Maple News reports that many Canadian investors may be unknowingly losing money due to foreign withholding taxes on investments held within a Tax-Free Savings Account (TFSA). Although TFSAs are designed to shield investments from Canadian income taxes, certain international holdings — especially U.S.-listed ETFs — can still generate hidden tax costs.
Withholding taxes are different from income taxes. These are levied when foreign governments tax income earned by non-resident investors. In the case of Canadian residents who hold U.S.-listed exchange-traded funds (ETFs) in their TFSAs, a 15% withholding tax is typically applied to dividend payments. For example, if a U.S. ETF pays out $1.00 USD per share in dividends, Canadian investors would only receive $0.85 per share after the tax.
Under the Canada-U.S. tax treaty, this 15% withholding tax is waived for certain registered accounts like the Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), and Locked-in Retirement Account (LIRA). Unfortunately, TFSAs do not benefit from the same exemption, making them less tax-efficient for these types of international assets.
To optimize tax savings, investors should carefully decide which investments to place in their TFSAs, RRSPs, and non-registered accounts. U.S.-listed dividend-paying ETFs are better suited to RRSPs to avoid the 15% tax hit. Meanwhile, Canadian-listed ETFs or stocks that don’t incur foreign withholding taxes are more appropriate for TFSAs.
Maple News recommends that investors periodically review their portfolio holdings and consider the tax implications across different account types. With some simple adjustments, Canadians could save thousands of dollars over their lifetimes by allocating their assets more strategically.
It’s important to note that this information is intended for general guidance only and should not be considered personalized financial advice. For a tailored investment strategy, consult with a certified financial advisor.