TFSA Rules for Holding U.S. Stocks: What Investors Need to Know

TFSA investors can hold VFV for U.S. stock exposure, but a 15% dividend tax applies. Here is what that means for your returns.

Key Points
  • Capital gains on U.S. stocks and ETFs like VFV are 100% tax-free inside a TFSA.
  • U.S. dividends are subject to a 15% withholding tax in a TFSA, and unlike in a taxable account, that tax cannot be recovered.
  • VFV charges a management expense ratio of just 0.09%, or 90 cents a year for every $1,000 invested, and pays a quarterly distribution.

The Tax-Free Savings Account is popular among investors because returns earned in the registered account are exempt from Canada Revenue Agency taxes. These returns can come from capital gains, dividends, or interest.

Moreover, you can own U.S. stocks in the TFSA and benefit from geographic diversification while gaining exposure to the world’s largest economy.

However, if you own U.S. stocks that pay a dividend, TFSA investors should note a tax rule. The Canada-U.S. Tax Treaty exempts RRSPs (Registered Retirement Savings Plan) and RRIFs (Registered Retirement Income Funds) from U.S. dividend withholding tax. These accounts already existed when the treaty was written in the 1980s.

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Why TFSA owners should invest in the U.S. economy

The top holdings of the TSX index include companies from mature sectors such as banking, energy, and mining. Canada does not offer significant exposure to the technology stocks that have driven markets higher in recent years.

So it makes sense that many Canadians want to hold U.S. stocks in the TFSA, given the S&P 500 has delivered higher returns than the TSX over the past decade.

One of the easiest ways to do that is through the Vanguard S&P 500 Index ETF (TSX: VFV), a Canadian dollar fund that tracks the S&P 500 index.

According to Vanguard’s most recent factsheet, the fund held $34.3 billion in assets as of July 31, 2026, and its unit price rose from $144.07 to $185.74 over the prior 12 months.

Since its inception in November 2012, VFV has returned 17.4% a year on a net asset value basis, and a $1,000 investment made a decade ago would now be worth roughly $4,350.

The VFV fund primarily invests in a U.S.-domiciled Vanguard S&P 500 ETF, and Vanguard pays the 15% withholding tax on those underlying dividends before passing the net amount to VFV unit holders.

Vanguard lists VFV’s benchmark as the S&P 500 CAD NY Rate NTR, with NTR standing for net total return, meaning the 15% withholding is already baked into how the benchmark is measured.

In dollar terms, VFV currently carries a dividend yield of about 1.1%, in line with the S&P 500, and it paid a distribution of $0.40 per unit in its most recent quarter.

The fund charges a management expense ratio of 0.09% and a management fee of 0.08%, which is pocket-friendly.

TFSA or RRSP: Where should you own U.S. ETFs

Since VFV’s dividend yield sits near 1.1%, the 15% tax bite is small in dollar terms. On a stock yielding 1%, a 15% withholding tax costs you about 0.15 percentage points of total return a year. It is a minor drag compared to the growth potential of holding the S&P 500’s biggest winners.

The math changes for high-yield U.S. dividend stocks or REITs, where the same 15% tax takes a much bigger bite out of income. Hold high-dividend stocks in an RRSP, where the treaty exemption applies, and no withholding tax is charged.

I like VFV as a core TFSA holding for investors who want broad, low-cost exposure to America’s largest companies without picking individual winners.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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