Can You Write Covered Calls on U.S. Stocks in a TFSA? Rules and Pitfalls
Many Canadians hold U.S. dividend stocks in their TFSA and wonder if they can boost returns by selling covered calls. The answer is yes — but there are CRA rules, IRS withholding issues, and brokerage requirements you need to understand first.
✅ CRA Rules Still Apply
- No naked calls: You must already own the U.S. shares in your TFSA before selling a call.
- No speculative activity: If your trading looks like a business, CRA could tax your TFSA gains.
- Stick to conservative trades: Blue-chip U.S. stocks reduce audit risk.
💵 The IRS Withholding Problem
Even in a TFSA, the U.S. government withholds 15% on dividends from U.S. stocks. Unfortunately, unlike an RRSP, a TFSA isn’t protected under the Canada–U.S. tax treaty — meaning you can’t reclaim this tax.
This doesn’t affect your option premium income, but it does reduce your total return.
📈 Why Covered Calls on U.S. Stocks Can Still Work
- Premiums in USD: A strong U.S. dollar can boost your Canadian returns.
- Broader stock selection: Access to large-cap U.S. dividend payers with liquid options.
- Extra income: Offsets some of the dividend withholding drag.
⚠️ Pitfalls to Avoid
- Buying illiquid U.S. stocks with wide bid-ask spreads
- Selling calls too close to earnings dates
- Overlooking currency exchange fees when trading options
🧠 Final Tip
If you want the premium income but hate losing 15% of dividends, consider holding your U.S. covered call positions in an RRSP instead. For TFSA, stick to high-yield U.S. dividend payers with stable prices, and use tools like Optrader.ca to find liquid, low-risk setups.
⚠️ This article is for education only and not tax or investment advice. Policies can change; confirm details with your brokerage and a tax professional.
