Your Complete Guide to Index Investing with Dan Bortolotti

The True Cost of Foreign Withholding Taxes

2017-12-02T23:29:50+00:00February 20th, 2014|Categories: ETFs, Index funds, Research, Taxes|Tags: |145 Comments

Back in the fall of 2012, I wrote a pair of blog posts about the impact of foreign withholding taxes in US and international equity funds. The first explained the general idea of this tax on foreign dividends, while the second showed which funds are best held in which types of account (RRSP, TFSA, non-registered). This is a complicated and confusing topic, so I was surprised at the enormous interest these articles generated from readers, the media, advisors and even the ETF providers themselves.

What was missing from those articles, however, was hard numbers: it’s one thing to say this fund is more tax-efficient than that one, but by how much? To my knowledge no one has ever quantified the costs of foreign withholding tax in a comprehensive way—until now. Justin Bender and I have done this in our new white paper, Foreign Withholding Taxes: How to estimate the hidden tax drag on US and international equity index funds and ETFs.

The factors that matter

The amount of foreign withholding tax payable depends on two important factors. The first is the structure of the ETF or mutual fund. Canadian index investors can get exposure to US and international stocks in three ways:

  • through a US-listed ETF
  • through a Canadian-listed ETF that holds a US-listed ETF
  • through a Canadian-listed ETF or mutual fund that holds the stocks directly

The second key factor is the type of account: RRSPs, personal taxable accounts, corporate accounts, TFSAs and RESPs are vulnerable to foreign withholding taxes in different ways. Their impact in corporate accounts, in particular, was little understood until Justin delved deeply into this matter with the expert help of Charles Berry, an accountant at Welch LLP.

We examine eight different fund structures in the paper, and for each one we estimate the total cost of a representative fund by adding the fund’s management fees to the foreign withholding taxes that apply in each account type. We’ll forgive you if you want to skip all the formulas and cut to the chase, and we’ve presented our estimates for many popular ETFs in a table at the end of the paper. Here’s a small sample:

US Equities Market RRSP TFSA Taxable
Vanguard Total Stock Market (VTI) US 0.05% 0.32% 0.05%
Vanguard US Total Market (VUN) CDN 0.44% 0.44% 0.17%
TD US Index – e-Series (TDB902) 0.65% 0.65% 0.35%
Developed Markets Equities Market RRSP TFSA Taxable
Vanguard FTSE Developed Markets (VEA) US 0.31% 0.68% 0.31%
Vanguard FTSE Developed ex N. America (VDU) CDN 0.90% 0.90% 0.53%
BMO MSCI EAFE (ZEA) CDN 0.67% 0.67% 0.34%
iShares MSCI EAFE IMI (XEF) CDN 0.94% 0.94% 0.56%
TD Int’l Index Fund – e-Series (TDB911) 0.84% 0.84% 0.51%
Emerging Markets Equities Market RRSP TFSA Taxable
Vanguard FTSE Emerging Markets (VWO) US 0.49% 0.85% 0.49%
Vanguard FTSE Emerging Markets (VEE) CDN 1.05% 1.05% 0.69%
iShares MSCI Emerging Markets IMI (XEC) CDN 1.00% 1.00% 0.68%

The first thing that jumps out is the large difference between US-listed and Canadian-listed ETFs when held in RRSPs. A fund like VUN is 39 basis points more expensive than VTI, while VDU adds an additional 59 basis points compared with VEA. In a large RRSP, therefore, it may be significantly more cost-effective to hold US-listed ETFs for your foreign equity exposure.

However—and this is important—this is only true if you can avoid the high cost of converting currency. If you’re investing relatively large sums and you’re comfortable doing Norbert’s gambit, then US-listed ETFs are an excellent option. But not everyone is keen to do this: in fact, after we explain the trade-off to clients of our DIY service, many decide they’re happy to pay more for the convenience of trading only Canadian-listed ETFs. And there’s nothing wrong with that decision.

Another important takeaway is that the tax advantages of US-listed equity ETFs are much smaller (or non-existent) in non-registered accounts. It probably makes sense for DIY investors to use Canadian-listed ETFs in their taxable accounts—even though their MERs are slightly higher—to avoid the cost of currency conversion.

Keep it in perspective

One of the common reactions to my earlier articles about foreign withholding taxes was to overestimate their significance. Let’s remember foreign equities are typically about 30% to 40% of a balanced portfolio, and the withholding taxes apply only to the dividends, which are likely to be in neighbourhood of 2% to 4%. So their impact on the overall portfolio may not be as large as you think.

Here’s an example of the cost breakdown in two versions of the Complete Couch Potato: the first uses US-listed ETFs for the foreign equities, while the second uses their Canadian-listed equivalents:

With US-listed ETFs % RRSP TFSA Taxable
Vanguard FTSE Canadian All Cap (VCN) 20% 0.14% 0.14% 0.14%
Vanguard Total Stock Market (VTI) 15% 0.05% 0.32% 0.05%
Vanguard FTSE Developed Markets (VEA)  10% 0.31% 0.68% 0.31%
Vanguard FTSE Emerging Markets (VWO)  5% 0.49% 0.85% 0.49%
BMO Equal Weight REITs (ZRE) 10% 0.62% 0.62% 0.62%
iShares DEX Real Return Bond (XRB) 10% 0.39% 0.39% 0.39%
Vanguard Canadian Aggregate Bond (VAB) 30% 0.22% 0.22% 0.22%
Total cost 0.26% 0.35% 0.26%
With Canadian-listed ETFs % RRSP TFSA Taxable
Vanguard FTSE Canadian All Cap (VCN) 20% 0.14% 0.14% 0.14%
Vanguard US Total Market (VUN) 15% 0.44% 0.44% 0.17%
Vanguard FTSE Developed ex N. America (VDU) 10% 0.90% 0.90% 0.53%
Vanguard FTSE Emerging Markets (VEE) 5% 1.05% 1.05% 0.69%
BMO Equal Weight REITs (ZRE) 10% 0.62% 0.62% 0.62%
iShares DEX Real Return Bond (XRB) 10% 0.39% 0.39% 0.39%
Vanguard Canadian Aggregate Bond (VAB) 30% 0.22% 0.22% 0.22%
Total cost 0.40% 0.40% 0.31%

I would argue that in a TFSA or taxable account the difference is trivial, and Canadian-listed ETFs are almost certainly the better choice. Even in an RRSP, the total difference of 14 basis points is not likely to outweigh the cost of currency conversion in smaller accounts.

In the end, it’s up to you to decide whether it’s worth using US-listed ETFs for your foreign equity holdings. But least now you have the numbers to help you make that choice.


  1. Harrison March 20, 2014 at 6:11 pm

    @CCP: I am adding money to my portfolio and after reading your posts regarding Swap-Based ETFs, I was wondering if it would be a good idea to sell my holdings of VCN and purchase HXT in my taxable account, even if it means realizing a capital gain?



  2. Canadian Couch Potato March 21, 2014 at 12:42 am

    @Harrison: There is no right or wrong answer: it simply depends whether you’re willing to pay the tax now or you’d rather defer it. Part of this will depend on whether you expect you may have a loss in the future that would offset the gain. You should also consider whether you might be in a lower tax bracket in the future, which would be an argument for deferring it longer.

  3. LawrenceW April 25, 2014 at 9:27 am

    @Harrison @CCC

    Regarding HXT, sure there is tax advantages now, but don’t you believe that at some point in the future, the CRA will come after missing revenues just like they did with advantaged bonds last year ?

  4. Canadian Couch Potato April 25, 2014 at 10:06 am

    @LawrenceW: That is always a possibility. However, swaps are different from the forward agreements used by the “advantaged” funds that the government targeted. They have been around for a long time in Canada and are widely used by institutional investors. As I understand it, there is no black magic behind them, just a tax arbitrage strategy.

  5. Omar April 26, 2014 at 2:05 pm

    Great article!

    Quick question: Wouldn’t Canadian listed ETF’s have to (eventually) convert C$ inflows into US$ to be able to invest in US or international markets? Keeping that in mind, wouldn’t, by design, there be an act of converting C$ to US$. Thus, if the conversion is going to occur anyways, why not go for a fund with lower overall expenses (mostly US funds listed in US$).

    Can you, please, shed some light on this?


  6. Canadian Couch Potato April 26, 2014 at 4:55 pm

    @Omar: Yes, Canadian ETFs and mutual funds need to convert currency to buy foreign stocks. But buying US-listed ETFs means you have to convert the currency. Who do you think gets a better exchange rate? :)

  7. Lindsay May 12, 2014 at 5:33 pm

    To clarify, the tax on VTI and VUN would be equal in a non-registered account, correct?

    I saw your excel sheet where you were comparing the two and had a 15% withholding tax for the Canadian one but not the US one, but I assume that was only for an RRSP account?
    Please correct me if I’m wrong. Thank you,

  8. Canadian Couch Potato May 12, 2014 at 7:44 pm

    @Lindsay: That’s right, the foreign withholding tax treatment is the same in a non-registered account: in both cases the tax would be withheld, but it is recoverable by claiming the foreign tax credit. In an RRSP the foreign withholding tax would be lost with VUN.

  9. Zaphod May 13, 2014 at 9:50 am

    Am I correct in assuming that RESPs (and RDSPs) work the same as TFSAs regarding taxation so the recommendations for TFSAs above apply equally for them?

    Your 2012 article “Which Fund Goes Where?” talked about taxable accounts and RRSPs – but what about TFSAs/RESPs as they are somewhat different tax-wise? The main question I have is whether or not it is efficient to hold XMW (which just holds the US listed ETF ACWV) in an RESP? If not should I hold ACWV in that account which is a US listed ETF that holds US and international stocks.

  10. Canadian Couch Potato May 13, 2014 at 10:11 am

    @Zaphod: RESPs and TFSAs are addressed in the white paper: RDSPs get the same treatment. There is no exemption for foreign withholding taxes in these accounts, and the amounts are not recoverable. So whether you hold XMW or ACWV you will lose the foreign withholding tax in an RESP.

  11. Lindsay May 14, 2014 at 3:52 pm

    Thanks CCP!

    And do dividends from VFV and VUN etfs qualify for the Canadian dividend tax credit? (Canadian company, but holdings are in the States). (I doubt that will be a deciding factor for me, but I like going in with all the info I can get.)

  12. Canadian Couch Potato May 14, 2014 at 3:57 pm

    @Lindsay: No, the dividends originate with US companies so they are not eligible for the tax credit.

  13. Paul W. May 18, 2014 at 1:08 pm

    In regard to U.S. witholding taxes on Canadian domiciled US Etf’s, it appears that the canadian currency version of HXS tracking the S&P 500 might be a good choice for registered accounts.
    The etf information package clearly states the total return swap method results in avoidance of any U.S. taxes on this etf. The m.e.r. is also lower than VUN. Could you give me your thoughts on this? Thanks.

  14. Canadian Couch Potato May 18, 2014 at 1:13 pm

    @Paul: There’s no free lunch. HXS carries a swap fee of 0.30% in addition to its MER, and that corresponds almost exactly to the expected withholding tax (based on 15% of a 2% yield). There may be a benefit to reducing the amount of income tax, but there is no impact on withholding taxes.

  15. Gordon June 2, 2014 at 1:32 pm

    ZRE maximum annual management fee is 0.55% according to data from BMO web site. In your tables is 0.62%. Which one is correct?

  16. Canadian Couch Potato June 2, 2014 at 2:02 pm

    @Gordon: The management fee is not the same as the MER. The latter also includes taxes and other administrative fees and may vary slightly from year to year. Vanguard and iShares include both on their websites; BMO and others regrettably do not. You can always find the most recent MER by looking in the fund’s Management Report of Fund Performance. For ZRE, it was 0.62% for each of the last four years.

  17. Jack June 11, 2014 at 10:57 am

    Can you please explain if I can use foreign tax credits in my tax return for portions of witholding taxes that were witheld in my RRSP.

    If not, in which cases I can claim this foreign tax credit with respect to which type of account?

  18. Canadian Couch Potato June 11, 2014 at 11:08 am

    @Jack: You can only claim the credit for foreign taxes that appear on your T3 or T5 slips. Since no slips are issued for funds held in an RRSP, these withholding taxes are not recoverable.

  19. Bob July 12, 2014 at 6:16 pm

    Hello CCP,
    Where should VXUS and the new VXC be held for least MER hit? I always thought VXUS should be held in a RRSP. If I understand it correctly and with the way you have it, VXC should be held in a taxable account since it is a CDN listed ETF?

    Would one recommend replacing VUN + VDU + VEE for the simplicity of just holding VXC?

  20. Canadian Couch Potato July 12, 2014 at 7:01 pm

    @Bob: The MER is not the issue. The main difference is foreign withholding taxes. US-listed ETFs are more tax efficient when held in an RRSP. In a taxable account this is less of an issue, and there is a big benefit to trading in Canadian dollars.

    I think you can make a good argument that holding a single fund for US, international and emerging markets is quite convenient if you hold all of those asset classes in the same account anyway.

  21. Tommy July 20, 2014 at 2:32 am

    Hi CCP,

    Great posting.. I’m wondering if your thoughts are any different if I wanted to purchase purely ETFs that hold U.S. equities that pay out dividends (i.e. Vanguard VIG)?

    Would it be likely my best option to purchase through a US-listed ETF (as opposed to a Canadian-listed ETF) through an RRSP account? This, IMO, would really be the only way to eliminate the withholding tax on the dividends, which would be relatively more significant than the Can. Couch Potato model portfolios mentioned since the ETF was dividend focused.


  22. Canadian Couch Potato July 20, 2014 at 9:14 am

    @Tommy: US-listed ETFs are always more tax-efficient in and RRSP and, as you say, this is even more of an advantage if the ETF has a higher than normal yield. As always, remember that US-listed ETFs also involve currency conversion costs that may outweigh the tax benefits.

  23. Derek July 24, 2014 at 10:40 am

    Hi Dan,
    I currently hold VUN ($25000) and XEF ($12000) inside my RRSP. Now after reading your articles about foreign withholding taxes, should I sell these funds and repurchase the comparative US-listed ETFs (Ex, VTI & VWO). What about future RRSP contributions?

    Thanks for your help and great articles.

  24. Canadian Couch Potato July 24, 2014 at 3:36 pm

    @Derek: The reduction in foreign withholding tax always needs to be weighed against the added cost of transacting in US dollars. If you are paying high costs to convert currency in order to buy VTI and VWO then it’s not worth it. My guess is that it’s not worth switching at this point.

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  26. Andrew December 18, 2014 at 11:10 am

    Am I missing something. Aren’t dividends from international stocks taxed at your marginal rate? For instance, earning $75k/year your marginal rate is 33%. So by putting these stocks in your TFSA you save paying the 33% which is much greater factor here than trying to save the 15% withholding tax.

  27. Canadian Couch Potato December 18, 2014 at 12:14 pm

    @Andrew: You’re not missing anything: it’s just about putting then cart before the horse. Many investors who learn about foreign withholding tax assume the advice is to avoid using registered accounts for foreign equities. But as you point out, income tax (and therefore asset location) is much more important factor, and that decision comes first. Understanding foreign withholding taxes simply helps you select more tax-efficient products to get that foreign equity exposure.

    For example, if you are holding foreign stocks in an RRSP, then US-listed ETFs make sense. If you are holding them in a TFSA, then you are probably better to stick with Canadian ETFs:

  28. David December 28, 2014 at 9:19 am

    If I own a Canadian ETF that holds international equities directly (e.g., XEF) in a non-registered account, then I understand that I would receive a tax slip indicating the foreign tax paid (by the ETF). I could then seek to recover the foreign tax by claiming the foreign tax credit. I’ve seen some info stating that the foreign tax credit must be calculated separately in respect of each country where the foreign tax was paid (and that if more than 3 countries are involved, one can’t use NetFile). Is this complication (calculating separately in relation to each country) a factor only where one holds different foreign equities directly (as opposed to holding an ETF), such that when holding something like XEF, one would instead simply receive a tax slip indicating one $ amount of foreign tax paid and then one would just use that one $ amount to claim the foreign tax credit? Great website. Very helpful.

  29. Canadian Couch Potato December 28, 2014 at 8:08 pm

    @David: Can you provide your source for the information about claiming the foreign tax credit separately for different countries? I have never known this to be an issue when investing with ETFs.

  30. David December 29, 2014 at 3:57 pm

    Thanks for the response. If you have not seen this as an issue with respect to ETFs, then my guess is that it does not apply when holding ETFs. (Perhaps this would only apply when an individual owns foreign securities directly (as opposed to owning an ETF that owns foreign securities) and withholding tax is deducted from payments made directly to the individual). Below is a link to what I was looking at.

  31. Canadian Couch Potato December 29, 2014 at 4:04 pm

    @David: Thanks for the link. I will investigate further.

  32. William December 31, 2014 at 1:00 pm

    This series of posts ( and the comments) are the best source available to the public on this complex issue. Thank you so much for providing this.

    I am interested on the effect of an ETF’s country of domicile on the risk of exposure to US estate taxes. Is a TMX listed ETF subject to these?

    Similarly, if the ETF is owned in a CCPC, are estate taxes on US equities still levied?


  33. Canadian Couch Potato December 31, 2014 at 2:59 pm

    @William: Thanks for the comment, and glad you found the information useful.

    Canadian-listed ETFs (and Canadian mutual funds) are not considered “US situs assets” even if they holds US equities. They would therefore not be subject to US estate taxes.

  34. Jerome March 3, 2015 at 10:26 pm

    How does VT work with respect to withholding taxes? It contains both US and international equity.

  35. Canadian Couch Potato March 4, 2015 at 7:41 am

    @Jerome: The ideas are the same: you can just consider as roughly equivalent to holding a blend of VTI, VEA and VWO. US withholding taxes would apply on the US stocks and international withholding taxes would apply on the others.

  36. Art April 19, 2015 at 11:04 pm

    Thank you for the informative post.

    Would a cdn-listed etf that provides international exposure such as VXC be reasonable to have in a tfsa? I lose the withholding tax, but its a better performer than a bond fund, which can be relegated to an rrsp.

    I considered putting canadian equity into the tfsa, but the non-registered account is a better spot. Besides, having too much canadian stock would create too much home-country bias.

    Any thoughts?

  37. Michael April 24, 2015 at 1:59 pm

    Lets say I was converting my currency using Norbert’s gambit. Do you know how one would come up with an estimate for the point (in terms of portfolio size) where it would become worthwhile to trade in US-listed ETFs vs. Canadian? Or is there a good rule of thumb? (eg. above $10,000, above $100,000, etc.)

  38. Michael April 24, 2015 at 2:01 pm

    Also, would it be possible for you to update your listed MERs on the model portfolios to account for the effect of withholding taxes? Love this blog, but I’m still having trouble figuring out what the “all-in” cost of these portfolios are. Seems like every time I read further back into the archives, another “hidden” fee is discussed that I didn’t know about :P

  39. Canadian Couch Potato April 24, 2015 at 2:49 pm

    @Michael: If you’re investing in an RRSP or TFSA, I would just add 0.30% or 0.40% to the cost of Canadian-listed ETFs and then compare costs and decide how much work you want to do to get that savings. For example, on 1 $10,000 holding you might save $30 to $40 a year, minus the cost of the currency conversion (which is low with Norbert’s gambit, but not zero). To me that’s not worth it. I think you want to be closer to $100,000 before it becomes compelling.

    In a non-registered account, I would almost always prefer Canadian-listed ETFs.

  40. agent47 June 6, 2015 at 11:45 pm

    I understand this article is a tad old, so I wanted to make sure about something: Is ZEA still the better choice tax-wise as compared to XEF? I understand that ZEA holds iShares MSCI EAFE index ETFs. From my understanding, it is typically better for Canadian listed ETFs to hold the underlying stocks themselves particularly in registered accounts. Given that ZEA (0.25% MER) and XEF (0.20% Management Fee) have similar MERs, it couldn’t possible be that ZEA is still the better choice, could it?

    Enlighten me if I am incorrect, CCP.

  41. Canadian Couch Potato June 7, 2015 at 3:05 pm

    agent47: A couple of issues here. First, ZEA has always held most its underlying stocks directly, not via ETFs, so it was more tax-efficient than XEF at first. However, since this post was written, XEF has switched to holding its stocks directly, so it is now equally tax-efficient.

  42. Canadian-listed ETFs vs USA-listed ETFs August 2, 2015 at 9:31 pm

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  43. Paul March 7, 2016 at 1:05 am

    Even with a high cost of currency conversion, you’re often better off going with the US fund in an RRSP provided you still have a while before you intend to sell/withdraw.

    I’ll take the example of VTI and VUN. Lets assume 2% conversion fee to USD, paid at year 0 of the investment (when you first convert). And a further 2% conversion fee when you cash out at retirement back to CAD. But you are paying 0.05% per year for MER for VTI. VUN, no exchange fees… but you pay 0.44% per year. And lets assume an average growth of 7% per year.

    For a 25 year investment, every $1 CAD turns into $5.15 CAD with VTI, but only $4.90 CAD with VUN. You have 5% more money in your pocket. Break-even occurs at 11 years — prior to that, you’re better off going with the VUN.

    And this assumes 2% each way on the currency. Hopefully you can do better!

  44. Raf January 25, 2017 at 4:06 am

    I understand that if I have US listed ETF’s in RRSP’s, it would be more tax-efficient than to invest from a TFSA. What would happen if I have US funds in my online brokerage account, buy US listed ETF’s and of course eventually sell them and get US Dollars, because it is not my intention to convert them to CAND. I think I should pay the 15% of taxes but I would not incur in money exchange expenses. I would appreciate any comment about this, Thanks

  45. Raf January 25, 2017 at 4:11 am

    I forgot to mentioned in my last question that those US funds are in a TFSA

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