Reference Guide: Foreign Withholding Taxes on ETFs for Canadian Investors

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As a self-learner to evaluate tax issues, I like to read the following content, and ask myself a few questions.

ETF Structures - common structure examples

There are three common ETF structures available to Canadian investors that provide access to international markets. First Asset's international ETFs employ the most tax-efficient structure by investing directly in portfolios of international stocks (see Structure 3).

Structure 1:

U.S.-LISTED ETF THAT INVESTS DIRECTLY IN INTERNATIONAL STOCKS
INVESTOR HAS DIRECT EXPOSURE TO INTERNATIONAL MARKETS

With this first structure, there are two levels of withholding tax a Canadian investor may be exposed to. First, an investor is subject to the taxes levied by the country in which each foreign stock is based. Second, the U.S. government may levy an additional withholding tax, up to 15%, on certain distributions made by the U.S. ETF to a Canadian investor's account. The amount of taxation depends on local jurisdictional tax legislation, as well as any respective income tax treaties.

Structure 2:

CANADIAN-LISTED ETF HOLDING A U.S.-LISTED ETF THAT INVESTS IN A PORTFOLIO OF INTERNATIONAL STOCKS
INVESTOR HAS INDIRECT EXPOSURE TO INTERNATIONAL MARKETS

Also known in Canada as a "wrapped" ETF, within this structure a dividend paid by a foreign company may be subject to withholding taxes since the payments are sent to the U.S. ETF. Distributions by the U.S. ETF may then be subject to an additional U.S. withholding tax as they are distributed to the Canadian ETF.

Structure 3:

CANADIAN-LISTED ETF THAT INVESTS DIRECTLY IN A PORTFOLIO OF INTERNATIONAL STOCKS
INVESTOR HAS DIRECT EXPOSURE TO INTERNATIONAL MARKETS

This is the most tax-efficient ETF available to Canadian investors. Withholding tax only applies to the Canadian investor according to the country where the foreign stock is domiciled. A dividend paid by a foreign company may be subject to one level of withholding tax as the payments are made to the Canadian ETF.

Withholding Tax Levels by Account Type

RRSP, TFSA, RESP & TAXABLE ACCOUNTS

Investors should consider the account type that the ETF is held in, as this also impacts the amount of withholding tax an investor is subject to. The chart below illustrates what levels of withholding tax a Canadian investor would be subject to depending on the account type the investment is held in.

Tax I: Withholding taxes levied by the country where the underlying stocks/holdings are domiciled
Tax II: Additional withholding tax (15%) levied by the virtue of being a U.S.-listed ETF

Actionable Items

I am considering to purchase Nasdaq 100-index ETF, and I have to think about purchase of US ETF directly or Canada version ETF.