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"iShares U.S. High Yield Fixed Income Index ETF (CAD-Hedged)" (TSE:CHB) is listed on the TSX and tracks an index of US high-yield bonds. It holds these bonds directly (i.e. not through a US-listed ETF).

As such, I figured that investing in CHB inside a TFSA would be suboptimal, as withheld US taxes can't be recovered in any way (whereas, inside an RRSP, there are no withheld US taxes to begin with).

However, looking at CHB's distribution history for 2020, I can see that it generated foreign income ($0.95265 per unit), while it paid $0 in foreign tax.

Looking at my broker's records, I can't see any US withholding tax activity for this security whatsoever.

I'm not sure what that means.

  • Does CHB "work around" US withheld taxes in any way? How does this happen?
  • Is it, therefore, reasonable to hold CHB in a TFSA?

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Does CHB "work around" US withheld taxes in any way? How does this happen?

Income from US bond interest may be considered "portfolio interest" or "qualified interest income" (see 26 U.S. Code § 871 - Tax on nonresident alien individuals). This kind of income is not taxed by the US.

Further details:

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  • Thank you. The problem is not necessarily about the US taxing it, but instead about the US withholding tax on it (%15 for Canadians). In Canada, we can recover that withheld tax in most cases — just not in the case of investment through a Tax-Free Savings Account. Maybe I'm missing something.
    – Isaac
    Commented Aug 12, 2022 at 19:25

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