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.
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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.
