The RRSP Fix for Withholding Tax Stops at the US Border. XAW Pays Tax at Three Levels.
This morning we showed that an RRSP’s exemption from US withholding tax attaches to the account, not to the fund, which is why a TSX-listed S&P 500 ETF still pays the treaty rate of 15% on its dividend income. The obvious response is to hold the US-listed version of the fund instead, inside the RRSP, and collect the exemption that way. That fix works, but it works for exactly one country. Foreign withholding tax on everything outside the United States is a different problem, and the audited numbers behind the iShares global and regional equity funds show it is not a small one.
Why the fix stops at the US border
The exemption this morning’s piece relied on comes from the Canada-US tax treaty. That is also why it matters what an RRSP actually is: an RRSP is a registered retirement savings plan, and this morning’s piece set out the two-part test for the treaty’s pension exemption and why an RRSP meets it. The US Treasury’s Technical Explanation of the 2007 Protocol to that treaty sets out the exemption’s reach: it is “exempt from taxation on dividend and interest income arising in the other Contracting State in a taxable year.” The other Contracting State, in a Canada-US treaty, is the United States.
The exemption reaches income arising in the United States, and says nothing about a dividend paid by a company in Tokyo or a company in Sao Paulo, because those dividends do not arise in the United States. What the funds’ own audited statements show is that foreign withholding tax was in fact charged on these funds’ non-US dividend income in 2025.
What the statements show
iShares’ 2025 Annual Financial Statements report two lines for each fund: dividend income, and the withholding taxes and foreign taxes charged against it. For the S&P 500 fund, XUS, that is $125,592,199 of dividend income and $18,838,830 of withholding tax, 15.00%, the figure this morning’s piece already walked through. The other three funds tell a different story:
| Ticker | Fund | Page | Dividend income | Withholding tax | Foreign taxes | Total tax as share of dividend income |
|---|---|---|---|---|---|---|
| XUS | iShares Core S&P 500 Index ETF | 111 | $125,592,199 | $18,838,830 | none | 15.00% |
| XEF | iShares Core MSCI EAFE IMI Index ETF | 20 | $382,875,957 | $38,537,436 | $83,570 | 10.09% |
| XEC | iShares Core MSCI Emerging Markets IMI Index ETF | 67 | $68,685,022 | $7,626,635 | $4,594,525 | 17.79% |
| XAW | iShares Core MSCI All Country World ex Canada Index ETF | 15 | $53,499,370 | $3,938,600 | none | 7.36% |
XAW’s 7.36% here is a fund-of-funds number, not a sign the single-ticket fund is the most tax-efficient of the four. It is entirely US withholding on distributions out of XAW’s own US-listed sleeves, and its denominator includes dividend income arriving from XEF and XEC, on which nothing could be withheld again at XAW’s level. The section below, on how XAW pays tax at three levels, takes it apart.
Every other figure in that table comes from the iShares 2025 Annual Financial Statements, at the printed pages shown. XEF, the developed-markets fund covering Europe, Australasia and the Far East, lost 10.07% of its dividend income to withholding tax alone, 10.09% once the small foreign-tax line is added. XEF also carries a second income line, “Non-cash dividends – unaffiliated,” of $18,931,148, which that 10.07% excludes; on the larger denominator of $401,807,105, XEF’s withholding works out to 9.59%. XEC’s figure looks far larger, at 17.79%, and its withholding tax alone is 11.10%. The cost shows up against total expenses too: XEC’s total taxes of $12,221,160 ran 1.72 times its total expenses of $7,106,046, XEF’s total taxes of $38,621,006 ran 1.26 times its total expenses of $30,634,562, and XUS’s total taxes of $18,838,830 ran 3.52 times its total expenses of $5,350,009.
XEC’s largest number is not dividend withholding
That 17.79% figure on XEC deserves a flag before it gets compared to anything else. It is not capital gains tax on the fund’s trading: XEC’s net realized gain on sale for 2025 was a loss of $118,846. The statements’ note on page 403 explains why this line exists at all: certain capital gains taxes are “determined on a self assessment basis” and so “may not be deducted by each Fund’s broker on a ‘withholding’ basis,” and are shown instead as foreign taxes. What that line actually holds is a deferred liability: page 66 carries “Deferred foreign capital gain tax” of $19,130,320 at December 31, 2025, against $15,282,450 a year earlier. The same note says the funds “applied the most likely amount method in measuring uncertain tax” liabilities, and that XEC “estimated these taxes at … $19,130,320.” The $4,594,525 foreign-taxes line in the table is the year’s movement in that accrued estimate on the fund’s unrealised gains, and the statements add plainly that “the estimated value could differ from the amount ultimately payable.” That makes XEC’s 17.79% a different kind of number than XUS’s 15.00%: one is cash withheld at source, the other is management’s current estimate of a liability not yet settled, and the two should not be read as a straight line-for-line comparison just because one is larger than the other.
The adjacent column in each of these statements, for 2024, separates the structural number from the volatile one. Withholding as a share of dividend income barely moves year to year: XEC was 11.10% in 2025 against 11.08% in 2024, XEF was 10.07% against 9.43%, and XAW was 7.36% against 7.62%. XEC’s foreign-taxes line swings far more, $4,594,525 in 2025 against $6,410,021 in 2024. One of these is a structural constant. The other is an estimate that moves.
The reclaims sit on a separate line, not netted into the tax expense
Page 403 also sets out how the funds book both sides. Income and capital gains “are recorded on a gross basis and the related withholding taxes are shown as a separate expense in the statements of comprehensive income,” and, separately, “The Funds file withholding tax reclaims in certain jurisdictions to recover a portion of amounts previously withheld.” The withholding tax in the table above is that gross expense, not a figure already net of what the funds expect to recover. The reclaims show up on their own lines: XEF booked $1,075,317 of “Foreign withholding tax claims” as income in 2025, against $39,879 in 2024, and carries a balance-sheet receivable, “Tax reclaim on dividends,” of $24,915,891 at December 31, 2025, up from $17,317,216 a year earlier. XEC’s equivalent receivable is far smaller, $55,684 against $59,805, and XAW and XUS carry no such asset at all. XEF’s $24,915,891 is the fund’s own measure of what it expects to get back; it sits alongside the $38,537,436 of withholding tax already in the table, not subtracted from it.
None of this reaches the holder directly. Inside a registered account, the withholding was paid by the fund, one level below the account, so it is already gone before any distribution reaches the account and no holder’s tax return ever sees it. A foreign tax credit exists for foreign tax a taxable, non-registered holder pays directly on their own income; it does not reach tax a fund already paid and reported.
XAW pays tax at three levels
XAW, the single-ticket global fund, is where this gets structural rather than just a bigger percentage. Its own Schedule of Investment Portfolio, at printed page 18 as at December 31, 2025, shows XAW is 99.6% other ETFs and holds nothing else of substance: 12.0% in Emerging Markets Equities, which is XEC; 23.3% in International Equities, which is XEF; and 64.3% in United States Equities, split across four US-listed iShares funds. A reader checking the Canadian ETF shelf for a single global fund is buying a Canadian trust that holds two more Canadian trusts, XEC and XEF, alongside four American ones.
That structure means XAW’s holder pays tax at three levels, and only one of them shows up on XAW’s own income statement. The $3,938,600 of withholding tax on XAW’s own statement comes from the US-listed sleeves distributing into it; tax paid inside XEF and XEC never reaches XAW’s income statement at all, because it is taken before those funds distribute and is absorbed into their unit value instead.
Using each fund’s full-year taxes against the average of its two year-end net asset figures (XAW’s average net assets were $3,252,126,625, built from $3,635,616,651 and $2,868,636,599 at the 2025 and 2024 year-ends on page 14; XEF’s were $12,919,616,780, from $16,601,662,373 and $9,237,571,188 on page 19; XEC’s were $2,497,034,906, from $3,086,852,644 and $1,907,217,167 on page 66), and multiplying by XAW’s holding weight in each as at December 31, 2025, gives this layer-by-layer picture. This is our own arithmetic, built on a mix of a point-in-time weight and a full-year tax figure, not a number the statements report directly. Withholding tax alone, and withholding plus XEC’s accrued foreign capital gains tax estimate, are different totals, so both columns are below:
| Where the tax is paid | Withholding tax only | Including foreign capital gains taxes |
|---|---|---|
| XAW’s own income statement | $12.11 | $12.11 |
| Inside XEF, at 23.3% of XAW | $6.95 | $6.97 |
| Inside XEC, at 12.0% of XAW | $3.67 | $5.87 |
| Total | $22.73 | $24.95 |
Set beside the $19.42 per $10,000 this morning’s piece found on XUS, withholding only, the global fund’s $22.73 of withholding alone is already higher. The two funds’ accrued estimates of foreign capital gains tax add another $2.22 on top, almost all of it XEC’s, for an all-taxes figure of $24.95, with the reminder that both XAW totals blend a snapshot weighting with a full year of tax.
Of that $22.73, $12.11 is charged at XAW’s own level, on distributions out of the four US-listed sleeves, which is the layer this morning’s piece showed an RRSP escapes by holding those US-listed funds directly. The other $10.62 is withheld inside XEF and XEC, and no choice of wrapper touches it.
One more thing the dividend-income figure on page 15 makes possible to check. $3,938,600 divided by 0.15 is $26,257,333, which is 49.1% of XAW’s $53,499,370 of dividend income. XAW’s only non-Canadian-listed holdings are its four US-listed funds, so 15% is the rate that applies to them, and that arithmetic says a little under half of XAW’s dividend income originated in the United States and was taxed at 15% before it ever reached XAW.
Tax against the fee the reader actually shops on
On the same per-$10,000 basis as the table above, the management fees a holder of XAW is paying across the three funds’ own statements come to $19.23: XAW’s own $10.88, plus XEF’s $22.15 weighted to its 23.3% share of XAW, which is $5.16, plus XEC’s $26.60 weighted to its 12.0% share, which is $3.19. That is our arithmetic on the same mixed basis as the tax table above, and it comes in under the $22.73 of withholding tax measured there. The cost that does not appear on any fund’s summary page is larger than the cost that does.
What this leaves the reader with
Inside an RRSP, the US sleeve is where the wrapper choice is worth real money, and this morning’s piece is where that argument is made in full. Outside the United States, the measured tax is present at every wrapper looked at here, and the audited statements show it being charged directly on the funds. Splitting a one-ticket global fund like XAW into its separate regional sleeves is a real decision with a cost on the other side of the ledger too: more funds to track and rebalance, more trades, and for the US sleeve specifically, the US-dollar considerations this morning’s piece already dealt with. None of this is a case for selling a particular fund or for assuming one structure beats another; it is a measurement of where the tax actually falls, which is the part a fund’s one-line management fee does not show.
Fund figures are from audited statements for the year ended December 31, 2025, data as of October 14, 2026.
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. 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: XAW pages 14, 15 and 18, XEF pages 19 and 20, XEC pages 66 and 67, XUS pages 110 and 111, and the income taxes note at page 403. The scope of the treaty exemption is quoted from the United States Department of the Treasury Technical Explanation of the Protocol done at Chelsea on September 21, 2007, printed page 40, retrieved October 14, 2026. The percentages, the tax to expense multiples, the per ten thousand dollar layer figures and the implied share of US-sourced dividend income are our own arithmetic on those reported lines, with each fund’s net asset base taken as the average of the two year-end figures the statements report and XAW’s sleeve weights taken as at December 31, 2025.
