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Investor Education Heinzl’s mailbag: The tax drag of one-stop ETFs, where to hold your Brookfield units, and more

I’m considering the Vanguard Balanced ETF Portfolio (VBAL), which is one of Vanguard’s all-in-one ETF products. Question: Do I pay two management fees – one on VBAL and another on the seven underlying exchange-traded funds it owns?

No. With ETFs that hold other ETFs, you pay only one management fee. VBAL’s management fee is 0.22 per cent. Including tax, the management expense ratio is 0.25 per cent.

Is there withholding tax on the U.S. stocks in VBAL?

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Because VBAL is a Canadian-listed ETF, there is 15-per-cent U.S. withholding tax on dividends from U.S. stocks in the underlying portfolio. This tax applies regardless of the type of account in which you hold VBAL and is not recoverable in registered accounts. However, in a non-registered account you can generally claim a foreign tax credit for the amount withheld. Some tax may also be withheld on VBAL’s foreign bond and dividend income, but a majority could also be claimed as a foreign tax credit.

Justin Bender, a portfolio manager with PWL Capital, likes VBAL and Vanguard’s other asset-allocation ETFs because they provide a low-cost, single-fund solution for investors. He estimates that the total withholding tax drag on VBAL is about 0.19 per cent in a registered account, or just 0.02 per cent in a non-registered account, after foreign tax credits. Even with the tax drag, “I think it’s still a great option for do-it-yourself investors,” he said. (Mr. Bender took a detailed look at Vanguard’s asset-allocation ETFs, here.)

I’d like to give my adult children a sum of money to invest. Under the attribution rules, do I have to pay taxes on the income they earn?

No. If you gift money to an adult child, there is no attribution of the income back to you. However, if you gift money to a minor child (or grandchild, niece or nephew) under the age of 18, the income (such as dividends or interest) is attributed back to you. However, any capital gain or loss is taxed in the hands of the minor child.

I own a mutual fund and, even though I didn’t sell any units, there is a capital gain reported on my tax slip. When I sell my units in the future, how can I get credit for the tax already paid?

With mutual funds and ETFs, there are two types of capital gains – those triggered by the fund internally when it sells securities that have risen in value, and the gain (or loss) you report when you ultimately sell your units. Your share of the fund’s own net capital gains during the year is reported on your T3 slip and taxed in your hands. You cannot claim these gains as a credit to offset future capital gains when you sell, as the two types of capital gains are distinct. However, if all or a portion of the fund’s capital gains were reinvested in the fund – which is often the case – you should add the amount of these reinvested distributions to your adjusted cost base. This will reduce your capital gain when you ultimately sell and effectively prevent you from being taxed twice. (Google “Heinzl reinvested distributions” for more information on this topic.)

Brookfield Infrastructure Partners LP (BIP-UN) declares dividends in U.S. dollars. Do I still get the Canadian dividend tax credit? And is it better to hold the units on the U.S. or Canadian side of my brokerage account?

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BIP is a Bermuda-based limited partnership and its distributions do not qualify for the Canadian dividend tax credit. For 2018, its distributions consisted of Canadian interest, foreign dividends and interest, other investment income and capital gains. (The tax characteristics of BIP’s distributions are provided on a T5013 slip issued to unitholders and are also listed on BIP’s website under “tax information.")

Although BIP (and other Brookfield Asset Management Inc. companies) declare distributions in U.S. dollars, if you hold the units on the Canadian side of your account you will receive the distribution in Canadian dollars. The good news is that, because the Canadian dollar amount is determined using the Bank of Canada’s closing exchange rate on the record date of the distribution, you will avoid the stiff currency conversion costs that most brokers charge. However, if you hold BIP on the U.S. side of your account, you may face these currency costs because some brokers convert the distribution from Canadian dollars back to U.S. dollars. So, in such cases, it’s better to hold BIP units on the Canadian side of your account. (Thanks to reader A.E. who blogged about this here.)

One final note on BIP: Several readers have reported receiving a U.S. Schedule K-1 tax-form and are wondering whether they have to file a U.S. return. BIP’s website indicates that Canadian unitholders can, in many cases, ignore the Schedule K-1. “We are required to use reasonable efforts to send a Schedule K-1 to all unitholders (not just U.S. residents). Consequently, Canadian unitholders may receive a Schedule K-1 in addition to Form T5013. In general, Canadian and Australian resident unitholders may disregard the Schedule K-1 (unless for example, they are a U.S. citizen),” BIP says. If you are unsure of anything, consult a tax professional.

E-mail your questions to jheinzl@globeandmail.com.

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