VXUS tax treatment

[whiteknight]

I'm currently holding VXUS in a taxable account (no room left in my registered accounts). It pays an annual distribution. So... what exactly is that distribution made up of? How will it be taxed? I know the distribution is from a combination of countries, with different tax treaties, and likely made up of some ROC and some dividend...

Is it going to be a challenge come tax time? Am I going to get double taxed (withholding taxes from some countries, taxed as regular income in Canada)?

I couldn't find any info from Canadians who have bought VXUS... but I know there are many who own it in this forum.

[Rysto]

I was under the impression that all distributions from foreign ETFs are taxed as income and don't get any favourable tax treatment, but I'm certainly prepared to be wrong on that(this seems to back me up on that).

Also note that if you hold a US-domiciled ETF outside of an RRSP you pay a 15% withholding tax to the US government. If you hold the ETF in a taxable account you can claim a tax credit for this, but if you hold it in a TFSA you're doubly screwed.

[Financial Cents]

I wrote about this some time ago...

Foreign investments are best held inside an RRSP because of the harsh tax treatment on foreign dividends. A U.S. listed ETF like VWO, VTI, VNQ, etc. held inside an RRSP escapes withholding taxes. Foreign dividends are taxed at your marginal rate. With U.S. listed ETFs, the Internal Revenue Service will take a 15% withholding tax on all dividends unless the funds are held in an RRSP.

You must pay withholding taxes if you keep your U.S. investments in your TFSA.


I personally keep all U.S.-listed ETFs in my RRSP, only.

[whiteknight]

Thanks for the replies and the link.

I'm out of room in my registered accounts (my RRSP and TFSA are filled with REITs, VTI, and bonds) but definitely understand that it would be ideal if I could shelter VXUS.

So, since VXUS is a US-based ETF, even though it holds international securities, it sounds like the US will grab their 15% withholding tax and I'll just need to claim a foreign tax credit. I know it will still be 100% taxed, but at least I'll avoid over-taxation (i.e. I won't be taxed at a more punitive rate than interest income from my bonds).