Foreign Withholding Tax: Which Fund Goes Where?

My previous post on foreign withholding taxes included a lot of information for investors to puzzle over. But unless you’re an accountant, you probably don’t care too deeply about the finer details. Most investors just want to answer a simple question: which fund should I put in which account?

Recall from the earlier post that there are five broad categories of funds you can use for US and international equities:

A. Canadian mutual fund or ETF that holds US or international stocks directly.
B. US-listed ETF that holds US stocks.
C. US-listed ETF that holds international stocks.
D. Canadian ETF that holds a US-listed ETF of US stocks.
E. Canadian ETF that holds a US-listed ETF of international stocks.

To help you make the most tax-efficient choice for each type of account, see the tables below. I’ve specified which of the above fund categories are the most tax-efficient, and which ones carry the largest withholding tax burden. Then I’ve included some comparisons of specific funds. In each case, the pairs track the same index and use the same currency hedging strategy. Once again, a big thanks to Justin Bender at PWL Capital for helping me sort through these details.

An important note before you make your decision: foreign withholding taxes are just one of many costs of investing, so they should not be the only factor in your fund choices. Management expense ratios are just as important: it makes no sense to pay an extra 0.50% in MER to save 0.30% in withholding taxes. Similarly, a US-listed ETF may be more tax-efficient than a Canadian one, but your overall cost will still be higher if you’re paying 1.5% in currency exchange fees. Make sure you’ve thought this through before making any changes to your portfolio.

Even more important, you need to consider your income tax situation when deciding where to hold your fund. While holding foreign equities in a non-registered account (as opposed to an RRSP) allows you to claim the foreign tax credit, the dividends are taxed at your full marginal rate, and any capital gains are also taxable. In an RRSP, these taxes can be deferred until retirement. Justin illustrates this idea with a dramatic example on his blog.

US Equities

For non-registered accounts choose A, B or D.

TD U.S. Index (TDB902) is equal to iShares S&P 500 (IVV)
TD U.S. Index Currency Neutral (TDB904) is equal to Vanguard S&P 500 Hedged to CAD (VSP)
Vanguard Total Stock Market (VTI) is equal to Vanguard US Total Market (VUN)
BMO S&P 500 (ZSP) is equal to Vanguard S&P 500 (VFV)
iShares US Fundamental
is equal to PowerShares FTSE RAFI 1000 (PRF)


For RRSPs choose B. Avoid A and D.

iShares S&P 500 (IVV) is more tax-efficient than TD U.S. Index (TDB902)
Vanguard S&P 500 Hedged to CAD (VSP) is equal to TD U.S. Index Currency Neutral (TDB904)
Vanguard Total Stock Market (VTI) is more tax-efficient than Vanguard US Total Market (VUN)
BMO S&P 500 (ZSP) is equal to Vanguard S&P 500 (VFV)
PowerShares FTSE RAFI 1000 (PRF) is more tax-efficient than iShares US Fundamental

International equities

For non-registered accounts choose A. Avoid C and E.

TD International Index (TDB911) is more tax-efficient than
Vanguard FTSE Developed Markets (VEA)
TD International Index Currency Neutral (TDB905) is more tax-efficient than
iShares MSCI EAFE CAD-Hedged (XIN)
iShares International Fundamental (CIE) is more tax-efficient than
 PowerShares FTSE RAFI Developed Mrkts ex-U.S. (PXF)
Vanguard FTSE Emerging Markets (VWO) is equal to  Vanguard FTSE Emerging Markets (VEE)


For RRSPs choose A or C. Avoid E.

 TD International Index (TDB911) is equal to Vanguard FTSE Developed Markets (VEA)
 TD International Index Currency Neutral (TDB905) is more tax-efficient than
iShares MSCI EAFE CAD-Hedged (XIN)
 iShares International Fundamental (CIE) is equal to  PowerShares FTSE RAFI Developed Mrkts ex-U.S. (PXF)
 Vanguard FTSE Emerging Markets (VWO) is more tax-efficient than
 Vanguard FTSE Emerging Markets (VEE)


153 Responses to Foreign Withholding Tax: Which Fund Goes Where?

  1. CD February 13, 2013 at 4:50 pm #

    @couch potato
    @ nathan

    Thanks for the advice. I’m ok for a little inefficiency as long as it’s simplistic. As for dumping XBB, I don’t mind assets that fluctuate in value since I’m in it for the long haul and I have a strong enough stomach to take the swings. Eventually, XBB will be the better choice again and I will be already in it by then by rebalancing.

  2. Maria March 6, 2013 at 1:28 pm #

    Thanks this is great information.

    Where is it most beneficial (regarding taxes) to hold individual US stocks, inside RRSP or in a non-registered account?

  3. Canadian Couch Potato March 6, 2013 at 1:37 pm #

    @Maria: If the US stocks are held directly, the withholding tax should not be an issue whether it’s a nonregistered account (recoverable) or an RRSP (exempt). But since you can defer taxes on foreign dividends and capital gains in an RRSP, in some cases for decades, that is likely to be the best place to keep US equities.

  4. Jas March 7, 2013 at 7:38 am #

    In Canada, there are very few choices of international equities “category A” funds (canadian mutual fund or ETF that holds international stocks directly). Investors with significant assets in taxable accounts have very limited choices for unhedged international equities if they prefer Canadian mutual funds than buying US-listed equities.

    This is one sector where, I think, a low-cost active mutual funds could make sense sense even for a passive investor. For example, Mawer and Beutel Goodman offer low cost international funds with low turnover with MER around 1.45%. If those funds make up only 25-35% of one’s portfolio, and the rest is invested in low cost index funds/etf, the over MER for the complete portfolio would still be quite reasonable.

  5. Brad April 3, 2013 at 11:17 am #

    Similar to Jas, it’s difficult to find international ETFs that are in category A. From lists a few ETFs. Interesting to see the TD e-series listed.

    Unfortunately I am following the Uber-Tuber portfolio. I’m trying to determine the best investments to use in my taxable account that follows the Fama-French research.
    I remember a year or two ago the Uber-Tuber portfolio held CIE, but now uses a lot of Vanguard funds. I checked a couple of the Vanguard funds used and they do not fit in Category A.

    Has anyone figured out the effective MER including the loss due to foreign withholding taxes? Tax season is coming, I might run some examples of the percentage of foreign withholding taxes I could recover.

  6. Canadian Couch Potato April 3, 2013 at 11:38 am #

    @Brad: There are precious few Canadian ETFs that hold EAFE stocks directly, and some of those that do (such as ZDM) use currency hedging. And they’re all expensive, especially CIE. The international withholding tax is quite small: it’s typically been less than 10%, compared with 15% for US equities. So on balance using US-listed ETFs is generally the way to go: whatever you give up in withholding taxes you more than make up for in lower MERs.

  7. Jas April 3, 2013 at 12:05 pm #

    How does using US-listed ETFs will affect tracking down the ACB (Adjusted cost basis) for non-registered/taxable accounts?

    I would assume it is a bit more trouble since you then will then have to keep track of the currency exchange commissions when you buy and when you sell as well as for the dividends you receive?


  8. Canadian Couch Potato April 3, 2013 at 12:07 pm #

    @Jas: Yes, it is a little more complicated to track your ACB in US dollars. Stay tuned for a detailed post about this later in the week.

  9. Jas April 3, 2013 at 12:09 pm #

    If only Vanguard Canada could offer an unhedged version of VEF or even better, an unhedged version of VXUS. But then, you would still have the problem of double levels of withholding taxes for international equities…

  10. Jas April 3, 2013 at 6:10 pm #

    I’m looking forward for your post on ACB tracking in taxable accounts!

  11. Drew June 26, 2013 at 1:44 pm #

    What is the optimal allocation when you’re looking to invest at least 50% of your income?

    You max out your RRSP and TFSA contribution quickly and everything else has to go into a taxable account. It’s clear that a TFSA is the best account for bonds, of the three.

    Is it better to put VTI in your RRSP while VXUS and Canadian equity go into a taxable account, or vice versa with VTI and VXUS?

    The US withholding tax portion of both VTI and VXUS is recoverable from taxable accounts. So does it matter which is sheltered and which is taxable? You’ll save the US withholding tax and pay the international portion either way, right?


  12. Canadian Couch Potato June 26, 2013 at 1:52 pm #

    @Drew: There’s no way to identify an “optimal” asset location without knowing the whole situation.
    But here are some general guidelines:

    Remember, too, that it in some cases it will make sense to keep US or international equities in a registered account even if the withholding taxes are lost. Better to pay a small withholding tax on dividends than to have 100% of those dividends subject to income tax.

  13. Drew June 26, 2013 at 1:57 pm #


    My portfolio would put the $5,000 maximum for TFSA to bonds.

    The remainder has to be split between RRSP and taxable. Since RRSP contribution is only ~20% of income, there is 25-30% left that can only be put in taxable. I was just wondering whether there is a “better” (relatively speaking) index ETF to put in a taxable account.

  14. Canadian Couch Potato June 26, 2013 at 2:08 pm #

    @Drew: Canadian equities would be the most tax-friendly, followed by US equities, then international equities.

  15. Jordan November 25, 2013 at 10:45 am #

    So now I have a concern regarding currency exchange fees.

    RRSP – I currently have VUS and VEF
    TFSA – I currently have VEC

    After reading this article, VUS and VEF are bad ideas.
    However how big would a contribution need to be to make the USD conversion worth it?
    Or should I just stick with TD/ishares etfs?

  16. Canadian Couch Potato November 25, 2013 at 2:34 pm #

    @Jordan: The size of the holding doesn’t have a lot to do with the decision, because currency conversion costs and foreign withholding taxes are both percentages. But don’t consider Canadian-listed ETFs to be a “bad idea.” They may not be optimal in terms of withholding taxes, but US-listed ETFs can be difficult to trade efficiently. Unless you have USD cash to invest or you are intimately familiar with Norbert’s gambit, chances are you are better off with the funds you have now.

  17. mark December 10, 2013 at 12:10 am #

    I think I just made a mistake. I bought some VXUS through rbc online investing to put in my LIRA and was charged a exchange rate of 1.05.
    I guess I should of slide some cash from my CAN LIRA account to my linked USD LIRA account to avoid the exchange in currency?
    Is that how this works with the RBC accounts with foreign USD securities and rates?
    I see rbc likes to convert VXUS price share in US dollars and lists it in CAN share price in my LIRA account, very confusing, is there a better way to save money?


  18. Canadian Couch Potato December 10, 2013 at 8:27 am #

    @Mark: Moving CAD cash to the USD side of your account will not avoid the currency conversion charges. The only way to get USD into a LIRA is to use Norbert’s gambit to convert CAD cash. If you’re not able to do that it might be better simply to use Canadian-listed ETFs in that account.

  19. Lee December 21, 2013 at 5:14 pm #

    I’m trying to find a way to get exposure to US Equities into my TFSA and avoid paying the US Foreign Withholding Tax on dividends. I have read somewhere that HXS Horizons S&P 500 (C$ Hedged) will work…. do you know if that is correct? And if that is true how about BMO S&P 500 Hedged to CAD (ZUE) or iShares S&P 500 CAD-Hedged (XSP)? Any other advice or options you can suggest would be most welcome.

  20. Sean December 24, 2013 at 4:04 pm #

    I am Canadian have a lot of US funds. So I use USD to buy US stocks and ETFs.

    Question 1. I have been holding these 2 funds for almost 7 or 8 years now in these 2 accounts:

    CHO 108 in investment account (Book value) USD 13,696.32 (Mkt) USD18,894

    VUG in RRSP (Book value) USD5,631 (Mkt) USD 7,829

    Do you think it is worthwhile to pursue the IRS to make a claim on the withholding tax on their dividends?

    Question 2. Now that I am actively in investing in the stock markets. How do I file the US claims for withholding tax and the capital gains or loss? I am aware of the simplified claim procedure if one’s income is less than a certain amount , which was about USD 65K a lon time ago. I am still far from reaching that bracket. However, I don’t know the process of claiming it. Could you help?

    Thank you.

  21. Canadian Couch Potato December 24, 2013 at 4:53 pm #

    @Sean: I suggest consulting a tax specialist to address your questions.

  22. John Lawson December 29, 2013 at 4:10 pm #

    What about ETF’s such as VEF. It does not seem that a category exists for this type of fund. A CDN ETF that holds US ETF’s of International stocks ? Are they suitable for Non-Reg account?

  23. Canadian Couch Potato December 29, 2013 at 6:59 pm #

    @John: VEF is category E.

  24. Jon January 5, 2014 at 6:32 pm #

    Hello CCP and others,
    I’m trying to look at what category different funds would fall into. Do you have any tips where on the company website/prospectus I would find this?
    A heartfelt thanks for your dedication with financial education!

  25. Canadian Couch Potato January 5, 2014 at 7:20 pm #

    @Jon: Thanks for the comment. I’ll assume that identifying US-listed ETFs (categories B and C) is obvious, so the only issue is whether a Canadian-listed ETF holds securities directly or via a US-listed ETF. In the case of iShares, you can determine this by visiting the ETF’s web page and clicking “Holdings”: you’ll see the name of the US-listed ETF first, and then the individual stocks listed as “Aggregate Underlying Holdings.” Almost all of the US and international equity ETFs use this structure. The exceptions are the Fundamental index ETFs (CLU and CIE).

    For Vanguard ETFs, you can look on each ETF’s main web page. Under the heading “Invest Approach” it says “Invests primarily in the U.S.-domiciled Vanguard [name] ETF.” All of US and international equity ETFs from Vanguard Canada hold US-listed ETFs, so you don’t need to spend time looking at them all individually.

    BMO, on the other hand, doesn’t use underlying US-listed ETFs for any of its US or international ETFs. You can also assume Canadian mutual funds hold their stocks directly.

  26. Colin January 8, 2014 at 9:47 pm #

    I am still confused about my us Vanguard ETFs such VTI, VWO, VEA. These 3 funds are in 3 separate accounts RESP, RRSP, Spousal RRSP. Is more tax resulting from the end payout with the American version of Vanguard ETFs? Would I be better to add to their now Canadian versions and slowly cash out the Us ones and transfer them into the Canadian ones?

  27. Canadian Couch Potato January 8, 2014 at 10:32 pm #

    @Colin: No, there is no additional tax payable when the proceeds of US-listed ETFs are withdrawn from registered accounts. The foreign withholding tax applies only to dividends.

  28. Colin January 11, 2014 at 1:21 pm #

    Does that mean you pay tax on the foreign dividends with Vanguard ETFs such as VTI but not the VUS? To use Canadian Vanguard or American Vanguard ETFs?
    Lower mer for American but dividend tax?

  29. Canadian Couch Potato January 11, 2014 at 2:52 pm #

    @Colin: In a non-registered account you pay income taxes on both funds, and they are fully taxable as foreign income.

  30. Lee January 29, 2014 at 12:25 pm #

    Hi, which funds are A, B, C or D? They are not marked.

  31. Canadian Couch Potato January 29, 2014 at 1:04 pm #

    @Lee: See the top of the post.

  32. Lee January 29, 2014 at 7:57 pm #

    I’m still not sure which funds should go in which accounts since I don’t know which funds belong to which categories. A table of fund names and their corresponding categories would be useful.

  33. Canadian Couch Potato January 30, 2014 at 11:59 am #

    @Lee: The previous post contains some examples:

  34. James March 8, 2014 at 11:58 am #

    Yes, this page was really confusing to me too. What is the significance of all the funds in each table? Why are certain ones being compared against others, and why are some better than others?

  35. Paul April 9, 2014 at 3:03 pm #

    Does “registered” include TFSA? (hanging my head in shame!)

  36. Canadian Couch Potato April 9, 2014 at 3:06 pm #

    @Paul: Yes, a “registered” account is any one that must be registered with CRA because it has special tax privileges (including RRSPs, TFSAs, RESPs, etc.).

  37. Aryka April 25, 2014 at 1:24 pm #

    What about e-funds like TDB952, where it’s in US funds – better in RRSP or non-registered account?

    What’s your opinion on holding TDB902 in a TFSA?

  38. Canadian Couch Potato April 25, 2014 at 2:45 pm #

    @Aryka: The currency of the fund of the fund does not affect the foreign withholding tax treatment. In RRSPs and TFSAs, the withholding tax would be lost in both of these funds.

  39. Aryka April 26, 2014 at 8:52 pm #

    Alright, thanks. Do you think that bit of inefficiency is worth the extra trading fees incurred buying ETFs on a regular basis (monthly or even biannually)?

  40. Sebastien June 25, 2014 at 5:09 pm #

    Is it better to have TDB902 in a RRSP instead a taxable account in the long term even if I then have to pay the tax on dividend? What will produce better income in 20 years? Just curious to know before I set my TD e-series account.

  41. Jen November 10, 2014 at 8:50 pm #

    I have been preparing over the last year to implement your advice. I now have my TD and TD Waterhouse accounts set up, and a request in to have all my investments moved to the latter, which will apparently take a few weeks.

    I am in an odd circumstance: I have savings of about $130,000 but very low income. I am the sole financial provider for myself and a young child, and we are both designated disabled. We are both designated for the Disability Tax Credit, thus eligible for RDSP. We can also each keep savings in an RESP and/or a “disability trust”. However, an RRSP would make us ineligible for a monthly subsidies.

    One of your Model Portfolios says, “These have lower MERs than their Canadian counterparts and are exempt from US withholding taxes when held in an RRSP.” Because placing money in an RRSP would eliminate approximately $500/mo in cash subsidies, how do you recommend I invest?

    Cash dividends and interest would also leave us ineligible for subsidies, so I am only interested in growth. I prefer to include REITs, and otherwise to keep things as simple as possible, as my disability makes it difficult for me to understand any of this stuff!

    Thank you.

  42. Canadian Couch Potato November 11, 2014 at 12:00 am #

    @Jen: I can’t make any specific investment recommendations for you, I’m afraid. But I think it’s safe to say the comment on my Model Portfolios page is not relevant to your situation. If an RRSP would jeopardize your disability benefits, don’t use one. I’m concerned about your comment that “cash dividends and interest would leave us ineligible for subsidies,” as virtually all of the funds in my model portfolios pay either dividends or interest. Before you take any action I suggest you seek the help of an expert to ensure you don’t make a decision that will prove harmful.

  43. Jen November 11, 2014 at 12:43 pm #

    Thank you very much, CCP!

    I will follow your advice to see a pro. I will be calling one listed on your site, as I’ve had such awful advice so far (e.g., a totally unsuitable policy, segregated funds with very high insurance premiums, etc). Thanks again for the reply.

  44. AFD November 12, 2014 at 7:09 am #

    Hey CCP. Just stumbled on your site and it’s a wealth of information. Thanks.

    I have one question. For the international equities section in your RRSP’s you say that VWO is more tax efficient than VEE. Just so that I understand, why is that? It seems like both of them are made up solely of non CDN and non US equities… therefore I would figure that all dividends from either of them are subject to foreign withholding tax with no chance of recovery. Therefore I would have assumed that both are the same inside an RRSP? If you could let me know what I’m missing from these assumptions, that’d be great. Thanks.

  45. Canadian Couch Potato November 12, 2014 at 9:01 am #

    @AFD: Welcome to the blog, and thanks for the comment. Because VEE uses a “wrap” structure (it simply holds VWO rather than holding the underlying stocks directly) there is an additional layer of foreign withholding tax. Lots more in our white paper on this topic:

  46. Imran November 16, 2014 at 10:29 pm #

    How can you tell that XIN is in the category “Canadian ETF that holds a US-listed ETF of international stocks”?

  47. Canadian Couch Potato November 17, 2014 at 8:22 am #

    @Imran: Just look at the “Holdings” section on the ETF’s web page:

  48. Jen December 9, 2014 at 5:30 pm #

    Hi there,

    On one page of your website, you say: “The following version of the [Complete Couch Potato] portfolio uses US-listed ETFs for the foreign equity components. These have lower MERs than their Canadian counterparts and are exempt from US withholding taxes when held in an RRSP.”

    On another, you expand on this by saying, “While holding foreign equities in a non-registered account (as opposed to an RRSP) allows you to claim the foreign tax credit, the dividends are taxed at your full marginal rate, and any capital gains are also taxable. In an RRSP, these taxes can be deferred until retirement.”

    Are US-listed ETFs held in other registered accounts (RESP, RDSP) also exempt from US withholding taxes? Or is this exemption specific only to the RRSP?

    If they are exempt from US withholding taxes in other Registered accounts, too, and we’re confident our income will be low enough to not be taxed on withdrawals at ages younger than retirement, is the Complete Couch Potato just as suitable for the RESP/RDSP as it is for the RRSP?

  49. Canadian Couch Potato December 9, 2014 at 6:31 pm #

    @Jen: No, the exemption on withholding taxes does not apply to RESPs or RDSPs (or TFSAs). It applies only to RRSPs and affiliated retirement accounts, such as LIRAs and RRIFs.

    The Complete Couch Potato might be appropriate for RESPs and RDSPs, but it depends on the circumstances. In general I think it is too complicated for most RESPs, which should really be kept nice and simple.

  50. Myles Mintzler January 19, 2015 at 2:08 pm #

    What would be the chances of having you dummy down all the above information above into a chart. You would have all the Canadian ETFs listed and columns for RRSP TFSA RESPs and RDSPs and of course one for a taxable account and have good/bad for tax effiency…. Please……


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