If you’re any kind of investor, you’ve got both Canadian and U.S. stocks.
Having all your assets tied up in Canada is silly. What happens when Quebec finally gets the bomb? You know those crazy poutine eaters won’t hesitate to nuke Alberta and then try to ride in and take the oil. They won’t succeed because MURICA will beat their asses to it, but still. It’s fun that they try.
Of course, the real reason why you shouldn’t have all your investments in Canadian dollars is because our economy isn’t really that important. Sure, we’ve got the oil and a lot of minerals, but that’s really about it. We’re not a superpower, we’re just pretty good. Think of us as the nation version of Ben Affleck’s little brother.
Besides, Canada is a whole 3% of the world’s economy. Our biggest claim to fame is our overpriced housing market, and maybe the fact that we’re America’s hat and/or largest trading partner. Oh, and Alberta will get mad if I don’t point out the oil thing again. Canada is a housing correction and a decent electric car away from turning into Poland.
Which is why, if you’re a canuck investor, you should hold at least some U.S. stocks. You could get all technical and say that everyone should own stocks from around the world, but let’s not go nuts. A lot of U.S. stocks have significant worldwide operations anyway. Besides, it’s easy to buy many foreign stocks using ADRs that trade in the U.S.
Assume you bought a U.S. stock that pays a dividend. Which account should you hold it in?
The answer is really simple — your registered one. As in, your RRSP.
Here’s what happens when you hold a U.S. stock in a registered account, and you get a dividend.
1. You get the dividend
2. There is no step 2, sucka
3. Uh, I dunno
4. Has this joke gone on too long?
5. Yes. Yes it has
Meanwhile, if you hold a U.S. stock in a regular margin account, the IRS will take a 15% withholding tax. You can apply to get that withholding tax back from the CRA, since the U.S. and Canada have a tax treaty. But unlike with Canadian dividends — which are taxed at a discounted rate — U.S. dividends are taxed as normal income. That means, depending on the tax bracket, you’d pay about 10% more in tax on U.S. dividends.
The TFSA is a little different. You’ll get dinged the 15% withholding tax, but that’s it. So again, it pays to hold U.S. stocks in your RRSP and stick Canadian ones in your TFSA or regular ol’ account.
Rules are slightly different for other parts of the world. Say you bought shares in Siemens, a German company. It pays a nice 3.25% dividend, and generally you’ll get withheld 15% of the income in both a registered or non-registered account.
The difference is that you’ll be able to get the tax credit from the taxable account, and not the RRSP. So it makes sense to hold foreign stocks that aren’t U.S. based (including ADRs that trade on U.S. stock exchanges) in your taxable account, at least from a dividend perspective.
Sometimes though, the country withholding the tax won’t know where the investor is from, and withhold the maximum amount of tax allowed. In the German example, it might be 25 or 30% of the value of the dividend. As a Canadian taxpayer you can apply to get your tax credit to get the 15% back, but that’s it.
Assume this happens with Siemens. Suddenly your 3.25% dividend turns into a less impressive 2.93% dividend, based on the 25% withholding tax and the 15% credit. And remember that you’re paying full tax on that, so in reality it’s more like a 2.75% dividend.
If you’re buying a stock based on the assumption that it’s undervalued and is likely to go up a lot, taxes are just a cost of doing business. Other governments don’t get in on the action of taxing capital gains on stocks.
But if you’re buying a stock for income, Canadian stocks continue to be your best bet. There’s no withholding taxes, and they get taxed using the dividend tax credit. I understand wanting to diversify across borders, but at least from a tax perspective, it’s not such a good plan.