Global REIT mutual funds and ETFs invest in companies around the world that own real estate (for the purposes of generating income for their shareholders). If you’ve decided to include global REITs in your portfolio because of the diversification benefits they provide, you should also understand the foreign withholding tax differences between two of the product structures available to Canadian investors:
Canadian-domiciled mutual funds or ETFs that hold the underlying global REITs
US-listed ETFs that hold the underlying global REITs
The DFA Global Real Estate Securities Fund Class F (DFA391) is an example of a Canadian-domiciled mutual fund that holds the underlying global REITs. Approximately 60% of the companies are US-domiciled (the US levies a withholding tax rate on dividends of 15%). The remaining dividend income is subject to various foreign withholding tax rates, depending on the country of origin. According to DFA’s most recent financial statements, the average withholding tax rate on dividends has been about 10%.
If you held this fund in an RRSP account, the foreign withholding taxes would be lost. If we assume a 4% dividend yield on a global REIT mutual fund, this tax drag would be approximately 0.40% per year (4% × 10% = 0.40%).
If you held this fund in a non-registered account, the foreign withholding taxes are generally recoverable. The downside is that you would be paying annual income taxes at your highest marginal tax rate on foreign dividends received.
The SPDR Dow Jones Global Real Estate ETF (RWO) is an example of a US-listed ETF that holds the underlying global REITs. It has similar country weightings as the DFA fund. One thing to keep in mind is that RWO’s financial statements will only include foreign withholding taxes levied from countries other than the US (since the ETF is US-domiciled). As expected, the average withholding tax rate on dividends has been lower than the DFA fund, at about 4%.
If you held this fund in an RRSP account, the international foreign withholding taxes of about 4% would be lost. The US foreign withholding taxes of 15% would not apply. If we assume a 4% dividend yield on a global REIT ETF, this tax drag would be approximately 0.16% per year (4% × 4% = 0.16%).
If you held this fund in a non-registered account, the international foreign withholding taxes of 4% would be lost. The US foreign withholding taxes (an additional 15% on all dividends) would generally be recoverable. The tax drag on this ETF would be similar to the example above (approximately 0.16% per year).
As always, you need to consider more than just foreign withholding taxes when making investment decisions. On this basis alone, US-listed global REIT ETFs appear to be more tax-efficient when held in an RRSP, and Canadian-domiciled global REIT mutual funds (that hold the underlying REITs) appear to be more tax-efficient when held in a non-registered account.