Foreign Stocks Held Within TFSA’s
It is entirely possible for you to include US and international stocks in your TFSA portfolio as there is no limit on the amount of foreign content you’re allowed. But there are some things to keep in mind.
Eligible US stocks
US stocks are eligible for TFSAs so long as they are traded on a designated stock exchange. If your stocks pay US dividends then you will have to pay foreign non-resident withholding tax on that money, which could be costly!
Fortunately you can generally claim the Canadian foreign tax credit on this amount withheld and get some (most) of it back.
US stocks and RRSP vs TFSA
Note that while there is an exemption for US dividends being paid into a RRSP or RRIF through the Canada-US Tax Treaty, there is currently no such exemption for TFSAs. So in this case it may actually be better to hold US stocks inside an RRSP vs a TFSA.
Besides the US, there is a plethora of non-US international stocks you can invest in. When deciding what stocks you want to focus on note which market they are based in:
- Frontier markets: Developing countries with potential for economic growth, such as Nigeria, Kenya, or Bangladesh. These can be very lucrative over the long term: cheap prices mean you could end up owning large blocks of shares. If, at some point in the future there is an uptick in that market, you are well-positioned for a financial windfall. However this carries a high degree of risk since many of these economies are fragile and could easily crumble due to geo-politics or disaster. Many investors choosing frontier markets actually invest in ETFs or mutual funds instead of individual stocks to reduce risk by diversifying.
- Emerging markets: Developing countries with rapid growth and industrialization, such as Brazil, China, Mexico, and India. These lie between frontier markets and developed markets, so if you are adverse to the level of risk required for frontier-market investing, this may be a better option. Again, mutual funds or ETFs offer less volatility than individual stocks due to their diversity which can further increase your personal comfort level.
- Developed markets: High-income countries with established capital markets such as Japan, most of the EU, and Australia. If you want to increase the diversity of your portfolio by going international, but not dabble in the inherent riskiness of frontier or emerging markets, try these markets instead.
Remember that no matter which international stocks you end up investing in, there will be bumps in the road. Governments rise and fall. Natural disasters can derail a fragile economy. Various international conflicts can affect worldwide prices on any number of products. The main takeaway is to diversify to lessen risk and think over the long-term.
International (non-US) stocks and your TFSA
Generally speaking, the rules governing US stocks also apply to other foreign stocks (UK, EU, Asia, etc). There will be a withholding tax, similar to the US scenario, but the rates will be different depending on which country you are dealing with. Check out the various withholding tax rates of other countries.
Foreign stocks and your TFSA contribution limit
Because foreign stocks are traded in their home currency, and due to exchange rates, you have to be careful not to inadvertently over-contribute to your TFSA. If you are in the habit of frequently moving foreign stocks in and out of your TFSA you will be eating into your contribution limit already, and when you mix in the exchange rate it can get confusing. Keep careful records of all your transactions!