# What Can I Do About Foreign Dividend Taxes?



## Park (Sep 11, 2010)

https://www.fraserinstitute.org/stu...nal-tax-rates-and-falling-tax-competitiveness

On foreign dividends, taxation is as high as 54% in Nova Scotia. This is followed by Ontario (53.53%) and Quebec (53.31%). 

https://www.pwlcapital.com/en/Advis...tion-of-Foreign-Income-in-a-Corporate-Account

If you're getting foreign dividends in a CCPC, the above link found that it increased the tax by 9.12% in absolute terms in their example. So one could be paying around 62% tax on foreign dividends in a CCPC. An interesting aside is that foreign interest in a CCPC is taxed similarly to Canadian interest outside a CCPC.

I consider an investment to be a product, that after inflation, expenses and taxes, has a positive expected return. Foreign dividends, bonds and cash don't meet that definition for me. Now bonds and cash can be excellent ways to manage risk, and their negative expected returns can be justified on that basis. But I see foreign dividends having a limited role in risk management at best. 

What can one do about foreign dividends?

1)Use tax advantaged accounts for foreign stocks

2)Have less exposure to foreign stocks. I've seen good arguments made that having 50% of one's stocks being Canadian is good asset allocation

3)Select foreign stock funds with low dividends. This would include small cap stocks and growth stocks.

4)Use derivative based products to minimize foreign dividends. Horizons, with their swap based products, are an example. I believe Purpose has similar products. Of course, one runs the risk that such derivative based products will no longer be allowed. Corporate class mutual funds would be an example of that. I wonder if one could buy such products domiciled outside Canada. I believe they are common in Europe. If the Canadian government disallowed such Canadian domiciled products, it might not be as easy for the government to prevent one from owning foreign domiciled counterparts. 

5)Buy individual foreign stocks with low dividends. Coordinate selling dates for those stocks with dividend dates, so as to miss the dividend. This would work with US stocks, although I'm not sure about other foreign stocks.

Comments?


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## Numbersman61 (Jan 26, 2015)

Have you considered investing in ETFs that specialize in foreign stocks?


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## Park (Sep 11, 2010)

Numbersman61 said:


> Have you considered investing in ETFs that specialize in foreign stocks?


Wouldn't investing in ETFs that specialize in foreign stocks expose me to the foreign dividend tax problem?


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## My Own Advisor (Sep 24, 2012)

FWIW, this is what I do:

1)Use tax advantaged accounts for foreign stocks - *yes, use RRSP or RRIF for that, if possible.*

2)Have less exposure to foreign stocks. I've seen good arguments made that having 50% of one's stocks being Canadian is good asset allocation - *yes, keep RRSP or RRIF full of foreign stocks, keep TFSA and non-reg. for CDN content or at least Canadian-listed funds/ETFs that hold foreign stocks.*

3)Select foreign stock funds with low dividends. This would include small cap stocks and growth stocks. *Yes, again, a good move.
*
4)Use derivative based products to minimize foreign dividends. Horizons, with their swap based products, are an example. I believe Purpose has similar products. Of course, one runs the risk that such derivative based products will no longer be allowed. Corporate class mutual funds would be an example of that. I wonder if one could buy such products domiciled outside Canada. I believe they are common in Europe. If the Canadian government disallowed such Canadian domiciled products, it might not be as easy for the government to prevent one from owning foreign domiciled counterparts. 

*I suppose but this simply defers the tax burden in a non-reg. account. I wouldn't bother myself, and don't. *

5)Buy individual foreign stocks with low dividends. Coordinate selling dates for those stocks with dividend dates, so as to miss the dividend. This would work with US stocks, although I'm not sure about other foreign stocks. *Similar to #3.*


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## Mitch (Nov 26, 2016)

I keep foreign stocks in RRSP to avoid the US withholding taxes. With the F/x fees, why pay an additional 15% if you don't have to?

Just to clarify, [and pls correct me if I'm wrong] but TFSA is tax free so wouldn't the Cdn taxes be 0%? US withholding tax still applies of course, but isn't that around 15% (as opposed to 54% mentioned by OP above)?


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## Spudd (Oct 11, 2011)

My Own Advisor said:


> 4)Use derivative based products to minimize foreign dividends. Horizons, with their swap based products, are an example. I believe Purpose has similar products. Of course, one runs the risk that such derivative based products will no longer be allowed. Corporate class mutual funds would be an example of that. I wonder if one could buy such products domiciled outside Canada. I believe they are common in Europe. If the Canadian government disallowed such Canadian domiciled products, it might not be as easy for the government to prevent one from owning foreign domiciled counterparts.
> 
> *I suppose but this simply defers the tax burden in a non-reg. account. I wouldn't bother myself, and don't. *


Actually, it means you pay capital gains tax instead of dividend tax, which is 50% of the tax burden.


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## Spudd (Oct 11, 2011)

Mitch said:


> Just to clarify, [and pls correct me if I'm wrong] but TFSA is tax free so wouldn't the Cdn taxes be 0%? US withholding tax still applies of course, but isn't that around 15% (as opposed to 54% mentioned by OP above)?


Yes, you're correct. The OP is just talking about non-registered accounts when he speaks about the 54% tax.


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## Eclectic12 (Oct 20, 2010)

Park said:


> ... What can one do about foreign dividends?
> 1)Use tax advantaged accounts for foreign stocks


I assume this means avoid foreign dividend paying stocks in the CCPC and use one's personal registered accounts for holding these types of stocks.
If so, then yes - that will work.

Though over time, especially as the RRSP has to be collapsed or if there is large amounts of money one wants to put into foreign markets - this may not last forever.




Park said:


> ... 2)Have less exposure to foreign stocks. I've seen good arguments made that having 50% of one's stocks being Canadian is good asset allocation


Is this worthwhile though?

Most of the stocks I buy have capital gains as the biggest part of the growth. Unless one is specifically looking for high foreign dividend or income paying investments, is one really losing that much?

BlackRock's new iShares S&P 500 Index ETF has high 90% or better for the last three years distributions as foreign income (which I believe is taxed higher than foreign dividends). When one looks at the gains over the last three years for a single unit ... there's $1.56 of heavily taxed cash but $16.88 of capital gains that won't be taxed so badly.

Looking at longer running US index style ETFs from BlackRock, CLU that has been running since 2006, it has a CG of $23.03 versus highly taxed income of $1.60.


It seems to me that while one should do what one can to reduce the taxes, worrying about highly taxed cash payments where the majority of the growth is capital gains may be less efficient.




Park said:


> ... 3)Select foreign stock funds with low dividends. This would include small cap stocks and growth stocks.


I am not sure one has to seek small caps as much as avoid high dividend paying stocks, unless in a registered account.




Park said:


> ... 4)Use derivative based products to minimize foreign dividends. Horizons, with their swap based products, are an example.


That works too ... if one is concerned about the structure, one could go half traditional investment, half swap type investment.



Park said:


> ... 5)Buy individual foreign stocks with low dividends. Coordinate selling dates for those stocks with dividend dates, so as to miss the dividend. This would work with US stocks, although I'm not sure about other foreign stocks.


Unless one finds a similar low fee commission to what's available for the Canada/US exchanges, I suspect you are right.
However, as per the examples above, is the extra costs/effort worth it if the bulk of the gain is from capital gains?


Cheers


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## Eclectic12 (Oct 20, 2010)

Spudd said:


> My Own Advisor said:
> 
> 
> > FWIW, this is what I do: ...
> ...


This is true.

At the same time though, looking at a few iShares US ETFs domiciled in Canada ... is it worth messing with a swap structure when the gain that is heavily taxed is $1.60 while the capital gains part of the gain is $23?


Cheers


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## Park (Sep 11, 2010)

Vanguard's Europe ETF (VGK) has a dividend yield of 3.50%. Historical real US returns have been about 6.5%. Assume future European returns are similar to past US returns. Assume 45% tax on foreign dividends. That means 24% of your real return is taken by dividend tax. And some might say that a real return of 6.5% is optimistic. 

A reasonable response would be that Europe is somewhat of an outlier, when it comes to dividends. The S&P500 has a dividend yield of 1.96%. At 45% tax, that decreases your return by 0.88%. Numbers like 0.88% are a major reason why indexing is about 30% of the US stock market. Once again assume future American real returns of 6.5% in stocks. You've lost 13.5% of that to dividend tax. And when I look at estimates of real US stock market returns over the next 10 years, I see numbers more like 5%.


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## Park (Sep 11, 2010)

S&P500 dividend yield is 1.96%. S&P500 Growth yield is 1.87%. Russell 2000 (small cap) yield is 1.53%. Russell 2000 Growth yield is 1.02%. So the smaller and less value an ETF is, the lower the dividend tends to me. OTOH, value beats growth long term. I've also seen data, that for an American investor, small cap foreign developed stocks have a considerably lower correlation with the American stock market than large cap foreign developed stocks. Those small cap stocks are a better diversifier.


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## Park (Sep 11, 2010)

http://www.drtax.ca/en/DTMax/support/calculator.aspx#

I've been looking at rates for eligible dividends (Canadian dividends).

The top rate is NS at 41.58%. The lowest is Saskatchewan at 30.33%. If you're in the top tax bracket, eligible dividends probably don't meet my definition of investment. What I've written about foreign dividends can also apply to domestic dividends.

Any suggestions about domestic dividends?


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## anisotropy (Dec 18, 2016)

Hi Park, I missed your thread and asked the very same question just yesterday! What is your solution (or preferred solution) to the foreign dividend problem? 

We have quite a bit of international equity. Our portfolio in the non-registered account currently consists of roughly 30% in XEF and 30% in VUN, VUS (in cdn dollars), VTI, and some other American stocks (in us dollars). The annual foreign dividends received in this set-up approaches 30k cad and are taxed as ordinary income. I am aware there is an etf with a swap structure (HXS) that could replace VUN but I haven't found the equivalent for XEF and VUS. 

While some may say taxes for the 30k ordinary income is not that bad, this 30k "ordinary income" adds quite a bit to our tax bill considering we also have income via Canadian dividends, interests, and capital gains through re-balancing. 

We didn't care about the foreign dividends taxes while we were both working, with us retired however, I feel it is important to deal with this and lower our tax bills.

Thanks. 

ps. Our TFSA are full and RRSP are of marginal benefit to us as withdrawls would be taxed at marginal rate as opposed to cap-gain.


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## Eclectic12 (Oct 20, 2010)

Park said:


> ... Any suggestions about domestic dividends?


Same as the foreign dividends ... go with a swap based index fund that does not pay dividends.

HXT for the S&P TSX 60 Index ETF and HXS for the S&P500 Index ETF.
There's also buying whatever stock does not pay a dividend, though that does limit one's participation in the market.

Post #4 in the thread http://canadianmoneyforum.com/showt...-foreign-dividends-taxes-(as-ordinary-income) says that long futures as well as calls/puts can be sued as well.


Cheers


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## mordko (Jan 23, 2016)

Just wondering... Another option would be to buy Berkshire Hathaway. It's a well picked set of international companies with very little exposure in Canada. Pays zero dividend. 

Obviously it would mean stepping away from the Couch Potato strategy, but so are some of the other options you are considering.


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## OhGreatGuru (May 24, 2009)

The rates quoted by OP are marginal tax rates for incomes over $200K. If your income is in that bracket, you should be getting advice from a professional tax planner, not from the internet.

The article from the Fraser Institute is the usual crock. Are we to drop tax rates for the rich like they do in the USA so the separation between rich and everyone else becomes obscene? Or are we to raise Value-Added Taxes to 25% as many of the countries to which the Fraser is comparing us have done?


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## mordko (Jan 23, 2016)

Guessing it's a rhetorical question, but... Why not? Although typically VAT is around 20%, economically it's the best way to tax.


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## OhGreatGuru (May 24, 2009)

I wasn't saying VAT shouldn't be higher/lower/or the same. I was saying the Fraser article is meaningless for comparing Canadian income tax rates unfavourably with those in other countries, without also considering what other taxes in those countries are.


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## OhGreatGuru (May 24, 2009)

*What Can I Do About Foreign Dividend Taxes?*

Sell your foreign stocks.

Pay the tax on capital gains, which has an inclusion rate of only 50%.

Buy Canadian stocks paying eligible dividends.

Problem solved.


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## mordko (Jan 23, 2016)

^ Yep. And enjoy much, much, much higher risk for the rest of your life.


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## mordko (Jan 23, 2016)

OhGreatGuru said:


> I wasn't saying VAT shouldn't be higher/lower/or the same. I was saying the Fraser article is meaningless for comparing Canadian income tax rates unfavourably with those in other countries, without also considering what other taxes in those countries are.


That's a major, major reading comprehension problem. The Fraser article talks specifically about personal taxes being high compared to other countries; these are known to discourage economic competitiveness and productivity. And high taxes on top earners not only harm economies but also don't bring any actual income - as the article states. At no point did the article talk about the overall level of taxation; it wasn't the point of the article.


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## anisotropy (Dec 18, 2016)

Thanks for the replies. I agree with mordko, holding primarily Canadian stocks paying eligible dividends is not a good idea. BRK is one of the "other American stocks" we hold, in fact, its weight is about the same as VTI.


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## Eclectic12 (Oct 20, 2010)

^^^

As I believe BRK does not pay dividends, then it will meet the criteria. Part of the challenge is that from what I recall being posted in another thread, something like 80% of the S&P 500 companies pay dividends.

On the good side, the US is a bigger market so maybe unlike the smaller Canadian market - there's more than two swap based ETFs.


Cheers


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