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Updated 2mo ago.
Updated 2mo ago.
Foreign withholding tax is a tax levied by a foreign country on dividends paid to non-resident investors. For example, the United States withholds 15% of dividends paid to Canadians. This withholding reduces the net return of ETFs holding foreign stocks in certain account types.
VFV.TO (S&P 500 in CAD) holds American stocks through a US Vanguard fund. The United States withholds 15% of dividends. In an RRSP, this withholding is recovered thanks to tax treaties, so the net return is higher. In a TFSA, the withholding is not recoverable. This is why US equity ETFs are often more tax-efficient in an RRSP.
Foreign withholding tax can reduce an ETF's return by 0.1 to 0.5% per year depending on the fund type and account used. To maximize tax efficiency: place US equity ETFs in the RRSP, Canadian equity ETFs in taxable accounts (dividend tax credit), and anything can go in the TFSA for simplicity.