The Patch

http://www.financialpost.com/money/story.html?id=1264398

Foreign dividends are not eligible for the dividend tax credit and are taxed at your full marginal tax rate when earned outside of an RRSP or TFSA, seemingly making them ideal for your RRSP or TFSA. But the problem with foreign dividends is that in most cases, a foreign non-resident withholding tax is applied by the foreign jurisdiction before the dividend is received in Canada.

If you hold the foreign stock in a non-registered account, you can claim a foreign tax credit against your Canadian tax payable for the amount of tax withheld. But if the foreign dividend is paid into an RRSP or TFSA, the foreign tax withheld is non-recoverable and no credit is available.

The Canada-United States tax treaty exempts U. S. dividends from withholding tax when paid to an RRSP or RRIF. But that same break does not apply to a TFSA, making U. S. dividend-paying stocks better off in RRSPs.

By Patch on Feb 9, 2009