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I am looking at buying some American based shares such as SPY (the S&P 500 Index ETF), but I am in Canada. I am wondering if buying something like this will have any consequences (e.g. I have to pay someone an extra 10% on my ROI because I bought it outside of my own country).

Does anyone know if I will have to pay any extra fees on buying shares that are in the U.S. if I live in Canada (and buy them from Canada)?

Thank you for any help, all help is greatly appreciated.

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First of all, the #1 reason NOT to buy shares in a US-domiciled ETF is that you lose too much money on converting your Canadian dollars into US dollars in order to buy it, and again converting back when you sell. So unless you have a source of USD income, or are comfortable using Norbert's Gambit, you should probably instead buy a Canadian ETF that holds US stocks, such as VUN or XUU. Those two are even broader than the S&P 500 index, but that's not a bad thing. If you can cheaply obtain USD, then you'd be better off with VTI over SPY, because it's MER is 4 basis points lower and has broader coverage of the US market.

Now to answer your question, there are a few differences in the ways foreign equity is taxed compared to Canadian equities. The biggest difference is that dividends from Canadian companies gets favorable tax treatment, so you'll pay less to the CRA than for dividends on US companies. But if you're holding the ETF inside a TFSA, RRSP, or RESP then it is sheltered from all Canadian tax, regardless of where the ETF is domiciled or what country's stocks are being held in it. A smaller difference with foreign equity is that foreign governments will apply a tax on dividend yields, called withholding tax, which varies from country to country. In the US the rate is 15% (for foreign investors who fill out a W-8BEN form). This tax is not charged when you hold a US-domiciled ETF in an RRSP. And if you are going to hold the stocks in a taxable account (which you should only do if you've already maxed out your TFSA and RRSP), then you can claim a foreign tax credit on your tax return that compensates you for the US withholding tax. This white paper by PWL Capital does a good job of explaining it and lists popular ETFs at the bottom showing the effect of the tax.

I'd also like to address the question asked in the topic, which is whether or not it's a good idea to buy US equities. The answer is that it's a good idea to diversify your investment portfolio across many countries. So yes, buy US equity ETFs (either Canadian or US domiciled, depending on what currency you can get) and also buy ETFs that hold Canadian equity, and some that hold international equity. And don't just buy equities unless you're willing to take big risks with your money. Most people will buy bond ETFs as well to protect themselves in case of market crashes. If this concept of diversification is new to you, maybe you should consider reading a little more on the topic of index investing. Canadian Couch Potato is great resource for learning, and has recommendations for ETFs and some model portofilos.

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    What a pleasure reading this answer! Thank you for taking the time to write out your valuable insights. – Kelsey Mar 25 '15 at 0:01
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    One thing I missed in my answer is the tax rate. I would point out that 15% is a preferential rate and you need to fill out a W-8BEN. Your broker will hopefully make sure you do this. – brian Mar 25 '15 at 0:02
  • Ah, I see. Thank you very much for the extra information. – Kelsey Mar 25 '15 at 0:05
  • What if I am buying a US domiciled company's shares that does not pay a dividend (e.g. Berkshire A), would I still be charged the 15% US rate plus the currency exchange rate? @Elbyron – Kelsey Mar 26 '15 at 6:01
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It's not without some consequences ... maybe. You will have to use US dollars to make the purchase and banks often charge 1-2% just to exchange your money. There are ways around this at most, if not all, discount brokers - but it's more complicated.

You will possibly be exposed to US estate tax but that has historically been for larger estates. What it will be in the future, no one knows.

In rare cases you may have to file a 1040NR to the IRS for some types of fund. SPY is not one of these, nor are any ETFs which just hold common shares.

You will be subject to a a different tax regime on income generated. All foreign income is counted as straight income and taxed at your highest marginal rate, this includes dividends and, extremely rare for the US, capital gains distributions.

Depending on which account you hold the ETF in the taxation is different. The best is an RRSP, there are no withholding taxes due to a tax treaty. There are no taxes on distributions since it's a tax sheltered account. Of course there are taxes on withdrawals but that's the same for any investment. Contrast this with buying a Canadian domiciled fund like XUS. Distributions paid to XUS will have withholding tax no matter where it's held, but not from XUS to you.

In a TFSA or RESP there is withholding tax but no income tax. You can not recover this withholding tax. Canadian funds will have no withholding tax, except possibly a hidden one from a foreign entity to the Canadian fund.

In a regular, non-registered account there will be withholding tax and income tax. The withholding tax will usually be recovered through a foreign tax credit. For a Canadian fund there would be no withholding tax from the fund to you but there is a non-recoverable withholding tax between the US companies and the Canadian ETF. Eventual capital gains will be taxed the same as a Canadian ETF, with the tax payable to Canada.

  • Great answer, very detailed, and well explained! Thank you for sharing your wisdom. – Kelsey Mar 25 '15 at 0:00
  • Saying all foreign income is taxed at your highest marginal rate is misleading in a few ways. First, someone might think that when you sell a foreign ETF you would be paying tax on 100% of the gain, but it's still 50% just like Canadian equities. Only the dividends are treated differently. Second, there is no "highest" marginal rate, a person only has a single marginal rate which is the amount they pay for each new dollar earned. And technically, the income is just added to your other income and the total is taxed, so marginal rate is only relevant in comparisons. – Elbyron Mar 25 '15 at 17:57
  • You should also qualify the statement that an RRSP has no withholding taxes. This is only true in the case of US-domiciled ETFs. If you buy a Canadian domiciled ETF made up of US stocks, such as VUN, you will be subject to withholding tax which cannot be recovered in an RRSP. Also Canadian mutual funds in an RRSP, even if they directly hold US stocks, will have withholding tax apply. – Elbyron Mar 25 '15 at 18:03
  • @Elbyron The capital gains issue is talked about in the last paragraph. It's not dividends that are treated differently, but the entire distribution - these are classified as foreign income. This can even include capital gains. Even more egregious is ROC which is a cost base adjustment in a Canadian ETF but is fully taxed as income from a US ETF. These are very common in REITs. Also, there are 3 or more marginal rates for everyone. The rate on cap gains, the rate on divs, and the rate on income. US distributions are taxed at the highest of these - income. – brian Mar 25 '15 at 19:40
  • As for comparing VUN, I explained this using XUS as an example, and mentioned the issue as it pertains to each different account type. I would recommend others read the links you provided for more information. – brian Mar 25 '15 at 19:40

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