Canada faces pressure to shield Canadian ETF issuers as US managers roll out tax‑savvy clones
A US$11tn US asset manager’s tax‑saving structure is going mainstream – and that shift could quietly siphon more client money out of Canada’s ETF ecosystem and into Wall Street products.
In a recent special report in The Globe and Mail, Eli Yufest, executive director of the Canadian Exchange Traded Funds Association, argued that a new US Securities and Exchange Commission (SEC) decision could become a serious problem for Canada’s capital markets if policymakers ignore it.
He framed it as a threat not just to the growth of the domestic ETF industry, but to Canada’s broader economic sovereignty over the next decade or two.
What changed in the US
For more than 20 years, Vanguard held a US patent on an ETF share‑class structure that let it run a mutual fund and an ETF off the same underlying portfolio.
According to coverage in The Globe and Mail, this setup delivered major economies of scale and tax benefits and helped cement Vanguard’s position as one of the dominant global asset managers.
CNBC reported that Wall Street saw this patent as “critical to Vanguard’s success because it saved an enormous amount of money in taxes.”
CNBC explained that the structure lets investors access the same portfolio through two wrappers – a mutual fund and an ETF – with “the same managers and the same holdings.”
Morningstar describes it as a way for ETFs to exist as a separate share class within a mutual fund.
Ben Johnson of Morningstar told CNBC this could help “millions of investors reduce tax burdens” because ETF share classes “help improve the tax efficiency of the fund to the benefit of everybody.”
Vanguard’s patent expired in 2023.
Since then, The Globe and Mail reports that around 80 US asset managers have applied to add ETF share classes to their mutual funds.
Bloomberg also reported that roughly 80 more competitors are in the queue for approval, including nearly every major name in the business.
On September 29, the SEC approved the first such application from Dimensional Fund Advisors and, according to The Globe and Mail, opened the floodgates, with hundreds more likely to follow.
Bloomberg said the SEC has told other applicants to conform their filings to DFA’s, and that firms including BlackRock, Fidelity, T. Rowe Price and Franklin Resources are seeking permission to use the same structure.
Bloomberg reported that this model ports the famous tax efficiency of the younger structure to the older vehicle.
Yufest added that it could trigger a wave of new ETF launches, rewrite the tax and performance of countless mutual funds, and potentially erode the barrier that has until now largely locked ETFs out of the American retirement system.
BNY Mellon’s global head of ETFs, Ben Slavin, called the development “really a game changer” on CNBC’s ETF Edge.
According to Bloomberg, SEC Commissioner Mark Uyeda said that, for too long, the artificial divide between mutual fund and ETF share classes has limited investor choice, reduced operational efficiency, and resulted in suboptimal tax treatment.
He added that similar relief had long been held by a single asset manager.
Why this matters for Canadian flows and businesses
The core concern for Canadian wealth firms is not the engineering detail; it is the competitive gap and capital flight risk.
In his Globe and Mail piece, Yufest highlighted that Canadians already allocate more than 30 per cent of their ETF assets to US‑listed products.
He noted that if even a portion of the roughly 80 US managers in the queue add ETF share classes and roll out a couple of dozen products each, Canadian investors could suddenly see more than 1,000 new US‑domiciled ETFs on their platforms.
The share of Canadian ETF assets sitting in US‑listed funds would likely climb from there.
Yufest argued that every incremental dollar flowing into US‑listed ETFs weakens the domestic ecosystem.
It diverts fee revenue and activity away from Canadian managers, exchanges, custodians, trading desks and service providers, and ultimately erodes tax revenues, jobs and innovation capacity in this market.
Over time, a smaller home market leaves less money to invest in new product design and reduces competitive pressure among Canadian firms, which can narrow the menu of Canadian‑listed options available to your clients.
He also pointed out that Canada has been a leader in ETF innovation – from launching the first ETF to pioneering bond and bitcoin funds and active ETF strategies – but that US‑listed funds are built for American investors.
They are structured around US regulations, tax rules and retirement needs, and they do not necessarily align with Canadian investor protection standards or RRSP/TFSA realities.
The long‑term risk, Yufest warned, is that Canada becomes primarily a distribution market for US ETFs.
In that scenario, advisors rely increasingly on foreign‑listed products that sit outside the full reach of domestic regulators, and the Canadian ETF ecosystem risks being hollowed out over a 15–20‑year horizon.
The tax and policy levers on the table
For policymakers and industry advocates, the main levers identified are tax and regulatory alignment.
Yufest’s argument to policymakers centres on tax symmetry and regulatory consistency.
In his The Globe and Mail commentary, he urged Ottawa to restore a level playing field between Canadian‑domiciled funds and US mutual‑fund ETFs that can use the share‑class structure.
He pointed back to 2019 federal budget changes to the “allocation to redeemers” methodology.
Those rules limited the ability of certain Canadian ETFs and mutual fund trusts to defer capital gains, which reduced their tax efficiency for investors.
By contrast, comparable tax deferral tools remain available to managers of US mutual‑fund ETFs that now plan to add ETF share classes.
Yufest argued that Canada should not leave its domestic ETF providers structurally disadvantaged on after‑tax outcomes.
He also floated a “Maple Investment” TFSA – a separate, additional tax‑advantaged account that would hold only Canadian investments, including Canadian‑listed ETFs.
The idea is to nudge household savings toward domestic products, stimulate demand for Canadian listings and keep more capital circulating within the local economy.
Another suggestion was to zero‑rate sales taxes such as GST/HST on ETF management fees.
That would directly lower costs for Canadian investors while improving the competitiveness of Canadian‑domiciled funds versus foreign‑listed alternatives.
On the regulatory side, Yufest called on federal and provincial authorities to align distribution, sales practice and investor‑protection standards so that any ETF sold to Canadians – whether listed in Toronto or New York – meets the same basic rules.
He noted that Canadian issuers must, for example, provide French‑language materials and comply with domestic disclosure and suitability standards, while many US‑listed products available to Canadians do not face identical requirements.
Stronger coordination between Ottawa, the Canadian Securities Administrators and other regulators could help ensure consistent protections and limit the use of commission‑based sales incentives across the board.
Yufest’s The Globe and Mail report argued that, taken together, these measures would restore tax fairness, reward Canadian investment and help Canadians build wealth, while also reducing unnecessary costs and strengthening investor protection.
The article added that they would ensure a more consistent regulatory framework, reinforce Canada’s leadership in ETF innovation and protect the strength and integrity of the domestic capital markets.
