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Some investing tips to keep onside with the U.S. and Canadian tax man
Q: I am a Green Card holder as well as a Canadian resident, and have two questions: No.1. Which are the best securities to invest inside my TFSA to be “friendly” from an Internal Revenue Service and Federal Treasury Board (IRS/FTB) tax point of view? And No. 2. Which are the best securities to invest in an RRSP—again, to be “friendly” from an IRS/FTB tax point of view?
—Mirjana G.
A: Hi Mirjana. Regarding your RRSP account, you can own any investment you like inside of an RRSP without any issue while you live in Canada. You may even want to hold any dividend-paying U.S. stocks inside your RRSP instead of a non-registered account.
Generally, dividends paid by U.S. companies to Canadians are subject to a tax treaty withholding rate of 15%. The tax treaty waives the withholding on U.S. stocks owned inside of RRSP accounts and is not subject to the passive foreign investment rules (PFICs).
TFSA accounts do not receive any special treatment by the Internal Revenue Service (IRS). U.S. dividends will be taxed at 15%, which your bank should withhold before they deposit the net amount into your account. Consider growth stocks (stocks whose gains are mostly from appreciation in value instead of dividend payouts) if you want to own U.S. stocks.
TOOL: Find out how much room you have in your TFSA with our calculator
If you are a U.S. taxpayer, not only will the IRS tax the account, but you will most likely have to complete and file foreign trust returns. And, if you invest in mutual funds, you now own a Passive Foreign Investment Company (PFIC) and will have to complete the required Form 8621. Also, keep in mind that a TFSA account may be considered a Foreign Grantor Trust under IRS tax laws and may result in an obligation to file forms 3520A and/or 3520 annually with the U.S. Treasury.
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