Canadians Abroad: Should You Invest in Foreign ETFs?

Investing in foreign ETFs as a Canadian

If you live in Canada, Sam, you’re taxed here on worldwide income regardless of where you were born. Buying an investment denominated in a foreign currency or listed on overseas exchanges still carries Canadian tax implications. It may also have tax consequences in the country where the fund is domiciled, most commonly in the form of withholding tax on distributions collected by the brokerage.

The ETF you mentioned, VWCE, is the Vanguard FTSE All-World UCITS ETF. It trades in euros on several European exchanges, including the NYSE Euronext, Deutsche Börse and Borsa Italiana. Most European brokerage platforms make it available to local investors.

Although VWCE trades in euros, its base currency is U.S. dollars. The fund aims to track the FTSE All-World Index, which holds roughly 4,000 large- and mid-cap stocks across developed and emerging markets. Around 60% of the holdings are U.S. stocks and the rest are non-U.S. securities.

For Canadian investors, Vanguard and other providers offer similar products listed in Canada and the U.S. For example, Vanguard FTSE Global All Cap ex Canada Index ETF (VXC) is listed on the Toronto Stock Exchange and Vanguard Total World Stock ETF (VT) trades on the New York Stock Exchange. These ETFs track comparable global exposures and are often easier to purchase and report if you use a Canadian brokerage. You may find an even closer match if you compare ETF holdings and structures.

Does the currency you buy a foreign investment in matter?

Unless an ETF is currency-hedged, the currency you use to purchase it generally has little effect on the underlying return. If an ETF holds shares of a company priced in South Korean won, for example, gains in won will translate into higher values in euros, U.S. dollars and Canadian dollars alike.

Where currency and domicile matter more is in tax withholding. Dividends from many foreign funds are subject to withholding tax at the source—commonly in the range of 15% to 25% depending on the country and the investor’s account type. In a non-registered Canadian account, those dividends are taxable in Canada, but you can normally claim a foreign tax credit for taxes already withheld so you are not double-taxed.

How to handle your tax return

Holding foreign investments in a taxable Canadian account can add paperwork. Foreign brokers may not provide tax slips that integrate neatly with Canadian filings, so you may need to calculate income and capital gains manually. That requires converting all amounts into Canadian dollars using the exchange rates that applied at the time of each transaction.

If the total adjusted cost base of your foreign investments exceeds CAD 100,000, you must file form T1135, the Foreign Income Verification Statement, with your annual tax return. Not filing when required can lead to penalties, so it’s an important consideration before you accumulate large taxable foreign positions.

Choosing a Canadian-listed ETF with similar exposure can simplify reporting. Canadian ETFs typically issue T3 and T5008 slips in Canadian dollars, making tax filing straightforward and potentially avoiding the T1135 filing requirement. For many investors, that simplicity is a compelling reason to prefer a domestic listing.

Are you really maintaining foreign currency exposure?

If your primary goal is to keep funds invested in euros, buying VWCE may not accomplish that. VWCE’s base currency and the currencies of the underlying holdings are what drive your currency exposure. To retain euro exposure specifically, you’d need an ETF that invests in European securities or an ETF that is explicitly hedged to the euro. Alternatively, you could hold euro-denominated cash or buy European-focused ETFs listed in North America or Europe that match your currency intent.

Currencies tend to move slowly and often hover in ranges over long periods. Betting on a single currency because your savings are already in it can introduce unnecessary complexity. Converting your euros to Canadian dollars and investing in a Canadian-listed global ETF may be simpler and just as effective over the long run.

Another practical consideration is tax-advantaged accounts. If you have contribution room in an RRSP, TFSA or an FHSA, it can make sense to move funds into those accounts and invest there rather than holding a large taxable foreign position. Using registered accounts can reduce tax drag and paperwork while preserving similar market exposure.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products.

*Name has been changed to preserve privacy.

Read more from Jason Heath:

• Can you use the Home Buyers’ Plan to buy a foreign property?
• The tax implications of working abroad for residents and non-residents of Canada
• Where do we pay income tax if we retire abroad?
• How to use income ETFs for retirement income