For Canadians living abroad, is it worth investing in foreign ETFs?

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, Nick, 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, Nick. 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.