The US. Stock market has done exceptionally well in the recent years which has Canadian investors all over the U.S. Stock market, buying up US dividend stocks for their for their accounts and they've done very well, but there's a question of whats the best place to put these investments from a tax point of view.
- We have the RRSP
- We have the TFSA
- We have the Non Registered accounts
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Where should the US. Dividend stocks go?
Most investors want to maximize the tax free income they earn so the choice comes between RRSPs or TFSAs.
There's a significant advantage, by holding dividend paying US Stocks in an RRSP.
You are able to avoid the US withholding tax on dividends because of the exemption under the Canada/USA Tax treaty. You will not get that same treatment for TFSAs
What is a withholding tax? the amount of an investors revenue withheld and sent directly to the government as partial payment of income tax.
When a US company pays a dividend to someone living outside of the US, particularly in Canada the U.S. assesses a withholding tax of 15%, but there is an exemption when those stocks are held in an Canadian RRSP account. Once again that exemption does not exist for the TFSA.
In a taxable account when you receive the US dividends, you pay the 15% withholding tax, however you get a tax foreign credit to apply against your Canadian taxes, so effectively you end up paying your Canadian tax rate against the US dividends.
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