Canadian Money Forum banner

1 - 14 of 14 Posts

·
Registered
Joined
·
373 Posts
Best spot for US stocks or US ETFs holding US stocks is in an RRSP as there is no withholding tax as prescribed by the Canada/US Tax Treaty. International equities are best held in a taxable account so as to claim foreign tax paid on the withholding taxes. US stocks are still subject to withholding tax even when held in a TFSA. All foreign dividend income is taxed in Canadian resident hands as regular income at your full MTR.
 

·
Banned
Joined
·
91 Posts
Discussion Starter #3
Best spot for US stocks or US ETFs holding US stocks is in an RRSP as there is no withholding tax as prescribed by the Canada/US Tax Treaty. International equities are best held in a taxable account so as to claim foreign tax paid on the withholding taxes. US stocks are still subject to withholding tax even when held in a TFSA. All foreign dividend income is taxed in Canadian resident hands as regular income at your full MTR.
Thanks, I have a non-registered account that the majority of my portfolio is in, in this account I have a US ETF (VTI) and a International ETF (VEA), should I consider transfering VTI to my RRSP or even just dump VTI and invest the monies in VEA or something else in my non-registered account, I do have some US equity in my RRSP already
 

·
Registered
Joined
·
373 Posts
I wouldn't be making any changes in your situation. With the bulk of your investments in a taxable account, it is still better to have those securities with capital gains potential held there than in a registered account; leave the fixed income in the registered account. You will still be able to claim foreign tax paid on VTI, so there is no advantage to trading it for VEA.
 

·
Banned
Joined
·
91 Posts
Discussion Starter #5
I wouldn't be making any changes in your situation. With the bulk of your investments in a taxable account, it is still better to have those securities with capital gains potential held there than in a registered account; leave the fixed income in the registered account. You will still be able to claim foreign tax paid on VTI, so there is no advantage to trading it for VEA.

what about TFSA, fixed income totally or anything else?
 

·
Registered
Joined
·
373 Posts
To take best advantage of the TFSA ideally, you would want to hold something with the greatest total tax liability over the life of the investment. I would be inclined to look at something along the lines of a REIT, or junk bonds or maybe even an emerging market ETF. Holding safe investments like GICs is just a waste of the tax holiday IMO.
 

·
Registered
Joined
·
343 Posts
I'm not completely sure, but I don't think the withholding tax exemption on US-based RRSP investments applies when those investments are held through a mutual fund or ETF. Withholding tax is supposed to be withheld by the entity making the cross-border payment. If you are an investor in a Canadian mutual fund or ETF that owns US investments, then the tax will probably be withheld by the US entity making distribution payments to the Canadian mutual fund or ETF. In short, if you are holding US investments through a Canada-based fund, you are probably still paying 15% withholding tax on interest and dividends.

If you have a self-directed RRSP account, then holding US stock and bonds directly (rather than through a fund) is your best bet, since the Canada-US tax treaty exempts payments of investment income (interest and dividends) to tax-deferred accounts from withholding tax. If you own Canada-based mutual fund units or ETFs that own US-based investments, then it doesn't really matter whether you hold such investments in an RRSP or the TFSA because withholding tax will be levied regardless.

For other international investments, Canada's system of bilateral tax treaties does not always include an exemption on withholding tax on payments to tax-deferred accounts (or rather, there is rarely such an exemption). Withholding tax rates can be up to 30%. If you hold a diversified fund of international investments, you should probably assume that you're paying a wad of withholding taxes on dividend and interest payments.

The best place to hold certain US and international investments may be in a taxable account. This is because you will at least get a tax credit for the foreign tax paid. (Essentially this works out to you paying the higher of the Canadian and international tax rates.) If you hold international investments in an RRSP, you may never get to recover the withholding tax since you will have paid such taxes over the life of the investment as it is held in your RRSP, and you will pay income tax when you de-register the funds. At least if you hold such investments in a TFSA, they are exempt from Canadian taxation.
 

·
Premium Member
Joined
·
2,686 Posts
I'm not completely sure, but I don't think the withholding tax exemption on US-based RRSP investments applies when those investments are held through a mutual fund or ETF. Withholding tax is supposed to be withheld by the entity making the cross-border payment. If you are an investor in a Canadian mutual fund or ETF that owns US investments, then the tax will probably be withheld by the US entity making distribution payments to the Canadian mutual fund or ETF. In short, if you are holding US investments through a Canada-based fund, you are probably still paying 15% withholding tax on interest and dividends.
I'm pretty sure withholding tax is not exempt for US investments held through a Canadian mutual fund or ETF. Take XSP as an example. It actually holds IVV and pays a 15% withholding tax, which is not recoverable for RRSP accounts. The best bet is to hold US-listed investments directly in a RRSP account provided you are comfortable with foreign currency fluctuations.
 

·
Registered
Joined
·
12,797 Posts
Does IVV have withholding tax, or do you need to hold the constituent securities? If the latter, I'm not sure it's worth it. Withholding tax on the 2% yield is 0.3% per year. I'm willing to bet that the average investor would underperform the index by more than that if they held individual securities.
 

·
Premium Member
Joined
·
2,686 Posts
Does IVV have withholding tax, or do you need to hold the constituent securities? If the latter, I'm not sure it's worth it. Withholding tax on the 2% yield is 0.3% per year. I'm willing to bet that the average investor would underperform the index by more than that if they held individual securities.
IVV is a US-listed ETF that tracks the S&P 500. For a Canadian resident, withholding tax will depend on which account holds IVV. In a RRSP, there is no withholding tax. In a taxable, TFSA or RESP account, the withholding tax is 15%. You can receive a credit for the withholding tax in a taxable account when filing your taxes.
 

·
Registered
Joined
·
500 Posts
runner39 said:
should I .... just dump VTI and invest the monies in VEA or something else
You should make your asset allocation decisions separately from, and before, the decision as to which account to house things in ... don’t let the tax tail wag your asset allocation dog.

It is impossible to say which items should be held where, without first determining whether it is even appropriate for you to have an RRSP in the first place, but since you are still contributing to it, I’ll assume that you’ve made that decision for all the right reasons.

In general ...
  • US stocks and US-based ETFs are best held in RRSP ... second choice would be TFSA ... third choice taxable account.
  • International stocks and foreign ETFs holding international stocks are best held in RRSP ... second choice would be TFSA ... third choice taxable account.
It is often suggested that some things should be held in a taxable account to “preserve” the ability to claim some kind of credit ... common examples are the dividend tax credit and the foreign tax credit ... that is valid advice in some very specific circumstances, but in general it is very much like paying a dime to preserve a nickel ... in most cases you’re better off just pocketing the dimes, and letting the nickels pass by.

The problem occurs when you don’t have enough contribution room to shelter everything ... in that case, you keep in RRSP and TFSA whichever assets would be punished the most by being held outside, and you hold in the taxable account whichever assets will be punished the least.

andrewf said:
Does IVV have withholding tax, or do you need to hold the constituent securities?
Countries have withholding taxes ... individual investments don’t ... since IVV consists exclusively of US securities, the withholding rules that apply are the US rules ... See CC’s post for the implications of that.

Robillard said:
(Essentially this works out to you paying the higher of the Canadian and international tax rates.)
Not exactly ... the actual tax burden can be higher than either of them ... it can be a lot higher, in fact ... there are various factors that play into this ... the key one being that you may not get a full dollar for dollar tax credit for the withheld amount ... not everyone does ... you get a credit for foreign taxes withheld ONLY to the extent that the income would ordinarily incur tax in Canada.
 

·
Banned
Joined
·
91 Posts
Discussion Starter #12
The problem occurs when you don’t have enough contribution room to shelter everything ... in that case, you keep in RRSP and TFSA whichever assets would be punished the most by being held outside, and you hold in the taxable account whichever assets will be punished the least.

which assets would be punished the least being in a non-registered (taxable account)?
 

·
Registered
Joined
·
500 Posts
runner39 said:
which assets would be punished the least being in a non-registered (taxable account)?
Generally, Canadian equities ... dividend payers if your income is low, and capital growers if your income is higher ... considering your holdings, XIU is a combination of both, and would be punished least, in comparison to your other assets.
 

·
Banned
Joined
·
3 Posts
Foreign Equities in non-registered account a good idea or should foreign equities be better off in RRSP of TFSA?
One consideration is the currency conversion fees (1-2%) most discount brokers charge every time you buy and sell foreign equities in a RRSP or TFSA. Most brokerages don't give you the option to keep the funds in US dollars and therefore they automatically convert it to Canadian dollars every time you buy or sell a US Stock.

The only discount brokers I could find (1 year ago) that made it possible to avoid the currency conversion fee was TD Waterhouse and Questrade.

With TD you are required to call them every time after you've done a trade and instruct them to "wash" the trade. They will then buy US Dollar Money Market units with the proceeds. When you do your next US Dollar trade you can instruct them to use the funds from the US money market fund and no currency conversion will be done.

With Questrade it's rather seemless as in the RRSP or TFSA they have seperate internal accounts for US Dollar and Canadian funds and equities.

Jack
 
1 - 14 of 14 Posts
Top