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I currently hold Vanguard VWO in my RSP. Being a believer in the "New Normal" I believe emerging markets will be a good place for up to a 25% allocation for the equity portion of a long-term portfolio. So, I'm considering adding an EM etf to my TFSA. Is there any reason to aviod this? In addition to the Vanguard etf which is on the U.S. exchange I'm looking at the Canadian EM etf options. The Claymore funds have been around longer and therfore have the highest lquidity but the MERS are slightly higher than the others. Some have hedging, some not. Any thoughts are welcome!
 

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I'm not entirely sure about this, but it is possible that you could be paying a significant amount of unrecoverable withholding taxes on dividends and interest.

Consider this set-up:
You are a Canadian-resident and buy a US-based ETF that owns securities of companies resident in a third country. Tax can be withheld on the dividend payments from the third country resident company to the US-based investment fund. Depending upon the relevant laws and treaties, that tax paid may or may not be recoverable by the fund. A further 15% will likely be withheld when distributions are made from the fund to you. Since the ETF units are held in your TFSA, you do not receive a tax credit for the withholding tax paid in the US.

The moral of the story is that if you are going to hold foreign securities in your TFSA, you will obviously receive the benefit of not paying Canadian income tax on dividends and interest, but you will not be able to recover any withholding taxes. If you are going to hold foreign securities in the TFSA, it may be best to stick with ones that will earn you capital gains, since they are not subject to withholding tax.
 
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