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Do you know what Canadian depository receipts are for? This explainer reveals the pros and cons, as well as the costs and more
Canadian depository receipts (CDRs) are a purely Canadian asset product. CDRs are designed to allow investors to trade foreign stocks in Canadian dollars on a Canadian stock exchange. This eliminates the cost of currency conversion, which is typically 1% or more.
How do CDRs work? You buy and sell them like stocks, with similar commissions and no management fees. Because they trade in Canadian dollars, you won’t have to worry about the impact of currency fluctuations on your investment returns. And you can buy CDRs in fractional shares, making high-priced stocks more accessible.
One disadvantage of CDRs is that dividends are not eligible for the dividend tax credit (intended to avoid double taxation, as corporate profits have already been taxed). And, like other U.S. dividends paid to Canadian investors, U.S. withholding tax will be charged when these securities are held in non-registered accounts.
Another downside is that although CDRs do not charge management fees, certain operating costs like currency hedging are embedded in their structure, costs you do not pay if you purchase the underlying security on its home stock exchange.
Example:“When Xander bought CDRs to add U.S. exposure to his portfolio, he put them in his RRSP account, to avoid paying U.S. withholding tax on his dividends.”
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