Open a TFSA - hold only US mutual funds and ETFs

MGeorge · Post by **MGeorge** » Fri Jan 25, 2013 10:33 am

I had an idea I want to float:

For a USC resident in Canada, who doesn't mind 3520/3520A reporting, and wants to get around PFIC report without the risk of holding only stocks;
Is it possible to hold US dollar, US domiciled mutual funds and ETFs in a TFSA?
I guess the dividends and distributions would be considered US source. However, let me propose the following case as an experiment:
Open a $20,000 USD TFSA (I'm not even sure this is possible).
Hold US domiciled mutual funds and ETFs in it.
Let's say they pay out a $1000 distribution. This isn't taxable in Canada, it is taxable in the US, however, it is US source income. Couldn't one take a treaty position that a non-USC resident of Canada would not pay tax on his/her 1040NR because the US source dividend is less than $3,800. Non-discrimination in the treaty would allow the USC to take an additional FTC to reduce tax to the level of a non-USC resident of Canada. ie $0 tax.

Is this correct, it sounds too good to be true!

Regards.

nelsona · Post by **nelsona** » Fri Jan 25, 2013 12:37 pm

your treaty positio is flwaed and non-us residents are not permitted to but us based mutual funda.

The treaty limits how US tax tax Cdn-source income, not US.

nelsona · Post by **nelsona** » Fri Jan 25, 2013 12:53 pm

by the way, US withholding WILL be taken from TFSA, just like it used to be for RRSPs. An arrangement was made a few yesrs ago to end this, but it only applies to RRSPs.

MGeorge · Post by **MGeorge** » Fri Jan 25, 2013 12:59 pm

Thanks - I didn't know about the restriction on US mutual funds. ETFs must be ok though, cause I'm currently holding them in my self directed investing account.

If there is witholding on the US ETFs/stockes held in a TFSA, can I get it back (or have it applied to any liability) when I file my 1040?

nelsona · Post by **nelsona** » Fri Jan 25, 2013 1:14 pm

Any US tax withheld, would be included on your 1040. Since the incom would be US-sourced, you would have no means of getting any credit for it.
So you are back at the old question: why have tfsa that is taxable in US?

MGeorge · Post by **MGeorge** » Fri Jan 25, 2013 3:20 pm

Thanks nelsona,
This year (on my 2012 return) it looks like I'm stuck with a mark-2-market gain tax from my Cdn mutual funds held in a TFSA. I'm planning to change these to US based ETFs - although still US taxable it will be at a much lower rate.