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U.S. witholding tax in Questrade and ETFs; for a TFSA account

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asked Aug 20, 2016 07:48 PM by
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updated Aug 22, 2016 07:53 PM by
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Hi,

I recently bought a U.S. stock (symbol CJREF) in my TFSA. I then realized CJR.B.TO exist. I also very recently learned about the U.S. withholding tax on dividends; notably applying on TFSA accounts.

1) How does Questrade handle such tax ? Is it automatically cut off the dividend I receive ? Do I have to fill forms ?

2) Since IVAL & QVAL also seems to give out dividends; will I have to pay a dividend tax on those ?

3) (I read on "synthetic ETF" @ http://www.theglobeandmail.com/globe-... ; see the part where they talk about HXS : "Because HXS owns no shares, it does not issue or receive any cash distributions and is not subject to U.S. taxes, including dividend withholding tax.".

Is the HXS above "trick" common ? Or rarely done with ETFs ? How to check if a ETF management is doing such a trick ?

4) For a Canadian, would CJR.B.TO make more sense than CJREF ? It seems to be about the same as CJREF, but in CAD currency. Wouldn't it be the same, minus the tax ?

5) Could a Norbert Gambit be done between CJREF & CJR.B.TO ? (I doubt it, but who knows :/)

Thank you,

RedSword

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answered Aug 22, 2016 08:34 PM by
Jin Won Choi gravatar image Administrator

Hi RedSword,

I don't exactly know how Questrade handles such taxes, but in general, you automatically receive a reduced amount of dividends due to the taxes. When U.S. stocks are held inside TFSAs, you do have to pay taxes on dividends, but not if they're held inside RRSPs. That's why the investment tax optimiser will in general try to place U.S. stocks inside RRSPs instead of TFSAs. Note that this tool is integrated in the Model Portfolios pages.

As for HXS, yes the practice of using derivatives is relatively common. You can tell whether an ETF is using derivatives by looking at its holdings. For example, you'll see that HXS's only holdings are called "Index Swaps", as opposed to actual shares of companies.

As a Canadian, it would probably make more sense to own CJR.B.TO instead of CJREF. You may be able to recover the taxes on dividends from CJREF, but doing so will probably involve some hassle. You could ask Questrade if they'll "journal" your CJREF shares to CJR.B.TO, the same way you journal DLR.TO shares for Norbert's gambit. Not sure if they'll let you, but it can't hurt to ask.

Hope that helps,

Jin

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Thanks for your answer. I did ask Questrade and they told me the stock was interlisted (so journalling was possible). Strangely enough, the dividend for CJREF is 0.095 USD.... and the one for CJR.B.TO is 0.095 CAD (I thought this was an error, but Questrade said nop). How could that be !?

RedSword ( Aug 23, 2016 12:02 PM )edit

That doesn't seem right. Sorry, but I don't know the answer.

Jin Choi ( Aug 23, 2016 06:53 PM )edit
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