[Donkey]

First of all - great site and thanks to those who have answered my other questions - i'm a real newbie and just starting to take more control of my own finances.

I'm trying to put together a diversified portfolio of ETF's for my wife and my RRSP's and TFSA's. This is strictly for long-horizon retirement funds.

Where i'm getting bogged down now is as per the subject line. I note a far greater selection and generally lower MER's on US ETF's.
I'm not clear on what the tax/currency implications are in buying these as opposed to only shopping from the TSX-listed ETF's.

Could anyone please help to clarify this for me?

Thanks!

 

[FrugalTrader]

The largest implications of buying USD ETF's are:

->The foreign exchange spread/fee when going from CAD->USD
->Currency risk (USD goes down, so does the value of your ETF relative to CAD)
->TFSA will charge a withholding tax on foreign dividends

 

[stephenheath]

Frugal...

TFSA will charge a withholding tax on foreign dividends

? I'm assuming you don't mean the tax free savings account? I currently have my vanguard ETF's in the RRSP which I am assuming is exempt from any withholding taxes, but how would this work if it was in the TFSA, or in a non registered regular account? (ETF's like VTI/VWO/VEA)

 

[hylaride]

Frugal...



? I'm assuming you don't mean the tax free savings account? I currently have my vanguard ETF's in the RRSP which I am assuming is exempt from any withholding taxes, but how would this work if it was in the TFSA, or in a non registered regular account? (ETF's like VTI/VWO/VEA)

Canada has a treaty with the United States regarding RRSP accounts. Since they're for "retirement/pension purposes" they're exempt from the American withholding taxes. Outside of the United States and Canada, if you own stock in a country that has withholding taxes, you'll still get dinged on them inside your RRSP. The same is true for every country other than Canada with respect to the TSFA. FrugalTrader was a little misleading with regards to his statement that "TFSA will charge a withholding tax on foreign dividends". It is in fact the foreign government that will before the dividend lands into your account.

The "Tax Free" part of the TFSA only applies to the CRA.

 

[CanadianCapitalist]

I'm assuming you don't mean the tax free savings account? I currently have my vanguard ETF's in the RRSP which I am assuming is exempt from any withholding taxes, but how would this work if it was in the TFSA, or in a non registered regular account? (ETF's like VTI/VWO/VEA)

I wrote about this just today

http://www.canadiancapitalist.com/withholding-tax-tfsa-investments/

No withholding tax on VTI/VWO/VEA in a RRSP. 15% when these are held in a TFSA.

Note that VWO/VEA have already paid a withholding tax to their respective countries. This is not recoverable for Canadian investors in any account -- taxable, RRSP or TFSA.

 

[stephenheath]

Haha, thanks CC... I looked at your site VERY early this morning and it hadn't updated, and of course, what are the odds that the very day I ask a question it's your topic? Ah well, the world tries to give me answers, what can I say?

That is VERY interesting news though and I'm really glad this came up, because I assumed TFSA would work the same as RRSP, and I was hoping any USD investments in the TFSA would actually have dividends that stay USD instead of being converted to CDN like in the RRSP accounts... if they did, I would have moved all my vanguard funds over, and then had to kick myself

 

[LateStudent]

hello Donkey, I like you am wondering if there's tricks & traps or reasons to go with the US exchanges rather than Canadian ones.

Anyway, tho I barely understand this stuff myself, it appears there's one issue that turns out to be a non-issue, estate taxes. iShares raises it, I suppose to promote their Canadian-listed product:
http://ca.ishares.com/publish/content/Press_News/PDF/XEM_XWD_June_24_2009_EN.pdf
"These funds stand above and apart from others because they enable investors to access foreign markets while avoiding the currency and estate tax considerations usually associated with U.S.-listed ETFs."


but this post at
www.canadiancapitalist.com/new-ishares-emerging-market-and-world-etfs/#comments
seems to indicate it's a non-issue, so don't have to worry about it.

"iShares states in their press release that their two new ETFs avoid the U.S. estate tax that would be applied on one’s death if they owned the U.S. ETFs. One might suppose this would be a reason to invest in them. But the US estate tax currently applies only if an investor has over $3.5 million in world assets. Even if they were above the threshold, there still are strategies to avoid the tax, e.g. incorporating etc."

... so no worries, hope I got that correct...

 

[cardhu]

But the US estate tax currently applies only if an investor has over $3.5 million

I thought the threshold was quite a bit lower than that ... has it changed recently?

 

[LateStudent]

a little more info here: http://blog.canadianbusiness.com/two-new-ishares-etfs-worthwhile/

 

[CanadianCapitalist]

I wrote about this here and found some resources that said that the threshold is $2 million. We are now so far under the threshold that I'm not worried just yet but this may be an issue for some high net-worth households.

Should U.S. Estate Taxes Affect the Choice of Investments?

 

[Doug]

Taxes will have to go up in the USA. An increase in estate tax is possibly the least politically unpopular tax increase. Remember, estate taxes are paid upon your death. Present estate taxes are irrelevant to the good majority of Canadian investors, unless they are unlucky. What is important is what happens in the future.