Building Your TFSA: Why Canadian Stocks Should Still Be Your First Choice

Canadian stocks tend to be more tax-efficient in a TFSA than U.S. ones.

Tony Dong, MSc, CETF®

Tony turned a series of 2017 marijuana stock losses into a freelance career advocating for ETF investing. He currently holds a Master’s in Risk Management from Columbia University and is a Certified ETF Advisor (CETF®). Tony is the founder of ETF Portfolio Blueprint (etfportfolioblueprint.com) and the Lead ETF Analyst for ETF Central, a partnership between Trackinsight and the NYSE. His analysis has also been featured in publications like Kiplinger, 24/7 Wall St., U.S. News & World Report, TheStreet, and Benzinga. Tony also provides independent content and marketing consulting services to various Canadian and U.S. ETF issuers. His editorial opinions for The Motley Fool remain independent and objective.

Published February 14, 2025 11:45 am EST

| More on: ZIU

In a Tax-Free Savings Account (TFSA), there’s a strong case for choosing Canadian stocks over U.S. stocks — and no, it’s not about patriotism. It comes down to tax efficiency. You might be thinking, “The TFSA is tax-free! What on earth are you talking about?”

Well, it’s not the Canadian government’s fault. Blame the U.S. Internal Revenue Service (IRS). If you hold U.S. stocks in a TFSA, there’s some fine print that could reduce your returns. Here’s how it works.

Canada national flag waving in wind on clear day — Source: Getty Images

15% foreign withholding tax

If you own U.S. stocks in a TFSA, whatever dividends they pay are automatically reduced by a 15% withholding tax before you even see them.

For example, if a U.S. company pays a 1% dividend yield over the year, you’d only receive 0.85% after the tax. That might not seem like a big deal, but over time — especially with high-yield dividend stocks — this tax drag can chip away at your returns.

Normally, the U.S. withholds 30% on foreign investors, but thanks to the Canada-U.S. tax treaty, this is reduced to 15% for Canadians. That being said, with the hostile Trump administration, this could be revoked if they notice.

The reason this applies to a TFSA is that the U.S. doesn’t recognize it as a legitimate retirement account. The only account exempt from foreign withholding tax at this time is a Registered Retirement Savings Plan (RRSP) — so if you’re going to hold U.S. stocks long term, it’s best to keep them there.

Buy Canadian stocks in a TFSA

To maximize tax efficiency, you need to be strategic about asset location. The best approach? Hold U.S. stocks in an RRSP and prioritize Canadian stocks in a TFSA.

You can pick individual stocks, but if you prefer a hands-off approach, I recommend an exchange-traded fund (ETF) like BMO S&P/TSX 60 Index ETF (TSX:ZIU).

This ETF holds a collection of 60 blue-chip Canadian stocks, representing Canada’s benchmark stock market index. It has a big tilt toward financials and energy, reflecting the structure of the Canadian market. The larger a stock is, the greater the weight it gets.

Right now, ZIU pays a 2.63% annualized distribution yield with quarterly payouts and charges a modest 0.15% management expense ratio (MER) — meaning you’d pay just $15 per year on a $10,000 investment.