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Discussion Starter #1
Can someone please clarify how Canadian-based International ETFs will be treated for tax purposes? I am thinking of investing in a fund such as "CBQ". I have the option of holding them in non-reg account, or my TFSA...

Would I be faced with significant forms/paperwork when filing my taxes each year? Or are the taxes already withheld by Claymore prior to them paying out any dividends? I know the focus is capital gain for most of these funds, but I don't want to start investing and find myself spending large amounts of time worrying and chasing up tax implications...

Thanks for any advice or links you can lend, I've searched every thread previously posted on this topic and remain VERY confused..:confused:
 

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Mutual funds don’t withhold taxes on distributions paid to Canadian residents....

If you hold this in a non-reg account, then yes, you will have to report the income, and pay taxes accordingly ... its not complicated, though ... they should give you a t-slip with all the info ... if there are any foreign withholding taxes (note, these are taxes withheld from the fund, not by the fund), they’ll be indicated on the t-slip and you can claim a credit for it.

If you hold this in a TFSA, then you won’t get any t-slips, because there are no tax implications, and you won’t be able to claim any credit for foreign withholding taxes.
 

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Discussion Starter #3
If you hold this in a TFSA, then you won’t get any t-slips, because there are no tax implications, and you won’t be able to claim any credit for foreign withholding taxes.
Thanks for your reply.

With that said, am I correct in assuming I'd come out ahead over time if I hold the Intl ETF in my Non-Reg account instead of within the TFSA due to my ability to reclaim some the taxes withheld?

I guess it's a matter of determining how much capital gain (and dividend payouts) can grow tax free in the TFSA, vs. how much I would lose in withheld taxes....

Is there a clear winner in determining whether to hold International ETFs in TFSA vs. Non-Reg?
 

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I think TFSA always wins if you still have contribution room. The question is usually given limited room, what to leave unsheltered in an unregistered account.
 

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As far as distributions go, you’d be further ahead keeping this in TFSA than in non-reg ... the taxes you’d pay on the foreign income and cap gains will outweigh any benefit you might realize by claiming the foreign tax credit ... there are other considerations besides distributions, though ... unlike the non-reg account and RRSP, losses in a TFSA cannot be used to offset other gains, so if you should happen to lose money on this investment, TFSA is not where you want to do it.

As Andrew pointed out, the contribution limits come into play as well, if you have more assets in total than you can accommodate in registered accounts ... once you’ve run out of contribution room, the rule of thumb is to place in non-reg whichever assets will be punished the least by being there ... that may or may not be CBQ.
 

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Is there a clear winner in determining whether to hold International ETFs in TFSA vs. Non-Reg?
Yes. The TFSA is a clear winner because all you pay (indirectly) are the withholding taxes. If CBQ has a dividend yield of 2%, you are losing about 0.30% to taxes every year.

In a taxable account, the dividends will be taxed as income. If you are in the top bracket, you are paying almost half your dividends in taxes. You'll also pay capital gains when you sell (if you have any).

http://www.canadiancapitalist.com/location-location-location-where-to-put-portfolio-components/
 

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No, the TFSA is not a clear winner, because there is no guarantee that this investment will be profitable ... as long as the overall returns (distributions are only one component of the overall investment return) are positive, then TFSA is preferable to non-reg ... but a significant capital loss can negate that advantage ... capital losses and TFSAs are not a good mix.

0.30% versus “almost half” ??? ... that is a very misleading comparison ... you don’t measure tax against the underlying capital that produced the returns, you measure it against the returns themselves ... perhaps what you meant to say was 15% versus 'almost half' ... a far less dramatic difference ... though in the specific case of CBQ it has never been as high as 15% ... it has ranged from about 6% to 12%.
 

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Capital losses are only useful if you have capital gains to be offset. You won't, without some non-registered investments.
 

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No, the TFSA is not a clear winner, because there is no guarantee that this investment will be profitable ... as long as the overall returns (distributions are only one component of the overall investment return) are positive, then TFSA is preferable to non-reg ... but a significant capital loss can negate that advantage ... capital losses and TFSAs are not a good mix.
Distributions may be just one component of investment returns but since they are a taxable event, it's important to consider them in deciding where to place an investment.

I agree with your point that capital losses and TFSAs don't mix. However, in a taxable account, a capital loss is good only if you had capital gains in the past three years or expect to have capital gains in the future. If you are assuming you are never going to have capital gains in a TFSA, why wouldn't the same assumption hold for a taxable account?

0.30% versus “almost half” ??? ... that is a very misleading comparison ... you don’t measure tax against the underlying capital that produced the returns, you measure it against the returns themselves ... perhaps what you meant to say was 15% versus 'almost half' ... a far less dramatic difference ... though in the specific case of CBQ it has never been as high as 15% ... it has ranged from about 6% to 12%.
Fair enough. I meant to say if you get 2% in dividends, you are losing 15% of it to withholding taxes in a TFSA. If you are in the top brackets, you'll lose about 40 to 46 percent in a taxable account.
 

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While I generally agree with the comments made on which accounts in which international investments should be held, I wanted to clarify something on their tax treatment.

As I understand it, where international investments are held in a taxable account, international investment income, such as dividends and interest (but not capital gains), is taxed in Canada at the same marginal rate as interest from Canadian sources. You generally get a tax credit for foreign tax paid/withheld.

Where international investments are held in a TFSA, they are not subject to Canadian tax, but they are still subject to foreign withholding taxes. The withholding tax is not recoverable, and you do not get a tax credit for the foreign tax paid. That being said, this generally still results in lower effective tax on international investment income.

Consider this example: Suppose you own a GBP100 face value UK corporate bond that pays GBP3 coupons semi-annually, for a total of GBP6 per year. Suppose that the relevant withholding tax rate is 15%, so HMRC withholds 45p on each interest payment. At the end of the year, you have paid 90p in tax. Let us also assume that the relevant exchange rate is CAD1.5/GBP. Back in Canada, this would have been reported as $9 in international investment income subject to foreign tax of $1.35.

If you held this bond in a taxable account, and your marginal tax rate was 40%, you would have to pay total Canadian income tax of $3.60, but you would get a credit for the $1.35 withholding tax already paid, which would make the incremental tax only $2.25. The total tax paid is $3.60, and the effective tax rate is 40%.

If you held this bond in a TFSA, you would not pay any Canadian tax, but you still would have paid the $1.35 withholding tax, so the effective tax rate would still be 15%.

In general, if you hold international investments in a taxable account, the effective tax rate on investment income (non-capital gains) will be the higher of the two relevant tax rates (Canadian marginal income tax rates are usually higher than international withholding tax rates). If you hold international investments in a TFSA the effective tax rate on investment income (non-capital gains) will be the foreign withholding tax rate. I hope that this provides some clarification.
 

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Discussion Starter #12
Thanks to everyone for the replies...This has been quite informative.

As I derive a professional income from corporation dividends (and a miniscule salary), my tax rate is already quite low after income splitting with the wife (usually 20-25%). The other unique part for me is that I don't use RRSPs, so it's a toss up between TFSA, NonReg personal and NonReg Corporation.

For the reasons listed so far by other posters above, I'm tempted to place the International ETFs in a NonReg account. This would free up my TFSA for small cap ETFs, high yield bonds etc. I figure the slightly increased tax (of 5-10%) within a NonReg personal account in my instance is worth it for the added diversification.
 

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CC said:
If you are assuming you are never going to have capital gains in a TFSA ...
I'm not assuming that ... capital gains are tax-free within a tax-free account anyway, and don’t need to be paired up with a capital loss to enjoy that status ... I am merely assuming that TFSA contributions are limited ... if someone has a portfolio consisting of multiple assets, and can’t accommodate their entire portfolio within TFSA, then the logical assets to hold within TFSA would be those generating the largest tax bill ... assets that have suffered significant capital loss tend not to generate large tax bills ... of course, its impossible to know in advance which assets would produce the biggest tax bill if held in non-reg account, and therefore its impossible to say in advance whether TFSA is a clear winner for any particular asset.

I agree that if TFSA had no contribution limits, there’d be no question but to keep CBQ inside.

Robillard said:
(Canadian marginal income tax rates are usually higher than international withholding tax rates).
The foreign tax credit applies ONLY to the extent that the income would ordinarily be taxed in Canada ... marginal tax rates have nothing to do with it... for a withholding rate of 15%, most people with incomes below about $35k/yr would only get partial credit for their foreign taxes paid, despite their marginal rate being higher than the withholding rate, the net result of which (if you consider your investment income to be marginal income) is that the effective tax burden can exceed both your marginal rate, and the withholding rate.
 
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