The article “For Canadians living abroad, is it worth investing in foreign ETFs?” was originally published in MoneySense on March 27, 2023 .Photo by Lukas Hartmann from Pexels.
Canadians with extra savings overseas may wish to invest in foreign ETFs. However, there may be alternatives with less complex tax implications.
“I’m a Canadian citizen who moved from Europe 2 years ago. I have some savings in EUR and I’m considering investing in VWCE (around 50,000 EUR).
I’m assuming this will complicate my tax returns in Canada. Are the extra complications worth it? What would you recommend in this case?” Sam*
Investing in foreign ETFs as a Canadian
Canadian residents are taxed on their worldwide income, Sam, regardless of citizenship. So, buying an investment in a foreign currency in a foreign country definitely still has Canadian tax implications for a resident. It typically also has foreign tax implications as well, although it is generally limited to withholding tax applied at the source on the investment income at the brokerage.
The exchange-traded fund (ETF) you are thinking about buying—VWCE—is the Vanguard FTSE All-World UCITS ETF. It trades in Euros on three stock exchanges: the NYSE Euronext, the Deutsche Börse and the Borsa Italiana S.p.A. You can likely buy it through most European discount brokerage accounts.
Although it trades in Euros, the base currency for the ETF is actually U.S. dollars. The fund seeks to track the performance of the FTSE All-World Index—about 4,000 large and mid-sized stocks in developed and emerging markets. Roughly 60% of the ETF is allocated to U.S. stocks and the other 40% is non-U.S. stocks.
It bears mentioning, Sam, that Vanguard offers similar ETFs in Canada and the U.S. that may be easier for a Canadian investor to purchase through a Canadian brokerage account. Vanguard FTSE Global All Cap ex Canada Index ETF (VXC) trades on the Toronto Stock Exchange (TSX) and Vanguard Total World Stock ETF (VT) trades on the New York Stock Exchange (NYSE). They track a similar mix of international stocks. I use these ETFs as examples of widely held, large ETF alternatives from Vanguard in North America, but if you do some digging, you may be able to find an ETF that’s even more similar to VWCE.
Does the currency you buy a foreign investment in matter?
Unless currency hedging is employed, the currency you buy an international ETF in does not really matter. If an ETF owns Samsung shares, for example, and those shares rise in value in South Korean won, their value also rises in Euros, U.S. dollars and Canadian dollars.
When you buy an ETF in a foreign currency or country, there will typically be withholding tax on the dividend income. The rate is generally between 15% and 25%. When you buy an ETF in a taxable non-registered account, the income is taxable in Canada. A Canadian taxpayer can generally claim a foreign tax credit for any tax already withheld to reduce their Canadian tax payable. So, you can avoid double taxation.
How to handle your tax return
Buying foreign investments in a taxable investment account may result in more complexity when you file your tax return, Sam. The foreign country’s tax reporting may not be set up to report income and capital gains easily on your Canadian tax return, so you may need to calculate them manually. You need to convert the income into Canadian dollars. If you sell a taxable investment in a foreign currency, you need to calculate the purchase price and the sale price in Canadian dollars based on the foreign exchange rates at the time of purchase and sale.
If your taxable foreign investments have a cumulative cost base in excess of $100,000 Canadian, you may need to file form T1135 Foreign Income Verification Statement. This form should be completed and submitted as part of your annual income tax filing. Failure to do so can result in penalties.
It might be simpler to buy the Vanguard FTSE Global All Cap ex Canada Index ETF (VXC) or a similar Canadian-listed ETF. The annual income and capital gains would be reported on T3 and T5008 slips in Canadian dollars, making it easier to report on your tax return. You would avoid the T1135 filing requirement. And you would own a similar investment to the VWCE ETF you are considering.
Are you really maintaining foreign currency exposure?
If part of your motivation is to keep the funds in Euros, you need to consider what you buy. Buying an ETF with a USD base currency that tracks stocks that are in other foreign currencies (like VWCE) is not really keeping the money in Euros. For that to be the case, you would need to buy a European stock ETF or an international ETF hedged back to Euros. You could also buy a Canadian- or U.S.-listed ETF that tracks European stocks to maintain Euro exposure.
Since major currencies tend to trend mostly sideways, as opposed to going up and down in big swings or for prolonged periods of time, it may not be worth placing a bet on a foreign currency simply because your money happens to be in that foreign currency already. You may be making things more complicated than they need to be, Sam.
Bringing the money back to Canada and investing in a Canadian-listed ETF that ignores the original currency may be better. Plus, if you have room in your registered retirement savings plan (RRSP) or your tax-free savings account (TFSA), or if you could benefit from opening a first home savings account (FHSA), it may be better to put your funds in one of these accounts rather than in a taxable one.
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 whatsoever.