Are dividends tax free in a TFSA?
Generally, any dividends, interest or capital gains from an investment held in a TFSA is not taxed and you may also withdraw them without being taxed. However, there are some exceptions such as dividends from foreign stocks which could be subject to taxes.
Withholding Taxes on Foreign Dividends in a TFSA
Withholding taxes will be deducted from foreign dividends received in an FHSA or a TFSA, and these taxes are not recoverable.
Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn. Administrative or other fees in relation to a TFSA and any interest on money borrowed to contribute to a TFSA are not tax-deductible.
If you have all accounts - non-registered, TFSA and RRSP/RRIF, it is best to keep the investments that attract the highest tax rates inside your TFSA or RRSP/RRIF, and those that attract the lowest rates (Canadian dividends and capital gains) in a non-registered account.
What if you've never contributed to a TFSA before? If you have lived in Canada your entire life and you were 18 or older when the Government of Canada first introduced TFSAs (in 2009) and you've never put money into a TFSA, then your contribution room could be as much as $95,000 (in 2024).
Generally, interest, dividends, or capital gains earned on investments in a TFSA are not taxable either while held in the account or when withdrawn.
Since U.S. dividends are not paid from Canadian corporations, U.S. dividends do not qualify for the preferential Canadian dividend tax treatment. Foreign dividends, including U.S. dividends, are subject to tax at your marginal tax rate like interest income.
U.S. stocks held in a TFSA are subject to 15% withholding tax on U.S. dividend income. Withholding tax would apply to other foreign stocks held in a TFSA, with rates starting at 15%, depending on the country. Only Canadian stocks are not subject to withholding tax on their dividends inside a TFSA.
Your TFSA lifetime contribution limit is $75,500. Your ongoing contribution amount. There is new contribution room every year. For 2024, you can contribute up to $7000 plus any unused contribution room from previous years.
Yes, you can definitely reinvest the dividend. You don't have to take it out of the TFSA. Likewise, if you have a stock that doubles in value, and you sell it, you can use the money to buy new stocks. This means that any income you earned there can be reinvested.
How do I avoid withholding tax on US dividend stocks?
Investors are generally exempt from U.S. withholding tax when they hold U.S. listed ETFs or U.S. stocks directly in a Registered Retirement Saving Plan (RRSP) or Registered Retirement Income Fund (RRIF).
If you're lucky enough to have the means, it's actually a stellar idea to max out your contributions to both an RRSP and a TFSA. Why not get the most out of tax-advantaged accounts before stuffing money into accounts that aren't tax-advantaged? Otherwise, you're effectively turning down free government money.
Interest and foreign dividends are taxed as ordinary income in the year they are received (or earned), according to the recipient's marginal rate of taxation. Depending on where you live in Canada, interest income will be taxed at a marginal rate varying by province, and averages around 52%.
It also means that starting on January 1, 2024, eligible Canadians will now have a cumulative lifetime TFSA contribution limit of $95,000 (see “What is the lifetime contribution limit for TFSA?” below for examples and charts).
If shares are disposed of at a loss inside your TFSA, there will be no superficial loss if the shares are repurchased within the TFSA within 30 days, as gains and losses in a TFSA are not taxable or deductible.
If you make contributions that exceed the authorized limit, you will be required to pay 1% tax per month on that amount. Note: If you withdraw funds then make another deposit the same year, you may exceed the contribution limit and be required to pay a penalty.
Options include owning dividend-paying stocks in a tax-advantaged retirement account or 529 plan. You can also avoid paying capital gains tax altogether on certain dividend-paying stocks if your income is low enough. A financial advisor can help you employ dividend investing in your portfolio.
Non-Canadian Dividends:
Dividends received from foreign companies may be subject to withholding taxes, depending on the country of origin. These taxes are typically withheld at the source and can reduce the overall dividend income you receive.
If the company pays out cash dividends, you will owe taxes on those payments even if you decide to reinvest the cash received. If however, the company reinvests your dividends to purchase additional shares, you will not owe taxes until you sell those shares.
For non-dividend U.S. stocks, holding them in TFSA could be a smart choice. Like Canadian stocks, you won't pay a capital gains tax on U.S. stocks when you sell them for a gain. And unlike RRSPs, you won't pay taxes when you withdraw money from your TFSA before retirement.
Do US citizens pay tax on foreign dividends?
Are Foreign Dividends Taxable in the U.S.? Yes, from a baseline perspective, foreign dividend income earned by a U.S. Person is taxable by the United States. That is because U.S. Taxpayers are taxed on their worldwide income, which includes passive income such as dividends, interest, and capital gains earnings.
Since ordinary dividends receive no special tax treatment, they pay 22%, or $2,200, in taxes on their dividends. However, if their dividend is qualified, they pay a 15% rate, based on their income, or $1,500.
If you have cash to put to work in a TFSA and adequate contribution room available, allocating a portion of it to dividend stocks can be a terrific way to grow your money. Between the tax-free dividend income, capital gains, and possible compounded growth, you can be a much wealthier investor when you retire.
TFSA earnings are subject to U.S. income tax. You must include any earnings from your TFSA as taxable income on your U.S. income tax return, and a direct foreign tax credit cannot be recouped as there is no Canadian tax incurred on them. Special filing requirements apply to specific investments.
Qualified dividends are taxed at 0%, 15% or 20% depending on taxable income and filing status. Nonqualified dividends are taxed as income at rates up to 37%. IRS form 1099-DIV helps taxpayers to accurately report dividend income.
