case in point was finding out about the yearly Return of Capital calculations for an income trust.

Like you, I'm learning and with knowledge comes the ability to help decide what to do and comfort.

As for the bank online discounters, they do have the deep pockets to get it right and adjust to the tax changes. 

I have no idea of how ofter or who but this isn't a perfect world so I try to make as many reasonable checks and balances to find/address any errors.

Cheers


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## Robillard (Apr 11, 2009)

kid5022 said:


> what i wanted to do was to arbitrage the two prices of MFC in my TFSA account, it seems it doesn't worth the effort to do so
> thank you once again


If you were trying to do this on a regular basis, it is possible that any gains from capital appreciation on short term trades are supposed to be treated as income, rather than as capital gains. To get capital gains treatment, rather than income treatment, you have to make an election under 39(4), and you have to be eligible to make this election. If you gained by short selling, the profits would be treated as income rather than capital gains, and would thus be fully taxable.

Also, see this taxtips link: http://www.taxtips.ca/personaltax/investing/taxtreatment/capitalorincome.htm


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