Should you treat U.S. stocks differently?

The standard advice is to put Canadian stocks in non-registered accounts, and put fixed income investments, such as bonds and GIC rate, inside RRSPs and TFSAs. Tax rates are lower on the Canadian dividend income and capital gains you get from stocks than they are on the interest income you get from bonds and GICs, so keep your stocks outside your RRSP where taxes matter, and then hold your bonds and GICs inside.

U.S. equities are more complicated. Dividends from U.S. stocks are taxed in Canada at regular rates, just like interest income. But capital gains on U.S. stocks—which you trigger when you sell a stock at a profit—are taxed favorably just like capital gains on Canadian stocks. So it makes sense to hold U.S. stocks that pay little or no dividends inside your non-registered accounts alongside Canadian stocks. On the other hand, U.S. stocks that pay handsome dividends probably fit better in your RRSP.

There is an added U.S. tax wrinkle here: the Internal Revenue Service levies a 15% withholding tax on dividends on U.S. stocks held by foreign investors (these are deducted automatically). If a stock pays a 3% dividend, then, the withholding tax would reduce it to 2.55%.

Fortunately, if you hold U.S. stocks in non-registered accounts, you get a credit for the amount withheld that you can apply against Canadian income taxes, so in most cases that leaves you square—providing your Canadian tax rate is at least 15%.

In the case of RRSPs and other retirement accounts, Canada has a tax treaty with the U.S. that exempts you from the withholding tax. But if you hold U.S. stocks in a TFSA or an RESP, you’re dinged the 15% levy and you can’t get it back. As a result, you’re best off holding U.S. stocks that pay hefty dividends inside your RRSPs, and keeping them outside of your TFSAs and RESPs. Who knew?

Keep in mind that dividend withholding tax amounts and treatments vary among other countries, so don’t count on the advice for U.S. stocks applying to stocks from overseas.