Buying US Stocks in a TFSA: Everything You Need to Know

Jake - Author/Founder

Jake - Author/Founder

I'm Jake. I believe you can build a wealthy life through frugal living and index investing.

I had had a lot to learn when I first started investing in 2015.

At first, I only held Canadian stocks in my TFSA. But eventually, I learned how to buy US stocks.

After all US stocks make up over 50% of the global stock market.

Following a series of mistakes, I now understand the ins and outs of holding US stocks and US ETFs in a TFSA in a way that minimizes currency exchange fees.

In this post, I share what I’ve learned, in hopes that it will help you avoid a bit of misery.

I believe investing should be made as simple as possible. Skip to the last section of this post if you want a simple way to hold US stocks in your TFSA – “A Simple Way to Hold Stocks in a TFSA”.

Can You Buy US Stocks in a TFSA?

Yes. 

You can buy and hold US stocks directly, or you can hold US stocks via an Exchange Traded Fund or mutual fund. 

To buy a US Stock or US ETF, you must exchange currency. This will result in an currency exchange fee through your brokerage. This fee is usually hidden in the form of a higher exchange rate. 

Let’s cover the key elements of holding US stocks in a TFSA. These elements are also applicable to US Listed ETFs. 

Table of Contents

Definitions

Exchange Traded Fund (ETF): A fund of stocks that trades on an exchange. ETFs can track many assets, but in this post I will only consider ETFs that track an index of stocks.

Exchange: An exchange is like a giant mall where buyers and sellers exchange securities. Securities traded on a US exchange must be purchased in US Dollars.

Security: For the purpose of this article, a security is a stock or ETF. Note that there are many additional types of securities.

Brokerage: The platform where you buy and trade securities. Examples include RBC Direct Investing, Wealth Simple Trade, and TD Direct Investing. 

CAD: Canadian Dollar

USD: U.S. Dollar

What is a “US Stock”?

Lets define a US stock as any stock that trades on a U.S. “exchange”.

There are two primary US exchanges:

  1. The New York Stock Exchange (NYSE) & NYSE ARCA.
  2.  NASDAQ.

In Canada we have one major stock exchange – the Toronto Stock Exchange (TSE).

All securities that trade on the TSE are traded in Canadian dollars, while all securities “listed” on a US exchange trade in US Dollars (USD).

Therefore, you must convert your dollars from CAD to USD to purchase any US security. This applies in the TFSA, RRSP and taxable accounts. 

How to Find What Exchange A Stock or ETF Trades On

You can find the exchange that a security trades on by searching for the security’s ticker in google. Then, check the top right of Google’s market summary.

For example, BABA is listed (trades on) the NYSE as per the snip below.  

A stock that is listed on a US exchange does not mean that the business has home base in the US. Alibaba, for example, is a Chinese company that trades on the New York Stock Exchange (NYSE) under the ticker BABA. Therefore BABA is traded in USD. 

What About ETFs?

ETFs trade just like stocks. When I talk about US-listed ETFs, I am referring to ETFs that are “listed” on a US Exchange.

For example, VTI is a US-listed index ETF that gives exposure to the entire US stock market by holding over 3000 US stocks.

The snip below shows it trades on the NYSE ARCA. Because it’s traded on a US exchange, VTI must be purchased in USD.

We also have ETFs listed on the TSE here in Canada. You can buy these guys in Canadian Dollars, so no currency exchange is required. An example would be VCN that holds over 240 Canadian stocks. 

This is related to the simple way to hold US Stocks in the TFSA, described below. 

Buying and Selling US Listed Stocks (and ETFs) In The TFSA

Most brokerages allow you to break the TFSA out into two “sides”: 

  • A CAD Side.
  • A USD Side.

Here is an example of my TFSA. Note that I use RBC Direct Investing as my brokerage. 

My Canadian holdings include all Canadian listed ETFs. Note that all values are provided in CAD.

The US holdings contain all my US-listed ETFs. Therefore, the US holdings are dispalyed in USD. 

Note that the USD side and CAD side exist within the singular TFSA account. They are not separate TFSAs.

Buying US Stocks on The Canadian Dollar Side

By default, you start with CAD cash on the Canadian Dollar side of your TFSA.

From the Canadian dollar side, you can buy and sell individual US stocks. But we just covered how US stocks and ETFs only trade in USD. So what’s the deal?  

This is where your brokerage saves the day. They exchange the currency from CAD to USD as part of the transaction.

The exchange of currency is not free, and the exact currency exchange fee depends on the brokerage. It is often between 1% to 2%. 

Often, this fee just comes in the form of a higher exchange rate. It’s hidden – a sneaky fee that can erode total returns by up to 4%. That’s 2% upon purchase, and 2% upon selling.  

Let’s go through an example.

Example: Buying a US Security on the CAD Side of the TFSA

Say you want to buy 10 shares US stock priced at $50 per share within your CAD account. The total transaction will amount to $500 USD.

Then currency exchange from CAD to USD will take place.

In addition, your brokerage will charge a currency conversion fee. We will use the Wealth Simple fee of 1.5%1. Here is the baseline data.

CAD-USD0.80USD/CAD
Currency Exchange Fee1.5%

Now let’s look at the details of the transaction, including transaction fees:

# Shares10
Cost/Share in USD$50 USD
Total Cost of Transaction (USD)$500 USD
Total Cost of Transaction (CAD)$625 CAD
Total Cost, Including Exchange$634 CAD

After the transaction is settled, you will see the stock in the Canadian Dollar side of your TFSA. As mentioned, the exchange fees will likely not be explicit as they are embedded in the exchange rate. 

Following the transaction, all price data associated with the stock will be displayed in CAD. The process repeats in reverse, meaning you must absorb another currency exchange fee when you sell. 

Buying US Stocks on the US Dollar Side

One way to limit exchange fees is to use the USD side of the TFSA to buy and sell your US listed stocks and ETFS. 

Here, you can use USD cash to buy U.S listed securities. When you sell the US listed securities, you’ll be left with USD cash in the account. 

This means you won’t incur a sneaky currency exchange fee every time you buy and sell US-listed security. Instead, you can buy the security in USD, and sell it to yield USD cash. 

The only currency exchange fees you incur are when you move money between the CAD and USD side of your TFSA.

How to Reduce Currency Exchange Fees

Trade US Stocks on the USD Side of the TFSA

I already covered how the USD side of your account can limit fees.

You can buy and sell as many US-listed stocks & ETFs as you want on the USD side without exchanging currency.

In addition, dividends paid by USD securities will come directly into the US account as USD cash. No currency exchange fees will be applied. I talk more about dividends later.

I don’t endorse frequent trading because it erodes your long-term returns. Good investors limit trades to the initial buy and an annual rebalancing. 

Exchange Currency For Cheap With Norbert’s Gambit

Use of the USD side of the TFSA can save on currency conversion fees. But you still incur a conversion fee when you move cash from the CAD side of the TFSA to the USD side. 

And you incur a fee again when you eventually move the money from the USD side back to the CAD side. 

Norbert’s gambit can reduce the costs of currency conversion, especially if you transfer high dollar amounts.  

It permits currency exchange for the price of two transactions. For example, you could exchange currency for free at a zero-commission brokerage!

I won’t cover Norbert’s Gambit in detail, because great resources already exist on the subject. Read more about Norbert’s Gambit.

Norbert's Gambit Cost Effectiveness

Norbert’s Gambit will cost you the commission fee associated with two transactions. Unfortunately, you can’t do Norbert’s gambit with Wealth Simple (source). 

RBC Direct Investing has a $10 commission fee for every order. Therefore, I pay $20 to exchange currency from CAD to USD, regardless of the amount. 

Currency exchange of $100 CAD into my USD account would cost me $20, so would a transfer of $10,000.

That $10,000 transfer was done for an exchange fee of 0.2%. That’s 2-10 times cheaper than your standard brokerage currency exchange fee. 

Dividends From US Stocks (and ETFs) in the TFSA

Dividends from US listed stocks and ETFs are paid in USD. 

The brokerage will automatically apply a currency conversion when you hold these dividend paying stocks/ETFs on the Canadian side of you TFSA. 

The dividend will hit your account in CAD, and the conversion fee will leech about 1.5% of all dividends paid.

This problem disappears if you hold the dividend-yielding securities in the US Side of the TFSA. The dividend will come in as USD and you’ll avoid currency conversion fees. 

Then you can use the USD cash from the dividends to buy more USD shares. These new shares will in-turn yield more dividends :). 

Withholding Taxes

The US government will “withhold” 15% of all dividends paid by US listed securities.  Let’s say you receive a $100 dividend from a US stock. Only $85 USD will hit your account.

This applies weather you hold the US stock on the CAD side or the USD side of your TFSA.

The TFSA doesn’t protect you from withholding tax, however the RRSP does if you hold US Listed Stocks or ETFs.

Example of Withholding Tax

The Simple Way to Hold US stocks in a TFSA

Did all of that sound complex? It is.

The good news is that you can hold US stocks without the need to hold or exchange currency.

Simple investing is good investing.  Simplicity makes you a better investor by limiting the effect of your human biases. 

You can get exposure to US stocks via index ETFs listed on the Toronto Stock Exchange here in Canada. Because these ETFs are listed on a Canadian exchange, you can buy and sell these ETFs in CAD.

Now you can avoid currency exchange fees when you:

  • Buy the ETF
  • Sell the ETF
  • Receive cash distributions from the ETF. These distributions are mainly the dividends from all the underlying US Stocks. 

This method reduces your stress and money as you no longer have to exchange or currency exchange fees. You don’t need a USD side to your TFSA, and you can stop scratching your head about Norbert’s gambit.

Canadian Listed ETFs: How Do They Work?

Some Canadian-listed ETFs hold the US Stocks directly. VFV is a good example – it directly holds the 500 stocks on the S&P500. Other ETFs hold the US ETF, and the US-listed ETF holds the stocks directly. An example is VEE

My favorite index ETFs are those that track the total market. These guys give exposure to the entire US market, by holding the thousands of underlying stocks that make up the U.S. stock market. Examples of Canadian-listed Total US Market ETFs include VUN and ITOT.

Index investing will likely result in better returns, with fewer demands on your time. You can read more at this post about Index Investing: A Simple Way to Invest in Stocks. 

Canadian Listed ETFs: Fees

The downside is that the Canadian listed ETFs have a higher expense ratio than their US equivalents. For example, both VFV and VOO track the S&P500. VFV has an MER of 0.08%, while VOO has an MER of 0.03%.

Both MERs are tiny and not worth optimizing unless you have millions of dollars invested.

Canadian Listed ETFs: Withholding Taxes

Withholding taxes still apply to Canadian listed ETFs, but you won’t see the withholding tax removed when the dividend hits your account. The taxes are already withheld by the fund. 

This is why the dividend yield of the Canadian-listed ETF will be about 15% lower than the dividend yield of the same US-listed ETF.

For example, VEE is a Canadian-listed ETF that holds the US listed ETF  VWO. The US-listed ETF VWO holds thousands of Emerging Market stocks. 

Let’s have a look at the dividend yield of both: 

VWO Distribution yield: 2.63%

VEE Distribution Yield: 2.16%

The yield on VEE is lower than VWO because VEE already captures the 15% withholding tax. VWO’s dividend is quoted before withholding taxes are removed. 

Conclusion

  • Any US Stock or US ETF that is listed on a US exchange must be purchased in USD. A currency exchange must therefore occur. 
  • Most brokerages allow you to open a “USD Side” in your TFSA. From here you can buy and sell US securities in USD. Dividends come in as USD cash. 
  • No matter how you slice it, you can’t get away from the 15% withholding tax on dividends from US listed stocks & ETFs. 
  • Unless you use Norbert’s Gambit, you have to exchange currency and pay the 1% to 2% exchange fee to move cash to the USD side of the TFSA. 
  • Norbert’s Gambit is a way to save on currency exchange for large dollar transfers. 
  • There is a simple way to hold US stocks – hold Canadian Listed index ETFs that hold underlying US stocks. You will still pay a 15% withholding tax on US dividends.