And that applies even if you already hold U.S. dollars and don’t want to eat a hefty brokerage currency-conversion fee. You don’t necessarily need to buy a U.S.-listed ETF. According to Cboe Canada’s ETF screener, there are currently 2,055 ETFs available this side of the border, and 237, or 11.5%, have a U.S.-dollar trading option. You can generally identify these versions by the “.U” suffix attached to their ticker.
These are still Canadian ETFs. They’re offered by Canadian ETF issuers and trade on Canadian exchanges, but their units are bought and sold in U.S. dollars rather than Canadian dollars. That gives investors who already have U.S. dollars a way to put that cash to work without first converting it back into Canadian dollars or crossing the border into U.S.-listed ETFs.
That’s an important distinction, because the currency an ETF trades in, where an ETF is domiciled, and what assets it owns are three separate things. A .U ticker can trade in U.S. dollars and own U.S. stocks, while remaining a Canadian-domiciled fund subject to domestic regulatory and tax frameworks.
This follows up on my previous column examining when it’s worth choosing a U.S.-listed ETF over a Canadian-listed alternative. In short, U.S. ETFs can certainly offer greater selection and, in many cases, lower fees, but crossing the border can introduce additional considerations around tax reporting obligations and U.S. estate-tax exposure.
Canadian-listed U.S.-dollar ETFs offer an interesting middle ground. You can keep your investment and trading currency in U.S. dollars while retaining the administrative and regulatory characteristics of a Canadian-domiciled ETF. Let’s look at how they may simplify matters compared with U.S.-listed ETFs, and some popular options that can serve as core portfolio building blocks.
Trading currency is not the same as fund domicile
One of the most important distinctions with .U ETFs is between trading currency and fund domicile. The currency matters for practical considerations such as whether you need to convert Canadian dollars into U.S. dollars and incur a foreign-exchange fee.
For certain tax and reporting obligations, however, where the ETF is legally domiciled can be much more important. This becomes particularly relevant when comparing Canadian-listed .U ETFs with U.S.-listed ETFs inside a non-registered account. There are two potential complications with the latter.
The first is Form T1135, formally known as the Foreign Income Verification Statement. If the total cost amount of your specified foreign property exceeds $100,000 at any point during the year, you generally have to file this form with the Canada Revenue Agency (CRA). U.S.-listed ETFs count as specified foreign property for this purpose.
Canadian-listed ETFs generally don’t, even when their underlying portfolio consists entirely of foreign securities. That exemption also applies to Canadian-domiciled .U ETFs. The fact that you’re buying and selling the units in U.S. dollars doesn’t transform them into foreign property.
The second consideration is U.S. estate-tax reporting. For a Canadian investor who is neither a U.S. citizen nor a U.S. resident, directly held U.S.-listed ETFs generally constitute U.S.-situs property. If you die holding more than US$60,000 of U.S.-situs assets, your executor may be required to file IRS Form 706-NA, the United States Estate (and Generation-Skipping Transfer) Tax Return for non-resident noncitizens.
The administrative distinction remains. Shares of U.S. corporations and U.S.-domiciled funds can constitute U.S.-situs property. A Canadian-domiciled .U ETF generally does not, even if it trades in U.S. dollars and the ETF itself invests entirely in U.S. stocks.
That’s one of the main attractions of the .U structure. From your brokerage account, you’re still transacting in U.S. dollars. From a domicile perspective, however, you continue to own units of a Canadian fund, with all the tax and regulatory advantages to boot.
What you still need to keep track of
Trading a Canadian ETF in U.S. dollars doesn’t eliminate every tax consideration. There are still two important details to understand.
The first is tax reporting in a non-registered account. You’re still dealing with a Canadian-domiciled ETF, so you’ll generally receive the usual Canadian T3 slip for distributions. Even though the ETF trades in U.S. dollars and may pay its distributions in U.S. dollars, the amounts reported for Canadian tax purposes ultimately need to be expressed in Canadian dollars.
Your Canadian brokerage will generally handle the conversion for the amounts appearing on the tax slip. Depending on the circumstances, foreign-currency amounts may be converted using the applicable exchange rate when the income arises, or an acceptable annual average exchange rate.
The second consideration is U.S. foreign withholding tax, and this is one area where Canadian domicile can work against you. Holding a Canadian-domiciled U.S.-dollar ETF inside a registered retirement savings plan (RRSP) doesn’t provide the same withholding-tax treatment as directly holding a U.S.-domiciled ETF.
Discussion about this post