The Tax-Free Savings Account (TFSA) is one of the most powerful investing tools Canadians have, and it can be used to build a diversified portfolio of quality stocks.
Capital gains on U.S. stocks are completely tax-free in Canada when held in a TFSA. But there is a catch that often catches investors off guard, and it involves dividends.
The U.S. government charges a 15% withholding tax on dividends paid to Canadian investors, and your TFSA offers zero protection against it.
The smart way around it is to fill your TFSA with high-quality U.S. growth stocks that pay little or no dividends. UiPath (NYSE:PATH) is one name worth putting on that list today.
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The 15% withholding tax explained
The U.S. Internal Revenue Service offers a tax break to Canadians only if U.S. dividend stocks are held in a retirement account, such as a Registered Retirement Savings Plan (RRSP).
- Under the Canada-U.S. tax treaty, dividends paid by American companies to Canadian investors are subject to a 15% withholding tax.
- In a regular taxable account, you can often recover that amount as a foreign tax credit on your Canadian return. Inside a TFSA, this recovery option disappears completely.
- So, if a U.S. stock pays you $100 in dividends inside the TFSA, you receive just $85. Taxes are already the biggest drag on long-term portfolio growth, and the withholding tax compounds that drag in a way many investors simply never account for.
This applies to U.S. stocks, U.S.-listed exchange-traded funds (ETFs), and Canadian-listed ETFs that hold U.S. stocks. In that last case, the withholding tax is deducted before the dividend even lands inside the fund. You never see it taken, which makes it even easier to ignore.
Own undervalued growth stocks in the TFSA
The solution is to be selective about which stocks to hold in the TFSA. High-growth technology companies that reinvest profits rather than paying dividends sidestep the withholding tax problem entirely.
Automation platform UiPath fits that profile. The company pays no dividend and is in the middle of a major strategic transformation. UiPath CEO Daniel Dines recently described what he sees as a generational shift in enterprise automation.
His core argument is straightforward: artificial intelligence will not replace the workflows and infrastructure enterprises depend on. AI will build and accelerate them. “Coding agents will help our customers and our partners to build automation,” Dines said during a recent investor event. “And to build automation at a larger scale than we’ve seen before.”
UiPath Chief Product and Technology Officer Raghu Malpani echoed that view, noting the company has pivoted its entire platform to support coding agents natively throughout the automation lifecycle, from writing process specifications to deploying and monitoring workflows in production.
Every phase of the automation lifecycle, from idea to deployment to error recovery, is being rebuilt around this capability. Malpani described coding agents as something that “compress the time to value dramatically,” making developers more productive and unlocking faster onboarding for new customers.
UiPath is forecast to increase adjusted earnings per share from $0.53 in 2025 to $1.30 in 2030. If the AI stock is priced at 20 times forward earnings, it could more than double within the next four years.
The Foolish takeaway
The TFSA is still an exceptional vehicle for owning U.S. stocks. Capital gains remain fully tax-free, and that alone is a significant advantage over holding the same positions in a taxable account.
The key is being deliberate about what you hold. U.S. dividend stocks quietly give back part of their return to the IRS every year inside a TFSA. Growth stocks with no meaningful payout do not have that problem.
UiPath is a company at an inflection point. Its platform sits at the intersection of enterprise automation, process orchestration, and now agentic artificial intelligence, three themes that are drawing serious investment from large enterprises globally.
