Foreign Withholding Tax | Emerging Markets Equity ETFs
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- Опубликовано: 10 июл 2024
- In this video, Justin compares the foreign withholding tax cost between U.S.-listed and Canadian-listed emerging markets equity ETFs (IEMG vs. XEC) across various account types.
The below topics are explained in this foreign withholding tax tutorial:
00:00 Intro
00:20 Factors that impact the amount of tax withheld on foreign dividends
00:40 Difference between Level 1 and Level 2 foreign withholding tax
01:15 How IEMG/VWO and XEC/VEE gain their exposure to emerging markets stocks
01:55 Foreign withholding taxes on emerging markets equity ETF dividends received in RRSPs, RRIFs, LIRAs, LIFs, etc.
03:01 Foreign withholding taxes on emerging markets equity ETF dividends received in TFSAs, RESPs, and RDSPs
03:28 Foreign withholding taxes on emerging markets equity ETF dividends received in non-registered accounts
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*****On March 13, 2023, BlackRock Canada announced XEC would be selling its position in IEMG, and purchasing the underlying emerging markets stocks directly. This change will reduce one layer of withholding taxes across all account types. BlackRock expects the changes to result in net capital losses for the fund, so no large capital gains distributions to investors are expected for the 2023 tax year*****
Honestly, I think you should redo this videos. This piece of information is extremely important!
Justin, it will be great if you will make a video about REITs ETF and Withholding Tax on it. Since REITs do not pay income tax themselves as long as they distribute at least 90% of their income to shareholders. This is because REITs are treated as pass-through entities for tax purposes, meaning that the income and expenses of the REIT are passed through to the shareholders.
Excellent as always.
Thanks for the great content, Justin! Could you please make a video comparing or comment on the most common model index-based portfolios? More specifically, I'm taking about XIC/VUN/XEF/XEC +/- ZAG vs. XIC/VXC +/- ZAG vs. XEQT/VEQT +/- ZAG (or XGRO/VGRO). Putting simplicity and convenience aside, it's not obvious to me which of them are best from foreign withholding tax perspective. I'm also not sure if the small difference in MER would make a significant difference in returns over the long-term. Thanks.
@Khaled - These options would all be similar from a foreign withholding perspective. The small MER difference would have minimal impact for most portfolios (unless the portfolio values were in the millions of dollars).
@@JustinBenderCPM Thank you!
Hi Justin. Thank you again for your high quality videos. Concerning the tax return you mentioned in the case the ETF is hold in a non-registered account, do you know if the T5 information are enough to get back automatically that return on the level 2 withholding tax or if there are special forms / procedures to do in order to get it?
jérémie bisson - The T3 or RL-16 information will be all that is required to input into your tax return to potentially receive a foreign income tax credit for foreign taxes paid.
HI Justin
I was wondering if you have any opinion about Fidelity allocation ETFs such as FEQT, and FGRO. It would be great if you have a video to compare these with other competitors
@Faraz Moein vaziri - I'm not planning to make a video about the Fidelity allocation ETFs, as I wouldn't recommend them to investors. There are better asset allocation ETF products available from BlackRock, Vanguard, BMO, and Mackenzie, in my opinion.
Thank you for great videos. A quick question: is there a Canadian ETF that directly invest internationally? in not-RRSP accounts, may ZEM and ZEA fully or partially avoid the second layer of non-res tax-withhold? Thanks again!
@EA Avi - Please see my announcement at the top of the comments. XEC has just sold its position in IEMG, and now holds the underlying stocks directly (now making it the most broadly diversified and tax-efficient EM equity ETF available to Canadian investors!)
Justin, with the recent changes made to XEC holding the stocks directly, if a person was going crazy and trying to optimize the locations of each of their funds would they do the following. XIC in non registered accounts for the CDN dividend tax credit. XUU in the non reg account for the withholding tax credit. XEF, XEC in the TFSA accounts because it doesn't matter between non reg and TFSA. US listed ETFs in RRSP account. Basically the changes to XEC have now shifted it from a fund I kept in my non reg account to a fund I should place in my TFSA account.
@Sahill Mohan - You would need to first determine your overall asset location strategy (check out my videos on this topic), and only then would you determine the most appropriate ETFs for each account type.
Hi Justin ! Thanks for all the informations! I’m 22 years old and from Canada. I currently have 50% of my portfolio in XIC-C and 50% in SPY-U. Both are ETF. I’m very new to investing and Im wondering if I would be better investing only in XIC or SPY. Or keep investing 50%/50% I’m adding 200$ every month and I’m investing for the long term. Let me know what you think I’m
@Jeanphilippe Cyr - The two ETFs are fine, but you are only exposed to North American companies. You could also consider investing in an international equity ETF and emerging markets equity ETF as well.
Hi Justin, I hold my VEE etf in my TFSA. Without having to watch the video a second time let me see if I understood you.
VEE is a Canadian listed ETF of emerging markets. Does that mean it has only one layer of foreign with holding tax. And the tax is unrecoverable.
VEE follow the same road as XEC in your TFSA. You will have the two levels of withholding taxes unfortunately.
As a general rule of thumb-if you can-hold only Canadian dividend paying companies (or ETF's like XIU) in your TFSA. You can have US or foreign stocks in there, but avoid dividend paying ones... unless you don't care about the withholding taxes. Keep US, EM and foreign dividend stocks for your RRSP, RRIF, LIRA etc. and non-registered (cash, margin) accounts. I'd try and balance all your portfolio allocations with this rule in mind.
@Niran Abraham - VEE is a Canadian-listed ETF that holds a U.S.-listed ETF that holds emerging markets ETFs (so it is subject to two layers of withholding tax in all account types). If VEE was a Canadian-listed ETF that held emerging markets stocks directly (bypassing the United States), it would only be subject to one layer.
@@JustinBenderCPM Thank you for helping me understand that better. i say these short videos are very effective. its sort of like re-reading a good book.
You might be better off trying ZEM over VEE in a TFSA since ZEM buys the EM stocks directly. You would avoid the second layer of taxes which is a big difference.
Why no tax treaty between USA and Canada re: TFSA? I mean there is for RRSP and three other kinds of special acccounts. Who to talk to in Canadian government to get this changed?
And why do governments restrict access to stock markets period? I don't know how restrictive Canada is for residents of India but the opposite is clear. Unless I am of Indian descent most Indian equities I may not purchase. Those that are in the TSX and NYSE are a small fraction. I can buy XID and ZID, even SMIN if I get out of Wealth Simple. But stocks such as Reliance and Indian bank stocks like HFDC? Impossible. India is booming. I just came back - talk about infrastructure improvements in the last five years! But for all practical purposes, it's a closed protected market. Likewise Vietnam.
You really should have introduced a Canadian-listed ETF which holds the foreign stocks directly, since they would not be subject to the level 2 taxes. This is a huge issue for any Canadian investing these products. BMO's "ZEM" ETF, for example has this superior tax structure.
@Sean C - Check out my next video:
Tax-Efficient Changes to XEC - ruclips.net/video/meW1Pf5uvNM/видео.html