Foreign Withholding Taxes Revisited

Justin Bender and I have just completed the second edition of our popular white paper, Foreign Withholding Taxes: How to estimate the hidden tax drag on US and international equity ETFs.

Originally published in 2014, the paper explains how many countries impose a tax on dividends paid to foreign investors—most notably a 15% levy on US stocks held by Canadians. When the first edition appeared, foreign withholding taxes were not well understood by many investors and advisors, and even the ETF providers rarely discussed them. In the two years since, the issue seems to be getting more recognition. Both Vanguard and iShares, for example, have made changes to their international equity ETFs to make them more tax-efficient. That’s great news, though it also made the first version of our paper somewhat dated.

In this new edition, we’ve made some significant changes. First, we’ve removed corporate accounts from the discussion and focused on personal accounts only. We’ve also used some different ETFs in our examples, including the Vanguard U.S. Total Market (VUN), the Vanguard FTSE Developed All Cap ex U.S. (VDU) and the iShares Core MSCI EAFE IMI (XEF). Finally, we’ve added some additional commentary to help investors make better decisions.

The takeaways

We invite you to dive into the paper for all the details, but if you’re looking for a summary of the important points, here they are:

  • In an RRSP, using US-listed ETFs for foreign equity holdings can bring a significant tax advantage. That’s because these securities are exempt from the usual 15% withholding tax on dividends imposed by the US government. Assuming a 2% yield on US stocks, the tax savings amounts to 0.30%.
  • In taxable accounts, Canadian-listed ETFs are generally a better choice. US-listed ETFs offer little or no tax advantage, and in cases where there would be a small benefit it’s likely to be outweighed by other considerations, including currency conversion costs and additional recordkeeping—more on this below.
  • In a TFSA or RESP, you should always use Canadian-listed ETFs for foreign equities. US-listed ETFs offer no tax advantage whatsoever, and in some cases they’re significantly less tax-efficient.
  • Finally, if you use Canadian-listed ETFs for international equities, look for funds that hold the stocks directly rather than through an underlying US-listed ETF. The “wrap” structure imposes a second level of foreign withholding tax that is not recoverable. To review the example we use in the paper, XEF holds its stocks directly, and Justin estimated its tax drag at 0.26% in an RRSP or TFSA. By comparison, VDU gets its exposure via an underlying US-listed ETF, resulting in foreign withholding taxes of 0.59%. (Note that Vanguard’s newer international equity fund, VIU, holds its stocks directly, so its tax drag should be similar to that of XEF.)

Understanding the trade-offs

US-listed ETFs have long been popular with Canadian investors because of their low fees, and if you’ve read through our paper you’ll understand they can also have significant tax benefits. With our clients, we regularly use US-listed ETFs in RRSPs and other retirement accounts for these reasons. But with DIY investors we usually don’t recommend this, unless you can be sure you understand the trade-offs. As for taxable accounts, the case for using US-listed ETFs is even weaker. Here’s why:

The cost of currency conversion. Any benefits from the lower fees and taxes on US-listed ETFs will be reduced or even eliminated if you fail to avoid the potentially high cost of converting currency before purchasing them. In most cases you should have a source of USD income or be comfortable using Norbert’s gambit—otherwise, stick with Canadian ETFs.

Here’s a bit of good news from our findings, which Justin explained in more detail in a recent blog. It turns out that in an RRSP, the foreign withholding taxes on XEF, a Canadian-listed ETF, are almost exactly the same as those of its US-listed equivalent, the iShares Core MSCI EAFE (IEFA). So this is one place where you really don’t need to use a US-listed fund.

Recordkeeping and reporting. In taxable accounts, tracking the adjusted cost base of US-listed ETFs is significantly more difficult, because you will need to look up the exchange rate on the settlement date of every transaction. This adds an additional cost, especially if you pay a tax preparer to do it for you.

US-listed ETFs are also considered foreign property by the Canada Revenue Agency, and non-registered holdings with a book value of $100,000 CAD or more must be reported annually using the T1135 form. Additional reporting is required when the total cost of your US-listed ETFs is over $250,000 CAD.

US estate taxes. Granted, this isn’t a problem for most of us. But wealthy Canadians may be subject to US estate taxes if they have significant holdings in US-listed ETFs, even if these are held in an RRSP.


97 Responses to Foreign Withholding Taxes Revisited

  1. Troy July 26, 2016 at 10:26 am #

    @Dan Thanks for the replies!

    For #2. In my RRSP, I hold VTI as my US holding. To avoid having to do Norberts Gambit and invest smaller amounts, it would be nice to instead hold a Canadian-listed ETF that holds US stocks directly since they have mostly the same withholding tax rate. So any suggestions there would be appreciated. It will obviously be hard to compete with VTI’s MER though.

    For #3. Thanks! I was searching the PDF for VGK and couldn’t find it, but I now see they list the name instead “Vanguard FTSE Europe ETF”.

  2. Canadian Couch Potato July 28, 2016 at 3:33 pm #

    @Troy: “It would be nice to hold a Canadian listed ETF holding US stocks directly since they should have relatively the same withholding taxation.” This is not true. A Canadian-listed ETF holding US stocks directly is not similar to VTI. The withholding tax would be the same with a Canadian-listed ETF that holds US stocks directly as it is for one that holds an underlying ETF. It is only with international stocks that the structure makes a significant difference.

  3. Troy July 28, 2016 at 4:39 pm #

    @Dan. Thanks for the clarification. Your reply makes sense now that I think about it. Wish this stuff was my career instead of an hour or 2 every month 🙂 I definitely appreciate all you do.

  4. Tony September 5, 2016 at 10:19 pm #

    To get the full cost of these funds then should I take the FWT+MER = Actual cost?

  5. Canadian Couch Potato September 5, 2016 at 10:24 pm #

    @Tony: Yes.

  6. Mes September 19, 2016 at 8:37 pm #

    Hi Dan,
    Thank you for revisiting the withholding taxes.
    Could you please give more details on the concept of ‘funds holding the foreign stocks directly.
    For example,
    VEE and VXC, would these two ETFs be directly held?

  7. Canadian Couch Potato September 20, 2016 at 10:51 am #

    @Mes: VEE and VXC both hold underlying US-listed ETFs. They do not hold their stocks directly. This means there will be a second layer of foreign withholding taxes.

  8. Que September 21, 2016 at 11:24 pm #

    @Dan: Is it better to have VXUS in RRSP, and XEF&XEC in TFSA, or have I missed the mark? thanks, Que

  9. Canadian Couch Potato September 22, 2016 at 9:35 am #

    @Que: You could do that. Or if you wanted a little more symmetry you could just use the US-listed counterparts of XEF and XEC (IEFA and IEMG).

  10. Que September 22, 2016 at 8:02 pm #

    @Dan: What would be a reasonable ratio between XEF & XEC? XEF 75% & XEC 25%? Thank, Que

  11. Canadian Couch Potato September 23, 2016 at 7:25 am #

    @Que: We usually do 80% developed and 20% emerging, which is roughly in line with the market cap of these two regions.

  12. Andrew September 23, 2016 at 2:13 pm #

    Is there a Canadian-listed Emerging Markets ETF that holds its stocks directly?

  13. Canadian Couch Potato September 24, 2016 at 10:00 am #

    @Andrew: Not completely, no, but BMO’s ZEM is close. It holds a few underlying iShares ETFs as well as individual stocks.

  14. Sebastien September 27, 2016 at 3:58 am #

    @CCP: Which one so you prefer between ZEM and XEF? They seems quite different in the equity selection.

  15. Canadian Couch Potato September 27, 2016 at 9:43 am #

    @Sebastien: ZEM holds emerging markets, while XEF holds developed markets. The iShares counterpart of ZEM is XEC.

  16. Sebastien September 27, 2016 at 9:54 am #

    @CCP: Sorry, I meant XEC. Which one do you prefer between ZEM and XEC in taxable and non-table accounts?

  17. Sebastien September 27, 2016 at 2:23 pm #

    @CCP: That answers the question. Thank you 😉

  18. Sven November 13, 2016 at 8:18 pm #

    What, if any, foreign ownership restrictions are there of holding more than $100K of US funds such as VTI in an RSP? Thanks Dan!

  19. Canadian Couch Potato November 14, 2016 at 7:39 am #

    @Sven: There is no restriction on foreign holdings in an RRSP, and they do not need to be reported on the T1135 form (as do large foreign holdings in non-registered accounts).

  20. Rahim December 4, 2016 at 2:24 pm #

    Hello CCB,

    I’m finally starting to wrap my head around this topic. Before I make a dumb move, I wanted to consult you (and the couch potato community). I invest in TD e-series funds – 25-25-25-25 split between Canadian bonds, Canadian equity, US equity and International equity funds. $55k in RRSP and $10k in TFSA so far. I contribute regularly (biweekly) to both my RRSP and TFSA accounts.

    Do I:
    1. Move my US and international equity funds in my TFSA to my RRSP (to avoid tax on foreign equity dividends) and only leave Canadian bonds and equity funds in my TFSA? With this option, going forward, I would contribute to US and International funds in my RRSP and Canadian bonds and equity funds in my TFSA.
    2. Or leave my funds as-is.

    As a couch potato, my gut says to go with option #2 and not tinker with my portfolios, but I question myself when I learn about things like withholding taxes on foreign dividends.

    Thanks in advance!

  21. Canadian Couch Potato December 5, 2016 at 10:58 am #

    @Rahim: You should definitely choose option #2. When you use mutual funds the foreign withholding taxes are the same whether you use a TFSA or an RRSP. The only situation where these two accounts are taxed differently is if you are using US-listed ETFs.

    Don’t stress about trying to tax-optimize your portfolio at this point. Foreign withholding taxes are not a significant drag on your investment returns now: they are something to worry about once your portfolio has grown much larger and you have the experience and confidence to structure the portfolio a little differently. For now, focus on those biweekly contributions. Good luck!

  22. Rahim December 10, 2016 at 8:00 am #

    @CCP, phew! Thanks for confirming that “keeping it simple” is often the best choice! Many thanks.

  23. Alex December 15, 2016 at 4:28 am #

    Hi, CCP.

    Thanks for being here for us new inexperienced investors like me.
    My issue is the opposite to what was discussed here.
    I’m actually looking for best way to invest 50 000 USD.
    I have an account with TD, so investing e-series in is one of the possible options.

    You recommend using RRSP to avoid 15% withholding tax.
    In my case, being a father of 3 little kids brings me nice tax returns today, and I actually believe the taxes I pay will grow in the future. So I’m not sure if going with RRSP is a right thing to do in my situation.

    I’m also not sure if splitting portfolio 25-25-25-25 between Canadian bonds, Canadian equity, US equity and International equity funds is still the best way to go for me.
    Investing in domestic equities using foreign currency is not what you recommend to do.
    Does it mean that I should sacrifice diversity for better tax efficiency?

    Thanks in advance!

  24. Canadian Couch Potato December 15, 2016 at 8:54 am #

    @Alex: Thanks for the comment. Unfortunately I can’t offer any specific advice about how you should invest your money. There are just too many individual issues that I cannot know. But overall I would say it is not usually a good idea to sacrifice diversification for tax-efficiency, especially if (as you say) you are in a relatively low tax bracket.

  25. Joe January 2, 2017 at 11:33 pm #

    Hi CCP,

    Let’s assume for a second I’ll never pay capital gains tax because my income will be low in retirement when I sell.

    If I had to prioritize XEF vs VTI using my rrsp room (the alternative would be a taxable account), XEF wins out because the dividend yield is just so much higher, right? The extra 1.3 percent dividend yield results in a tax of over 50 bps (varies with my current marginal rate of course), which is above the 30 bps from saving on withholding tax. Am I missing something?


  26. Canadian Couch Potato January 3, 2017 at 8:59 am #

    @Joe: In general you’re right that it currently makes more sense to tax-shelter international equities than US equities because of the higher yield. If you need to hold some of your equities in non-registered accounts, it usually makes sense to put Canadian equities there first, followed by US equities. Remember, too, that if you are holding US equities in a non-registered account, a CAD-denominated ETF is likely to be preferable to VTI:

  27. Joe January 3, 2017 at 11:48 am #


    Thank you! This was very helpful. Thanks for the reminder VUN is OK in a taxable because I can get it back at tax time.

  28. Steven January 9, 2017 at 7:57 pm #

    Reading an above comment and going through the recommended funds, you seem to prefer XEC over ZEM for emerging markets. I’m wondering, why? As you mention, ZEM holds many stocks directly, it has similar size as well as MER.

  29. Canadian Couch Potato January 9, 2017 at 9:32 pm #

    @Steven: I tend to be agnostic about product choices like this. For emerging markets, ZEM, XEF and VEE are all likely to be very similar, so just pick one ans stock with it. We often use XEF because we like the added diversification of the “all cap” index, which includes mid and small-cap companies as well.

  30. Aleks January 18, 2017 at 10:36 am #

    Dan, first of all thank you very much for all your hard work! It’s great to have people like you and Justin Bender educating dummy investors like me 🙂 I know how to save (came to Canada 15 years ago and now am mortgage-free with 150.000 in RRSP).

    I’m true believer in your couch potato strategy. Once I convinced myself “You can’t beat the market” my life became so much easier.

    I had RRSP in TD e-series funds for a while and now made a jump into Questrade. And I have simple (I hope 🙂 question:
    how would you model portofolio look loke for person who is ready to do Norbert’s gambit and trade US ETF?

    Thanks in advance!

  31. Mike February 5, 2017 at 3:19 pm #

    Hi Dan,

    I’ve noticed in the VIU summary document that the ETF has a 0.75% TER. Does this not significantly lower the attractiveness of the ETF versus XEF? Or am I missing something?

    Any clarification would be much appreciated!

  32. Canadian Couch Potato February 5, 2017 at 3:31 pm #

    @Mike: That extremely high TER is almost surely a result of the start-up costs incurred when the fund was launched just over a year ago. I would be surprised if the annual TER was more than a basis point or two going forward. If you look at VDU (same asset class, but launched several years ago) the most recent TER is 0.00%.

  33. Deirdre Lindsay February 5, 2017 at 4:27 pm #

    Hi Dan,

    Thank you very much for all the information you provide to all of us investors, both experienced and inexperienced.

    I have $356,000 in Mutual Funds invested with TD Direct Investing, spread over 3 accounts, Cash, RRSP and TFSA.
    I want to liquidate everything and invest in EFTs. I’ve been sitting on these funds for nearly a year as, having read &
    analyzed so much about ETFs, I’m now mentally paralyzed. Could you advise if the last P/F I put together makes
    investment sense;

    RRSP: 25% each in ZCN, VTI, VEA & ZAG/GICs.
    TFSA: 1/3rd each in XIC, VFV & XEF.
    Cash: 40% each in HXT & HXS and 20% in BXF or ZDB.

    I also have $118,00 invested in Cash, RRSP & TFSA in TD E-Series funds (900,902, 909 & 911). At this point, I’m wondering if I should just stick with the e-Series, despite the higher costs.

    Thank you, Dan

  34. Greg February 27, 2017 at 9:44 am #

    Dan, great article! Is a LIRA treated the same as an RRSP by the IRS in regards to withholding taxes?

  35. Canadian Couch Potato February 27, 2017 at 9:52 am #

    @Greg: Yes, in this context “RRSP” includes LIRAs and RRIFs also.

  36. AJB March 11, 2017 at 8:54 pm #

    Good evening Dan,
    Would holding XEF instead of VXUS in a TFSA be more efficient and offer a similar international coverage and diversification in the market?

  37. Canadian Couch Potato March 12, 2017 at 2:16 pm #

    @AJB: XEF is a better choice in a TFSA than a US-listed ETF, but it is not equivalent to VXUS, which also holds emerging markets. To get close to VXUS you would need to hold about 4 parts XEF for 1 part XEC.

  38. M June 19, 2017 at 3:28 pm #

    Hi Dan,

    Thanks so much for sharing your knowledge. Is the statement you made in the paper re: RRSP true for LIRA and LRSP as well?
    “In an RRSP, Level 1 withholding taxes do not apply.”

    Appreciate your response.

  39. Canadian Couch Potato June 19, 2017 at 7:39 pm #

    @M: Yes, locked-in accounts are treated the same as RRSPs in this respect.

  40. JamesB September 3, 2017 at 3:02 pm #

    Thanks so much for sharing your knowledge with us in these articles!

    I am working on building my portfolio. My income sources are in US dollars (~70%) and (~30%). I was thinking to buy US-listed ETFs with my USD and Canadian-listed ETFs with CAD. This way I would avoid regular currency conversions which could cost me ~1% each time. I have come up with this:

    – Fixed 25%:
    – ZAG (BMO Aggregate Bond Index, ER 0.10%) – Canadian-listed ETF
    – BND (Vanguard Total Bond Market, ER 0.05%) – US-listed

    – Equities:
    – 10% VCN (Vanguard FTSE Canada All Cap, ER 0.06%) – Canadian-listed
    – 65% VTI (Vanguard Total Stock Market, ER 0.04%) – US-listed

    I didn’t include non-US international ETFs on purpose since I think I got international exposure covered by looking at stock of international businesses held in VTI. Please let me know if this is not recommended.

    Before I put this into action, I would appreciate your feedback Dan or anyone else:

    1. Does my asset allocation make sense?

    2. Is it correct that US foreign witholding tax does not apply to US bonds held on any type of investment account (Canadian-listed ETF holding US Bonds or US-listed Bond ETFs)?

    3. My RRSP and TFSA limits are very low, so a big portion of my investments will go to taxable accounts. What is the best way to utilize my registered accounts:
    – TFSA and RRSP: Put all bonds first, and then equities if any room left?
    – Taxable: All equities.

    Thanks you!

  41. Canadian Couch Potato September 5, 2017 at 8:13 am #

    @JamesB: I can’t offer a thorough assessment of your plan, but a few things to point out. First, it is true there is no foreign withholding tax on US bond interest, but I do not recommend using unhedged USD bond holdings if you are planning to live and work in Canada:

    As for the asset location, it always depends on the details. But in general it makes sense to fill the TFSA with equities (not bonds), but to avoid US-listed ETFs here.

  42. MikeM October 23, 2017 at 12:50 am #

    Dan, Re: your previous comment responding to JamesB, you say one should prefer to fill a TFSA with equities, not bonds. But, you’ve taught me elsewhere that bonds should definitely be in tax shelters like an RRSP because of their tax inefficiency. So what makes the difference between an RRSP and TFSA in this case?

    And thank you for your blog! I started investing in ETFs about 1.5 years ago now and have learned so much from CCP, including all your great responses to these comments.

  43. Canadian Couch Potato October 23, 2017 at 8:43 am #

    @MikeM: Thanks for the follow-up question. While a TFSA provides tax-free growth indefinitely, the same is not true of an RRSP. Withdrawals from an RRSP are ultimately taxable, and withdrawals are subject to a minimum requirement after age 72. So all other things being equal, it makes sense to keep the slower-growth assets in the RRSP and the high-growth assets in the TFSA.

  44. John November 26, 2017 at 10:12 am #

    I can only imagine how satisfying it must be help so many people improve their lives. Thank you for your contributions.

    You mention that if you use Canadian-listed ETFs for international equities, look for funds that hold the stocks directly rather than through an underlying US-listed ETF. I hold TD international index ETF (non-hedged) (TPE) in a non registered account and believe it holds stocks directly but am not sure. How can you tell? I’ve tried to call TD and they don’t even seem to know!

  45. Canadian Couch Potato November 26, 2017 at 10:25 am #

    @John: Thanks for the comment. Yes, the TD International Index Fund does indeed hold the stocks directly. You can tell my looking at the list of holdings in the fund’s financial statements.


  1. Top Canadian ETF Providers | ETF Investing - January 23, 2017

    […] iShares‘ biggest selling point is probably the lower bid-ask spreads due to higher assets under management in many of its ETFs.  Otherwise, nothing special.  Their international ETFs hold US ETFs (ETF of ETFs structure), which creates an extra layer of fees and withholding taxes (see this blog post). […]

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