Offshore ETFs: Not Reporting or Distributing :S

mike_302

As the title suggests, I just discovered that all the ETFs I still hold in my Canadian account are not reporting or distributing funds... They're Vanguard funds traded on the Toronto Stock Exchange, but they're not listed as reporting or distributing funds... This means that if I sell any of the funds to maintain a balanced portfolio in my Canadian account, and I am paying tax in the UK on the arising basis, then my gains are not capital gains: they're income.

How do I fix this situation? Surely I can maintain a Canadian ETF portfolio and not pay income tax on all the gains! ...

bostonerimus

If you are taxed on an arising basis in the UK you are going to have to pay UK tax on the dividends and any capital gains at your marginal income tax rate, you might also be liable to Canadian tax....check the tax treaty.

If these ETFs are by any chance the US Vanguard ETFs then they are HMRC reporting. Check the CUSIP numbers.

mike_302

They're not the US ones (at least, they're not the US based Vanguard ETFs - - there's one US-focussed ETF trading in Toronto; not reporting).

So I'm not resident in Canada for tax purposes, and 15% of my dividend income is already withheld by my brokerage for tax purposes. Are YOU able to tell me: is the calculation as simple as summing the total dividends paid I to my account, and reporting a 15% tax already paid when I fill in my self assessment? Or is there a lot more to it because it's an ETF? For the life of me, I can't get a straight answer from anyone. I know that there are some additional distributions going on that affect my the average cost basis of my position with the ETF, but that only matters when I sell the position I think... I am told by some that I have to account for other distribution history data reported by Vanguard.

If I'll pay tax at the marginal rate, I'll probably not touch these ETFs... The account distribution will just go like an unkept garden... It's not worth that tax hit!

System

I suspect that the tax on the account distribution is due whether you touch them or not.

mike_302

?? Why would I owe capital gains tax on something I haven't sold to make any gains on yet?

bostonerimus

Canada can tax you at up to 15% on dividends, see article 10 of the treaty. You can then claim the Canadian tax you pay as a foreign tax credit on your UK self assessment. As these are non HMRC reporting ETFs you'll pay tax at your marginal income tax rate.

What are the "additional distributions: you mention are they capital gains distributions. If so you'll also have to pay UK tax on those, and you'll have to take a foreign tax credit on your Canada tax return.

mike_302

To be clear, when I said redistribution, I meant I would rebalance the portfolio on a regular basis by buying some additional ETF shares if a certain sector is below a target proportion of my portfolio, and sell other ETF shares if that sector is overrepresented.

bostonerimus

mike_302 wrote: »

?? Why would I owe capital gains tax on something I haven't sold to make any gains on yet?

Your fund will pay dividends and might also make capital gains distributions (I think Canada is similar to the US in that funds sometimes make capital gains distributions). You have to pay tax on those each year.....unless you are inside some tax free wrapper. Are these funds inside something like a RRSP?

mike_302

What are the "additional distributions: you mention are they capital gains distributions. If so you'll also have to pay UK tax on those, and you'll have to take a foreign tax credit on your Canada tax return

Yes, Capital Gains Distributions, as well as several others like "Foreign Income", "Foreign Withholding Tax", and "Other Income" -- you can see the table that breaks down the distribution for each of Vanguard's funds here: https://www.vanguardcanada.ca/individual/mvc/loadImage?country=can&docId=7587

These are reported for the full year, but some of the number are also broken down by month for each of the different funds, on the individual fund's page (e.g. for VAB, see teh distribution history section partway down the page here: https://www.vanguardcanada.ca/individual/mvc/loadImage?country=can&docId=7587)

The long-standing question: how do I use the different columns in these distribution history tables, when calculating the responses to my Self Assessment? Or am I just overcomplicating it if I can already easily calculate dividends paid to me and 15% withholding tax? Note: I also have a third party service that collects data from the Vanguard site and tracks the Return of Capital transactions as well, adjusting my average cost basis in a spreadsheet with each additional return on capital.

Are these funds inside something like a RRSP?

They aren't in an RRSP. But actually, even if they were, you should note that the UK stopped recognizing all Canadian and Australian tax wrappers as of 2015 and 2016... The reason hasn't been explicitly stated, but I understand it's because Canada and Australia let citizens access this money in certain cases, before the age of 55 which is the year the UK has set....

bostonerimus

You will have to take each type of income/gain and apply the treaty so that you pay the correct amount of tax to either Canada or the UK. The UK is going to be your primary tax authority in most cases......dividends are an exception as Canada gets first dibs on those........so you have to work out how much to pay each country and how much to claim as foreign tax credits in each country. Your tax rate in the UK will be your marginal income tax rate, but the rate in Canada is going to be determined by the treaty and Canadian domestic law. As you can see owning cross border pooled investments gets complicated and it's often hard to get two tax regimes to exactly mesh.

mike_302

The Canadian tax authority advised me that after I filed my last tax assessment, I would only ever have to file anything to the UK authorities. They said that any taxable capital from remaining funds would simply be taxed at the 15% rate, and that amount would be taken out automatically (as it has). So then, what does the HMRC need to know out of that table?