When I first started investing in 2015, I held Canadian and US stocks in my TFSA. After all, US stocks make up over 50% of the global stock market.
While I was a beginner investor:
- I paid unnecessary currency exchange fees when buying and selling US securities.
- Currency exchange fees unknowingly ate away at dividends from my US stocks.
- When I switched to index investing, I didn’t know about the 15% foreign withholding tax on US dividends.
I share what I’ve learned to help you save on currency exchange fees.
Finally, I believe simple investing = good investing. Skip to the final section to see the most simple way to hold US stocks in your TFSA.
The (Not So Fun) Disclaimer
Any securities mentioned in this post are for educational purposes. I am not recommending these investments. Before making investment decisions, you need to know if you are ready to invest and what your risk tolerance is.
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. 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
Two Ways To Hold US Stocks in a TFSA
Two ways I have held US stocks in my TFSA US stocks directly, or you can hold US stocks via an Exchange Traded Fund or mutual fund.
You must exchange currency to buy a Stock or ETF listed on a US exchange. 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 and US listed ETFs in a TFSA.
1. What is a “US Listed Security”?
A “US listed security” is any security that trades on a U.S. “exchange”.
There are two primary US exchanges:
- The New York Stock Exchange (NYSE) & NYSE ARCA.
- NASDAQ.
In Canada, we have one major stock exchange – the Toronto Stock Exchange (TSE).
All securities on the TSE trade in Canadian dollars (CAD). Securities that are “listed” on a US exchange trade in US Dollars (USD).
Therefore, you must convert your dollars from CAD to USD to purchase any US-listed security. This applies in the TFSA, RRSP and taxable accounts.
You may wonder, “how do I know if a stock or ETF trades on a US or Canadian exchange?”
How to Find What Exchange A Stock or ETF Trades On
You can find the exchange with a quick search for the security’s ticker in google. Once you hit search, check the top right of Google’s market summary for the exchange.
For example, BABA is trades on the NYSE as per the snip below.
A stock listed on a US exchange does not mean that the business has a home base in the US.
For example, Alibaba is a Chinese company that trades on the New York Stock Exchange (NYSE) under the ticker BABA. Therefore BABA can only be purchased in USD.
What About ETFs?
ETFs trade just like stocks. When I talk about US-listed ETFs, I refer to those “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 ETFs in Canadian Dollars, so no currency exchange is required. An example would be that holds over 240 Canadian stocks.
This is related to the simple way to hold US Stocks in the TFSA, described below.
2. The Two "Sides" Of the TFSA: USD & CAD
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. I blacked out numbers, as I don’t like sharing all my personal details. Note that I use RBC Direct Investing as my brokerage.
The totals for Canadian holdings are displayed in CAD. And US holdings are displayed in USD.
Note that the USD and CAD sides exist within a singular TFSA account. They are not separate TFSAs.
But you can have multiple different TFSAs with various brokerages. You need to ensure you don’t exceed your total contribution room.
Buying US Stocks on The Canadian Dollar Side
By default, you start with CAD cash on the Canadian Dollar side of your TFSA.
You can buy and sell individual US stocks from the Canadian dollar side. But we just covered how US stocks and ETFs only trade in USD.
So what’s the deal?
Your brokerage will exchange CAD to USD as part of the transaction. They save the day. But it comes at a cost.
The fee to exchange currency will depend on the brokerage. It is often between 1% to 2%.
So, how do you see the currency exchange fee? You’ll see it in the form of a higher exchange rate.
Such hidden exchange fees 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-USD | 0.80USD/CAD |
| Currency Exchange Fee | 1.5% |
Now let’s look at the details of the transaction, including transaction fees:
| # Shares | 10 |
| 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 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.
When you sell (in a long-time as you are a long-term investor) the process repeats in reverse, meaning you must absorb another currency exchange fee.
Buying US Stocks on the US Dollar Side of The TFSA
You can reduce exchange fees by trading US-listed securities in the USD side of the TFSA.
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.
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 discuss dividends more below.
Under this approach, 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 produce USD cash.
I don’t endorse frequent trading. It erodes long-term returns. Good investors limit trades to the initial buy and annual rebalancing.
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3. How To Reduce Currency Exchange Fees
Using the USD side of the TFSA can save on currency conversion fees.
But unless you earn your income in USD, you need to get cash to the USD side somehow. That requires a currency exchange.
And eventually (hopefully in 10+ years as a good long-term investor) you will need to move the money from the USD side back to the CAD side.
How do you reduce currency exchange fees for transfers to the CAD side? This applies to the RRSP as well.
Exchange Currency With Norbert’s Gambit
Let’s assume Fred is travelling to the US. Frugal Fred wants to avoid currency exchange.
So, he buys a block of silver in Canada for $1000. Fred takes this block of silver across the border and sells it for $800 USD (assuming a 0.80 exchange rate).
Fred uses the block of silver as an intermediate store of value. Since markets are efficient, the block of silver only differs in price by an amount equal to the exchange rate.
This sounds good, but Fred takes on risk based on daily fluctuations in the price of silver.
With Norbet’s Gambit, you use an intermediate asset just like Fred. But instead of silver, you can use security. I use the ETFs DLR and DLR.U. Here is an example
Norbert's Gambit Transaction Costs
With Norbert’s gambit, you can exchange currency for the price of two transactions. One transaction to buy an ETF in CAD, and a second transaction to sell the ETF in USD.
So, you could exchange currency for free at a zero-commission brokerage. Unfortunately, you can’t do Norbert’s gambit with Wealth Simple (source).
I won’t cover Norbert’s Gambit in detail because great resources already exist. Read more about Norbert’s Gambit, including how to execute it at various different Canadian brokerages.
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 or $100,000.
For example, a $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.
4. 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. Suppose you receive a $100 USD dividend from a US stock. Only $85 USD will hit your account.
This applies whether you hold the US stock on the CAD side or the USD side of your TFSA. There is no way to escape from withholding taxes in the TFSA!
The RRSP is different. You don’t pay withholding tax in for US Listed Stocks or ETFs held in the RRSP.
5. 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 exchange currency into USD.
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 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 in a TFSA.
- 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.
- Canadian Listed index ETFs are a simple way to save on currency exchange. You still pay a 15% withholding tax on dividends from the underlying stocks.
