The hard life being a Canadian dividend investor

So, you want to own Canadian dividend stocks for the tax benefits but also want US exposure. What should you do? If you invest in dividend stocks and you live in Canada, it can be difficult having a diversified portfolio while trying to remain tax efficient.

You are pretty much forced to invest in US based companies since your options are pretty limited in Canada. Ideally, if you are an investor in Canada you want to find a Canadian alternative for US high yield dividend stocks so you are not at a disadvantage taxwise. So if you own ATT, maybe you are better off owning BELL shares instead. 

So what are the disadvantages of owning a US dividend stock? 

For one, you are subject to a 15% withholding tax that is immediately taken out of the dividend payment. The good news is, you get a credit for this after you file your taxes. The worst part is, US dividends are taxed as regular income. So if you are in a high tax bracket, investing in ATT does not make any sense at all. 

ATT has historically performed well when you factor in dividends being reinvested – But are you benefiting?

But what about utilizing your TFSA or RRSP? 

With a TFSA, you are still subject to the 15% withholding tax and you won’t get a credit back for it. Of course, all capital gains and dividends after deducting the 15% withholding tax is tax free. 

The only way to avoid paying US withholding tax is if you are investing within your RRSP. Thanks to the US/Canadian treaty in place, Canadians keep 100% of their RRSP investment returns. But if you decide to take money out, there are stiff penalties so there is a catch. 

The RRSP vs TFSA comparison I put together highlights the drawbacks and benefits of each. Personally, I never liked the restrictions with RRSPs so I will never put money in it. 

So does it ever make sense investing in US dividend stocks as a Canadian Citizen? 

There is one exception and it’s the only reason I invest in them – options. I will typically sell put options when I want to acquire shares or sell call options when I want to liquidate my position. Most Canadian firms don’t have an active options market so if you want to boost your returns selling calls for income, it is very difficult to get a fill. Here is a select few Canadian dividend stocks that also have a good options market: TD, ENB, MFC, BCE, BAM

Conclusion 

As you can see, you need to be selective when investing in dividend stocks. Dividends are a great way to compound your investment returns – As long as you aren’t giving most of it to the taxman. Making use of your TFSA or RRSP could help you put more money back in your pocket but just remember there’s strings attached.