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Canadian versions of U.S. ETFs are better for Canadians

When choosing an ETF that has a Canadian and US version, the Canadian version has advantages.

When you buy an Exchange Traded Fund (ETF) that has a Canadian and U.S. version is one better than the other?

A reader recently asked this question in response to an article about the Ark Investment Management LLC flagship innovation ETF (ARKK) which has a Canadian and American version.

The New York-based fund was launched in 2014 and has about US$17.8 billion in assets. The Canadian version, (EARK) was launched by Emerge Funds Canada Inc. in 2019. It has C$194 million in assets.

The funds have the same holdings and both are managed by ARK CEO Cathie Wood and her team.

If you are a Canadian, the domestic version makes most sense because of the tax treatment of the purchase and any dividends that are paid.

When Canadians buy stocks or ETFS that are based outside Canada they are buying ‘foreign property’ for tax purposes. Canadian versions of the same fund are considered Canadian.

That matters, because once you pass a threshold where you own foreign property with a cost of more than C$100,000, you must declare it on your tax return. The Canada Revenue Agency wants a record so when you sell the property they can tax the proceeds.

The things that count as foreign property include bank accounts, stocks, bonds and real estate. Even if the foreign stocks and bonds are held in Canadian brokerage accounts, you must report them. Investments held inside your Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) do not need to be included.

Another reason to hold investments in Canadian versions of funds is the treatment of dividends. The Canadian fund is eligible for a dividend tax credit credit, the U.S. version is not. You may also be subject to an IRS withholding tax of 10% on dividends paid in the U.S. version. You will get it back, but not until you file your tax return in the spring.

Other things to consider are fees. In this case, ARKK has a management expense ratio of 0.75% versus 1.15% for EARK. So you are paying more in fees in Canada, though Emerge says fees will drop as the fund grows. Does that outweigh the tax advantages? Each situation will be different, so it is something to discuss with your advisor.

If you want to know more, TurboTax has a good primer on the topic.

Adam Mayers writes about investing and personal finance. He is a contributor to the Globe & Mail’s Globe Advisor and a contributing editor to Gordon Pape's Internet Wealth Builder newsletter. Adam was Business Editor and investment columnist at The Toronto Star and is the author of six books.

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