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Foreign Withholding Taxes and Global REITs

January 29, 2013 - 6 comments

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:

  1. Canadian-domiciled mutual funds or ETFs that hold the underlying global REITs
  2. US-listed ETFs that hold the underlying global REITs

Structure #1:

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.

Structure #2:

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.

By: Justin Bender with 6 comments.
Comments
  25/11/2013 9:14:13 AM
Justin Bender
@Amolak - the discussion is not whether Global REITs should be held in a taxable or tax-deferred account, but rather what type of Global REIT structures are best held in each type of account (in regards to foreign withholding taxes) once you have made that decision.
 
  24/11/2013 5:28:16 PM
Amolak
Is your last sentence on which REITs are best held in RRSPs versus taxable accounts reversed?
 
  21/06/2013 11:08:09 PM
Aracely
I've used a TON of non-traded REITs and would also add that the fees on these babies are thugorh the roof. You'll want to get the low-down on all expenses before getting in.That said, I love the upside of zero stock market fluctuation over the next few years, as long as you're willing to see it as a long term investment.
 
  19/02/2013 11:36:28 AM
Justin Bender
@Que - I generally recommend global diversification for the equity and REIT portion of investor's portfolios. I consider foreign currency to be another diversifier within the overall portfolio.

The foreign withholding tax information was found through the company's financial statements posted by the U.S. Securities and Commission Edgar database. It is buried, but available to the public.
 
  13/02/2013 5:58:05 PM
Que
Where did you find the foreign withholding taxes for RWO?
 
  13/02/2013 5:14:20 PM
Que
Justin, What is your take on 'currency risk' vs global diversification? When would you want to go global instead of staying in Canada?
 



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