Where should investors hold their US dividend earning stocks? Canadian investors who file a W-8BEN form through their broker are subject to a 15% withholding tax on the US dividends they receive. US dividends received inside an RSP are free from this tax, but US dividends received inside a TFSA are not. Canadian investors receiving US dividends in their non-registered accounts are eligible to claim half the withholding tax they paid and get a tax credit on their annual return. With this in mind, Canadian investors should probably not hold US dividend earning stocks inside their TFSA. The best place to hold US dividend paying stocks is in a non-registered account, but the ultimate allocation will depend on the investor’s situation.
High net worth investors should also be aware of the rules regarding disclosure for US holdings worth more than $100,000 and various implications for their estate’s when large amounts of US investments are held.
Investors should also pay attention to the currency risk and diversification benefits associated with holding US and other foreign securities. The impacts of currency cuts both ways. When the Canadian dollar is weak against foreign currencies, the Canadian based investor holding US investments will benefit, but the opposite is true when the Canadian dollar is strong.
There are also ways to own Canadian stocks held in US dollars by purchasing those shares of Canadian companies traded on US exchanges and there are also a small number of Canadian stocks that pay dividends in US dollars which could also provide some currency diversification.
Another strategy to consider is whether to use ETFs traded on Canadian exchanges that track US benchmarks. Investors can also get this exposure by choosing ETFs on US benchmarks traded on Canadian exchanges that include currency hedging. The downside of some of these hedged ETFs is they are a bit more expensive.
