Author Topic: Help with Asset Allocation and Tax Efficiency (Canadians)  (Read 1684 times)

FrugalFan

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Help with Asset Allocation and Tax Efficiency (Canadians)
« on: December 29, 2015, 12:31:02 PM »
Hello. I would appreciate some help with something. We have a big chunk of money that we are moving from Edward Jones to index ETFs via Questrade, and I want to make sure I am placing the funds in the right places and am nervous about buying so much at once. We essentially have three "buckets" to divide our asset allocation: 2xRRSP, 2xTFSA, and one joint taxable account. The general advice is to hold bonds in non-taxable accounts and Canadian equities in taxable accounts. I also know that using Norbert's Gambit, I could recover withholding taxes for US listed ETFs if I held them in the RRSP's, but I think I have decided it is not worth the trouble for now, especially with the Canadian dollar so low. But what about VXC? As I understand, it is a Canadian listed ETF that holds US ETFs, so we have to pay withholding taxes if in RRSP and TFSA, but this link got me a bit confused about the best place to hold it (unfortunately it is new and was not included in the original list):
http://canadiancouchpotato.com/2012/09/20/foreign-withholding-tax-which-fund-goes-where/
I would appreciate any feedback!

tyir

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Re: Help with Asset Allocation and Tax Efficiency (Canadians)
« Reply #1 on: December 29, 2015, 03:59:14 PM »
Hi,

Dan from CCP writes about VXC here:
http://canadiancouchpotato.com/2014/07/10/under-the-hood-vanguard-ftse-all-world-ex-canada-vxc/

As he mentions, this will lose the withholding tax, but you get the convinence of a merged US/international fund as well as not needing currency conversion.

In terms of the "best" place to hold it - it's always better to have funds in RRSP/TFSA versus taxable. In this case it doesn't matter much between RRSP/TFSA since this isn't a US registered fund (which gives a slight advantage to RRSP).

Since you are using the general advice of putting bonds in taxable, I would suggest the simple model of:

Bonds in RRSP until full. If full, then TFSA.
Next VXC. RRSP if room left, then TFSA, then unregistered.
Finally, VCN. RRSP if any room left, then TFSA, then unregistered.

The main point is it is better to have VCN in unregistered compared to VXC - because of the much mroe favorable dividend treatment. It's always better to use RRSP/TFSA if available though.

Hope this helps.


tyir

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Re: Help with Asset Allocation and Tax Efficiency (Canadians)
« Reply #2 on: December 29, 2015, 04:03:15 PM »
One aside: you mention it's not worth converting to US since the dollar is so low now - that is the wrong way to think about it.

If you buy VXC - that buys american indexed equities under the hood - so as CAN goes down, the price of VXC goes up. There's actually not that much difference between converting CAN to USD and buying VTI (as well as buying an appropriate amount of international funds) as compared to buying VXC. THe difference is you are doing to conversion yourself with VTI, but it works out to basically the same thing in the end.

MMMdude

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Re: Help with Asset Allocation and Tax Efficiency (Canadians)
« Reply #3 on: December 29, 2015, 04:28:08 PM »
Unfortunately my rrsp and tfsa is fully absorbed by bond fund holdings which leaves vxc for my taxable accounts.  Keep in mind that if you choose us domiciled etf and get to 100k level you have to report that as foreign property. Vxc being cdn domiciled doesnt have that issue. I often wished that the cdn govt would allow some foreign dividends to be treated similarly to canadian eligible dividends but alas no.  At least we can claim the foreign tax withheld at tax time to avoid double tax.

Vxc seems to me the best canadian listed holding out there for ex canada diversification, just wish it had abit higher yield on it

Heckler

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Re: Help with Asset Allocation and Tax Efficiency (Canadians)
« Reply #4 on: December 29, 2015, 05:44:18 PM »
Have you considered the benefits of treating your multiple accounts as one portfolio?



https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts

CCP also has an article on it.

Heckler

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Heckler

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Re: Help with Asset Allocation and Tax Efficiency (Canadians)
« Reply #6 on: December 29, 2015, 05:47:03 PM »
I would setup a spreadsheet similar to one in the links and take your time making an asset allocation and rebalancing plan.  Then execute and commit!