U.S.-Listed ETFs for Canadians: When Foreign Withholding Tax and Lower Fees Outweigh Currency Conversion
Sarah just moved $180,000 from a savings account into her RRSP and opened the Questrade dashboard. VOO is 0.03%. VFV, the Canadian wrapper for the same S&P 500 index, is 0.09%. She's staring at a 6-basis-point spread and wondering if it's worth the hassle of holding U.S. dollars.
The answer depends entirely on which account she's using and how much she's converting.
The RRSP case: withholding tax makes the decision
For RRSPs, the Canada-U.S. tax treaty exempts U.S.-listed dividends from the 15% withholding tax. Canadian-listed ETFs that hold U.S. stocks do not get this exemption. The withholding tax is deducted before the dividend reaches the fund and is unrecoverable.
Run the numbers. A U.S. equity ETF with a 2% dividend yield loses roughly 0.30% annually to withholding when held through a Canadian wrapper in an RRSP. That's ten times the MER difference between VOO and VFV. The U.S. listing wins by a wide margin, even after accounting for a 1.5% currency conversion cost at most brokerages. For a $180,000 position, that 0.30% drag costs $540 every year. The one-time conversion cost is $2,700. Breakeven is five years. After that, the U.S. listing is cheaper forever.
Below $50,000, the math gets thin. At $40,000, the annual withholding drag is $120. The conversion cost is $600. Breakeven stretches to five years, but you're optimizing for hundreds of dollars while adding T1135 reporting complexity if your total foreign property exceeds $100,000. For small accounts, the Canadian wrapper is simpler and the cost difference is noise.
The TFSA case: no treaty benefit, different calculus
TFSAs do not qualify for the treaty exemption. The U.S. does not recognize them as retirement accounts. Whether you hold VFV or VOO, you're paying the 15% withholding tax on dividends. The only remaining advantage of the U.S. listing is the lower MER.
VOO at 0.03% versus VFV at 0.09% is a 6-basis-point difference. On $100,000, that's $60 per year. Currency conversion at 1.5% is $1,500 upfront. Breakeven is 25 years. For the TFSA, the Canadian listing almost always wins because the withholding tax advantage disappears and the MER savings are too small to justify the conversion cost.
Currency conversion: the hidden anchor
Most Canadian brokerages charge 1.5% to 2% on retail currency conversion. That's $1,500 to $2,000 per $100,000. Norbert's Gambit, using an interlisted stock like DLR.TO to convert at near-market rates, cuts this to under 0.10%, or about $100. The technique takes two to three business days and requires buying, journaling, and selling shares. It's not hard, but it's friction. For one-time conversions above $50,000, the savings justify the effort. Below that threshold, the time cost usually outweighs the dollar savings.
Some brokerages (Questrade, Interactive Brokers) offer better retail FX rates, in the 0.5% to 1.0% range. At 0.5%, the conversion cost on $100,000 is $500. That changes the breakeven math significantly. Check your brokerage's actual FX spread before assuming 1.5%.
Where the decision flips
U.S.-listed in the RRSP if the balance exceeds $50,000 and you're using Norbert's Gambit or a low-cost FX platform. Canadian-listed in the TFSA unless you already hold USD and never plan to convert back. In non-registered accounts, the U.S. withholding tax generates a foreign tax credit that offsets Canadian tax, collapsing the advantage of the U.S. listing to the MER difference alone, usually not enough to matter.
The 6-basis-point MER spread is real. The 30-basis-point withholding drag is larger. The 150-basis-point currency conversion cost dwarfs both. The decision isn't about optimization. It's about which cost you're willing to pay, and which account makes it worth paying.
