This is the time of year that everyone should be planning on making their tax-free savings account contributions. For 2024, the limit has been increased to $7,000 from $6,500.
I suggest you contribute as early in the year as you can to gain more tax-sheltered protection for any income or growth your investment may have.
The name of this tax-sheltered account is a bit misleading to some. Many people think of it as a savings account like your bank account. This is not true. Any investments, as with your registered retirement savings plan, can be bought or transferred from your non-registered investment account into your TFSA. Funds inside a TFSA can be used to invest in stocks, bonds, mutual funds, guaranteed investment certificates and so on.
The decision on what to invest in requires more thought than most people think.
Do I keep it “safe” and buy a GIC? Do I shelter the dividend yield I get from a stock? Do I buy a mutual fund and reinvest the income and let it sit for the long term?
These are some of the questions you should ask yourself.
Initially we think we should protect the income from an investment inside the tax shelter. Then, we often buy or transfer in a higher paying stock such as a bank, utility or telecom company. What may not come across our radar of choices is investing in solid U.S. companies.
Any dividends that are paid from a U.S. company into an account other than one deemed for retirement purposes is subject to a non-resident withholding tax. We hear the word “tax” and that may be the deterrent from buying in our TFSA. When you take a more in-depth and closer look, the dividend yield on U.S. stocks is comparatively low versus Canadian stocks.
To clarify, if you have on file with your TFSA provider a W8-BEN form showing you are a resident of Canada, the non-residency withholding tax is reduced to 15 per cent from 25 per cent.
It sounds like a lot, but if the dividend amount is US$1.84, as it is for Coca-Cola Co., the amount of tax deducted is 27.6 cents. In the grand scheme of things, it is not that much. Often U.S. stocks are more appealing for their price appreciation than for their yield.
I have clients who have contributed the lifetime maximum of $95,000 to their TFSAs, and their accounts are now worth a couple of hundred thousand dollars. It hasn’t mattered that it has come from price growth rather than dividend income. The bottom line for this account is the overall value.
For this year’s TFSA contribution, consider investing in a good name brand blue-chip U.S.-listed company. Over the long term, you may experience significant growth that is tax sheltered. When you take those juicy capital gains out eventually, they are not taxed like they are if they are held in your registered savings plan.
Nancy Woods is portfolio manager and senior investment adviser with RBC Dominion Securities Inc.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
Editor’s note: Due to an editing error, a previous version of this article incorrectly stated the tax deducted for a dividend of US$1.84. The correct amount is 27.6 cents. This version has been updated.
Nancy Woods