My TFSA holds US stocks — why was 15% withheld on dividends inside a "tax-free" account?
Because the United States does not recognize the TFSA. Canada calls it tax-free; the IRS treats it as an ordinary taxable account. The Canada-US treaty cuts US dividend withholding from 30% to 15% (with a W-8BEN on file), but the 0% exemption that registered retirement accounts enjoy does not extend to the TFSA — so 15% comes off your US dividends before they ever reach the account.
The treaty mechanics
| Account | US dividend withholding | Treaty basis |
|---|---|---|
| Taxable account / TFSA | 15% (with W-8BEN; 30% without) | Treaty Article X |
| RRSP / RRIF | 0% | Treaty Article XXI(2)(a) — recognized retirement plans |
| 401(k) / IRA (US side) | n/a | US domestic |
The 0% rate is reserved for pension and retirement arrangements the treaty explicitly recognizes. The TFSA — like the RESP and RDSP — is not one of them. Filing a W-8BEN with your broker gets you from 30% down to the treaty 15%, but no lower.
Why this surprises people
Three compounding misunderstandings:
- "Tax-free in Canada" ≠ "tax-free everywhere." The TFSA's tax-free status exists only under Canadian domestic law.
- The IRS may treat the TFSA as a foreign trust. For US persons holding a TFSA, the IRS position is that it can be a foreign grantor trust — potentially triggering extra reporting (Forms 3520/3520-A) on top of the withholding.
- You cannot recover the 15% on your Canadian return the way you might expect. Because the TFSA pays no Canadian tax, there is no Canadian tax for a foreign tax credit to offset — the 15% is simply gone.
What to do instead
- Hold US dividend stocks in your RRSP/RRIF, where the treaty 0% rate applies. This is the single highest-value fix.
- Hold Canadian dividend stocks in the TFSA — no cross-border withholding at all.
- If you must hold US stocks in a TFSA, make sure a W-8BEN is on file so you pay 15%, not 30%.
Frequently asked questions
Does the 15% apply to capital gains when I sell the US stock?
No — withholding applies to dividends. Capital gains on US stocks inside a TFSA are still tax-free in Canada, and the US generally does not tax a nonresident alien's capital gains on stock sales.
I'm a US citizen living in Canada with a TFSA — anything extra?
Yes, and it's worse: the IRS taxes you on the TFSA's income annually (no deferral), may treat it as a foreign trust with extra forms, and you still suffer the 15% dividend withholding. Most cross-border planners tell US citizens to avoid TFSAs entirely.
Can I get the 15% back from the IRS?
No. The 15% is the correct treaty rate — it is tax legally owed, not an overpayment. A refund claim would fail.
Sources
- https://zenithfinancialadvisors.com/blog/tfsa-trap-americans-canada-2026
- IRS guidance on treaty withholding and Form W-8BEN — https://www.irs.gov
- Canada-US Tax Treaty, Articles X (dividends) and XXI(2)(a) (pension exemption)