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The purpose of this article is to explain how, if at all, dividends are taxed within a TFSA.
I wish the answer was as simple as “no they aren’t”, but there are a few caveats we need to discuss so that you understand the full story.
It might not be an exciting story, but I guarantee you will leave this article having learned something.
Dividends generated within your TFSA will not count towards your taxable income. If you decide to withdraw these dividends from your TFSA, you still won’t be subject to any taxes. However, dividends paid to you by foreign companies may be subject to withholding tax even if the stocks are held within your TFSA.
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To further explain the answer given above, let’s first look at Canadian dividends.
Are Canadian Dividends Taxable within a TFSA?
If you invest in a Canadian dividend-paying company within your TFSA, such as Telus, your dividend income will be completely tax free and not subject to any withholding or income taxes.
Popular Canadian Dividend Paying Stocks
- Telus (T.TO)
- Fortis (FTS.TO)
- Bank of Nova Scotia (BNS.TO)
- TD Bank (TD.TO)
- Royal Bank (RY.TO)
|Company||Dividends Generated||Withholding Tax (%)||Withholding Tax ($)||Actual Dividend Income||Tax on Withdrawal|
Not bad, hey!
There isn’t much more to this. Any dividends generated within your TFSA from Canadian based companies are not subject to any taxes, end of story.
But here’s the thing, most investors don’t only invest in Canadian based companies, for example, some of the best companies in the world are based in America.
And this is where withholding taxes come in to play – but you don’t have to do anything, so don’t worry.
What are Withholding Taxes on Foreign Dividends
To recap what was stated at the beginning of the article, dividends generated within your TFSA from companies outside of Canada may be subject to withholding taxes.
Withholding taxes are taxes paid by investors to non-resident governments.
So if you’re a Canadian, the United States is technically a foreign country and therefore any dividends generated from American based companies will be subject to a 15% withholding tax.
“Thank you, I’ll take that” – IRS.
Popular American Dividend Paying Stocks
- Home Depot (HD)
- Apple (AAPL)
- Microsoft (MSFT)
- Best Buy (BBY)
- Walmart (WMT)
And yes, even though your TFSA is “tax free”, this withholding tax still applies.
Luckily for you though, these taxes will be withheld before they enter your account so you don’t have to worry about anything.
Quick Note #1 – Due to a tax treaty between Canada and the US, dividends generated within your RRSP from American companies are not subject to a withholding tax. Unfortunately, TFSAs don’t get this same treatment.
If you are a little confused still, go easy on yourself, this stuff can be confusing. Here’s an extension of our last example to help clarify this answer.
For simplicity sake, let’s say you own two stocks in your TFSA, Apple and Telus.
- Telus – Canadian Company
- Apple – American Company
If you earn $500 in dividends from each of these companies, that is great, but the dividends you earn from Apple will be reduced by 15% as a withholding tax.
This results in you only receiving $425 in dividends.
For the other stock you own, Telus, you will receive the full $500 dividend because it is a Canadian based company and no withholding taxes apply.
|Company||Dividends Generated||Withholding Tax (%)||Withholding Tax ($)||Actual Dividend Income|
Tax on Withdrawal ($)
Quick Note #2 – Any dividends generated from Canadian mutual funds or ETFs that hold US securities will also be subject to this 15% withholding tax.
But don’t forget, you can invest in other dividend paying companies outside of the US and Canada as well – and all of these countries have their own unique withholding tax rates that are applied to dividend income.
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Popular Dividend Paying Stocks Outside of Canada and the US.
- Nestle (SWX:NESN) – Swiss Based.
- Unilver (LON: ULVR) – UK Based.
- Halma (LON: HLMA) – UK Based.
- Fresenius Medical Care (ETR: FME ) – Germany Based.
- Sanofi (EPA:SAN) – France Based.
View withholding tax rates from each country here. This information was provided to us by SP Global.
Are Dividends Taxed When Withdrawn from a TFSA?
We talked about this earlier in the article, but I think it is really important to clarify what was stated – more so for your peace of mind than anything else.
Any dividends you withdraw from your TFSA are tax-free. In other words, dividends withdrawn from your TFSA will not count towards your taxable income. And while that is great, unlike contributions to your RRSP, TFSA contributions do not reduce taxable income.
Even if these dividends come from foreign companies, the withholding taxes will have already been taken off your dividends, so you really don’t have to worry about it.
Typically, if you hold stocks in a non-registered investment account, your dividend income is subject to taxation when you earn it, not when it’s withdrawn from that account.
But in the case of your TFSA, you won’t have to pay any income tax on your dividend earnings whatsoever.
That is the beauty of these accounts! If you are a Canadian citizen over the age of 17, make sure you take advantage!
To clarify all of this, just remember – dividends withdrawn from your TFSA are not subject to any taxation. If these dividends were earned from foreign companies, the withholding taxes have already been withheld.
Related Financial Geek Article: Top 7 Benefits of Transferring Your TFSA to Wealthsimple
Is it Worth Investing in Foreign Stocks Within a TFSA?
If you’ve read this far, you might now be wondering, is it even worth investing in foreign companies if the dividends within my TFSA are going to be subject to withholding taxes.
This is a very fair question, and one that is commonly raised.
While you’ll have to make your own decisions on this, I personally think it is still very much worth it.
Think about investments outside of just dividends, some of the fastest growing companies in the world such as Tesla, Facebook and Amazon – all don’t pay dividends. But holding these stocks within your TFSA allows you to capitalize on capital gains at a tax-free rate.
If you are still stuck on dividends, I get it, but there is still a case to be made for why you should invest in foreign companies despite this withholding tax, especially if you are investing for the long term.
From a historical perspective, US stocks have outperformed Canadian stocks by almost 2%, so this 15% withholding taxes really isn’t a huge deal – in my opinion.
For more information on withholding taxes and if investing in foreign companies within your TFSA is worth it, check out this great video done by Griffin Milks.
At the end of the day, your decision here will also come down to what you want to invest, so don’t be afraid to ask for a second opinion from a professional advisor.
To conclude, don’t worry about how you pay taxes on dividends generated within your TFSA, because there are no action items for you to take.
Yes, there are withholding taxes on foreign dividends but those government agencies, such as the IRS, will take their withholding tax before the dividends even enter your account, so there’s nothing you need to do.
In other words, let the IRS take their 15% and move on. Just know your dividends will be 15% less than what your American counterpart would receive if you had identical portfolios.
If you are investing solely in Canadian dividend stocks, forget everything I just said. Why?
Because Canadian dividends generated within your TFSA are free of any withholding or income tax.
With that said, while I don’t usually give advice, I don’t recommend investing solely in Canadian based companies within your TFSA. Some of the world’s greatest and most profitable companies are headquartered outside of Canada.
In other words, don’t avoid nickels to save pennies.
I told you it wouldn’t be exciting! But hey, as always, I hope you learned something new here today.
How to Open a TFSA with Wealthsimple (4-Step Guide)
If you are interested opening up a TFSA for yourself, check out The Financial Geek’s Step-by-Step Guide on how to do so with Wealthsimple.