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 you can recover some or all of it by claiming a foreign tax credit on your return. (This can be complex, and I’m unable to provide detailed instructions for recovering withholding taxes. If the amounts are significant, you should consult a professional for help.)
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). As you will see when you look at the details below, your TFSA may actually be the worst place to hold foreign securities.
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 specifies 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 final 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, for example, the iShares S&P 500 (XSP) and Vanguard MSCI Emerging Markets (VEE) simply hold units of their New York–listed counterparts (IVV and VWO, respectively).