Do I Have to Pay Taxes on US Stocks in TFSA?

If individuals are using their Tax-Free Savings Account (TFSA) to invest in U.S. stocks, they are naturally likely hoping for tax-free growth. Yet, there is a catch—particularly when it comes to dividends. The outline is presented below:

• Capital gains from U.S. stocks inside a TFSA are not taxed in Canada. If you simply buy low and sell high, it is correct that the profits stay in the account, untaxed.
• Dividends from U.S. companies, however, are treated differently. A 15% withholding tax is applied by the U.S. government before the dividend reaches your TFSA.
• No foreign tax credit is allowed for this 15% because the Canada–U.S. tax treaty does not grant TFSA accounts the same recognition as RRSPs. As a result, the withholding is final and cannot be recovered.

The short answer to “Do I pay tax on my TFSA when it holds U.S. stocks?” varies in accordance with the type of return. Growth from capital appreciation is untouched. Yet, income through dividends sees a small, unrecoverable bite. It is worth noting the below aspects:

• This rule only applies to U.S. dividend-paying stocks. Canadian dividends or capital gains within the TFSA remain tax-free.
• For income-focused investors, holding those U.S. dividend stocks in an RRSP instead may lower tax impact.

And if you are a U.S. citizen or green card holder living in Canada, the situation is more complex. The IRS will tax income inside your TFSA, covering both dividends and capital gains.

Acknowledging how TFSA U.S. stocks tax rules work is a keystone in terms of profit maximization with investments. The goal is to structure the holdings in order to lower tax loss and keep the savings on track. If you are unsure, contact Watter CPA for maximum clarity.

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