Canada’s ETF investment offerings allow investors to choose solutions that have broad market exposure or provide access to a specific investment theme. However, some Canadian investors opt to utilize U.S. ETFs within their portfolio, and though they are within their right to do so, such an action has implications. This paper will highlight the benefits Canadian investors derive from purchasing Canadian-domiciled ETFs.

Beyond Risk and Return: The Experiential Benefits of Canadian ETFs for Investors

When discussing an investor’s experience with ETFs, it's natural to think of risk and return. However, other factors also play a significant role in shaping one’s investment experience. For Canadian ETF investors, there are experiential benefits to utilizing Canadian ETFs over U.S. ETFs. The following are material ways in which Canadian ETFs provide a better investment experience to Canadian investors.

Simplified Taxation

The Canada Revenue Association (CRA) requires Canadian resident taxpayers (individuals, corporations, and certain partnerships and trusts) to file form T1135, Foreign Income Verification Statement, if the total cost of their specified foreign properties (SFP) exceeds $100,000 (in Canadian dollars) at any time during the year.

Cost is generally defined as the adjusted cost base of the properties. The purpose of this reporting is to allow the CRA to better track and address compliance risks, and to help combat international tax evasion and aggressive tax avoidance. As stated by the CRA, U.S. exchange-traded funds are considered SFP .

Since most Canadian ETFs are treated the same as conventional open-ended mutual funds for tax purposes, they do not need to file Form T1135 in respect of their foreign holdings. Similarly, because Canadian ETFs are not considered SFP, investors in Canadian ETFs don’t need to report this investment on the form, even if the ETF invests in foreign securities. Thus, simplified tax reporting is a top-of-mind benefit for Canadians purchasing Canadian-listed ETFs versus U.S.-listed ETFs or foreign securities directly.  

Manage your US Estate Tax Exposure

The U.S. estate tax normally applies to both U.S. persons (based on their worldwide estate) and non-U.S. persons (based on U.S. situs property). KPMG Canada has issued a memo on this topic, which noted that shares and units in Canadian mutual funds and ETFs that invest in U.S. securities are not considered U.S. situs assets for U.S. estate tax purposes.

Simply put, Canadian ETFs can be an effective way for Canadians who are not U.S. persons to have exposure to U.S. markets without a potential U.S. estate tax liability.

The Currency Consideration

For Canadian investors purchasing U.S. ETFs, the broker will need to convert CAD to USD. The conversion rate used by discount brokers may not be competitive, especially if the trade is relatively small.

Conversely, when investors buy a Canadian ETF holding U.S. securities, the ETF converts their CAD to U.S. dollars at institutional rates that are very cost-effective. As such, using Canadian ETFs is a pathway of least resistance to ensuring the cost of gaining exposure to U.S. equities is not inflated.  

Gaining Access to U.S. Investment Strategies through Canadian ETFs

The continuous growth of the Canadian ETF landscape has afforded Canadian investors great optionality, which minimizes the need for individuals to purchase U.S.-listed ETFs - as many of those investment strategies are accessible through Canadian ETF manufacturers. For example, BMO ETFs created the BMO ARK Innovation ETFs, with ARK Invest as the sub-advisor. These solutions reflect the investment philosophy of renowned investment manager Cathy Wood and her outlook on disruptive innovations.

ARK’s research underpins the BMO ARK Innovation ETFs, as the three ETFs within the suite reflect the sub-advisor’s belief that five innovation platforms are evolving and converging simultaneously to create dramatic cost declines, unleash incremental demand across sectors and geographies, and spawn more innovation. The five innovation themes are: Artificial Intelligence, Energy Storage, Robotics, DNA Sequencing, and Blockchain Technology.

The three ETFs within the suite are:

BMO ARK Innovation Fund (Cboe: ARKK), which invests primarily in global equity securities of companies across various sectors involved in the development of technologically enabled products or services associated with fintech innovation, genomic innovation, industrial innovation, and next-generation internet innovation that have the potential to change the way the world works.

BMO ARK Genomic Revolution Fund (Cboe: ARKG), which primarily in global equity securities of companies across various sectors that are focused on and are expected to substantially benefit from extending and enhancing the quality of human and other life by incorporating technological and scientific developments and advancements in genomics into their business such as CRISPR, targeted therapeutics, bioinformatics, molecular diagnostics, stem cells and agricultural biology that have the potential for changing the way the world works.

BMO ARK Next Generation Internet Fund (Cboe: ARKW), which invests primarily in global equity securities of companies across various sectors focused on and expected to benefit from shifting the bases of technology infrastructure to the cloud, enabling mobile, new and local services, such as companies that rely on or benefit from the increased use of shared technology, infrastructure and services, internet-based products and services, new payment methods, big data, the internet of things, and social distribution and media that have the potential for changing the way the world works.

Takeaway

Canadian investors benefit from using Canadian-domiciled and Canadian-listed ETFs, as they simplify investing. Additionally, the expansion of the Canadian ETF landscape is bringing more innovative and novel solutions to the market, allowing investors more optionality in the building blocks that comprise their portfolios.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.