Yes, You Can Hold US Stocks in a TFSA
Absolutely, you can buy US-listed stocks and ETFs inside your TFSA through any Canadian brokerage that offers US trading. This includes platforms like Wealthsimple Trade, Questrade, TD Direct Investing, and others available to Ottawa investors.
But there's a catch that many investors don't know about until they see it on their statements.
The US Withholding Tax Problem
The US and Canada have a tax treaty that normally reduces US withholding tax on dividends paid to Canadians to 15%. But this treaty benefit only applies to registered retirement accounts like RRSPs, not TFSAs.
This means if you hold a US stock like Apple, Microsoft, or a US-listed ETF like VTI in your TFSA, the IRS withholds 15% of every dividend before it even reaches you. And because the money is in your TFSA, you can't claim a foreign tax credit to recover it on your Canadian tax return.
That 15% is simply gone.
How Much Does This Actually Cost?
It depends on the yield. For a growth stock paying little to no dividends (like Berkshire Hathaway), it doesn't matter much. But for a high-yield dividend ETF paying 4% annually on a $50,000 position, you'd lose $300/year to withholding tax, permanently.
Over 20 years with compounding, that adds up to thousands of dollars in lost returns.
The Workaround: Canadian-Listed ETFs
Here's the good news: you can still get US and global market exposure in your TFSA without the withholding tax trap, by using Canadian-listed ETFs that hold US stocks.
For example:
- VFV (Vanguard S&P 500 ETF, CAD-listed) tracks the S&P 500 and is listed on the TSX
- XEQT or VEQT: all-in-one global equity ETFs listed in Canada
When a Canadian ETF holds US stocks, there is still some withholding tax at the fund level on dividends, but it's typically much smaller than holding US stocks directly, and the convenience and diversification often outweigh it for most investors.
Where Should You Hold US Stocks?
A common strategy used by Ottawa investors and Canadians generally:
- TFSA: Canadian-listed ETFs, Canadian stocks, growth-oriented US stocks with no or low dividends
- RRSP: US-listed ETFs (like VTI or VXUS), the Canada-US tax treaty applies here, so no withholding tax on dividends
- Non-registered account: US dividend stocks (withholding tax can be recovered via foreign tax credit)
Don't Let This Stop You From Investing
If you only have a TFSA and you want broad market exposure, buying a Canadian-listed ETF like XEQT or VEQT is still an excellent strategy, don't let perfect be the enemy of good. The tax-free growth in your TFSA on capital gains and the small amount of dividends will likely far outweigh the withholding tax drag.
