# Most Tax Efficient ETFs



## EngPhysGuy (Jul 9, 2015)

2017 is the year I'd like to rearrange my portfolio and make it is tax efficient as possible. I allocate >50% to US and International, currently all through ETFs on the TSX. Many hold a US-listed ETF of US or International stocks (VUS/VDU/VEE/VXC), so I'd like to revisit this.

CCP has a lot of good reading on this and I seem to have my head around Foriegn withholding taxes and how they apply to the various accounts.
http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/
http://canadiancouchpotato.com/2016/07/11/foreign-withholding-taxes-revisited/
http://canadiancouchpotato.com/2012/09/20/foreign-withholding-tax-which-fund-goes-where/

Here's a preliminary list I've generated, and open to any feedback.

Canada:
XIU(TSE), XIC(TSE), HXT(TSE)

US:
VTI(NYSE)

Developed:
XEF(TSE), VI - CAD hedge(TSE), VIU(TSE)

World Ex Canada:
Do any hold stocks directly?

Emerging:
ZEM(TSE) - seems to hold both US listed ETF and stocks directly


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## redsgomarching (Mar 6, 2016)

to solve tax problem, hold in registered account


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## EngPhysGuy (Jul 9, 2015)

redsgomarching said:


> to solve tax problem, hold in registered account


I wish it was so easy  

Of course there is no tax on capital gains in a registered account, but this isn't true for dividends. And if all registered accounts are full, where to put each fund can make a meaning difference on the overall return of your portfolio.

Take a Canadian ETF holding international stocks (XEF) for instance. Withholding tax on dividends is not recoverable in a RRSP or TFSA but could be recovered when in a non-registered. 

Anyways, what to hold and where is a different topic. I'm interested in the most tax efficient ETFs, mainly in terms of dividend payments.


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## treva84 (Dec 9, 2014)

Look for corporate class ETFs, they are the most efficient. I know Purpose Investments has some corporate class ETFs, including a dividend ETF.


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## OnlyMyOpinion (Sep 1, 2013)

Yes, nn easy. As your second link mentions _'Understanding the Tradeoffs'_, you will be introducing fx into the mix and depending on the amounts, potentially T1135 reporting.


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## mordko (Jan 23, 2016)

- Why mention HXT but not HXS? 

- What is the most tax efficient ETF depends on individual circumstances. The best way to resolve this is to run different options and compare tax.

- yes, you are losing withholding tax by holding XEF in a TFSA, but it still could be the most tax efficient option.

If you are ok with VTI then why not VWO for EM?


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## EngPhysGuy (Jul 9, 2015)

Thanks, mordko. 

Yes, I could have included HXS as well. I'm actually not entirely sure how this strategy (HXT / HXS) works for US equities. The S&P500 companies are still paying a dividend, so is there a withholding tax applied before they are reinvested, or are they able to get around this by not actually paying a dividend out to the ETF owners in Canada?

Good point about VWO. I guess in my current situation I have very little funds in US currency so was only thinking of using this for US stocks. It may make sense for developed and EM as well...


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## gardner (Feb 13, 2014)

EngPhysGuy said:


> Of course there is no tax on capital gains in a registered account, but this isn't true for dividends.


I believe dividends on RRSP holdings are not subject to withholding tax by the Americans. It's TFSAs where you will get burned on dividend taxation.


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## EngPhysGuy (Jul 9, 2015)

gardner said:


> I believe dividends on RRSP holdings are not subject to withholding tax by the Americans. It's TFSAs where you will get burned on dividend taxation.


Hi Gardner, this is only true if you hold a US-listed ETF in your RRSP. A Canadian ETF that either holds US stocks directly, or holds a US-listed ETF of US stocks, is subject to US withholding tax. Since no tax receipts are provided in an RRSP this withholding tax is not recoverable. All the more reason to use a US-listed ETF for US securities when in an RRSP.


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## mordko (Jan 23, 2016)

EngPhysGuy said:


> Thanks, mordko.
> 
> Yes, I could have included HXS as well. I'm actually not entirely sure how this strategy (HXT / HXS) works for US equities. The S&P500 companies are still paying a dividend, so is there a withholding tax applied before they are reinvested, or are they able to get around this by not actually paying a dividend out to the ETF owners in Canada?


It's a swap-based ETF. Does not pay dividends, therefore no tax on dividends. You get an increase in you unit price, which includes the total return of the index (capital and dividends). Ultimately, when you sell, it will all be taxed as capital gains. 

You obviously carry a small additional risk of the counterparty failing because it's a swap-based product. There is also a risk that our Federal government may decide to close this loophole.


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## My Own Advisor (Sep 24, 2012)

"There is also a risk that our Federal government may decide to close this loophole."

I'm surprised they haven't to date. The ability to defer tax, in a taxable account, just seems odd but I guess they allow it because capital gains (or losses) are not realized until there is a sale in non-reg. accounts.


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## andrewf (Mar 1, 2010)

You avoid the withholding tax on dividends with HXS, but there are swap fees (in addition to the MER of the ETF, paid to the counterparty) which, depending on your tax bracket, may be equivalent or even greater than the withholding that is avoided.


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## EngPhysGuy (Jul 9, 2015)

Thanks for the responses to help my understanding of HXS. Did some more reading, and seems like this could be a good solution for getting US exposure in a non-registered account. The MER + swap fees is about 0.4%.

In RRSP Us-listed ETF is still the best, in a TFSA the withholding tax on 2% dividend return is 0.3%, so comparable once MER is accounted for. But in non-registered, the tax on US dividends would likely be greater than the 0.3% swap fee. As said previously though, will be up to each individual scenario. Looks like a nice option though.


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## Franko (Mar 31, 2012)

EngPhysGuy said:


> Thanks for the responses to help my understanding of HXS. Did some more reading, and seems like this could be a good solution for getting US exposure in a non-registered account. The MER + swap fees is about 0.4%.
> 
> In RRSP Us-listed ETF is still the best, in a TFSA the withholding tax on 2% dividend return is 0.3%, so comparable once MER is accounted for. But in non-registered, the tax on US dividends would likely be greater than the 0.3% swap fee. As said previously though, will be up to each individual scenario. Looks like a nice option though.


I have a fair amount of my portfolio in my non-reg and also my corporate investment account...swaps have been a godsend for me. From my projections, the tax deferral wins out handily over the additional cost of the swap and even when you factor in that CDN-eligible dividends are sometimes taxed at an even lower rate than capital gains (dependent on your tax bracket), the savings are there.


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## james4beach (Nov 15, 2012)

My Own Advisor said:


> "There is also a risk that our Federal government may decide to close this loophole."
> 
> I'm surprised they haven't to date. The ability to defer tax, in a taxable account, just seems odd but I guess they allow it because capital gains (or losses) are not realized until there is a sale in non-reg. accounts.


I share this concern that they will close this loophole.


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## larry81 (Nov 22, 2010)

From my understanding, even if the government close the tax deferral "loophole", the investor holding swap-based ETF would be better to realise and pay tax on his cap gain than to pay a yearly tax on years and years of dividends/interests. The case is even stronger for swap-based bonds ETF since interests is taxed at marginal tax rate.

disclosure: i hapilly hold a large chunk of HBB in my non-reg


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## GreatLaker (Mar 23, 2014)

Considering the tax loophole
HXT has $1B assets. Say 2.5% TSX dividend yield = $25M annual dividends. At 25% marginal tax on dividends, that's $6.25M lost annually in tax, that eventually will be taxed as capital gains.

So without calculating it to 3 decimal places and overthinking it too much, I think Bill Morneau has better things to do than close $6M tax loopholes, like trying to explain how and when the deficits that JT is running up will ever get paid off.


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## andrewf (Mar 1, 2010)

And from a principle standpoint, there are reasons why swaps should not be taxed (ie, unless you want to allow counterparties to deduct from their income to avoid double taxation).


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## My Own Advisor (Sep 24, 2012)

I guess on the broader scale, it begs the question for me: why on earth have such a convoluted tax code to begin with? Other than keeping thousands of people of employed in government?

It just doesn't make sense why things (our tax code) are so complicated - but I'm a simple guy. 

@GreatLaker - I get the priority....$6 M is a not even a drop in the bucket. There are bigger issues at play. Like how to play with political game with Trump!!!


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