The Quest for US Dividends/Cash

Most of our US stock holdings are kept in our RRIF accounts where dividends are not subject to withholding tax from the IRS.   We do have a few shares of AT&T in the US side of our non-registered account and use the dividends paid from this stock to generate US cash that we then withdraw and transfer to our TD Bank US bank account.  This is a way for us to accumulate US cash without having to incur currency conversion fees to acquire it.   Since we don't own much of the AT&T stock, it takes a while to accumulate enough US cash to cover our expenses while on a vacation in the States.  I have often wished that we could generate the US cash at a faster rate.

One step that we took in this endeavour was to move our shares of Algonquin Power (AQN.T) to the US side of our non-registered account, once we realized that this Canadian company actually pays its dividend in US currency.  In fact, we were losing money by keeping this stock journaled on the Canadian side, since the US dividends had to be converted back to Canadian currency, for which our discount broker took a fee.  So now we have two sources of income from our non-registered account that generates US cash.

Another avenue opened up in 2018 when our discount broker Scotia iTrade finally started to support US fund Registered accounts.  In the past within our TFSAs, RRSPs and RRIFs, our stock that paid dividends in US dollars could only be held in our "Canadian" accounts and each of USD payment would be converted back to Canadian dollars by iTrade at a service charge of about 1.5%.  Now we can transfer this stock to the US side of our registered accounts and accumulate US cash without incurring conversion fees, just like we did with the AT&T stock in our non-registered account.  Accordingly in each of our registered accounts, we moved our US stock plus any Canadian stock that reportedly paid in US dollars.  This included Algonquin Power (AQN.T) and Brookfield companies (BIP.UN, BEP.UN).  Unfortunately it turns out that Brookfield pays US cash only to US residents, so it did not turn out to be a good source of US currency.  However we also held AQN as well as other US stock in our registered accounts, so these were viable sources to generate US cash without incurring currency exchange fees.

But what is involved in withdrawing US cash from a TFSA or RRSP/RRIF account to the US side of the non-registered account?  Given that there are rules and limits regarding withdrawing Canadian funds from registered accounts to begin with, what extra complexities are there when trying to withdraw US funds?  Would there be any conversion or currency exchange fees?  How would any withholding tax be calculated if applicable, and would it be taken from the Canadian or the US side?  I decided to make two relatively small experimental withdrawals, one from my TFSA and one from my husband Rich's RRIF to see what happens.

I withdrew $195.02USD that had accumulated in my TFSA and received the full amount in the US side of my non-registered account.  There was no conversion charge or any other fees (or taxes as per the feature of the TFSA).  This was a relatively easy transaction but a question still remains.  When you remove money from your TFSA, you should be able to re-contribute that amount in the next calendar year.  But how much will I be able to re-contribute and would this amount be calculated in Canadian?  Hopefully the contribution room I generate will not be in US or this will defeat the purpose of trying to extract US cash from my TFSA if I can only replace it with US cash the next year.  I am hoping that if for example I withdrew $100 USD when the exchange rate was 1.35, that next year I could re-contribute $135 Canadian. 

In preparation for this test, as a baseline I checked my CRA account at the beginning of Jan 2019 prior to making my annual contribution.  I expected it to say that my available contribution room is $6000 (the new contribution amount for 2019), since I have maxed out my contributions every year since TFSA started.  Instead, it said in large bold characters that I had room to contribute $11,500!  Despite having made my 2018 TFSA contribution of $5500 seven months earlier in June of that year, this CRA account was still not up to date.  While there is a little icon which when clicked on indicates that all prior contributions may not have been recognized yet, given the lengthy time lag, I find this extremely misleading and wonder what is the point of this account?  Someone who is not as cognizant of the limits or kept track of all their deposits and withdrawals through the years may be tricked into over-contributing for the year and then be penalized for it!  I continued to check and it was not until late February 2019 that my account reflected my 2018 contribution.  This is good to know that there could be almost a full year's lag.  So I will not know the answer to how much of the $195.02USD I can re-contribute next year until CRA calculates my contribution room for 2020.  I will write about the results in my 2019 Year-End in Review at the beginning of next year.

The second experiment was more complicated since it involved trying to withdraw $284.75USD sitting in my husband Rich's RRIF account.  He had already previously made his annual withdrawal, exceeding the minimum by around $11,000 and paid the 20% withholding tax.  We have both started to take out more than the minimum in our RRIF accounts to try to actively reduce the size of the accounts before we reach age 71.  By moving stock in-kind to our non-registered account, we are also increasing the regular dividend income that we use to pay our bills.  We were hoping that the $284.75 cash could be transferred to the US side of our non-registered account and that the withholding tax could be paid from the excess Canadian cash that he had available.  

Admittedly, this was an unusual request, but it took three phone calls to Scotia iTrade to try to get this done, and in the end it still was not correct but the result was close enough to what we wanted.  In each case, they transferred some US cash to our non-registered account and charged the withholding tax in Canadian dollars, but each time the calculation was incorrect.  The first time, they charged insufficient withholding tax, taking only around 11% when Rich was already in the 20% range for the year and left $28.48 USD in the RRIF.  The second time they charged the correct 20% withholding tax in Canadian dollars ($76.83), but again only transferred a portion of the US cash, leaving $56.95USD, or the equivalent of the withholding tax in US dollars in the RRIF!  Finally after the third call, we were able to get the entire $284.75 USD to be transferred to the non-registered account but now they took around 27% withholding tax ($96.04). This is when we decided that the result was close enough to what we wanted.  We were able to extract all of the US cash from our RRIF without any conversion fees, and paid just a bit more than what was required in withholding tax, so we would not be in trouble with CRA.  The good news is that there was no currency conversion fee for the transaction.  While this was an interesting experiment, the lesson I learned is that this wasn't worth all the trouble.  

Next year if we want to withdraw US cash or US stock from a RRIF account, we will be sure to do so while we are still under the yearly minimum limit so that there is no withholding tax in play.  After that, we can make further withdrawals in Canadian funds to reduce all the confusion about currency conversion and withholding tax. 

Now that we will be accumulating more US currency per quarter from all the additional sources described above, I investigated whether there was a better option for our US bank account in terms of fees, as well as the possibility of getting a no-fee US credit card whose balance could be paid off by that account.  Currently we have TD Bank's US $ Daily Interest Chequing Account which has no monthly fees but charges $1.25 per withdrawal if the monthly balance is less than $1500.  TD's associated US credit card costs $3.95 US per month.  We do not make enough US purchases in a year to make this fee worthwhile for us.

I looked into moving to Royal Bank's US High Interest e-Savings account which has no monthly fees and allows one free debit per month. That in itself would not make it worth our effort to move, since we usually make at most 1-2 withdrawals of US cash per year in order to go on vacation, so the new account would save us at most $1.25-$2.50 on the entire year, and would actually cost more if we ever needed to make two withdrawals in the same month, since RBC's fee for subsequent withdrawals is $3.00.  I would also have to go through the hassle of tying my discount broker to this new account and transferring the cash that I already have in TD (at a cost of $1.25). So it would only be worthwhile if I could also obtain RBC's no-fee Visa Signature Black U.S. Credit Card.  As it turns out these two products do not go together.  In order to get the US Credit Card, I would have to also get a Direct Chequing US Bank Account, which costs $39.50US per year.  So we decided to stay with TD US bank account and forgo having a US credit card, which was more of a whim than an necessity anyways.