How Foreign Withholding Taxes Affect Returns

In our newly revised white paper, Justin Bender and I explain the hidden cost of foreign withholding taxes on US and international equity ETFs. I gave an overview of the most important points in my previous blog post. Now let’s look at one of the more subtle ideas: how those taxes affect your personal rate of return.

Meet Julie, an investor who is looking to hold US equities in both her RRSP and non-registered account. After reading our paper, Julie knows the US imposes a 15% withholding tax on dividends paid to Canadians, and with US stocks yielding 2% these days, that would result in a drag of about 0.30%. So she decides on the following:

In her RRSP, Julie uses the Vanguard Total Stock Market ETF (VTI), because this US-listed fund is exempt from withholding taxes.
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In her taxable account, Julie uses the Vanguard U.S. Total Market Index ETF (VUN), the Canadian-listed equivalent of VTI. This ETF is denominated in Canadian dollars, which makes it cheaper and easier to trade. Although the fund is not exempt from the foreign withholding taxes in a non-registered account,

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The Next Smart Beta Revolution

{Note: This post was an April Fool’s joke!] As the ETF industry in Canada matures, more and more providers are moving away from traditional cap-weighted index funds in favour of…
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