Many Canadians use their Tax-Free Savings Account (TFSA) to buy U.S. stocks, assuming that “tax-free” means completely tax-free in every situation. While the TFSA does shield you from Canadian taxes on capital gains and withdrawals, there are lesser-known rules — especially involving U.S. holdings — that can affect your returns.

The biggest issue is withholding tax on U.S. dividends. When you hold American dividend-paying stocks inside a TFSA, the U.S. government typically withholds 15% of the dividend at the source. Unlike an RRSP, which benefits from a tax treaty exemption on U.S. dividends, the TFSA does not receive that same treatment. That means the withholding tax is effectively unrecoverable in a TFSA. Investors often overlook this, especially when comparing account types.

For growth-focused U.S. stocks that reinvest earnings instead of paying dividends, this may not matter much. However, if you’re holding high-yield American dividend stocks or U.S. dividend ETFs in your TFSA, that 15% drag can meaningfully reduce long-term compounding. Over decades, the impact can add up.

Another factor to consider is currency exposure. Buying U.S. stocks introduces foreign exchange risk, since your returns depend not only on the stock’s performance but also on movements between the Canadian and U.S. dollar. Currency swings can either amplify gains or offset them, sometimes masking the true performance of your underlying investment.

There are also contribution and trading rules to keep in mind. Overcontributions to a TFSA trigger penalties, and frequent, short-term trading inside the account can potentially raise concerns about operating a business within a TFSA — which could jeopardize its tax-advantaged status. While long-term investing generally avoids this issue, aggressive trading strategies increase risk.

Also Read: Dividend paying stocks Canada

None of this means you should avoid U.S. stocks in your TFSA. Many investors benefit from holding high-quality American companies for long-term growth. But understanding the fine print helps you decide where different assets belong — whether in a TFSA, RRSP, or taxable account.

Also Read: Stock investment Canada for beginners

Being aware of withholding taxes, currency effects, and compliance rules ensures you maximize the TFSA’s advantages instead of unintentionally eroding them over time.