Buying Canadian stocks from the U.S.: OTC, interlisted, or direct

A Canadian junior listed on the TSX Venture Exchange can usually be bought from a U.S. brokerage account. The question is where. You might buy its U.S. over-the-counter quote, a U.S. exchange listing if it has one, or the shares on the Canadian exchange itself. Each route has different costs and risks, and for thinly traded small caps, the differences can be large.

Option 1: the U.S. over-the-counter quote

Many Canadian juniors carry a U.S. OTC symbol. For foreign ordinary shares this is typically a five-letter ticker ending in F. It is not a separate security. It is the same Canadian share, quoted in U.S. dollars during U.S. hours, with settlement and custody handled back in Canada. (A Y as the fifth letter signals an ADR instead; see ADRs vs foreign ordinary shares.)

OTC market tiers

Canadian reporting issuers that keep their filings current on SEDAR+ can generally rely on an SEC exemption (Rule 12g3-2(b)) instead of registering with the SEC, so most U.S.-quoted juniors file nothing on EDGAR. Their disclosure is on SEDAR+.

The liquidity problem

For many juniors, the OTC quote trades only a fraction of the home-market volume. Market makers price it off the Canadian market, adjusted for the exchange rate, but spreads can be wide and quoted size small. A market order in a thin OTC quote can fill well away from the last trade. Use limit orders, and compare the U.S. quote against the Canadian price converted at the current exchange rate before you trade. Our guide to OTC foreign stocks covers this in more depth.

Rule 15c2-11 and disappearing quotes

The SEC amended Rule 15c2-11 in 2020, with most provisions effective September 26, 2021. Broker-dealers generally may not publish quotes for an OTC security unless current information about the issuer is publicly available. For foreign private issuers, information posted on certain electronic systems in the home market can count. If a company falls behind, its quote can lose public quotations and move to the "grey" or expert market, where you may be able to sell only with difficulty. A junior that stops filing on SEDAR+ can lose its U.S. quote.

Option 2: interlisted shares on a U.S. exchange

Larger Canadian miners are often listed on both a Canadian exchange and a U.S. exchange such as the NYSE, NYSE American, or Nasdaq. These are the simplest to buy: any U.S. broker, U.S. dollars, U.S. hours, normal exchange rules. Interlisted companies are SEC registrants and file on EDGAR. Few early-stage juniors qualify, since U.S. exchange listing standards and the cost of SEC reporting are significant.

Option 3: buying on the TSX or TSXV directly

Some U.S. brokers let you trade directly on Canadian exchanges in Canadian dollars. Interactive Brokers, for example, publishes commission schedules for the TSX and TSX Venture Exchange. Fidelity has offered online trading in Canadian shares through its international trading service. Others may offer it only by phone, only on the TSX, or not at all. Availability changes, so confirm with your broker which Canadian venues it supports (TSX, TSXV, CSE) and on what terms.

Advantages: you trade where the volume is, usually with tighter spreads, and you see the true market. Disadvantages: you must convert U.S. dollars to Canadian dollars, and the conversion spread can cost more than the commission. See how to buy foreign stocks for broker considerations generally.

Currency conversion and currency risk

When you buy in Canada, you hold a Canadian-dollar asset. Your U.S.-dollar return depends on both the stock and the exchange rate. Even buying the OTC quote does not avoid this: the U.S. price tracks the Canadian price converted at the current rate. Brokers charge for conversion in different ways, sometimes as an explicit fee and sometimes as a markup on the rate. Read currency risk for the full picture.

Tax points for U.S. holders

Dividend withholding

Canada's statutory withholding rate on dividends paid to non-residents is 25%, generally reduced to 15% for U.S. residents who qualify for treaty benefits. You may be able to claim a foreign tax credit for the tax withheld. Most juniors pay no dividends, so this mostly matters for producers and royalty companies. See withholding rates by country.

PFIC risk

This is the bigger issue for juniors. A non-U.S. company whose income is mostly passive, or whose assets are mostly cash and other passive assets, can be a passive foreign investment company (PFIC) under U.S. tax rules. An explorer with no revenue and a pile of cash from its last financing can fall into that category. PFIC status can mean punitive tax treatment and extra reporting unless you make an election, and some Canadian juniors state in their filings whether they believe they are PFICs. Read our PFIC rules guide and confirm your situation with a tax professional.

Choosing a route

• Interlisted on a U.S. exchange? Usually the simplest choice.
• OTCQX or OTCQB with decent volume? Workable, with limit orders.
• Pink with thin volume? Compare the cost of buying direct on the TSXV or CSE.
• Any route: research the company on SEDAR+, and read the Canada country guide for market hours, settlement, and tax basics.

Educational content only, not investment, tax or legal advice. The Stateside Report does not recommend buying or selling any security. Tax rules depend on your situation; confirm with a qualified tax professional. Full disclosures.