Every Canadian above 18 years of age can open a Tax-Free Savings Account (TFSA) and start investing in it. The tax benefits offered by a TFSA make it lucrative, as all the income and capital gains you get from investing is tax-free, whether you reinvest or withdraw. Despite knowing this benefit, many young Canadians are not using the TFSA efficiently because they find the rules confusing. Yes, a TFSA has certain rules that, if breached, incur a 1% monthly penalty. But that shouldn’t stop you, as a TFSA has the power to help you build a tax-free million-dollar portfolio.
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Understanding TFSA rules around global investments
Firstly, understand that TFSA tax benefits are offered by the Canada Revenue Agency (CRA). When you invest in stocks in the United States and other countries, the tax rules of those countries apply. Considering the tax treaty Canada has with that country, the taxation rules will change. It’s not just with the TFSA but with all types of income you earn from a foreign country.
Let’s take the example of the United States, as it has the world’s two largest stock exchanges. The TFSA allows you to invest in stocks trading on the NYSE and NASDAQ.
Investing in US dividend stocks through a TFSA
The Internal Revenue Service (IRS) imposes a 15% withholding tax on dividends paid to non-residents under the US-Canada tax treaty. A 15% tax is the treaty benefit that you must claim by submitting Form W-8BEN with your broker. Otherwise, you will be charged a 30% withholding tax.
This tax makes US dividend stocks unattractive for a TFSA. You are simply wasting your contribution room, which you could otherwise invest in Canadian dividend stocks and get tax-free dividends.
However, some tech stocks, like Broadcom (NASDAQ:AVGO) and Nvidia, are good TFSA picks. Even though they pay dividends, their yield is less than 1%, and their key return potential is capital gains from stock price appreciation.
Broadcom’s US$2.60 annual dividend per share versus a US$100 stock price appreciation makes the 15% dividend withholding tax a drop in the ocean.
The sharp 21% dip in Broadcom in June is an opportunity to buy the dip. Almost all artificial intelligence (AI) stocks corrected in June after SpaceX debuted on the NASDAQ. Broadcom’s fundamentals driving the stock are still strong. There was a small hiccup as Broadcom retained its 2026 revenue outlook, while analysts were expecting the company to increase its outlook. However, revenue and profits are growing, and AI data centre investing is still at its peak.
Capital gains from US stocks
While US dividends attract withholding tax, capital gains are exempt. That is because the IRS allows non-residents to pay tax on capital gains in their resident country. If capital gains are taxed as per the Canadian tax system, the CRA exempts all TFSA investments from taxes. So the US$100 capital appreciation in Broadcom year-to-date is tax-free if invested through a TFSA.
Thus, investing in US growth stocks through a TFSA can help you generate tax-free wealth. However, you have to be careful with the dollar amount you invest.
Convert TFSA global investments to Canadian dollars
Another layer of complexity with foreign stocks is the exchange rate. The CRA determines TFSA contribution room in Canadian dollars. Always convert your foreign stock investments to Canadian dollars to calculate your TFSA contribution room. Any over-contribution will attract a 1% penalty every month from the CRA until you withdraw the surplus.
Final takeaway
While global investments come with their own set of rules, they also bring strong returns. If investing in US stocks seems like a hassle, you can buy ETFs that invest in US stocks and hedge against the dollar rate. The iShares NASDAQ 100 Index ETF (CAD-Hedged) replicates the Nasdaq 100 index but trades on the TSX and gives returns in Canadian dollars.
You could also invest in US stocks through their Canadian Depositary Receipts (CDR), such as SpaceX CDR – (CAD Hedged). You get exposure to US stocks while skipping the tedious task of currency conversion.
