Foreign investments in an RRSP: rules, US dividends and currency
There is no longer any limit on how much of your RRSP you can invest outside Canada. The questions today are practical ones: how foreign dividends are taxed, which kind of fund to hold, and how much currency risk you are willing to take.
A short history: the foreign-content limit
For many years the Income Tax Act limited the amount of “foreign property” that RRSPs, pension plans and other tax-deferred retirement plans could hold. In its final years the limit was 30% of the plan’s cost, so most of a typical RRSP had to stay in Canadian investments.
The 2005 federal budget proposed removing the rule, and the Budget Implementation Act, 2005, which received Royal Assent on June 29, 2005, eliminated the foreign property limitations on tax-deferred retirement savings plans. The change applied for 2005 and later years. Since then, an RRSP can hold 100% foreign investments, provided each holding is a qualified investment for an RRSP.
Qualified investments still matter. An RRSP can hold only certain types of investment. Shares and funds listed on major stock exchanges, including in the US, generally qualify, but some private or unlisted investments do not. Your plan issuer can tell you what it accepts. See Common mistakes.
US dividends: why the account type matters
When a US company pays a dividend to a Canadian investor, the US normally withholds tax at source, generally 15% under the Canada–US tax treaty. How much of that you lose depends on where you hold the investment:
| Account | US withholding on US dividends | Can you recover it? |
|---|---|---|
| RRSP and RRIF | Generally none, for US securities held directly | Not needed |
| TFSA and RESP | 15% generally applies | No; there is no Canadian tax to credit it against |
| Non-registered account | 15% generally applies | Usually, through the foreign tax credit on your return |
The RRSP and RRIF exemption comes from the treaty’s article on exempt organizations, which covers plans that provide retirement benefits. Under the treaty as usually interpreted, TFSAs and RESPs are not covered, so the 15% applies in them. The CRA has not published a statement on the TFSA point, which is why it is described here as the usual interpretation.
Example. $50,000 of US shares paying a 2% dividend produces $1,000 a year. In a TFSA, about $150 is withheld each year and lost. In an RRSP, generally none is withheld.
US-listed vs Canadian-listed ETFs
Many Canadians get US exposure through exchange-traded funds (ETFs). The structure of the fund decides whether the RRSP exemption helps you.
- US-listed ETF held in an RRSP
- The ETF itself is a US fund paying dividends to your RRSP, so the treaty exemption generally applies and no US tax is withheld. The trade-offs: you need US dollars to buy it, currency conversion can be costly, and these funds trade in US dollars.
- Canadian-listed ETF that holds US stocks directly
- The fund, not your RRSP, receives the US dividends. US withholding tax is taken at the fund level, and your RRSP’s exemption does not reach through the fund. That cost is lost, whatever account you hold the ETF in.
- Canadian-listed ETF that holds a US-listed ETF
- The withholding happens when the US ETF pays the Canadian ETF. Again it is lost at the fund level.
For a typical broad US stock fund, that withholding cost is a fraction of a percentage point a year. It is real, but it is often smaller than currency conversion costs or the fee differences between funds, so do the arithmetic for your own amounts before switching. Fund providers publish their holdings structure and fees. See Mutual funds & ETFs and Investing.
Currency risk
Foreign investments are priced in foreign currencies. When you measure them in Canadian dollars, exchange-rate moves add to or subtract from your return.
Example. A US fund rises 10% in US dollars over a year. During that year the US dollar falls 5% against the Canadian dollar. Your return in Canadian dollars is roughly 1.10 × 0.95 = 1.045, or about 4.5%, not 10%. If the US dollar had risen 5% instead, your return would be about 15.5%.
Some funds are currency-hedged, which reduces this effect but adds cost. Over long periods currency moves tend to matter less than the investments themselves, and for someone who will spend money on imported goods or travel, some foreign currency exposure can even be useful. Decide in advance whether you want hedging, rather than switching after a bad year.
Why diversify abroad
Canada’s stock market is a small part of the world market and is concentrated in a few sectors such as banks, energy and materials. Holding only Canadian shares means a heavy bet on those industries. Adding US, international and emerging-market holdings spreads risk across more companies, industries and economies.
There is no single right mix. Canadian investors often keep a larger share at home than the country’s weight in world markets, partly because Canadian dividends get favourable tax treatment in non-registered accounts and there is no currency risk. Inside an RRSP, the dividend tax credit does not apply, which is one reason many people hold more foreign investments in their RRSP and more Canadian dividend payers in taxable accounts.
Practical checklist
- Check the fund structure (direct holdings, or a fund of US ETFs) and its total fees.
- Hold US dividend payers in your RRSP or RRIF rather than your TFSA where it fits your plan.
- Compare currency conversion costs at your brokerage before buying US-listed funds.
- Decide whether you want currency hedging, and stick with it.
- Rebalance once a year rather than reacting to exchange-rate news.