• Investment Taxation

Foreign Withholding Taxes in International Equity ETFs (Revisited)

In August 2014, BlackRock Canada announced that they were changing the investment strategy of the iShares Core MSCI EAFE IMI Index ETF (XEF) in order to reduce the overall amount of foreign withholding tax levied on the fund.  XEF would no longer gain its international stock exposure by holding the iShares Core MSCI EAFE ETF (IEFA) (a US-listed ETF) – it would instead hold the underlying stocks directly.

Lately, I’ve spoken to numerous investors who feel that holding US-listed international equity ETFs, such as IEFA, is still the way to go (especially in RRSP accounts), due to the lower foreign withholding taxes levied. In order to dispel this myth, let’s compare the foreign withholding tax cost of our two similar funds, IEFA and XEF.

(Note: For this analysis, I’ve used the methodology from our white paper, Foreign Withholding Taxes, and summarized the results in the chart below).

Estimated Foreign Withholding Tax by Account Type

Account Type


iShares Core MSCI EAFE IMI Index ETF (XEF)










Sources: 2015 BlackRock Annual Reports, MSCI Index Fact Sheets as of April 29, 2016

Tax-Free and Taxable Accounts

The foreign withholding tax drag is higher in the tax-free (TFSA) accounts (0.69% vs. 0.26%) and taxable accounts (0.25% vs. 0.00%) for IEFA relative to XEF. Although IEFA has a lower expense ratio than XEF (0.12% vs. 0.22%) the 10 basis point advantage can’t compete with XEF’s more tax-efficient structure.  Converting currencies in these accounts to purchase IEFA would also add additional cost and complexity to the portfolio.  I think it’s safe to say that XEF is a slam-dunk for these types of accounts.

Tax-Deferred Accounts

These next results were what really stood out to me. IEFA and XEF had almost the exact same foreign withholding tax cost (0.25% vs. 0.26%) when held in tax-deferred accounts (such as RRSPs or LIRAs).  The only advantage of holding IEFA over XEF would be the slightly lower expense ratio (0.12% vs. 0.22%).

We’ll call this one a draw. Although IEFA is slightly cheaper before considering currency conversion costs, a few currency conversion errors can quickly tilt the analysis in favour of XEF.  If you’re still debating which ETF to purchase in your RRSP account, please follow this simple advice:

  • If you have no idea what ‘Norbert’s gambit’ is, and have no desire to learn, hold XEF.




iShares Core MSCI EAFE IMI Index ETF (XEF)

Net Dividends (A)



Foreign Withholding Tax (B)



Gross Dividends (A + B)



Foreign Withholding Tax Level 1 (%) = [B ÷ (A + B)]




Foreign Withholding Tax Level 2 (%) (if applicable)



Gross Dividend Index Yield (as of April 29, 2016)



MER (%)



Sources: 2015 BlackRock Annual Reports, MSCI Index Fact Sheets as of April 29, 2016

By |2017-01-17T15:01:08+00:00June 1st, 2016|Categories: Investment Taxation|Tags: , |33 Comments


  1. Sue September 19, 2018 at 10:33 pm - Reply

    XDG and foreign withholding tax in an RESP question.

    do you know how I might be able to find out how much there may in in unrecoverable FWT with this ETF in such an account? Thanks for your insights.


  2. Gary August 17, 2018 at 5:08 pm - Reply

    Hi Justin,

    do you know what the tax treatment for VIU is in the TSFA? I’m hoping similar to XEF. Where there’s only 1 withholding tax vs. 2 levels

    Is there anything available for emerging markets? best I could find is VEE and Ishares version but you pay two levels of WH taxes.

    • Justin August 17, 2018 at 8:05 pm - Reply

      @Gary: There would be a single level of foreign withholding tax in a TFSA for VIU (as it holds the underlying stocks directly, it is the same structure as XEF).

      The only ETF for emerging markets that comes close is the BMO MSCI Emerging Markets Index ETF (ZEM) – it mostly holds the underlying stocks directly (although it does still hold about 15% of its assets in US-listed emerging markets ETFs).

  3. Sebastien August 14, 2018 at 12:02 pm - Reply

    Hi Justin, I try to understand how to do the math to find out how much L1 withholding taxes I have to pay for REET. My first guess is 1181493 / (1181493 + 23045360) * (100% – 61.35%) + 61.35% * 15% as 61.35% of the ETF hold US REITs, but this is a poor estimation as it doesn’t mean 61.35% of the yield is from the US REITs. Is there any information I can find to get a better L1 withholding taxes average percentage?

    Thank you for your time.

    • Justin August 14, 2018 at 1:20 pm - Reply

      @Sebastien: The closest you could probably get is to use the iShares International Developed Real Estate ETF (IFGL) (which follows the FTSE EPRA/NAREIT Developed Real Estate ex-U.S. Index) as a proxy for the international portion of the ETF that follows the FTSE EPRA/NAREIT Global ex US REIT Index. You could then use the gross dividend yields available on the FTSE index fact sheets: https://www.ftse.com/analytics/factsheets/Home/Search

  4. Simon May 3, 2018 at 5:56 pm - Reply

    Hi Justin.

    Can you please explain the difference in dividend yield between the two products? Why is XEF’s dividend yield so much lower than IEFA if they match the same index?

    The current 12 month trailing yield is 2.54% for IEFA and 2.04% for XEF.

    For disclosure, I am holding IEFA in my RRSP account as a long term investment.


    • Justin May 7, 2018 at 2:26 am - Reply

      @Simon: I generally do not pay much attention to distribution yields listed on ETF websites (they can be misleading for various reasons). The dividend yield for XEF and IEFA is approximately equal to the gross index yield minus foreign withholding taxes (depending on the account type) minus fees.

  5. Diego Revere September 22, 2017 at 9:02 pm - Reply

    Hi Justin,

    Would you happen to know the withholding tax drag on XEF vs IEFA in a corporate account?

    I put added the MER + withholding taxes below so the info in this article could be seen beside the Feb 2014 numbers from the white paper.

    Estimated Foreign Withholding Tax with MER by Account Type

    Account Type IEFA (June 2016) XEF (June 2016) IEFA (Feb 2014) XEF (Feb 2014)

    TFSA 0.81% 0.48% 0.74% 0.94%

    Taxable 0.37% 0.22% 0.36% 0.56%

    RRSP 0.37% 0.48% 0.36% 0.94%

    Corporate ? ? 0.55% 0.75%

    It’s nice to see a company changing their ETF to make it more tax efficient!

    How is XEF able to make withholding taxes drop to zero in a taxable account? This seems crazy! It seems odd that IEFA would generate withholding taxes while XEF doesn’t? Does this basically mean that the IEFA withholding tax goes to the USA rather than to the countries where the underlying stocks are domiciled?

    Thanks for sharing all of this useful info!

    • Justin September 26, 2017 at 8:30 pm - Reply

      @Diego Revere: The tax drag from holding foreign equity ETFs in a corporate account is more complicated than I discussed in the 2014 version of the FWT paper (which is why I excluded it from the 2016 update). Basically, the foreign withholding tax implications are similar in a corporate account vs. a personal account, but the refundable taxes in a corporate account are less than if the income was from a Canadian source (resulting in a additional tax drag when dividends are ultimately distributed to the taxpayer and taxed in their hands):


  6. Gary January 2, 2017 at 1:11 pm - Reply

    @Justin – We have recently moved our RRSP accounts from Nesbitt Burns to Investorline. All is currently in cash. I have seen your model portfolios (June 30,2016) and have decided to go with 40% VSB, 20% VCN … I plan to use Norbert’s Gambit to convert the rest from CAD to USD using DLR/DLR.U. Using VTI seems to be a no-brainer for 20% of the original amount. For the final 20% would you still recommend IEFA/IEMG (16%/4%)? In our case the RRSPs are all of our investments … no TFSA or taxable accounts. Is there a US listed ETF that covers both IEFA/IEMG. Just thinking of ways to possibly reduce the complexity.

    Thanks Gary

    • Justin January 3, 2017 at 2:49 pm - Reply

      @Gary: I tend to favour IEFA/IEMG in an RRSP account, but you could also consider using XEF/IEMG or VIU/VWO (as the foreign withholding taxes in RRSPs are not as onerous for developed markets ETFs that hold the underlying stocks directly).

      Another option would be VXUS or IXUS, but these ETFs also contain Canadian stocks.

  7. JSN November 18, 2016 at 1:39 am - Reply

    Would you recommend VIU over XEF for a non-registered account due to it’s smaller yield? According to Blackrock’s website XEF has a distribution of 3.39% while Vanguard’s website reports VIU as having a distribution yield of 1.40%.

    I’m thinking due to the lower yield VIU would be preferable as the capital appreciation would be similar to XEF without having to deal with paying taxes on a relatively large amount of dividends at your full marginal rate.

    Or is the yield smaller for VIU due to Vanguard using a sampling strategy to replicate the FTSE index?

    Thanks again for the great education!

    • Justin November 18, 2016 at 9:22 am - Reply

      @JSN: The FTSE Developed All Cap ex North America Index (which is the index VIU follows) has a dividend yield of about 3.06%. The MSCI EAFE IMI Index (which XEF follows) has a dividend yield of about 3.16%. Both ETFs would be expected to have similar tax attributes.

      I wouldn’t give much consideration to the distribution values that are posted on either BlackRock’s or Vanguard’s websites.

  8. Que August 19, 2016 at 4:01 pm - Reply

    @Justin: I was actually curious if there was an advantage to hold multiple funds in a portfolio instead of having an all in one fund or disadvantage. Has any done any studies, and crunched the numbers?

    It would depend on how often you rebalance your multiple fund Portfolio versus how often the fund company rebalances their all in one fund. Who knows maybe that more expensive all in one fund actually rebalances so much more than the average DIY multiple fund portfolio that it would actually get a better return. I mean rebalancing is how we automatically buy low and sell high. I would think the all in one fund would be rebalancing constantly on a daily basis as they get more funds, compared to a typical DIYer who maybe on average rebalances once a year, which has to make some sort of difference in return.

    I thought it might be a good post for you or Dan to cover. I could see th title of the post already: Should we all be in an “all in one fund”?

    • Justin August 21, 2016 at 11:29 am - Reply

      @Que: The advantage/disadvantages would differ, depending on many factors (i.e. the measurement period, the relative performance of the underlying equity regions, the initial region weights chosen, etc.). For an interesting example, please refer to this blog post: https://www.canadianportfoliomanagerblog.com/split-the-eafe-for-better-returns/

      An all-in-one fund would technically never rebalance (whereas an investor splitting the regions up would rebalance occasionally). As new cash flowed into the all-in-one fund, the ETF portfolio manager would be allocating the cash based on the current market cap allocation (so they would be adding more to the regions that have outperformed, and less to the regions that have underperformed). This is the exact opposite of what an investor would be doing who had a target asset mix (which split up the equity regions) and was contributing to the portfolio (they would be adding more to the underperformers).

  9. Que August 18, 2016 at 11:56 pm - Reply

    @Justin – would IEFA/IEMG bet better for rebalancing returns than VXUS?

    • Justin August 19, 2016 at 9:12 am - Reply

      @Que: VXUS is a good choice – I only split them up for consistency and to give me more flexibility (i.e. I hold XEF in a TFSA, but I tend to hold IEMG in an RRSP, due to foreign withholding tax implications).

  10. Que August 16, 2016 at 11:59 am - Reply

    @Justin – could you comment on VXUS and VTI, in terms of a comparison. Do you think using NG for conversions and holding VXUS and VTI in RRSP account would be the best option for RRSP, and then VUN and XEF/XEC for a Tax-free or taxable account? Or are there better ETFs either Canadian or US listed? Thanks, Que

    • Justin August 17, 2016 at 7:46 am - Reply

      @Que – VTI and VXUS would be fine in an RRSP if you were using Norbert’s gambit to convert the currency (VUN, XEF and XEC would be fine for tax-free or taxable). For consistency, I tend to use US-listed ETFS that have a Canadian-listed ETF substitute (i.e. VTI/VUN, IEFA/XEF, IEMG/XEC).

  11. Francis July 6, 2016 at 10:54 pm - Reply

    I just wonder for asset location if XEF is that much efficient in tax free account, should I try to only hold US equity like VTI in my US$ RRSP account and hold XEF in my TFSA account as much as possible?

    • Justin July 7, 2016 at 9:04 am - Reply

      @Francis – that would be one possible option – it’s difficult to know in advance which method will be more tax-efficient, but I don’t see any issues (other than behavioural) with holding XEF in a TFSA and VTI in your USD RRSP account.

  12. Julio June 30, 2016 at 12:43 pm - Reply

    Sorry I meant VIU

  13. Julio June 30, 2016 at 12:41 pm - Reply

    Hi Justin,

    How TDB911 International – e series compares to VIE or XEF, in total fees and diversification?


    • Justin June 30, 2016 at 4:04 pm - Reply

      @Julio – TDB911 tracks the MSCI EAFE Index (925 large + mid cap companies), XEF tracks the MSCI EAFE IMI Index (3,082 large + mid + small cap companies) and VIU tracks the FTSE Developed All Cap ex North America Index (3,496 large + mid + small cap companies). Keep in mind that FTSE considers Korea to be a developed country, whereas MSCI does not. If we exclude the 366 Korean companies from the FTSE All Cap Index, it would have similar diversification to the MSCI IMI Index.

      In terms of cost, all of them would be expected to have similar foreign withholding tax implications (as they hold the underlying stocks directly), but VIU and XEF would have lower MERs than TDB911 (about 0.22% vs. 0.51%).

  14. Aaron June 2, 2016 at 6:00 pm - Reply

    For emerging markets your withholding tax white paper states that ZEM may be somewhat more tax-efficient than type-H funds. But with only 29% of its holdings in US ETFs, shouldn’t ZEM be the lowest cost option for taxable accounts, just as XEF is for developed international? It would be great to have a recommendation for emerging markets as well. Thanks!

    • Justin June 3, 2016 at 4:57 pm - Reply

      @Aaron – this is a great idea for a future blog post – it’d be a much easier analysis if BMO held all of the stocks directly. For what it’s worth, I tend to get my emerging markets exposure from US-listed ETFs (IEMG and VWO) in my RRSP accounts.

  15. Adam June 2, 2016 at 10:34 am - Reply

    “If you have no idea what ‘Norbert’s gambit’ is, and have no desire to learn, hold XEF.” – I am aware, I have learnt, and I still will hold XEF. 😛

    • Justin June 2, 2016 at 2:32 pm - Reply

      @Adam – nicely said 😉

  16. LawrenceW June 1, 2016 at 9:32 pm - Reply

    Nice post !

    I am not sure i understand why some people still people use XEF/XEC vs VIU/VEE since both VIU and VEE are more diversified and have lower MER than the ishares counterparts.

    It would be nice if you could do a comparison.

    Keep up the good work !

    • Justin June 2, 2016 at 2:36 pm - Reply

      @LawrenceW – thanks! I’m fairly indifferent between using a combination of XEF/XEC vs. VIU/VEE. I use both pairs for tax loss selling in client accounts (the only issue is the index provider classification differences between developed and emerging markets).

    • Tim June 8, 2016 at 8:21 pm - Reply

      @LawrenceW: I was interested to hear about VIU/VEE and looked them up as I hold XEF/XEC. Those are interesting options.

      iShares must have lowered their MERs through, as both XEF and VIU have the same 0.22% MER. For VEE and XEC, VEE has 0.24% and XEC has 0.26% so very close.


      • Justin June 8, 2016 at 8:38 pm - Reply

        @Tim @LawrenceW – I’m currently working on a post that should dispel the myth that VIU/VEE is significantly more diversified than XEF/XEC – stay tuned.

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