The 15% Tax on US Dividends Nobody Tells Canadians About (TFSA vs RRSP vs Cash)

If you hold US dividend stocks or US ETFs in a TFSA, the IRS takes 15% before the money reaches you and you can never get it back. In an RRSP, the same holding pays zero. Most Canadians have this exactly backwards.

Here is a cost most Canadian investors are paying and have never seen on a statement.

If you hold US dividend-paying stocks or a US-listed ETF in your TFSA, the IRS takes 15% of every dividend before it arrives. It does not appear as a line item. It is netted out at source. And unlike almost every other tax you pay, you can never get it back.

Hold the exact same security in an RRSP and the rate is zero.

That is not a loophole. It is written into the Canada-United States tax treaty, and it produces one of the few genuinely free optimisations available to a Canadian investor.

The default is 30%, and you are probably already avoiding it

Start with the baseline. The United States withholds 30% on dividends paid to non-residents. That is the statutory rate.

The Canada-US tax treaty reduces it to 15% for Canadian residents — but only if your broker has a valid W-8BEN on file certifying your status. Canadian brokers normally handle this at account opening and renew it about every three years.

If you ever see 30% coming off a US dividend, an expired W-8BEN is almost always the reason. It is worth checking once.

One important boundary: withholding applies to dividends, not capital gains. A Canadian resident selling a US stock at a profit owes no US tax on the gain, in any account type. This article is only about dividend income.

The rules, account by account

RRSP, RRIF, LIRA: 0%

Article XXI of the treaty exempts recognised retirement plans from US withholding entirely. Canada's registered retirement accounts qualify.

The condition that matters: the exemption applies only when you hold US securities directly — individual US stocks, or US-listed ETFs traded in US dollars such as VTI, VOO, SCHD or ITOT.

TFSA, FHSA, RESP: 15%, permanently

This is the part that surprises people. Under the treaty, a TFSA is not a retirement plan. Neither is an FHSA or an RESP. They are treated as ordinary savings accounts, and they receive no exemption.

So 15% is withheld. And because the income is not taxable in Canada, there is no Canadian tax bill against which to claim a foreign tax credit. The money is simply gone.

Worked example: a $1,000 US dividend paid into a TFSA arrives as $850. There is no form to file, no credit to claim, no recovery mechanism. That $150 is a permanent loss.

Non-registered (cash or margin): 15%, recoverable

Here the 15% is withheld, but it is recoverable through the federal foreign tax credit on Form T2209 and the provincial equivalent. In effect the withholding prepays part of your Canadian tax liability on that income.

The catch is separate: US dividends in a taxable account are taxed as ordinary income at your full marginal rate, with none of the gross-up-and-credit treatment that makes Canadian eligible dividends tax-efficient. The withholding is recoverable; the unfavourable tax treatment is not.

The trap: Canadian-listed ETFs that hold US stocks

This is where most people who think they have optimised have not.

VFV, XEQT, VUN, ZSP and similar funds are Canadian-listed ETFs that hold US stocks. When Apple pays a dividend, it goes to the fund, not to you. The IRS looks at the recipient and sees a Canadian fund — not your RRSP. It withholds 15% right there.

Your RRSP exemption never enters the picture, because the US payer cannot see your RRSP.

The single cell worth memorising is the top-left one. US-listed ETF, held in an RRSP, is the only combination that pays nothing.

There is a further wrinkle for the thorough: a Canadian-listed fund that holds a US-listed ETF, which in turn holds international stocks, can suffer two layers of withholding. That is beyond most investors' needs, but it is why "wrap" structures are less efficient than they appear.

What it actually costs

Percentages are abstract. Here is the real number.

The cost equals 15% × the dividend yield × the US portion of the holding.

• VFV (100% US equities, roughly 1.3% yield): about 0.20% per year of assets. On $50,000 in a TFSA, roughly $100 a year.
• XEQT (about 46% US equities): about 0.10% per year. On $50,000, roughly $50 a year.
• A high-yield US dividend ETF at 3.5% yield: about 0.53% per year — which can exceed the fund's own management fee.

Compare that to how hard investors work to shave 0.03% off an expense ratio. This is often the larger number, and almost nobody looks at it.

Note the pattern: the cost scales with yield. A growth-oriented US holding paying 0.5% loses almost nothing to withholding. A US dividend or covered-call strategy loses a lot. If you are going to hold high-yielding US securities anywhere, the RRSP is where they belong.

So what should you actually do?

A practical order of operations, not a rule.

1. Put high-yielding US securities in the RRSP, held US-listed. This is the highest-value application. US dividend ETFs, US REITs and individual US dividend stocks all pay zero withholding in an RRSP when held directly in US dollars.

2. Use the TFSA for Canadian dividends and for growth. Canadian dividends have no withholding at all. Growth-oriented holdings with low yields lose little. Both are efficient TFSA uses.

3. Do not restructure everything over 0.20%. Which account you fund first depends on your marginal tax rate now versus in retirement, and whether you need the money before 65. Those are much bigger levers than 15% of a 1.3% yield. The withholding tax is a tiebreaker.

4. Getting US-listed ETFs into an RRSP requires US dollars. Converting CAD to USD through a bank or broker typically costs 1.5%–2.5% in FX spread — which can wipe out several years of withholding savings in one transaction. If you are converting a meaningful amount, Norbert's Gambit is the standard way Canadians avoid that spread.

5. Currency risk does not change. A US-listed ETF and a Canadian-listed equivalent both give you full exposure to the US dollar. Neither hedges it. The listing currency is a settlement detail, not a risk difference.

The one-sentence version

If you hold US dividend payers, hold them US-listed inside an RRSP, and stop holding them in a TFSA if you have a choice — because the TFSA is the one account where the tax is real, invisible, and permanent.

Frequently asked questions