How and When Are TFSAs and RRSPs Taxed in Canada?

Ask MoneySense

I read your blog—thank you for the helpful information. That motivated me to start investing, but I have a few questions. I understand there’s U.S. withholding tax on dividends in a TFSA. Do we also pay tax when we sell the following?

U.S. stocks in a TFSA
U.S. stocks in an RRSP
Canadian stocks in an RRSP

—Tawheeda

Tax considerations for TFSA and RRSP accounts

Thanks for the question, Tawheeda. Investing in stocks is a powerful way to build long-term wealth, but tax rules affect account choice and overall returns. Below I’ll explain how taxes and withholding rules apply to TFSA and RRSP accounts, what happens when you sell, and practical guidance on asset placement and diversification.

TFSA day trading and taxable business income

Tax-Free Savings Accounts (TFSAs) are designed to shelter investment gains and withdrawals from tax. For most buy-and-hold investors, capital gains and trading profits inside a TFSA are tax-free. However, if your activity resembles a business—frequent, short-term trading with an intent to profit from price movements—the Canada Revenue Agency (CRA) may treat earnings as business income, which is taxable. There is no fixed threshold that defines “day trading”; the CRA looks at factors such as trading frequency, holding period, and intent.

Taxes on U.S. stocks held in a TFSA

U.S. dividends paid to Canadian residents are subject to a 15% U.S. withholding tax when held in a TFSA. That withholding applies whether you hold U.S. stocks directly or indirectly through funds; the withholding reduces the dividend before it reaches the TFSA. Other foreign stocks are typically subject to withholding tax at rates set by tax treaties, often starting around 15%. Only Canadian dividends escape foreign withholding within a TFSA.

That doesn’t mean you must avoid U.S. or foreign stocks in a TFSA. Holding a diversified mix of global equities can improve risk-adjusted returns because Canada represents a relatively small share of the global market and has limited exposure to sectors like technology and healthcare. If your TFSA represents most of your savings, including international exposure can be sensible. If it’s small relative to your other accounts, you might tilt toward Canadian dividend stocks to reduce withholding drag.

Note: Canadian mutual funds and ETFs held inside a TFSA can still face foreign withholding at the fund level. The fund receives reduced dividends after withholding, even if you don’t see a separate withholding line on your TFSA statement.

Do you pay tax when you sell U.S. stocks in a TFSA?

When you sell investments inside a TFSA, capital gains are generally tax-free and withdrawals are not taxed. The sale itself does not trigger Canadian tax inside a TFSA. The one caveat remains the potential business income designation for very active traders; otherwise selling U.S. stocks for a profit in a TFSA is tax-free in Canada, though the dividends those stocks paid earlier could still have been reduced by U.S. withholding.

When are RRSP gains taxable?

Registered Retirement Savings Plans (RRSPs) provide tax deferral: investment gains, interest, dividends, and capital gains inside the RRSP are not taxed while they remain in the plan. You are taxed when you withdraw funds from the RRSP. Unlike TFSAs, the CRA typically does not treat frequent trading inside an RRSP as business income. One rare exception is trading certain non-qualified investments—most common investments such as stocks, ETFs, mutual funds, bonds, and GICs are qualified.

How are U.S. dividends treated in an RRSP?

U.S. dividends held directly in an RRSP are exempt from U.S. withholding tax because of the Canada–U.S. tax treaty. If you hold U.S. stocks directly inside an RRSP, you generally won’t face the 15% U.S. withholding. However, if you hold U.S equities indirectly through a Canadian-listed mutual fund or ETF, the fund itself is treated as a non-resident for U.S. tax purposes and dividends received by the fund may be subject to withholding before the fund passes returns to you. The same withholding considerations apply to other foreign dividends depending on the treaty between Canada and the source country.

Taxes when you withdraw from an RRSP

Withdrawals from an RRSP are fully taxable as income in the year of withdrawal, with the exception of amounts withdrawn under specific programs such as the Home Buyers’ Plan and the Lifelong Learning Plan, which have repayment rules. Because RRSP withdrawals are taxable, many investors use asset location strategies—placing higher-growth, tax-inefficient assets in a TFSA and more stable, interest-bearing or taxable assets in an RRSP—to optimize lifetime tax outcomes.

Foreign exchange, withholding tax and net returns

Buying U.S. stocks requires currency conversion from Canadian dollars to U.S. dollars. FX costs in brokerages can range from roughly 1% to 2% and will reduce returns. Avoiding a 15% withholding on dividends by holding U.S. stocks in an RRSP can save on future dividend taxes, but when weighed against currency conversion costs and expected dividend yields, it may take several years to offset the FX expense. Consider expected dividend yield, withholding rates, and FX costs when choosing account placement.

Practical asset-allocation advice

Think strategically about asset location: holding fixed income or tax-efficient investments in an RRSP and placing high-growth equities in a TFSA can be an effective tax-aware approach. Diversification across countries and sectors remains important; tax considerations matter, but they should not override sound portfolio construction based on risk tolerance, time horizon, and investment objectives.

In summary: selling U.S. stocks or Canadian stocks inside a TFSA is generally tax-free in Canada unless the activity qualifies as business income. RRSP gains are not taxed until withdrawal. U.S. dividend withholding applies in a TFSA but is generally exempt in an RRSP for direct U.S. holdings. Use asset-location strategies to balance tax efficiency with diversification and long-term goals.