Withholding tax on US dividends in Canada

A few years ago, I bought my first US stock in a TFSA. It was a company I used every day, I liked the business, and it paid a decent dividend. A few months later, I checked my account and noticed the dividend payment looked a little light. Not dramatically wrong, just… less than the math suggested it should be.

I eventually figured out what happened. The US government had taken 15% of my dividend before it even arrived in my account. No notification, no separate line item at first glance, just a quieter deposit than expected. It wasn’t a mistake. It was working exactly as designed.

This is called withholding tax, and it affects every Canadian who holds US investments. Once you understand how it works, you can make smarter decisions about which accounts to hold your US stocks in. None of this is financial or tax advice. Just the mechanics I wish someone had explained to me sooner.

What withholding tax actually is

When a US company pays a dividend, the IRS considers that income earned in the United States, even if the shareholder lives in Canada. By default, the US withholds 30% of that dividend for non-resident investors.

But Canada and the US have a tax treaty that reduces this rate to 15% for Canadian residents. So instead of losing 30 cents on every dollar of dividends, you lose 15 cents. That’s better, but it’s still money leaving your pocket.

This happens automatically. Your brokerage doesn’t give you a choice. The 15% is deducted at the source before the dividend lands in your account. You receive the remaining 85%.

A concrete example

Say you own $10,000 worth of a US stock that pays a 3% annual dividend. That’s $300 per year in dividends before tax.

With the 15% withholding, the US government keeps $45. You receive $255.

Over 10 years, assuming the same dividend (and ignoring growth for simplicity), that’s $450 skimmed off the top. If your position is larger, or the yield is higher, the numbers get bigger fast. On a $50,000 position with a 3% yield, you’re handing over $225 per year, or $2,250 over a decade.

It’s not catastrophic. But it’s not nothing, either. And the frustrating part is that depending on which account you hold these stocks in, you might be able to avoid it entirely.

The RRSP exception

Here’s where the Canada-US tax treaty does something genuinely useful. Dividends from US stocks held inside an RRSP (or RRIF) are exempt from the 15% withholding tax. The US government recognizes these as retirement accounts and agrees not to touch them.

This means the full dividend lands in your account. Using the same example from above, that’s $300 instead of $255. Every year. No tax lost.

This is one of the few cases in investing where the account you choose has a direct, measurable impact on your returns, not just a future tax difference, but actual money kept or lost in real time.

TFSAs and non-registered accounts: no exemption

Your TFSA isn’t recognized as a retirement account under the US tax treaty. So US dividends received in a TFSA are hit with the full 15% withholding. And here’s the kicker: because TFSA income isn’t taxable in Canada, you can’t claim a foreign tax credit to offset that withholding. The money is simply gone.

In a non-registered (taxable) account, the same 15% withholding applies. The difference is that you can usually claim a foreign tax credit on your Canadian tax return to recover some or all of that amount. So in a taxable account, it stings less because the tax system gives you a way to get it back.

Here’s how it breaks down:

Account type	15% US withholding applies?	Can you recover it?
RRSP / RRIF	No, exempt under the tax treaty	N/A, nothing is withheld
TFSA	Yes	No, lost permanently
FHSA	Yes	No, lost permanently
RESP	Yes	No, lost permanently
Non-registered (taxable)	Yes	Usually, via foreign tax credit on your return

The practical takeaway: if you hold US dividend-paying stocks or ETFs, your RRSP is the most tax-efficient place for them.

The hidden layer inside Canadian ETFs

This is where it gets sneakier. A lot of Canadian investors don’t buy US stocks directly. They buy Canadian-listed ETFs that hold US stocks. Think VFV (which tracks the S&P 500), or the US equity portion of an all-in-one ETF like XEQT or VGRO.

These ETFs are listed on the TSX and pay dividends in Canadian dollars. It feels like a Canadian investment. But inside the fund, the ETF provider is receiving US dividends, and those dividends are subject to the same 15% withholding tax before the fund distributes anything to you.

This withholding happens inside the fund structure, at a level you can’t see or recover. It doesn’t matter whether you hold VFV in your RRSP or TFSA. The withholding already happened before the money reached the fund level. Your account type can’t fix it because you don’t directly own the US stocks.

The only way to avoid this layer is to hold the US-listed version of the ETF directly. For example, instead of holding VFV (the Canadian-listed S&P 500 ETF), you could hold VOO (the US-listed version) in your RRSP. Since your RRSP is exempt from withholding and you directly own the US fund, you keep 100% of the dividends.

How much does this actually cost?

Let’s put some numbers on it. If you hold $50,000 in a Canadian-listed S&P 500 ETF (like VFV) with a yield around 1.3%, the annual dividends are roughly $650. The 15% withholding buried inside the fund costs you about $98 per year. Over 20 years, that’s close to $2,000, and that’s before accounting for the growth you missed by not reinvesting those dollars.

If you held the US-listed equivalent (VOO) directly in your RRSP instead, you’d keep that $98 every year.

Is $98 per year life-changing? No. But it scales. At $200,000 invested, it’s roughly $390 per year. At $500,000, it’s close to $975.

Should you actually do anything about this?

Honestly, it depends on where you are.

If you have a smaller portfolio and you’re investing through an all-in-one ETF like XEQT in your TFSA, the withholding tax drag is real but small. It might cost you 0.2% to 0.3% per year in lost returns. That’s worth knowing about, but it’s probably not worth restructuring your entire portfolio over. The simplicity of one fund in one account has value too, especially if the alternative means managing currency conversions, multiple accounts, and US-listed holdings.

If your portfolio is larger, say north of $100,000 to $200,000 in US equity, it starts to make more sense to think about this. Holding US-listed ETFs directly in your RRSP, and using something like Norbert’s Gambit to convert currency cheaply, can save you a meaningful amount over time.

The middle ground for a lot of people: use your RRSP for US equity (ideally US-listed ETFs if the amount justifies it), use your TFSA for Canadian stocks, and don’t lose sleep over the withholding on the US portion of an all-in-one ETF if that’s what keeps you invested consistently.

A few things worth noting

This applies to dividends only, not capital gains. If a US stock goes up in value and you sell it for a profit, withholding tax doesn’t come into play. It’s strictly about distributions.

The 15% rate assumes you’ve properly filed a W-8BEN form with your brokerage. Most Canadian brokerages handle this for you automatically, but it’s worth confirming. Without the form, the withholding rate jumps to 30%.

And if your US holdings are significant enough, you may also have reporting obligations for foreign property over $100,000 in cost.

The bottom line

The US government takes 15% of dividends paid to Canadian investors. Your RRSP and RRIF are the account types that are exempt. TFSAs and other registered accounts aren’t, and you can’t recover the tax. Canadian-listed ETFs that hold US stocks have this withholding baked in at a level you can’t avoid regardless of account type.

For smaller portfolios, it’s a minor drag that isn’t worth stressing over. For larger portfolios, the math gets real, and it’s worth being intentional about where you hold what.