As a result, it may be easier to contribute Canadian dollars to a TFSA, or to use a buffer when estimating the exchange trade conversion from U.S. to Canadian dollars when contributing U.S. funds, Michelle. The exact amount of the buffer may be difficult to determine. Currency can fluctuate from day to day, and your financial institution may use a rate that varies by up to a couple percent from the posted exchange rate. To be safe, you could consider building in, say, a 5% buffer, and then ask your financial institution after the fact to confirm the contribution amount in Canadian dollars that it will report to the CRA. And if you are short a few dollars based on your contribution limit, you can top it up in Canadian dollars.
Note that your financial institution bears no responsibility with regards to tracking or confirming your available TFSA room—it simply reports contributions and withdrawals to the CRA. So, it is ultimately up to you to make sure you do not overcontribute.
Also, remember that if you withdraw from one TFSA, you do not get that contribution room back to contribute to the other TFSA immediately. TFSA withdrawals impact your TFSA room the next January 1, with net withdrawals for the year added back to your TFSA room for the subsequent year. If you recontribute too soon, you could be charged the 1% penalty tax.
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Foreign withholding tax and TFSAs
When you own U.S. securities or other foreign investments in your TFSA, non-resident withholding tax generally applies. The financial institution is responsible for withholding the tax from dividends and distributions before they hit your account.
The withholding tax is your final tax obligation to a foreign tax authority, so there are no tax-filing obligations for a Canadian resident who is not a U.S. citizen when they buy U.S. securities in their TFSA.
Final thoughts
A diversified portfolio should include U.S. and foreign stocks to complement Canadian stock exposure. So, on that basis, Michelle, using a U.S. TFSA can be a good investment strategy.
You could also explore alternatives to buying U.S. stocks in U.S. dollars, such as CDRs or even U.S.-equity ETFs listed on the Toronto Stock Exchange. If you are contributing U.S. dollars directly to your TFSA, just make sure the contribution amount in Canadian dollars based on the current exchange rate does not put you in an overcontribution position.
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About Jason Heath, CFP
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
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