Assume your RRSP is full, and you must buy U.S. stock in TFSA or in an unregistered [aka non-registered] account. The default answer seems to be TFSA!

If you have an RRSP, a TFSA and a non-registered account, you may be better off with your TFSA in U.S. stocks despite the 15% tax withholding.

But when might an unregistered account be better?


Holding U.S. stocks in a TFSA does not avoid the U.S. withholding tax on dividends, as there is no tax treaty covering investments in a TFSA, while there is a treaty covering investments held in an RRSP. Dividends are primarily why holding U.S. stocks in an RRSP can be preferable to holding the same stocks in a TFSA. If the stock pays no dividend, there is no such advantage, although a stock could start paying a dividend in the future. I would suggest if you're holding a U.S. stock primarily for the dividend income, then it could be best held inside an RRSP.

If you buy a U.S. stock for your TFSA and then later sell it for a gain, that gain does not result in capital gains tax being owed — whereas in a non-registered account you would incur capital gains tax on such a sale. And in an RRSP, you would eventually pay tax on your gains, as all the money inside an RRSP is tax-deferred (not tax free) and so will eventually be shared with the government. So gains are a case where the TFSA can have an edge over both non-registered accounts as well as RRSPs.

So if you're planning on having any ten-baggers, the TFSA could be the better account to hold them in — even if there is some miniscule dividend being paid and 15% of that being pocketed by the U.S. IRS through the withholding tax. IMHO, I'd rather give the IRS 15% of inconsequential dividends from my ten-bagger than have to share my ten-bagger's gains with the Canada Revenue Agency at normal income tax rates! Because that's what would eventually happen when withdrawing the ten-bagger's proceeds from an RRSP.

So to get to your question: Is there a situation where holding a U.S. stock in a non-registered account is better than holding in a TFSA (or RRSP)? Yes, there are a few cases I can think of:

  1. If you have no RRSP and TFSA contribution room left, holding your U.S. stock in a non-registered account is better than deliberately over-contributing to either your TFSA or RRSP and suffering the exorbitant excess contribution penalties.

  2. If you were to somehow know that you would eventually sell the U.S. stock at a loss, in a non-registered account the loss would be a capital loss for tax purposes and could be used to offset taxable capital gains in the same or some previous years (up to a limit.) Losses realized in a TFSA or RRSP cannot be used to offset taxable capital gains.

  3. If you hold marginable U.S. stocks in a margin account (one kind of non-registered account), the stocks can increase your available margin — i.e. the amount of funds you can borrow from your broker to purchase more stock. You can't do this in a TFSA or RRSP. However, there are risks associated with leveraged investing and this isn't suitable for many investors.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy