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Discussion Starter #1
I'm looking at other options for monies within my TFSA.

This must have been discussed among our groups in various blogs MDJ and CC inclusive, but I don't recall if anybody else is doing this. I'm trying to decide if the TFSA is infact THE most tax-effective best place to hold ADRs of companies who DO NOT have any tax-minimizing treaties with Canada.

Why TFSA vs. RRSP? Well I hope to have income producing holdings, utilities, telecom etc. so the access to the dividends is important.

Move way REITS and Canadian incomes trusts.
 

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Sampson,

The key point with regards to foreign securities held in the TFSA is that even thought you don't pay tax on the investment income earned on securities in the account, you are still effectively paying some tax since the international system of withholding taxes causes tax to be deducted at source. You are not entitled to a tax credit on the foreign tax paid on the securities in your TFSA. Even your RRSP may not be a good location to hold certain foreign securities because the foreign tax paid may not be fully refundable if at all. It all depends on the bilateral tax treaty between Canada and the foreign jurisdiction (if one exists at all).

In general, in Canada the highest taxes are paid on interest income, then dividend income, and finally capital gains in that order. (If you are in the lower tax brackets though, you may pay higher effective taxes on capital gains than dividend income.) In general, interest and dividend income earned on foreign securities is taxed like interest income (at your marginal tax rate), but you normally receive a credit for the foreign tax paid. Capital gains on foreign securities are taxed like other capital gains.

So basically, there is tax a benefit from holding foreign securities in your TFSA and RRSP, but depending on your situation, it may make sense to organize your portfolio such that foreign securities are held in a taxable account, while your Canadian securities are held in your TFSA and/or RRSP.

I hope that this helps. Let me know if it needs further explanation.
 

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thanks robillard, this is an excellent treatment of a topic to which not enough attention is paid.

couple minor points:

- only foreign countries enter into tax treaties with canada; foreign companies do not.

- in some cases an ADR can actually have a double layer of withholding taxes. There is the visible 15% withheld by the US when it remits the dividend to a canadian taxpayer. In addition often there is a hidden withheld tax imposed on the primary dividend stream by the country of origin, where the shares were issued and where they principally trade. Until recently - when they eliminated their dividends - a number of european banks were in this category. I had read that it is possible to identify the micro-portion of this original WT tax that would apply to an individual canadian taxpayer and even claim the same, but in reality the costs of carrying out this work or paying an accountant to do the same would normally exceed any canadian tax credit obtainable.

- as to when it may make sense to organize a portfolio so that "your Canadian securities are held in your TFSA and/or RRSP," offhand i believe there would be very few instances where holding a dividend-paying canadian in an RRSP would make sense, because investor would lose the canadian dividend tax credit. By this i mean real dividends in the narrow sense of the word, not income trust distributions which have unfortunately come to be called dividends but which are generally a package of payouts with varying tax consequences. The only exception i can think of is investor w taxable income so low that he/she cannot benefit from dividend tax credit.

anything that underlines or points up the tax consequences of holding foreign securities, including plain-vanilla US stocks, has value for this forum imo.
 

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Mostly agree. Bad idea to put foreign traded securities in TFSA. There are plenty of good Canadian securities to buy for that account.

* 15% will be withheld from US sources (which these are) and you cannot recover the tax on your personal tax return.
* The originating country of the underlying company will have probably withheld tax on the distributions to the US bank issuing the ADR. Also not recoverable.
* Since all but one (2?) brokers do not allow you to hold US dollars in a TFSA, every purchase and sale and income receipts must get exchanged for Loonies at about 1.5% each time. WAY too much of a drain on your returns.
 

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Thanks humble_pie.

"Companies" and "Countries" look alike when you are writing in a rush.

Also whether it makes any sense to hold dividend-paying stocks in the TFSA or RRSP, it depends in which province and what tax bracket one is. The benefit of the dividend tax credit is tied to the gap between the corporate tax rate and one's marginal tax rate. You are right though that it may not make sense to hold dividend-paying stocks in one's RRSP, particularly if one expects to be in one of the top tax brackets in retirement.
 

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Discussion Starter #6
Thanks for the great info.

While not a novice investor, I do suddenly realize my exposure to non-US companies is limited, and thankfully largely outside any tax-free or -deferred accounts.

I'll just keep the current strategy then.
 

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Discussion Starter #8 (Edited)
Keep in mind many US companies get a large % of earnings from outside the US.
KO,MCD,CAT come to mind.
I don't understand how this affects my personal consideration of investment income tax. Are you suggesting that we should also consider the taxes which the companies pay in the foreign companies where they operate? So US companies generating revenues in places where tax burdens are high are to be avoided?
 

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Discussion Starter #9
* Since all but one (2?) brokers do not allow you to hold US dollars in a TFSA, every purchase and sale and income receipts must get exchanged for Loonies at about 1.5% each time. WAY too much of a drain on your returns.
True, but I think the 1-2% cost on a sustainable 6% dividend from a foreign company giving me exposure to a foreign market I'm interested in is worth it.

I don't mind receiving only 5.9% on my initial investment.
 

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I don't understand how this affects my personal consideration of investment income tax. Are you suggesting that we should also consider the taxes which the companies pay in the foreign companies where they operate? So US companies generating revenues in places where tax burdens are high are to be avoided?
Sampson,

It doesn't really affect your personal consideration of investment income tax. Corporations with international operations pay tax on those earnings in each jurisdiction in which they operate. Just because a corporation has international operations does not mean that you are paying extra tax. In general corporations are only supposed to pay tax where its income is earned, though there are some quirks to the international tax system that can cause some of that income to be taxed twice. Your main concern should be where the listed entity (typically a holding company) is resident, and has its securities registered. The dividend tax credit only applies to the dividends of Canadian corporations.
 

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Sampson it has no bearing tax wise.
I posted in reference to your exposure to non US comapnies.
In my opinion if a US company derives earnings 70% outside the US I consider that into my allocation.
 
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