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Foreign Withholding Tax Explained

September 17, 2012 Tweet

The Couch Potato strategy calls for a signi cant allocation to US and international stocks. When you
live in a country with a small, poorly diversi ed stock market, global diversi cation is extremely
important. But it does carry a price in the form of foreign withholding taxes.

Many countries levy a tax on dividends paid to foreign investors: the rate varies, but for US stocks it is
15%. (Foreign withholding taxes do not apply to capital gains.) With broad-based US index funds now
yielding about 2%, the withholding tax amounts to an additional cost of 30 basis points. As you can
see, the impact of withholding taxes can be far greater than that of management fees, which get a lot
more attention.

To learn how much tax is withheld by your fund, click the “Distributions” tab on its web page and look
under the heading “Foreign Tax Paid.” Here’s what the table looks like for the iShares S&P 500 (XSP).
Notice the amount of tax paid for 2011 ($0.04388 per share) is approximately 15% of the foreign
income received ($0.26866):

Investors and advisors are often unaware of how foreign withholding taxes affect returns, and the
reason is simple: they’re damned complicated. The amount of tax you pay varies with the type of
account (taxable, RRSP, TFSA) and the structure of the fund.

What type of account?

Let’s start with account types. If you hold foreign stocks in a non-registered (taxable) account,
withholding taxes always apply: if a company pays a 20-cent dividend each quarter, only 17 cents
ends up in your account. The good news is the amount you paid will appear on your T3 and T5 slips
and you can recover some or all of it by claiming a foreign tax credit on your return.
The other key point is that Canada has tax treaties with the US and many other countries that have
agreed to waive withholding taxes on stocks held in registered retirement accounts, including RRSPs,
RRIFs and Locked-In Retirement Accounts (LIRAs).

Note this exemption does not apply to Tax-Free Savings Accounts (TFSAs).

What type of fund?

The structure of the fund you’re using for your foreign investments is also extremely important—and
even more confusing.

First consider Canadian funds that hold foreign securities directly, which includes mutual funds such as
the TD e-Series and some (but surprisingly few) US and international equity ETFs on the Toronto Stock
Exchange. Because these funds hold the individual stocks directly, the managers can track the
withholding taxes and report them (through a T3 slip) to investors who hold the funds in a taxable
account. That allows the investor apply for the foreign tax credit.

However, if you hold these funds in an RRSP, you forfeit the exemption you would otherwise receive on
foreign withholding taxes. That’s because the fund itself pays the withholding taxes: you don’t pay it
directly. And because you’re investing in an RRSP, the fund won’t issue a T3 slip that would allow you
to recover it.

With US-listed ETFs the US withholding tax is recoverable in a non-registered account: you’ll receive a
T5 slip that speci es the amount paid. Better yet, if you hold these ETFs in an RRSP, you’re exempt
from US withholding taxes. The downside is that when a US-listed ETF holds international stocks
there’s an extra layer of withholding tax applied by the stocks’ native countries. There is no way to
recover that tax.

The nal category is Canadian-listed ETFs that hold US-listed ETFs. These include a number of
Canadian iShares and Vanguard funds. Rather than holding their underlying stocks directly, they simply
hold units of their New York–listed counterparts.

When you hold these in a taxable account, you can recover taxes withheld by the US-listed ETF, but
those withheld by non-US countries are not recoverable. In an RRSP, you may incur two levels of
withholding tax and neither is recoverable, which makes this structure particularly tax-inef cient for
international equities.

Confused yet? You’re not alone. To provide you with a handy reference I’ve broken down all of the
categories, provided examples of common funds in that category, and summarized the tax implications
in each type of account.

A. Canadian fund that holds US or international stocks directly.

TD US Index Fund e-Series (TDB902 and TDB904)
iShares US Fundamental (CLU and CLU.C)
BMO S&P 500 (ZUE and ZSP)
TD International Index e-Series (TDB911 and TDB905)
iShares International Fundamental (CIE)
BMO International Equity (ZDM)
iShares MSCI EAFE IMI (XEF)

In a taxable account, US or international withholding taxes apply, but are recoverable.

In an RRSP or TFSA, US or international withholding taxes apply and are not recoverable.

B. US-listed ETF that holds US stocks.

Vanguard Total Stock Market (VTI)
iShares S&P 500 (IVV)

In a taxable account, US withholding taxes apply, but are recoverable.

In an RRSP, US withholding taxes do not apply.
In a TFSA, US withholding taxes apply and are not recoverable.

C. US-listed ETF that holds international stocks.

iShares MSCI EAFE (EFA)
Vanguard FTSE Developed Markets (VEA)
iShares MSCI Emerging Markets (EEM)
Vanguard FTSE Emerging Markets (VWO)
Vanguard Total International Stock (VXUS)

In a taxable account, international withholding taxes apply and are not recoverable. US
withholding taxes apply, but are recoverable.
In an RRSP, international withholding taxes apply and are not recoverable. US withholding taxes
do not apply.
In a TFSA, international and US withholding taxes apply and are not recoverable.

D. Canadian ETF that holds a US-listed ETF of US stocks.

Vanguard US Total Market (VUS and VUN)
Vanguard S&P 500 (VSP and VFV)
iShares S&P 500 (XSP and XUS)

In a taxable account, US withholding taxes apply, but are recoverable.

In an RRSP or TFSA, US withholding taxes apply and are not recoverable.

E. Canadian ETF that holds a US-listed ETF of international stocks.

iShares MSCI Emerging Markets IMI (XEC)
iShares MSCI EAFE (XIN)Vanguard FTSE Developed ex North America (VEF and VDU)
Vanguard FTSE Emerging Markets (VEE)

In a taxable account, international withholding taxes apply and are not recoverable. US
withholding taxes apply, but are recoverable.
In an RRSP or TFSA, US and international withholding taxes apply are not recoverable.
For tables suggesting the most tax-ef cient account for each type of fund, see this post.

Many thanks to Justin Bender at PWL Capital for verifying the accuracy of this post. For more
information, I also recommend this document from Dimensional Fund Advisors, which discusses
international (non-US) withholding taxes in detail.

This post is intended for educational purposes only and does not constitute tax advice for any
individual. You should always consult with a specialist before making any investment for tax reasons.

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 An ETF Pricing Puzzle Foreign Withholding Tax: Which Fund Goes Where? 

200 Responses to Foreign Withholding Tax Explained

Jacques La amme August 17, 2014 at 12:27 pm #

I own units of the Mawer Global Small Cap fund in my TFSA. I was told that no tax forms would
be issued as this investment is in a registered plan, eventhough this fund invests throughout the world. Is
this correct or not?

Canadian Couch Potato August 17, 2014 at 6:57 pm #

@Jaques: Thats right, you won’t get a T-slip for any fund held in a TFSA because there are no
taxable events to report.

Art August 20, 2014 at 8:35 pm #

Hello Couch Potato!

After reading this, as well as the “which fund goes where” articles I am still quite confused about what
do with my TFSA in terms of maximizing tax ef ciency.

I have a portfolio of 4 funds that used to have mutual funds that will shortly be transformed into 3-4
etfs.
They are as follows: Cash 41k, TFSA 25k, LIRA 29k, RRSP 19.5k

I will transfer funds from my cash until TFSA is maxed until 31k. I was going to keep canadian equity
such as VCN in my cash account, VPI in my LIRA and VXC in my RRSP. As for TFSA, the suggestions i
see is bonds, reits, cash and gic.
If I have a car loan that is 1.9%, what is even the point of owning bonds that have 1.5% return? I thought
that no taxation meant i could put all sorts of juicy things into it but the limitations presented make me
feel like the tfsa is lackluster.

Am I missing something? What is the tax-ef cient move here?

Thank you.

Canadian Couch Potato August 20, 2014 at 11:04 pm #

@Art: I really can’t comment without knowing the details of your overall asset allocation,
planned future contribution, contribution limits, etc. As for why one would buy bonds when carrying
consumer debt, I think you can always make an argument for paying off debt before adding to your
investments, especially in taxable accounts.

Art August 20, 2014 at 11:26 pm #

The details quite simple – up until recently i had about 100k in a smattering of mutual funds as
suggested by some nancial advisor. After reading a few books by Mr. Bernstein and realizing how
clueless i have been, I moved my investments to qtrade and consolidated them into 4 accounts that i
have mentioned above.

My goal is to sell the mutual funds and have a simple 4 fund portfolio while I learn and read some more.
The plan is to get away from these dreadful mutual funds that i bought into with their high MERs and
outrageous turnover. I was going to go for a 70/30 equity/bonds allocation.

Just starting a career in the oilpatch, and looking to keep my tfsa topped off at all times, and will
probably avoid putting any more money into RRSP until I learn a lot more.

Ultimately, I just want something that performs better than the shambling mess i have right now (in the
long term of course), and while I understand the taxation in RRSP and cash accounts, something about
TFSA eludes me. It allows you to pay no tax on interest and deduct contributions from your yearly
income, but the tax ef cient things to go into it are bonds and other low-interest or esoteric instruments?

Perhaps I sound really ignorant, but it is what it is. How do i make the TFSA a moneymaker that i’ve
been reading so much about? I would appreciate any pointers or direction. Thank you.
 Canadian Couch Potato August 21, 2014 at 8:59 am #

@Art: I think the problem is revealed in your comment that the TFSA “allows you to pay no tax
on interest and deduct contributions from your yearly income.” A TFSA does not allow you to deduct
contributions like an RRSP does. Contributions are made with after-tax dollars, but then future
withdrawals are not taxable (unlike RRSP withdrawals).

At this point I think your main priority should be choosing a simple portfolio (such as the Global Couch
Potato) and getting it set up with as much as possible in tax-sheltered accounts. The details of your
asset location are much less important and can be adjusted later when you are more con dent.

Parin August 21, 2014 at 4:51 pm #

My husband and I are struggling with investing funds in our granddaughter’s registered
disability savings plan. We would like to put funds into a low cost broad based ETF that is tax ef cient.
What would you suggest? We have been looking at Vanguard’s low fee ETFs.

Canadian Couch Potato August 21, 2014 at 5:04 pm #

@Parin: Vanguard ETFs are excellent, but a more important consideration is your asset mix,
which will determine the amount of risk in the portfolio. That’s impossible to know without a more
thorough discussion about your needs and your temperament.

Art September 3, 2014 at 12:22 pm #

Thank you for your advice,

I will be choosing a simple portfolio. Nonetheless, could you point me in the right direction regarding
tfsa’s? I’ll have one that will be maxed, but I am still having a hard time understanding what to really
hold in my soon-to-be $36500 TFSA.

http://canadiancouchpotato.com/2010/03/05/put-your-assets-in-their-place/
The above post mentions xed income and REIT. What other asset class/fund type would suit a tax
sheltered account?

Thank you.

Art September 3, 2014 at 4:57 pm #

An addition to my comment:

I would appreciate an opinion on my planned portfolio. As i mentioned above,i have 4 accounts, cash,
tfsa,lira and rrsp
cash – CDN equity (VCN)
TFSA – 50/50 of reit/short term bonds such as XSB/XRE or vanguards VSB/VRE
RRSP – CDN listed US and international equity – VXC
LIRA – US listed US equity

My LIRA is around 30k and i wont be touching it for a while, thus my reasoning is that i will eat the
currency conversion costs once but get a tax ef cient retirement fund. I just started a lucrative career
and will use my cash ow to top up rrsp and rebalance the portfolio as necessary.

Thank you for reading.

Canadian Couch Potato September 3, 2014 at 7:56 pm #

@Art: It’s impossible to say too much without knowing the details of your situation, but your
plan sounds generally ne. A couple of observations: If you want to hold equal amounts of US and
international stocks, you won;t be able to do that with a Us equity ETF in one account and VXC in
another (you will always be overweight US stocks). So you might want to use separate ETFs for US and
international in the RRSP. Similar issue with the 50/50 mix of REITs and bonds in the TFSA. The
proportion of each asset class in the TFSA doesn’t really matter: it’s the proportion in the overall portfolio
that is more important.

http://canadiancouchpotato.com/2012/03/12/ask-the-spud-investing-with-multiple-accounts/
http://canadiancouchpotato.com/2014/08/13/managing-multiple-family-accounts/

art September 3, 2014 at 9:11 pm #

My reasoning was that although the lira is 30% of the portfolio right now, i will never cobtribute
to it. Therefore, as my canadian (tfsa, nonregistered) and us +international (rrsp) holdings grow, i will
rebalance the portfolio. Is it really that bad to have some initial skew in %, if you know that cash ow
rebalancing is imminent?

The lira is my army pension and i just wanted to put an ef cient fund into it and not worry as it becomes
much smaller portion of the portfolio.

As for tfsa, the 50/50 would give me a rough allocation of 15%/15% of the portfolio for now, but how
would i maintain the proper ratio? Contribution room doesnt increase that quickly and tfsa seems to be
the most ef cient account for xed income and reit.

Thoughts?

Canadian Couch Potato September 3, 2014 at 9:22 pm #

@art: Again, impossible to say more without knowing all the details. Your asset location (i.e.
which fund goes where) will have to evolve over the years, since the contribution room will increase at
different rates in the RRSP and TFSA, and not at all in the LIRA. As you’ve discovered, managing
multiple accounts like this is probably the hardest part of DIY investing. It sounds you’re on the right
track so far.

dan September 11, 2014 at 5:16 pm #

Hello,
if i wanted to invest equally in a US-listed ETF that holds US equity vs. US-listed ETF that holds
international equity, which would go in RRSP and which in taxable account then?
or should I just go half-half for each?
thanks!

Canadian Couch Potato September 11, 2014 at 6:14 pm #

@dan: Currently the yield on international equities is higher, so it would likely make more sense
to keep that asset class in the RRSP to reduce the amount of tax you’d pay on foreign dividends.

Andre December 27, 2014 at 1:34 pm #

Hello, I am thinking about adding VFV to my portfolio. I currently trade with TD Waterhouse and
use their platform to purchase these shares.
I’ve read your posts over many times, and still dont fully understand about the tax implications I may
face.
I dont have an RRSP or TFSA acct set up, I would just hold this fund in my trading account.

So lets say I bought 100 shares of VFV a year ago for $3496. The stock is valued at $42.97 today, and
would have received $43 total in dividend pymts since buying.
If I were to sell it now for $4297, would their be any tax I would be required to pay on the $801 increase
in value? or will i be only taxed 15% on the $43 dividend pymt recieved since buying?

Do you have any input on choosing between VFV or the TDB902, would I be better off either one or is it
same etf, different pile?

thanks alot for this awesome site!

Canadian Couch Potato December 28, 2014 at 8:24 pm #

@Andre: Foreign withholding taxes do not apply to capital gains, only dividends. So if your
holding of VFV paid $43 in dividends, that money would be subject to withholding tax of of $6.45 ($43 x
0.15). That amount would appear on the T3 slip you receive at tax time and you can claim a foreign tax
credit to recover it.

You would still have to report an $801 capital gain on your tax return, and half of this would be taxable
at your marginal rate. But this has nothing to do with foreign withholding tax. It’s just plain old Canadian
capital gains tax.
http://www.taxtips.ca/ ling/capitalgain.htm

The holdings and the tax treatment of VFV and TDB902 are virtually identical. The decision comes down
to whether you prefer the lower management fee (advantage ETF) or avoiding all trading commissions
(advantage mutual fund).
http://canadiancouchpotato.com/2012/07/30/comparing-the-costs-of-index-funds-and-etfs/

Alex December 28, 2014 at 10:19 pm #

Dan,
What is the % for withholding tax, if any, charged for holding UL and GSK ADRs in an RRSP account? I
am referring to dividends paid.

Thanks

Canadian Couch Potato December 29, 2014 at 4:03 pm #

@Alex: I wish there was a straightforward answer, but there doesn’t seem to be. See this article
on withholding taxes as they apply to ADRs:
http://www.theglobeandmail.com/globe-investor/personal- nance/taxes/global-dividend-hunters-must-
beware-tax-trap/article9840189/

kerry February 17, 2015 at 2:20 pm #

I use a program called plus 500 out of London England I am Canadian. do I have to pay tax on
any earnings from this cfd company?

Max Thunder April 15, 2015 at 4:32 pm #

I own XUS.
“In a taxable account, US withholding taxes apply, but are recoverable.”

Am I right that if I didn’t pay any Canadian tax, then it is NOT recoverable? I’m a student with not
enough taxable income to pay any taxes to the CRA. I’m ling my taxes and from what I can see, the
foreign withholding tax credit can only be used to reduce taxes (the amount on line 405 must not be
above line 429). Does this seem right?

Canadian Couch Potato April 15, 2015 at 5:33 pm #

@Max: You’re correct: the foreign tax is non-refundable, so if you did not pay any Canadian tax then you
will not receive a refund.

Jon April 17, 2015 at 2:20 pm #

Hi,

1. I’m not sure which of the couch potato portfolio’s I should choose.
Option 1: VAB, VCN, VUN, VDU (Developed Excluding North America), VEE (Emerging Markets)
Option 2: VAB, VCN, VXC (World excluding Canada)

Is the obvious one to choose option 2 just to save MER fees? Or is there more diversi cation in option 1?
Less tax implications in one of them (I could not nd VXC in the article of “foreign withholding tax:which
fund goes where”). Or taking into consideration MER and taxes which would be the best option in the
long run?

2. I was also planning on investing in a real estate ETF. CCP recommends two but one of them is using
an equal weight strategy with a higher MER and the other is using a cap weighted strategy with a lower
MER. Which is more bene cial in the long run?

Thanks CCP

Canadian Couch Potato April 17, 2015 at 4:45 pm #

@Jon: the tax implications and diversi cation are virtually the same. Option 1 is just so much
simpler, especially if the whole portfolio is in a single account.

The REIT decision is really up to you. I like the equal-weighted strategy in a sector fund that would
otherwise be dominated by a few big names. But the lower cost also has advantages, obviously. Just
understand that the performance may be quite different from year to year:
http://canadiancouchpotato.com/2013/12/19/why-has-vre-outperformed-its-rivals-in-2013/

Jon April 17, 2015 at 6:01 pm #

Thanks for the reply I just have a couple more questions.

1. I just read Justin’s tax ef ciency example for ETFS and want to make sure I have this down.

-For bonds and REITS I will have them in my TFSA to prevent tax implications on interest and capital
gains
-For U.S. or international ETFs I should look at which ETF has the higher dividend yield and put whatever
I can in my RRSP rst. Anything leftover will go to my TFSA (if I have room) because it’s more
advantageous to NOT get taxed in a TFSA on foreign income at my marginal rate than recoup foreign
tax withheld.

Would you agree with the above?

2. I am 27, I have a total $100K right now, $50K in non registered and $50K in TFSA just cash in the
account.

Unfortunately, the past 2 years I have $50K invested equally in a NON-registered account in CDN banks
(BMO, TD, BNS, NA, RBC) in DRIP, before I came across this website and I cannot sell them because I
don’t want to deal with the tax implications of capital gains, etc.

My question is if I want to split like one of your portfolios: $30K (CDN), $30K (US), $30K (International),
$10K bond/REIT, which is impossible at the moment because 50% is allocated to CDN banks, should I
try to split the remaining $50k between US,International, and bonds and NOT invest in anything in CDN
ETF. My thinking is since banks hold majority in CDN ETF then I will treat the 50K I have right now as a
CDN ETF and only purchase a CDN ETF only to commit to the 30% split I would like in my portfolio in the
future. If you do not agree with this, I would really like your opinion on a proper split as from reading up
on this website and other forums your method seems to be working for a lot of investors.

Really appreciate it, thanks CCP

Canadian Couch Potato April 18, 2015 at 8:31 am #

@Jon: Your suggested split between TFSA and non-registered accounts sounds about right.

As for the second question, I can’t recommend you sell or buy anything speci cally. But I will say that if
you want to avoid paying capital gains taxes on your bank stocks you will probably hold them for the
rest of your life. So I would ask whether it makes more sense to consider realizing a pretty small gain
now and building your portfolio properly rather than continuing to let that one past decision drive your
future strategy.

Jim April 18, 2015 at 2:59 pm #

If I keep US stocks in my RRSP and I get the tax form from the company requesting me to
submit it to IRS, do I need to do it?

Can you please explain the difference on when one from Canada should be submitting these type of
forms if he/she is purely a resident of Canada (not USA); just owns US stocks.

Does it depend on which accounts one keeps US stocks or is it regardless of the account we need to
submit the forms to IRS?

Canadian Couch Potato April 18, 2015 at 3:57 pm #

@Jim: You will not get any tax slips for US stocks or ETFs held in registered accounts. And unless
you are a “US person” you don’t need to report anything to the IRS. Even if you are a US person you
should not have to report holdings in an RRSP, provided to you le the proper paperwork:
http://canadiancouchpotato.com/2014/06/18/us-investors-in-canada-what-to-watch-for/
 Stephen LIU April 23, 2015 at 12:38 am #

Hello -I’ve some questions about US withholding tax on US dividends to Canadians. Would
appreciate very much for your help.

(1) Recently I purchased some shares in a US company and received its dividend payment. Total gross
payment in Cdn. funds is about $1,200 and a w/holding tax of Cdn.$500+ was deducted. Even
considering the US/Cdn. conversion, this rate (almost 40%) seems extremely high. I purchased the
shares thru’ a Cdn. discount brokerage rm and am following up with it. But I worry this could be a long,
circuitous process to go thru’. In the meantime can you advise if:-

(a) in your experience there might be a reason for this high rate; and
(b) how best one can follow up such cases.

(2) I understand in general the Foreign Tax Credit concept in Cdn. tax returns but just am curious to know
if a Cdn. resident (not residing in USA) can recover the US W/holding tax by ling a US tax return -Have
no income from US sources other than the dividend income from this stock (just a thought, probably not
worth the effort anyways).

Thank you so much for your help!

Canadian Couch Potato April 23, 2015 at 8:33 am #

@Stephen: You should consult a tax specialist about this question. But in general:

1) The normal US withholding tax on dividends is 30%, but that is reduced to 15% if you le a W-8BEN
form through your brokerage. That would be the rst thing to investigate. Note that some US
investments (such as master limited partnerships) have higher withholding rates on distributions than
conventional company dividends.

2) It’s not possible or necessary to reclaim the foreign withholding tax via the US. You receive a credit for
this amount when you le your Canadian tax return, so you are paying the fair amount.

Stephen April 23, 2015 at 4:14 pm #

Hi -Thank you for your reply. Very much appreciated.

I still have a question about (2) in my earlier e-mail. That is, if a higher rate of US withholding tax has
been applied to the 1st dividend payment (because of non- ling of W8BEN or even for other whatever
reasons) and later problem recti ed (e.g., by ling a W8BEN now), is there any way to recover the over-
deducted tax on the 1st payment?

As always, thank you for your advice.

Canadian Couch Potato April 23, 2015 at 8:51 pm #

@Stephen: The amount of foreign tax paid should appear on your T-slip next year. If it does, you can
claim the foreign tax credit.

Jason April 27, 2015 at 3:54 am #

Which is more advantageous the dividend tax credit for canadian stock or foreign divident tax
credit for foreign stock?

Or which provides more of a refund % wise?

Thanks

Canadian Couch Potato April 27, 2015 at 7:45 am #

@Jason: The foreign tax credit doesn’t really offer any true refund: it simply makes sure you’re
not taxed twice on the same dividend. Let’s say you are in a 40% tax bracket and you receive $100 in US
dividends. The withholding tax takes 15%, so you will actually receive only $85 in your account.
However, your T-slip will report $100 in foreign dividends, which will be taxed at 40% in Canada. So
now you have paid 55% tax. But the T-slip will also report $15 in foreign tax paid, which you can recover
with the foreign tax credit. In the end you only pay 40% tax.

The Canadian dividend tax credit is quite different, though it is also designed to eliminate double
taxation. It simply recognizes that your dividends have already been taxed once at the corporate level
before being paid to you, and so the tax you pay is reduced accordingly.

Anon May 19, 2015 at 12:28 am #

Regarding:

A. Canadian fund that holds US or international stocks directly.

Is it that foreign dividends get taxed at the fund level? If so, then why should there be a difference in the
tax treatment based on the type of account in which the investor holds the Canadian fund (recoverable
for taxable account, but nonrecoverable for RRSP/TSFA).

If it’s that foreign dividends get taxed at the investor level, then why is there a difference in treatment of
US stocks held in a Canadian ETF vs US ETF in an RRSP? (nonrecoverable in the former but recoverable
in the latter)

Donald Lamont June 20, 2015 at 2:09 pm #

In a website called taxtips.ca, they say there is no 15% U.S. withholding tax on dividends of U.S.
stocks held within the RRSP because there is a tax treaty between Canada and the U.S. You say there is
withholding tax. Who is right?
 Canadian Couch Potato June 20, 2015 at 2:34 pm #

@Donald: We’re both saying the same thing. The key idea is that you must hold US stocks or
ETFs directly in your RRSP to be exempt from the withholding tax. If you use a Canadian ETF or mutual
fund that holds the US stocks, then you will pay the withholding tax even in an RRSP.

RJ September 11, 2015 at 3:37 pm #

With the changes the index that VEA tracks such that it now has 8% Canadian stocks I am
debating whether to make any changes to my portfolio which consists of VEA, VTI, VWO and XIC. VEA
currently represents 40% of my equities and all are in registered accounts.

One the one hand I prefer to have fewer holdings and I am reluctant to switch VEA for VPL and VPK as it
increases complexity and the MER is three basis points higher.

On the other hand I do not like paying withholding taxes on the Canadian portion of VEA. I am
wondering how I would calculate the impact of level 1 and 2 withholding taxes on the Canadian portion
of VEA in an RRSP and RESP?

Also I wonder if overtime rebalancing bonus is likely to offset the increased MER cost of holding VPL and
VGK.

Note my accounts allows me to buy ETF without commission.

Do you have any comments on the impact of withholding taxes on the Canadian portion?

Canadian Couch Potato September 11, 2015 at 4:43 pm #

@RJ: In principle your concern is valid, but in practical terms I suspect we’re talking about a
trivial cost that isn’t worth worrying about. It’s always important to do the calculations so you know the
dollars involved and not just the percentages. Using a few assumptions:

– Your holding in VEA is $50,000.

– 8% of that is Canadian stocks, so that’s $4,000.
– The current yield on the broad Canadian market is about 3%.
– That means the amount of Canadian dividends is about $120 a year.
– If the withholding tax is 15%, that’s $18 a year.

After doing the math, is it worth it to switch?

RJ September 12, 2015 at 11:50 am #

Thanks CP. So continuing to work with those assumptions the difference in MER is 3 basis
points on the international portion or .0003 x $46,000 or $13.80 and -.0004 x $4000 or ($1.20) on the
Canadian difference between VEA and XIC. This means the net cost in increased MER from going to VPL
and VGK is .$12.60 on $50,000 vs. the $18 you calculated. The difference of $5.40 on $50,000 is the
equivalent of one basis point. Certainly not especially signi cant, but I still like understanding the math
so that I can understand what the optimal decision would be.

Honestly the biggest reason I might not use VPL and VGK even if I was starting fresh is the increased
complexity and the necessity of of deciding what asset allocation to make to each.

The one question I still have is would you still end up paying the full $18 in withholding taxes on the
Canadian portion of VEA if it is held in a RRSP or only one of the levels?

Canadian Couch Potato September 12, 2015 at 12:05 pm #

@RJ: In an RRSP, Level I withholding taxes would apply with VEA, but Level II would not. The
presence of Canada in the fund will not change that. Have you seen our white paper?
http://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/

Bill November 6, 2015 at 1:31 pm #

How does the 15% dividend foreign credit work if you use margin loan?

The broker withholds the full 15% on the total dividend but when you report your income you substract
interest expense. So this means you can’t recover the full amount?
E.g. $1000 dividend * 15% = $150 withheld. Normally I’d get the $150 tax credit. But if I borrow and
have $500 interest expense, my net income is $500. My normal tax would be say $75 on this. But I paid
$150. I read that they never give you back more than you would have paid so do you just lose the other
$75? That would seem to be a form of double taxation. Thanks.

Canadian Couch Potato November 7, 2015 at 4:21 pm #

@Bill: I don’t have any experience with investing on margin, but I don’t think it changes
anything. The only factors are the number of shares you own and the dollar value of the dividend. So if
you own 1,000 shares and they pay a $1 dividend, you would receive $850 and the brokerage would
withhold $150. Your T-slip would then report that you received $1,000 in dividends (which you must
report) and paid $150 in foreign tax (which you can reclaim). Whether you borrowed the money to buy
those shares should not make any difference: the deductibility of any interest you pay is a different
calculation.

As always, check with your accountant or tax preparer.

Gary April 27, 2016 at 2:36 pm #

CRA requires that you break down the foreign tax paid by countries if it is more than $200. How
can you come with that information when your ETF provider does not give you that information on the
T3? I phoned my ETF provider and was told that it only provides distribution information and it is not
required to provide the break down by country.

Canadian Couch Potato April 27, 2016 at 4:04 pm #

@Gary: This is a great question we have encountered, too, and there really isn’t a satisfying
answer. You can’t report what you don’t know, and I am not aware of CRA ever coming down on this
issue. For US-listed ETFs (even if they hold international equities) you can make a good argument for
putting “United States.” For Canadian ETFs of international equities you could put “Other” and explain
the predicament if challenged.

Zoran November 17, 2016 at 3:53 pm #

Hi CP,

I have a question about US LPs securities held in RRSP account and dividend distribution. I thought that
all tax withholdings are exempted if US securities are held in RRSP account. Since I received less then
the full amount for dividend distribution, I inquired about it with my broker. They are saying that tax
withholding on dividend distributions by US LPs are not exempted.
I searched on-line and so far I couldn’t nd the con rmation. That’s how I came across your website.
If what broker company is telling me is true, is there a way to get tax withheld amount back via tax
return?
If that is not true, what is it that I could do to receive this tax withheld amount?

Thanks,

Zoran

Canadian Couch Potato November 17, 2016 at 4:02 pm #

@Zoran: As I understand it, distributions from LPs are not considered dividends, so they are not
included in the exemption to withholding taxes in an RRSP.

According to Jamie Golombek in a Globe and Mail article:

“Distributions of income from MLPs are generally distributions of business income, which is
treated differently than dividends paid on U.S. stocks. As a result, MLP income is subject to a 35
per cent withholding tax, which is not reduced by the Canada-U.S. tax treaty. Is there a way to
avoid this tax? The answer is no, if it’s in an RRSP. If it’s held outside a registered account, you
may be entitled to a foreign tax credit for some of the withholding tax against Canadian tax
payable on that investment income.”

Source: http://www.theglobeandmail.com/globe-investor/investor-education/answers-to-your-tangled-
tax-questions/article1372575/
 Dan January 2, 2017 at 4:17 pm #

Hi,
Concerning Zoran’s question, I think distributions from a US-listed MLP ETN (such as AMJ) inside an
RRSP would have no tax withheld.

But I have a question on the issue:

The Canada-US tax treaty says US interest payed to a Canadian resident can only be taxed in Canada.
So considering distributions from US-listed ETNs and US-listed US-bond ETF (such as SJNK) are made of
US interest, would there be withholding tax inside a TFSA?

Thanks!
Dan

Canadian Couch Potato January 2, 2017 at 4:30 pm #

@Dan: Interest from US bonds is generally not subject to withheld taxes, but there are some
exceptions. If you hold a US-listed ETF in a TFSA I would de nitely look closely at your statements to see
whether you receive the full distribution.

← Older Comments
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Foreign Withholding Taxes In International Equity ETFs | Investor Spread - September 12, 2014
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long ago, you rarely heard anyone discussing this hidden drag on returns. But […]

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