I moved most of my US total stock market investments in my RRSP from VUN to VTI using Norbet's Gambit. That 30mins of time saves me ~$1600 CAD/year on lower MER and withholding taxes. Definitely one of the best moves I've made as an investor in terms of benefit for time/risk/cost related to the move.
Ben, another stellar video! Quick question about the 15% withholding tax on Canadian listed ETFs ie. VFV or XUS held in an RRSP or TFSA...where does the 15% go? Do we even see the 15% loss or is the dividend just knocked down by 15%...and we never really see it?
Great video Ben! Just a quick heads-up on an error at 4:50 when talking about TFSA US LISTED ETFS....it shows a graphic of CAD Listed ETF instead. I was left wondering what the correct allocation should be. Love your videos and insights!
I double-checked my RRSP and TFSA. I do not see any US non-residence withholding tax on the dividend payments from XSP, which is an ETF for the S&P 500. I'm thinking of switching to VFV for the better performance.
I had no idea, my mouth fell open. Thanks man, keep making these videos! I recently changed my investments to mostly ETFs thanks to your videos and I went worldwide in diversification, in an attempt to both be diversified and at the same time get fees down from actively managed funds. I was paying more attention to MER than to foreign taxed dividends. I'll be looking into the tax structure of my ETF dividends here in the next few days. Thanks for posting the paper.
Might be simpler and easier to just buy the Vanguard Portfolio ETFs: VGRO, VBAL, VCNS, unless of course you maxed out your RRSP, TFSA, RESP accounts. Never forget the KISS: Keep It Simple Stupid rule.
Thank you, I will be looking into the Vanguard ETFs again. They were part of my research when I was buying ETFs but they didn't stand out to me at the time.
Alright so I checked those 3 ETFs out, but the MER on them is 0.25%. The MER on my actively managed index funds, when I still had them (TD e-series) were as low as 0.31%, so with those Vanguard ETFs it doesn't look like I'd be saving much on fees in comparison to the actively managed funds that I used to have. Now, in my new portfolio that I created, I included ETFs that are as low as 0.03% MER, some others are 0.06% MER and the highest one is 0.20% MER. I did the math and my average MER is 0.11% throughout my entire portfolio, so if I went with the Vanguards that you suggested, I would literally more than double my fees. I doubt that I would do better overall in that case, even if the ones I have do have, happen to have some downsides.
I understand the withholding Tax on Dividends in a TFSA now, but is there also a withholding tax on the capital gains if i decide to sell the entire ETF at a profit? say I buy $1000.00 of VOO in my TFSA, and sell if for $1500.00, do i pay any withholding tax on the $500 profit? If so what would it be? 15%, same as dividends?
Great primer, Ben. That whitepaper from Justin and Dan was my bible when working through my asset location strategy last year. My taxable account largely consists a GIC ladder (optimizing for dollars paid in taxes rather than percentage points) plus a bit of VCN. It was pretty straightforward, but of course thanks to the great content coming from Team PWL I'm much better equipped to plan the next step once my taxable account grows to the point where I need to maintain foreign equities. P.S. I think your shirt broke my monitor. :)
Sorry about your monitor! It's really great to know that the content has been helpful in building your strategy. Thanks for another thoughtful comment, anothercrappypianist.
Hi Ben, I am a little confused here. When you say holding a US-listed ETF, does that mean that this is where the fund's assets are located? For example, Vanguard FTSE All-World UCITS ETF (VWRL AS) is a Netherlands-listed ETF in this case.
Thanks for this informative video. I'm just still not clear whether Canadians pay taxes on capital gains from US stocks in TFSA or just on dividends only?
I’m glad I watched that video. I’m still young so I priviledge my TFSA over my RRSP. But I buy a specific US stock I like. Now I will put it in my RRSP and just ask the deduction later on.
Amazing video. I am definitely looking forward to your next video, where you will outline some strategies of asset allocation. All my portfolio is in taxable account right now, and I am thinking about transferring some to TFSA in the near future. However, you said the witholding tax in TFSA is not recoverable, compared to taxable account, and I'm quite lost on what my next step should be. Indeed, as you said, I did NOT know about these taxes as they do not show up on my statement.
Ah that is a very good question, zz1what. While the TFSA does result in some unrecoverable foreign withholding tax, you are still likely to be better off holding assets in your TFSA. The amount of tax that you will pay on the dividends in a taxable account is greater than the unrecoverable foreign withholding tax in the TFSA.
Correction: XEC holds IEMG. It does not hold emerging market shares directly. ZEM holds some emerging markets shares directly and others through US listed ETFs.
Yikes! You're absolutely correct. Not sure how that made it into the video :/ I'll add a note to the description. The problem with ZEM is that it tracks the MSCI Emerging Markets Index. XEC tracks the MSCI Emerging Markets IMI Index. Here are the index definitions from MSCI: The MSCI Emerging Markets Index captures large and mid cap representation across 24 Emerging Markets (EM) countries*. With 1,138 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Emerging Markets Investable Market Index (IMI) captures large, mid and small cap representation across 24 Emerging Markets (EM) countries*. With 2,876 constituents, the index covers approximately 99% of the free float-adjusted market capitalization in each country. The problem that you introduce with ZEM is that you are eliminating all of your small cap exposure. We have data from all over the world showing that, over the long-term, small outperforms large. Emerging markets small cap stocks returned 12.23% per year on average between 1989 - 2017 while large cap stocks returned 10.47% per year on average. That is an annualized difference of 1.76%. For the past 10 years, the MSCI Emerging Markets Index has returned 5.36% per year on average, while the MSCI Emerging Markets Small Cap Index has returned 7.69% per year on average. The MSCI Emerging Markets IMI Index is about 15% small cap, so the average performance difference between EM IMI and EM would be about 0.30% per year over that period.
Many thanks for informative and level-headed videos. Ben, regarding the withholding tax for a Canadian investor, is it applied to US listed ETF of Canadian government or corporate bonds (VSC and VSB)?
Hey @Ben ... wondering if Index funds held under RESP will have same withholding tax implications ? ..I ask specially for index funds as here you are talking on equity funds.
Hi Ben, Your videos are very helpful, thank you! I have a question: I just read the paper by Bender on Foreign withholding taxes. Supposed I want to purchase a Canadian-listed ETF that holds a US ETF, which in turn holds international equities. Wouldn't it make the most sense to put this in the RSP because, the US will not withhold taxes thus creating only one level of withholding? If I were to do it in non-registered account that would be two levels of taxes (US and international). Thanks, Ahmed
Generally speaking, this structure is only seen in Emerging Market ETFs such as VEE and XEC which hold their U.S. Listed ETF counterparts VWO & IEMG respectively. Holding the U.S. Listed ETF (VWO or IEMG) in an RRSP will only result in one layer of international withholding tax. Similarly, holding the Canadian Listed ETF (VEE or XEC) in a taxable account will result in a "RECOVERABLE 2nd U.S. Layer of withholding tax". Both have the same outcome. For international developed equities, Canadian Listed ETFs such as VIU, XEF (MSCI EAFE IMI Index ETF) and ZEM hold the stocks directly so there is only one layer of withholding tax. You may also consider holding IEFA (the U.S. Listed MSCI EAFE IMI Index ETF) in an RRSP solely because of its lower MER. There are no tax benefits otherwise. There are also no direct U.S. Listed substitutes for VIU and ZEM.
Thank you Ben Felix, I asked you a question yesterday on that topic on another video of yours and found later that night that you made this one which answer my question. I read the white paper from your colleagues wow there is a lot of good information in there. Thank you very much!
Hi Ben; I downloaded the White Paper that your co-workers Dan & Justin wrote. (A darn fine read I might add!) I do have a question (actually 2) that I would like some clarification on. I have read somewhere recently (I think it was on the Globe & Mail) that Stocks from companies in the United Kingdom do not withhold taxes on Dividends for Canadians, thus if we were to hold a U.K. company in our TFSA we do not have to pay the tax. (For Example Unilever) - whereas if we were to hold a Canadian ETF that holds Developed markets directly (think XEF or VEH) then level 1 withholding tax applies and is not recoverable? (Again this is inside a TFSA - I understand it is recoverable if held in a taxable account) "If" dividends produced by holding the U.K. company Unilever directly in a TFSA are not subject to withholding tax, are there special conditions to consider? (I.E. you need to hold the shares on the NYSE or on the LSE in order to qualify etc?)
I have never looked too closely at UK listed securities in a TFSA, so I am not sure about the withholding tax treatment. Cursory Google search seems to suggest that it is the case that no taxes will be withheld. Even if this is true, you would want to avoid holding individuals stock in your TFSA regardless of the dividend treatment (reason here: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-O5yId4eQ5Sc.html). My bet is that to benefit from the preferential foreign withholding tax treatment you would need to hold the stock on the LSE. I will look further into this. You have piqued my interest.
What would be the tax if a french, swiss, monegasque, UK or irish citizen had stocks and got paid dividends mostly french. Would the usa tax them 15% too
Great video..Although I am still little confused... I would like to buy a dividend paying company into my RRSP Company Norilsk Nickel.based in Russia.Russian company listed on U.S market paying dividend to Canadian resident.Into my RRSP How is that taxed? thanks
Ben, is the 'total return by NAV' for Canadian-listed international ETFs (let's say VFV) reported net of the withholding tax? If I go to the Vanguard website, it says VFV did 13.61% in 2017 and 8.46% in 2016. I know that is net of MER, but is it also net of withholding tax? Does the benchmark return assume 0 withholding tax, like it does fees (ie. MER)? Thanks
Vanguard calculates their annual distribution per unit net of withholding tax, so I believe that their total return calculation would be net of withholding tax. The benchmarks on the site do not indicate whether they are net or gross of dividends. Ideally a benchmark index will indicate in brackets whether it is net of withholding tax (net div.) or gross of withholding tax (gross div.).
The MER is still 0.25%. You would also have some unrecoverable foreign withholding tax that would increase costs a bit, but that same issue will apply in a TFSA.
So these videos are only targeted towards a Canadian audience? Since this is not stated up front, it seems that I should move on in order to avoid wasting time evaluating which video contains relevant information for my region (which happens to be Germany). Thanks anyways!
Great video to inform people on tax impacts. I read lot of articles form Justin and Dan and thank you guys for sharing your knowledge with Canadians. I have 3 account RRSP, TFSA, and Taxable ( Cooperation Margin ), and to reduce my taxes, sort of, I allocate RRSP and TFSA to VXC ( Vanguard All World- Ex- Canada) and taxable in Canadian Individual Stocks ( Most dividend paying ones). What is your opinion on that?
Interesting idea! I don't know if focusing on dividend paying stocks is the best strategy from either a tax efficiency or a diversification perspective. Why not use VCN in the taxable account? I did a video a while ago on why a focus on dividend paying stocks might not be optimal ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-9j6DInAMMaM.html
Good point! I checked on the Portfolio Visulizer back testing my stocks from 2008-2018 and I saw an amazing return. I also understand the past doesn't predict the future.
It is relatively easy to find something that looks good in a back test. To have any reliability, the back test needs to be conducted in different geographic regions and over different time periods, and also have a sensible explanation. For example, if you look at small cap stocks through history they have outperformed large cap stocks over the majority of time periods in every country. Even still we cannot be sure that trend will persist in the future. However, small stocks are generally riskier than large stocks, so it may be reasonable to expect a higher return for taking more risk. The combination of robust data and a sensible explanation make this an example of a reasonable back test.
Ben I have a question, slightly unrelated. When a mutual fund invests in other mutual funds, is the fees compounded? When a mutual fund that holds 4 other mutual funds with MER of 2%, does that include the fees charged by the 4 mutual funds or are those in addition. How are majority of the mutual funds structured?
If you own a fund of funds you are not charged double fees. The MER quoted on the fund facts reflects any underlying costs from funds within the fund. I think most funds probably hold securities directly. There's about CAD $1.1T in assets in mutual funds in Canada. About CAD $391B of that is owned through funds of funds.
Hi Ben, I'm still a little slow in understanding this. I was wondering if you could clear this up on my personal situation. I am a canadian resident and i purchase my company U.S. based stock. I recieved a T5 and a form 1042-s foreign witholding tax. I have claimed the amount on "box 16" which is the foreign tax credit on my T5. My question is, what do i do with this form 1042-s? Is it just for my persinal information or do I need to input this again on my income tax return on a different section? I think I understand but just need clarification. Thank you!
Ben, could you perhaps mention in a future video whether rebalancing funds or stocks etc makes any difference in a person's eventual return, let's say after 20 or 30 years? I don't see how the math would make it better to rebalance them, seeing as in the end they should all average out anyway.
Great question. There are differing opinions on this. For example, John Bogle, the founder of Vanguard, does not advocate rebalancing. The big thing to keep in mind is that rebalancing keeps you on track with your target asset allocation which should mean that your portfolio is risk-appropriate. If you are flexible with you asset allocation/risk profile then rebalancing might not matter as much.
Hi Ben, I read the foreign withholding tax paper linked in the description and it states that the tax on dividends is the same whether you hold US stocks directly or buy an ETF that holds US stocks but I don't think this is correct. For example, a Canadian resident that buys ZSP in a TFSA account will not be taxed on the dividends but if he buy US stocks directly, then he will be taxed in a TFSA account. Could you please confirm if I'm right or wrong. Thank you!
Dividends earned in a TFSA are tax-free whether they come from an individual US stock or an ETF. The thing you want to look out for is withholding tax. If you own a US stock and it pays a dividend, the US will withhold 15% tax. In a taxable account you can use that withholding tax to reduce your Canadian taxes. In a TFSA there is no way to get the withholding tax back. In an RRSP the US will not withhold tax on dividends. What you want to avoid is a Canadian listed ETF that owns a US listed ETF in your TFSA. Then there are two levels of unrecoverable withholding tax.
So in terms of withholding tax in a TFSA, there is no advantage between owning a Canadian listed ETF of US stocks or owning those US stocks directly. If I decide to own the stocks directly, I will be saving on management fees. Is that correct?
That is correct. The challenge with owning stocks directly is that you need a huge amount of capital to replicate a market by owning individual stocks. For example, you would need to buy around 4,000 shares, paying commission on each trade, to replicate the US market. Or you could buy XUU for 0.07%. Even further to that point, many direct brokerages offer free trading for ETFs, but not for stocks.
Lets say i invest in an ishares etf like XQQ that directly hold US stocks instead of the ones that hold a US etf which then holds stocks, in TFSA.. What are the implications ?
@@sahillotia7658 Whether US stocks are held directly by a Canadian ETF, or they are held through a US ETF that holds the stocks, the withholding tax implication is the same. 1. Held in an RRSP, the withholding tax applies and is non-recoverable. 2. Held in a TFSA or RESP, the withholding tax applies, and is also non-recoverable. 3. Held in a Taxable Account, the withholding tax applies, but are recoverable by claiming foreign tax credit with your T3 or T5 slips. Hope that helps.
Can you do a show on the Saskatchewan Pension Plan? It is a voluntary DC pension plan available to all Canadians with RRSP room. It is a simple alternative that would be very useful to many Canadians. The main advantage of it is that it is locked in and has really only one choice, the balanced fund. The locked in part prevents people from tapping into their long term investments as a piggy bank. Too many people use ETFs for trading and timing which no longer makes them passive.
That is a great idea that I had never considered as a topic. I think I will add this to my list of future videos. Thanks! This also gave me the idea to do a video on all of the big defined benefit pension plans in Canada (CPPIB, Teachers, etc.).
Actually, SPP has 2 options: the Balanced fund and the Short Term fund. The latter is intended for retirees and the return is very low due to the fact that is it invested in short term Canadian government bonds and cash. Earlier this year, the Saskatchewan government raised the maximum contribution limit from 2500/year to 6000/year which makes it a more viable option for those who do not have workplace pension plans.
May Haak you are correct, but a short term fund isn't really a viable option when you are not retired, so it realistically only has one. Also, they are bringing in a variable benefit option at retirement in addition to annuity and lira retirement options. Important in a low interest rate environment. Also plan allows 10k RRSP transfer per year. And the 6k contribution limit is indexed to ympe increases.
Informative video but I think you have a slight error ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-_gC2y4j5s0M.html ... XEC is 99.88% made up by holding IEMG which is a US listed ETF... wouldn't VEE be a better choice? Followed by ZEM? (ZEM however does hold some ETF's in it)