• Last Updated:
  • Feb 8th, 2018 4:10 pm
[OP]
Newbie
Jun 5, 2014
66 posts
3 upvotes
Toronto, ON

Index Investing

Hello,

I have a few questions about XIC and XAW. I plan to invest 33.33% in XIC and 66.66% in XAW for the long-term solely in a TFSA. I have a few questions if anyone can help.

1. I've read that it's not recommended to put XAW in a TFSA due to the withholding tax. I haven't used any of my TFSA room as of yet though. Does that mean I should seperate the ETFs?
2. How does the withholding tax get paid? Is it automatically deducted from XAW when it's in my TFSA? Do I have file anything in terms of taxes?
3. If there's a withholding tax on XAW, what's the true MER % then?
4. Should I be adding anything else to the portfolio or is this diversified enough?

Thanks for all of your help.
9 replies
Deal Addict
User avatar
Jan 28, 2012
1629 posts
462 upvotes
All the withholding tax means is that the dividends from stocks outside Canada get taxed in a TFSA by the source country, whereas in an RRSP there are tax treaties that avoid this. What happens is the dividends from any stocks that the ETF holds will just be about 15% lower depending on what country they are coming from.

The dividends on xaw are not the main source of growth as the yield is around 2%. So instead of 2% you would get ~1.7%. Capital gains are not effected.

You don't actually have to pay or file anything, you simply get a slightly smaller dividend, and you probably won't ever even notice unless you hold the same amount in an RRSP and compare.


If you have a huge amount of money where you are maxing your TFSA and RRSP, then Yeah, allocate it so the foreign stocks are in your RRSP and look at the two accounts as a combined whole for how you allocate your portfolio.

If you are new and probably aren't even maxing the TFSA yet I wouldn't worry.

I currently hold xaw as the foreign stock portion of my own TFSA. Now that I think about it the last couple dividends I got, I think were exactly what I shares advertised so maybe I'm not even losing anything
Deal Addict
Nov 25, 2014
1739 posts
952 upvotes
Newton Brook, ON
Rhaegar wrote: All the withholding tax means is that the dividends from stocks outside Canada get taxed in a TFSA by the source country, whereas in an RRSP there are tax treaties that avoid this. What happens is the dividends from any stocks that the ETF holds will just be about 15% lower depending on what country they are coming from.

The dividends on xaw are not the main source of growth as the yield is around 2%. So instead of 2% you would get ~1.7%. Capital gains are not effected.

You don't actually have to pay or file anything, you simply get a slightly smaller dividend, and you probably won't ever even notice unless you hold the same amount in an RRSP and compare.


If you have a huge amount of money where you are maxing your TFSA and RRSP, then Yeah, allocate it so the foreign stocks are in your RRSP and look at the two accounts as a combined whole for how you allocate your portfolio.

If you are new and probably aren't even maxing the TFSA yet I wouldn't worry.

I currently hold xaw as the foreign stock portion of my own TFSA. Now that I think about it the last couple dividends I got, I think were exactly what I shares advertised so maybe I'm not even losing anything
To be clear, holding XAW in an RSP wouldn't help because it's actually a Canadian ETF holding US ETFs. The withholding taxes would still be taken out before it reaches you. To benefit from the tax treaty you would need to buy the US ETFs directly (e.g. ITOT) which are priced in USD.
You need someone with an umbrella not a fork
Deal Addict
User avatar
Jan 28, 2012
1629 posts
462 upvotes
nmclean wrote: To be clear, holding XAW in an RSP wouldn't help because it's actually a Canadian ETF holding US ETFs. The withholding taxes would still be taken out before it reaches you. To benefit from the tax treaty you would need to buy the US ETFs directly (e.g. ITOT) which are priced in USD.
Right, I knew there was more to it. Thanks for the clarification

I think the take home message is that unless you have a large enough account that you are maxing tfsa and also opening a large USD RRSP, don't worry about holding something like xaw
Deal Addict
May 28, 2007
1213 posts
477 upvotes
nmclean wrote: To be clear, holding XAW in an RSP wouldn't help because it's actually a Canadian ETF holding US ETFs. The withholding taxes would still be taken out before it reaches you. To benefit from the tax treaty you would need to buy the US ETFs directly (e.g. ITOT) which are priced in USD.
So would it be advantageous to buy U.S. ETFs, or does the exchange rate you have to pay make it not worthwhile and just stick with Canadian based ETFs that hold U.S. assets?
Deal Fanatic
Mar 24, 2008
6053 posts
2305 upvotes
Toronto
RCML27 wrote: So would it be advantageous to buy U.S. ETFs, or does the exchange rate you have to pay make it not worthwhile and just stick with Canadian based ETFs that hold U.S. assets?
The exchange rate only matter when you convert from US -> CAD and then from CAD -> USD. Holding US listed ETFs in an RRSP is a good way to:

1) Pay less fees as US listed ETFs generally have lower MERs when compared with Canadian listed ETFs
2) Pay lower withholding tax, if any.

When it comes to the exchange rate, it may work in your favour or against you depending on the currency movements. I use Norbert's Gambit to minimize the fees I have to pay when converting CAD -> USD.
Illegitimi non carborundum
Deal Addict
May 28, 2007
1213 posts
477 upvotes
ksgill wrote: The exchange rate only matter when you convert from US -> CAD and then from CAD -> USD. Holding US listed ETFs in an RRSP is a good way to:

1) Pay less fees as US listed ETFs generally have lower MERs when compared with Canadian listed ETFs
2) Pay lower withholding tax, if any.

When it comes to the exchange rate, it may work in your favour or against you depending on the currency movements. I use Norbert's Gambit to minimize the fees I have to pay when converting CAD -> USD.
Thanks for the quick answer. One more question. With the Canadian dollar where it is now and stocks falling to cheaper prices, is it worthwhile to think about buying U.S. stuff now and paying that exchange rate gap using Norbert's Gambit?
Deal Addict
Oct 21, 2012
1412 posts
494 upvotes
Toronto
ksgill wrote: The exchange rate only matter when you convert from US -> CAD and then from CAD -> USD. Holding US listed ETFs in an RRSP is a good way to:

1) Pay less fees as US listed ETFs generally have lower MERs when compared with Canadian listed ETFs
2) Pay lower withholding tax, if any.

When it comes to the exchange rate, it may work in your favour or against you depending on the currency movements. I use Norbert's Gambit to minimize the fees I have to pay when converting CAD -> USD.
Another method I have used with iTrade is activating the US$ friendly for a quarter. There is no FX rate fee but there is a one time fee for the quarter. When I re balance, I activate it, make my adjustments with buys and sells and then de activate it. Not sure if any other brokerages have it.
Deal Fanatic
Mar 24, 2008
6053 posts
2305 upvotes
Toronto
RCML27 wrote: Thanks for the quick answer. One more question. With the Canadian dollar where it is now and stocks falling to cheaper prices, is it worthwhile to think about buying U.S. stuff now and paying that exchange rate gap using Norbert's Gambit?
The underlying stocks in whichever ETF (USD or CAD) you buy are the same. For example, if a stock X is $100 USD, if you buy the same stock in CAD and USD/CAD is $1.25, it'll cost you $125 CAD to buy it. Theoretically, it makes not difference which currency you buy it in. If the US dollar gains against CAD, you'll capture that return when you sell the ETF and convert the money back into CAD. The opposite is true if CAD gains vs USD. It's entirely up to you to decide if it's worth it.

If you want to keep things simple, just buy it in CAD and be done with it. The slightly higher MER won't make much difference in the long run.
joey1234 wrote: Another method I have used with iTrade is activating the US$ friendly for a quarter. There is no FX rate fee but there is a one time fee for the quarter. When I re balance, I activate it, make my adjustments with buys and sells and then de activate it. Not sure if any other brokerages have it.
Interesting, I haven't come across this feature at any other brokerage that I have ever been with (TD, RBC, Questrade and BMO). Just out of curiosity, what's the fee for doing this?
Last edited by ksgill on Feb 8th, 2018 3:37 pm, edited 2 times in total.
Illegitimi non carborundum

Top