TFSA versus RRSP for US ETF - Stocktrades Canada

I’m looking at buying the US FIVG ETF. I’m trying to decide if it should go into my TFSA or my RRSP. If I understand correctly, if I put it into my RRSP, I pay no taxes now, but I do pay taxes when I withdraw my RRSP. If I put it into my TFSA, I pay a withholding tax of 15% of the dividend, but no taxes when I withdraw the money eventually. Given that I expect large growth in this ETF, but a small dividend (about 1%), I think it would be wiser to put in into my TFSA and not ever pay taxes on the growth, but lose 15% of the dividend. Is my logic reasonable? It seems everything I read says putting it into an RRSP is better.

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Asked on May 28, 2020 9:14 am

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Hi there,

We are no tax experts, and everyone's situation is different. That being said, your reasoning is sound.

There is no hard and fast rule here - the main reason why "everything you read" says to put US dividend stocks in your RRSP is because of the 15% withholding tax. However, as you mentioned - you are taxed at your income tax rate when you withdraw your RRSPs. Which as you pointed out, can actually work against you - especially if you have a high growth stock and have a high tax rate come retirement.

Personally, I think people put too much stock in the 15% withholding rule - especially if it is a small dividend. TFSA is tax free and if you expect exponential growth, then in my opinion, the TFSA is the right investment vehicle. Although the 15% is lost and not recoverable, is is small in comparison to what you would be taxed when you withdraw from an RRSP.

As mentioned, I am by no means an ETF tax expert and it is worth nothing that there are nuances depending on where the ETF is listed and the holdings within the ETF. That being said, based on my own tax situation I would have came to the same conclusion as you.

Mat

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Posted by Mathieu Litalien

Answered on May 28, 2020 3:01 pm

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