Winter 2024

Finding Efficiency in International Equity Selection

Jan. 18, 2024

With numerous ways for Canadian investors to gain an exposure to EAFE and International markets, Daniel Stanley, Director of Institutional & Advisory, Ontario, argues the most efficient is through a homegrown ETF solution.

Most Investment Counsel Portfolio Managers (ICPM) and Family Offices (FO) can boast of strong stock selection capabilities in Canadian and U.S. markets, complementing this with American Depository Receipts (ADRs) and other tools for diversification into EAFE and international exposures. 

Using Exchange Traded Funds (ETFs), however, can improve execution while broadening exposure. ETFs trade at tighter spreads and can also provide operational effectiveness by simplifying Know-Your-Product requirements — effective Compliance on a single instrument rather than a host of individual exposures and companies.

There are three ways investors can access international equities in Canada via an ETF. The first method is through a U.S.-listed ETF that provides exposure to international equities. The second route is a Canadian-listed ETFs that wraps a U.S.-listed ETF that provides exposure to international equities. The third option is a Canadian-listed ETF that holds the international securities directly. 

Three Ways to Gain EAFE/​International ETF Exposure

ETF Structure

U.S.-Listed ETF

Canadian Wrap

Canadian Direct

Withholding Tax

Two Layers

Two Layers

One Layer


More Efficient

More Efficient

Less Efficient

FX Cost

Client Rate

Institutional Rate

Institutional Rate

Source: BMO Global Asset Management.

Tax Implications

Investors will sometimes use U.S.-listed ETFs, especially those that have been around for a long time, such as the iShares MSCI EAFE ETF/​iShares Core MSCI EAFE ETF, without realizing the tax implications, including U.S. estate and withholding taxes. 

The below details the tax treatment of U.S.-listed ETFs held in Canada.

U.S. Estate Taxes

  • High-net-worth Canadian residents with US$13.61M1 in worldwide assets in 2024 and U.S. assets with a value that exceeds US$60,000 may be required to pay U.S. estate tax on the value of their U.S. assets. They would certainly be required to file for US estate taxes, possibly incurring professional fees to do so.
  • Gross assets are defined as real property, investments, jewelry, equity membership in golf, tennis, yacht or ski clubs and the face value of non-Canadian life insurance policies. U.S. assets are defined as real property, equity membership in golf, tennis, yacht or ski clubs and US-listed securities. 
  • If the value of your worldwide estate is not greater than US$13.61 million, you will not be subject to U.S. estate tax. However, if the value of your U.S. assets is greater than US$60,000, you must file a U.S. estate tax return even though you will not have an estate tax liability. 
  • The tax rate starts from 18% and moves up to 40% for investors with U.S. assets exceeding US$1 million. The important distinction is that the tax is assessed on assets, not on gains, so the impact can be considerable.
  • The Canada-U.S. Tax Treaty allows for the estate tax liability to be reduced by claiming a unified credit’ and a marital credit’. 

Note: Most U.S. equity, U.S. property, and some U.S. debt securities will be subject to estate tax. 

Wealthy Canadians looking to invest in the most efficient manner might consider investing in a Canadian-listed ETF or mutual fund. Canadian mutual funds and Canadian-listed ETFs (even if they invest in U.S. or global equity or debt securities) are generally not considered to be U.S. assets for estate tax purposes.2

Withholding taxes are another important tax consideration for Canadian ICPMs and FOs to be aware of when considering a U.S.-listed ETF to gain an international or EAFE exposure. A Canadian investor in the iShares MSCI EAFE ETF, for example, would see their performance diminished by nearly a third of a percentage point under the example below.

Withholding Tax Example3

iShares MSCI EAFE ETF (EFA) (U.S.-Listed ETF): When held by a Canadian resident in a non-registered account, two withholding taxes apply in this scenario:

  1. The withholding tax imposed by the U.S. which are recoverable – 15%.
  2. The withholding tax imposed by foreign countries apply and are not recoverable – 12-14%.

Assuming 15% withholding tax on foreign dividends, Canadian investors in EFA (distribution yield of 2.18% as of December 29, 2023) would lose approximately 32.7bps.

SOLUTION: Because the BMO MSCI EAFE Index ETF (Ticker: ZEA) is a Canadian-listed ETF and generally holds its underlying securities directly, foreign tax credits can be claimed to offset the foreign withholding taxes.

IMPORTANT: Because the majority of BMO ETFs hold their underlying securities directly, foreign tax credits can be claimed to recover any applicable withholding taxes in a non-registered account.

Streamlined Conversion

Our portfolio management team at BMO ETFs has a track record of working with institutional clients to convert U.S.-listed international ETFs into ZEA through a very streamlined process that benefits Canadian clients by allowing the delivery of the U.S.-listed ETF in exchange for ZEA.

ZEA allows clients to benefit on three levels. The first is because the ETF holds the underlying securities directly, and is thus more tax-efficient. Secondly, the BMO ETFs’ process allows the U.S.-listed ETF to be delivered for creation or redemption and therefore very liquid. Lastly, the BMO ETF trades in Canadian dollars and benefits from institutional foreign-exchange rates. On a relative basis, ZEA has outperformed peer funds like iShares Core MSCI EAFE IMI Index ETF and iShares Core MSCI EAFE ETF in recent years. 

Source: BMO Global Asset Management, December 31, 2020 – December 29, 2023.4

To sum up, we would argue that clients who are relying on ADRs and other securities to achieve their diversification needs into EAFE and international markets are better equipped to make those allocations through a Canadian-listed ETF. And within that same vein, once tax implications are taken into consideration, a Canadian-listed ETF offers the most efficient means to do so.

Please contact your BMO ETF Specialist for more information. Our Portfolio Managers are also available to help with trading insights. They can also be reached at 18777417263.

1 BMO Private Banking.

2 As long as the Canadian funds are treated as corporations for U.S. tax purposes.

3 Example is for illustrative purposes only and should not be construed as legal or tax advice. Please consult your own legal and tax advisor about your own situation.

4 ZEA Annualized Performance, BMO Global Asset Management, Bloomberg, as of December 292023





Since Inception (February 102014)








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