Registered investment accounts such as RRSPs, RRIFs, and TFSAs offer many tax benefits. But they also have strict annual contribution limits. Your clients can save big on taxes by prioritizing what money goes in these accounts. If a client holds foreign shares, they should keep the ones paying high dividends in registered accounts. Foreign stocks paying low or no dividends can be held in nonregistered accounts.
Dividends received from foreign investments are 100% taxable in Canada. By holding these shares in registered accounts, your client can avoid much of this tax. That’s because income held in registered accounts, including dividends, grows tax-free. Your client might have to pay a withholding tax on certain foreign dividends, unless the company is based in the United States, but once the proceeds enter the registered account, they’re not subject to further tax.
Your clients can also save on taxes by holding low-dividend and no-dividend foreign stocks in registered accounts. But the savings are nowhere near as substantial with these shares. If a client is running up against contribution limits, the foreign shares paying the least dividends should be the first ones held out of registered accounts.
It’s also important for you to calculate the correct adjusted cost basis for foreign shares. You must figure this amount in Canadian dollars. To do this, use the appropriate exchange rate if your client transferred Canadian money to buy the shares. If your client made the purchase with foreign funds, use the exchange rate on the settlement date to calculate the transaction in Canadian dollars.
Your clients save on taxes with registered investment accounts. With you helping them get the most from these accounts, they can save even more.