US Dollar TFSA’s
For one reason or another, you may want to your TFSA to hold US funds. Maybe you want to avoid costly currency exchange rates. Or maybe the stocks you want to buy and sell in are in US dollars. Or maybe you like to keep your US and Canadian TFSAs separate for other reasons.
In any event, most registered accounts, including TFSAs, RRSPs, and RRIFs, allow for the option of holding US funds instead of Canadian funds (RESPs are an exception). Simply ask your bank or credit union if they offer this option, though most do. If your TFSA is a self-directed-one, check with the brokerage firm.
US transactions and their Canadian equivalent
Your TFSA contributions are allowed to be in US dollars. Be aware that even though the money sitting inside the TFSA may be in US dollars, any receipts or withdrawal records for tax purposes will actually be in the Canadian dollar equivalent. As well, any contributions you make will be recorded in Canadian dollars, so when keeping track of your contribution room, make sure you are working with Canadian amounts and not US ones. When the US and Canadian dollar were close to par, this wasn’t much of an issue, but with the current exchange rate, you may inadvertently over-contribute nowadays!
Tax consequences for US-dollar TFSAs
There are no tax consequences for trading in US dollars since by definition, the contents of a TFSA are tax-sheltered. There may be transaction costs or maintenance fees, but these come from your bank and are not associated with the CRA. Check with your bank or brokerage firm to see if there are internal fees associated with holding US currency in your TFSA.
If you choose to de-register the TFSA, or it de-registers itself after a period of time (eg. if you have a TFSA arrangement in trust with an expiry date), then the money sitting inside the TFSA will become taxable. When this happens, the CRA will convert the value from US dollars to Canadian dollars first, and then tax you on the Canadian equivalent.
“There are no tax consequences for trading in US dollars since by definition, the contents of a TFSA are tax-sheltered.”
This is not exactly correct, the last time I checked. The IRS does not recognize TFSAs as tax-free (as it does with RRSPs) so withholding tax is deducted from dividends. I would guess that the tax payer would get credit for the deducted tax similarly to in regular taxable accounts. If this has been changed, please explicitly state that in your “authoritative” description.
Canadians can hold US dollars in their TFSA’s without consequence, which is what the text in this article is referring to. It is not describing a situation where an American or dual citizen is using a TFSA for investment purposes.
When I’m keeping track of my remaining contribution room and I have USD funds, how is the remaining contribution room calculated? Do I translate the book value of funds to CAD and it should not exceed (for example) CAD $6,000 at any given moment; or do I translate USD funds in CAD at the time of purchase (i.e. not revalue funds)?
Our understanding is that you calculate the CAD equivalent of your USD when you’re depositing funds or making withdrawals to your TFSA. Your book value can fluctuate with DRIPs, as can the market value of your investments, so that part of things shouldn’t require constant monitoring. What’s important is that you don’t exceed making contributions in USD that exceed Canadian limits (ex. if the loonie is at $0.80 USD, and the annual contribution limit is $6,000, ensure you don’t deposit more than $4800 USD into your account). Likewise, when you make withdrawals in USD, ensure you have calculated their CAD equivalent so that you know how your contribution room is being affected.
When you sell a US stock in a US TSFA and withdraw cash out of your US TSFA is it tax free like it is in a Canadian TSFA?
Yes, a USD TFSA functions the same way that a CAD TFSA does. Just ensure that you’re not over-contributing when making deposits into your USD account. i.e. 2021’s limit is $6,000 CAD. Depositing $6,000 USD into your USD TFSA would result in an over-contribution, as the US dollar is currently worth more than the Canadian dollar.
How is the conversion rate calculated on the tax free savings account from USD to CAD in terms of calculating the maximum contribution limit?
Hi, I’m no expert but I do have a USD TFSA account. Any conversion rates are applied at the official exchange rate you put USD in or take ‘CAD’ out. At rate of 1.25, putting in US$1000 would count as putting in CAD$1250. Taking out CAD$1250 would be converted back to US$1000.