Your RRSP Is Exempt From US Withholding Tax. Your Canadian S&P 500 ETF Is Not.
A Canadian who holds a TSX-listed S&P 500 ETF inside an RRSP has usually been told the tax-efficient thing is done, on the strength of a rule that is true: an RRSP is exempt from US withholding tax. The exemption is real, and it is written into the Canada-US tax treaty. It attaches to the RRSP. It does not attach to the fund. iShares’ own audited statements for 2025 show four of its Canadian-listed US-equity funds paying almost exactly 15% of every dollar of dividend income they received, and for a holder in an RRSP or a TFSA, none of it comes back.
The Exemption Attaches to the Plan, Not to the Fund
Start with the rate. The Canada-US tax convention, signed on September 26, 1980 and amended five times since, most recently on September 21, 2007, sets out in Article X, paragraph 2(b), that the United States may tax a dividend paid to a resident of Canada at “15 per cent of the gross amount of the dividends in all other cases.” That is the treaty rate on American dividends crossing the border. It is a withholding tax, not a cost of fund management, and nobody is doing anything wrong when it is charged.
The relief sits in Article XXI, paragraph 2, and the wording is the whole argument:
“Subject to the provisions of paragraph 4, income referred to in Articles X (Dividends) and XI (Interest) derived by a trust, company, organization or other arrangement that is a resident of a Contracting State, generally exempt from income taxation in a taxable year in that State and operated exclusively to administer or provide pension, retirement or employee benefits shall be exempt from income taxation in that taxable year in the other Contracting State.”
There are two tests and both have to be met. The arrangement must be generally exempt from income tax at home, and it must be operated exclusively to administer or provide pension, retirement or employee benefits. An RRSP clears both. A fund listed on the TSX that anybody can buy fails the second. How much of a US dividend a given account ultimately keeps is a question with a different answer in each one, worked through account by account in how each account is taxed on investment income. The question here sits one level below that: what happens to the dividend before it ever reaches the account.
The treaty does contemplate pooled vehicles, and it drew the line narrowly. Paragraph 3 extends the exemption to an arrangement “operated exclusively to earn income for the benefit of one or more of the following: (a) an organization referred to in paragraph 1; or (b) a trust, company, organization or other arrangement referred to in paragraph 2”. Paragraph 1 is charities and similar bodies, and paragraph 2 is the pension arrangements above. A pooled fund qualifies only if it exists exclusively for those holders, which a retail ETF sold to anyone with a brokerage account is not.
The US side reads it the same way. Treasury’s Technical Explanation of the 2007 protocol, at printed page 40, restates paragraph 2 as applying to an arrangement “operated exclusively to administer or provide pension, retirement or employee benefits or benefits for the self-employed under one or more funds or plans established to provide pension or retirement benefits or other employee benefits”, exempt “if the income of such organization or other arrangement is generally exempt from taxation for that year in the Contracting State in which it is resident.”
What the Audited Statements Show
That is the theory. The numbers are in the 2025 annual financial statements for the iShares equity funds, audited, for the year ended December 31, 2025. Two lines per fund do all the work: “Dividend income” under income, and “Withholding taxes” under taxes.
| Ticker | Fund | Dividend income | Withholding tax | Share | 2024 share | Management fee |
|---|---|---|---|---|---|---|
| XUS | iShares Core S&P 500 Index ETF | $125,592,199 | $18,838,830 | 15.00% | 15.00% | $5,325,898 |
| XSP | iShares Core S&P 500 Index ETF (CAD-Hedged) | $158,116,057 | $23,717,408 | 15.00% | 15.00% | $6,843,242 |
| XUU | iShares Core S&P U.S. Total Market Index ETF | $46,984,838 | $7,013,370 | 14.93% | 14.93% | $1,684,552 |
| XMH | iShares S&P U.S. Mid-Cap Index ETF | $7,685,208 | $1,152,781 | 15.00% | 15.00% | $587,763 |
| XIC | iShares Core S&P/TSX Capped Composite Index ETF | $459,039,320 | $124,749 | 0.03% | 0.01% | $9,574,129 |
Figures from the Statements of Comprehensive Income at printed pages 111 (XUS), 116 (XSP), 133 (XUU), 337 (XMH) and 145 (XIC), with the 2024 comparatives in the adjacent column on each of those pages.
The precision is worth dwelling on. At XUS and XMH, 15% of reported dividend income rounded to the dollar equals the withholding figure the statements report, to the dollar. At XSP the two are one dollar apart. XUU came in at 14.93%.
Each of those statements sets the 2024 comparative beside the 2025 figure, and the 2024 column says what the 2025 column says, so this is not an artifact of one year. XUS withheld $15,064,386 on $100,429,239 of dividend income in 2024, 15.00% again. XUU’s 14.93% is the same in both years, which makes it a stable feature of that fund rather than a loose end. XSP, the CAD-hedged version of the index XUS tracks, paid 15.00% in both years alongside the unhedged fund: currency hedging makes no difference to the withholding.
XIC is the control, and it is the reason this cannot be explained away as something funds simply do. Same issuer, same kind of trust, same fiscal year, Canadian stocks instead of American ones: 0.03% of dividend income. The 15% is not a cost of being a fund. It is the cost of owning American dividends through one. Which funds on the Canadian shelf hold US equities at all is the next thing to check, and our Canadian ETF page is the place to start.
Set the withholding beside what the funds charge to run the money and the scale lands. On our arithmetic across those two reported lines, withholding ran from 1.96 to 4.16 times the management fee across the four US-equity funds.
The Cost to an XUS Holder, and Why the MER Does Not Carry It
XUS held net assets of $10,723,348,211 on December 31, 2025 and $8,673,561,185 a year earlier, per the Statements of Financial Position at printed page 110. Averaging the two year-ends gives $9,698,454,698, and the rest of this paragraph is our arithmetic on that base. The $18,838,830 of withholding tax works out to 0.1942% of net assets, or $19.42 a year per $10,000 held. The fund’s MER, from its 2025 annual management report of fund performance, is 0.09%, which is $9.00 on the same $10,000. The withholding alone, at roughly 0.19% of net assets, was larger than the fund’s entire reported MER.
That 0.1942% is not a fixed property of a US-equity fund, and staying on the same base and the same arithmetic shows why. XUS’s $125,592,199 of dividend income against $9,698,454,698 is a dividend yield of 1.2950%, and 15% of 1.2950% is 0.1942%, the withholding figure exactly. The drag is 15% of whatever the fund yields, so it moves with the yield rather than sitting at 0.19% for every US fund on the shelf.
The MER does not include the withholding tax, and the statements let you show that rather than take it on faith. XUS reported total expenses of $5,350,009 for 2025 at printed page 111. Add the $18,838,830 of withholding tax, and the combined figure against those same average net assets is 0.2494% on our arithmetic. A fund reporting 0.09% is plainly not counting the withholding tax in it. Nothing is being concealed. The expense ratio measures expenses, and this is a tax, which is why it has to be looked for separately.
Holding a US Fund Inside the Canadian One Does Not Help
The obvious hope is that structure fixes this, and the portfolio schedules close it off. At printed page 114, 99.9% of XUS, $10,716,602,867 of fair value, sits in a single holding: the US-listed iShares Core S&P 500 ETF. XUU, at printed page 137, holds 97.7% in US-listed iShares funds with a small tail of individual US stocks held directly.
XUU is the stronger of the two cases, because it reaches American dividends by both available routes inside one Canadian trust: US-listed funds for almost all of it, and US shares registered to the fund itself for the tail. Holding the shares directly did not change the outcome, and its withholding still came to 14.93% of dividend income in both 2025 and 2024.
So one fund owns a US fund, the other owns US funds plus US shares, and both paid the treaty rate. Wrapping American dividends in a Canadian trust is what triggers the withholding, whatever that trust holds.
Where the Choice of Wrapper Changes the Answer
RRSP, RRIF, LIRA and the rest of the retirement family. The account itself clears Article XXI(2). Dividends from US shares and from US-listed funds reach it without the 15%. Dividends arriving through a Canadian-listed wrapper have already been taxed one level down, inside the fund, before the account ever sees them. This is the only account type where the choice of wrapper is worth real money.
TFSA. The 15% is charged either way. A TFSA is exempt from Canadian tax, so it clears the treaty’s first test, and it is a savings account rather than an arrangement operated exclusively to administer or provide pension, retirement or employee benefits, so it does not clear the second. Buying the US-listed fund directly in a TFSA changes nothing about the withholding, which means the convenience of the Canadian-listed version costs nothing there.
Non-registered. Here, unlike in a registered account, there is Canadian tax payable on the income for a foreign credit to come off, which is the distinction Article XXIV, paragraph 2(a) turns on. US tax “shall be deducted from any Canadian tax payable in respect of such profits, income or gains”, subject to “the provisions of the law of Canada regarding the deduction from tax payable in Canada of tax paid in a territory outside Canada”. What the fund itself undertakes to report is narrower: iShares states in its financial-highlights footnote that “The tax characteristics of distributions are reported annually by the Fund to CDS Clearing and Depository Services Inc. (“CDS”). CDS makes this information available to brokers who provide it to unitholders through standard tax reporting.”
That conditional clause in Article XXIV is also the second half of why the loss is permanent inside a registered account. A credit is a deduction from Canadian tax payable on that income, and inside an RRSP or a TFSA there is no Canadian tax payable on that income for it to come off.
The Cost on the Other Side Is Currency
The structural fix in an RRSP is to hold the US-listed fund, which means holding US dollars, and converting Canadian dollars at a broker’s retail exchange rate carries a cost of its own. The two costs do not run on the same clock. The withholding, 0.1942% of net assets on the arithmetic above, is charged again every year the position is held. A conversion is paid when you convert. So the answer turns on how long the position is held, which makes the conversion the part to price before the trade, and the cheap way to do it is set out in our walkthrough of Norbert’s gambit for converting CAD to USD.
The familiar rule was never wrong. It was just describing the account, and the account is not the thing that receives the dividend.
Disclaimer: The content on bestcanadianstocks.ca is for informational and entertainment purposes only and does not constitute financial advice. Past performance is not indicative of future results. Always consult a qualified financial advisor before making investment decisions. Article X(2)(b), Article XXI(2), Article XXI(3) and Article XXIV(2) are quoted from the consolidated Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital, published by the Department of Finance Canada, signed September 26, 1980 and amended most recently on September 21, 2007. The restatement of Article XXI(2) is from the United States Department of the Treasury Technical Explanation of the Protocol done at Chelsea on September 21, 2007, printed page 40. Every fund figure is a line item from BlackRock Canada’s 2025 Annual Financial Statements for the iShares equity funds, audited, for the year ended December 31, 2025, at the printed pages named in the article, and the 0.09 percent management expense ratio and the CDS reporting footnote are from the iShares Core S&P 500 Index ETF 2025 annual Management Report of Fund Performance, CAD units. Treasury and Finance Canada documents retrieved October 14, 2026. The percentages, the withholding to management fee multiples, the 0.1942 percent, the 0.2494 percent and the per ten thousand dollar figures are our own arithmetic on those reported lines, with the net asset base taken as the average of the two year-end figures the statements report.
