The Illusion of Domestic Simplicity
Marketing departments at major Canadian banks love to sell you "All-in-One" asset allocation ETFs listed on the TSX. They claim these funds provide global diversification with zero effort. While true on the surface, the internal plumbing of these funds tells a different story. When a Canadian ETF holds US-listed stocks, it often triggers a layer of non-resident withholding tax that is completely invisible to the retail investor.
This is particularly damaging in a Tax-Free Savings Account (TFSA). Because the IRS does not recognize the TFSA as a pension account, the 15% withholding tax on dividends is lost forever. You cannot claim a Foreign Tax Credit (FTC) for taxes paid within a TFSA or RESP. Over a 30-year investment horizon, this "leakage" can reduce your final portfolio value by tens of thousands of dollars compared to holding the underlying assets directly in a more tax-efficient manner.
Furthermore, the Management Expense Ratio (MER) of Canadian-listed ETFs is frequently higher than their US-listed counterparts. For example, a standard S&P 500 tracker in Canada might charge 0.08% to 0.10%, while the equivalent US-listed fund (like VOO or IVV) charges a mere 0.03%. While 0.05% sounds negligible, it represents a 60% increase in management costs for the exact same basket of stocks.