Is it better to hold U.S. stocks in a TFSA or RRSP?

Q: I’ve been reading about holding U.S. stocks in a TFSA, and how this could be problematic due to U.S. withholding taxes. I still have contribution room in my RRSP. Should I move my U.S. blue-chip stocks from my TFSA to RRSP? Would this be beneficial tax-wise for me? Many people seem to say “it depends”. Depends on what? Can you please explain?

—Trevor

A: Hi Trevor. As you know, every Canadian resident with a Social Insurance Number (SIN) can open a TFSA account once they reach the age of majority whether they have income or not. Interest, dividends and capital gains from Canadian investments accrue in your TFSA tax-free. However, if you own U.S. stocks, the IRS requires that taxes are withheld regardless of the fact that the stocks are held in a tax-free account.

In determining if you should move your blue-chip stocks from your TFSA to your RRSP, here are some things to analyze and ponder.

First, the IRS levies a 15% withholding tax on Canadian investment accounts as part of Canada’s treaty with the U.S. Look at the return on your blue-chip stock after the withholding tax. After doing this analysis you may find that the numbers speak for themselves and your return after the withholding tax is better than the return on your Canadian investments.

Second, the IRS does not levy withholding taxes on U.S. investments held in an RRSP

Third, how much diversity are you looking for in your overall portfolio with your TFSA and RRSP? This will be somewhat determined by how soon you plan on withdrawing the funds in your RRSP and TFSA. If you are intending to hold for a long time, then moving your stocks to your RRSP account and holding Canadian investments in your TFSA may be a good strategy. On the other hand, if you are retiring soon, you may be looking for more diversity to spread your risk in which case leaving the stocks in your TFSA will make sense.

Finally, your province is a factor in this decision. Ask your accountant to calculate your taxes owing under each scenario so you are sure of the impact of your decision.

Theresa Morley, CPA, CA is a partner with Morley Chartered Accountants in Barrie, Ont. Read her blog.

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