Q – I would like to invest in dividend-paying foreign companies (not U.S. or Canadian) trading on American exchanges as American Depositary Receipts (ADRs) and keep those investments in a Tax-Free Savings Account (TFSA). My first question is whether I will pay any taxes. The second question is how to calculate the exact amount of contribution per year, since I will have to purchase them in U.S. dollars. For example if the maximum contribution per year is C$5,000 and the exchange rate is C$1=US$0.95 for that day, does it mean that I am allowed to contribute only $5,000 x 0.95 = US$4,750. – Mike S.
A – Replying to your first question, you will not have to pay any tax on capital gains earned within the TFSA – that’s true no matter what you invest in. However, any dividends paid into the plan will be subject to withholding tax. The percentage will depend on the tax treaty between Canada and the home country of the company you are investing in. For U.S. stocks, the withholding tax is 15%, but the tax could be higher – check with your broker.
As to the second question, you are overthinking this. Your contribution limit is C$5,000, period. Exchange rates are not a factor. Once the money is in the plan and used to purchase foreign stocks, your Canadian dollars will be converted to execute the trades. – G.P.
Gordon Pape is one of Canada’s best-known personal finance commentators and mutual fund experts and a regular contributor to the Fund Library. Click here to submit your question to Gordon.
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The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call the author to discuss your particular circumstances.