Canada - Investments Optimized for RRSP/TFSA & Non-Reg Accounts?

[Retire-Canada]

I tried a search and didn't find the answer to this question.

That funds do you hold to maximize tax optimization and to a lesser extent mitigate currency fluctuations/exchange costs in your Canadian accounts?

My typical additions are $1K - $5K on a monthly basis.

My FIRE asset allocation is:

- stocks 86% [75%-80% US/remainder CDN]
- bonds 10%
- cash/MM 4%

At the moment I hold less than 1% cash since I am pre-FIRE.

I'm not stuck on a precise asset allocation. I'm still formulating my thoughts on what I should shoot for, but I can adjust as needed via regular additions and/or annual rebalancing.

At the moment by split between accounts is:

- RRSP 90% [maxed]
- TFSA [maxed] 10%
- Non-Reg = $0 [all new 2015 additions will go here]

My research so far is suggesting:

RRSP = 100% VUN [US total stock]

- no currency exchange loses keeps $$ in CDN
- no withholding taxes on RRSP

TFSA = VCE [CDN stock] & HBB [CDN Bonds] % to balance asset allocation

- no withholding tax on VCE
- no dividends from HBB [dividends converted to unrealized capital gains]

Non-Reg = 100% VCE & HBB % to balance asset allocation

- no withholding taxes
- CDN currency
- may have to add VUN to this account depending on value to balance asset allocation

I'd love to hear what other CDNs are doing?

Is sticking with CDN equities and bonds in non-RRSP accounts worth missing out on US markets to avoid withholding taxes and currency conversion costs?

-- Vik

[RichMoose]

I think your plan is bang on the money for the most part. Personally I would move your HBB allocation to your RRSP because its a historically lower growth investment. Don't get to excited about missing out US markets. Your stock allocation is already 75% US which is very appropriate. Also, by every metric their markets are overvalued compared to Canada so now would likely be the wrong time to move to higher US allocations. Stick to your plan!

As for what I'm doing:

RRSP: All US with VFV/VSP

TFSA: Canadian & International (Canadian based ETF)

Non-Reg: Nothing here yet (hopefully the end of this year or next year), but will be all Canadian.

I don't invest in bonds because of my long time line. I will probably move to include bonds when I'm about 5 years away from retirement.

[Retire-Canada]

Thanks!

I'm planing on using my RRSP as income first at least until my projections show 7% of my estimated 71yr old RRSP value is at my expected cost of living including CPP + OAS.

I don't want a huge RRSP with mandatory withdrawals that drive me into higher marginal tax rates.

I'll use Non-Reg accounts next and save my TFSA for last unless my RRSP is projected to be lower than my 71yr old target value in which case I'll switch to TFSA after the Non-Reg accounts are dry.

Also capital gains and dividends are taxed as income in a RRSP and at lower rates outside of the RRSP.

-- Vik

[Le Barbu]

If you dont want to avoid curency convertion (not the same as curency risk btw), keep things simple, low fees, tax efficient, that is what I would do:

Drop the bonds
RRSP +/-75%XAW & +/-25%VCN*
TFSA 100% VCN
Non-registered 100% VCN

*I would shoot to stay around 30% Canadian and 70% US+Int overal

[Le Barbu]

Also capital gains and dividends are taxed as income in a RRSP and at lower rates outside of the RRSP.

-- Vik

What? RRSP whithdrawals are taxed on total income of the year they are withdrawn, that's it.

They dont care how it grew up (dividends, interests, capital gains) !

To avoid a "to big" RRSP, retire early and withdraw on your own schedule to fund TFSA or living expenses. How old are you?

[Retire-Canada]

Also capital gains and dividends are taxed as income in a RRSP and at lower rates outside of the RRSP.

-- Vik

What? RRSP whithdrawals are taxed on total income of the year they are withdrawn, that's it.

They dont care how it grew up (dividends, interests, capital gains) !

To avoid a "to big" RRSP, retire early and withdraw on your own schedule to fund TFSA or living expenses. How old are you?

We are saying the same thing about CG and dividends in a RRSP.

We are saying the same thing about early RRSP withdrawals.

I'm going to turn 46 this month.

-- Vik

[Retire-Canada]

I notice you guys are suggesting some CDN equities ETFs other than VCE.

Just wondering about why you selected the ETFs you did?

-- Vik

[Le Barbu]

So you have a lot or time to withdraw RRSP when you retire. I will retire when RRSP when it reach +/-500k$ so 8%/year is 40k$ and taxes is not to bad. I'm 43 this month (me to!!) and FIRE in about 4-5 years

[Le Barbu]

I notice you guys are suggesting some CDN equities ETFs other than VCE.

Just wondering about why you selected the ETFs you did?

-- Vik

VCE is fine but VCN is more "complete" and same MER

I hold ZCN and XIC wich are competitors but all the same index and MER

[Retire-Canada]

So you have a lot or time to withdraw RRSP when you retire.

Yes. I may not take any money from investments for a few years as I will do some part-time work that will cover my cost of living, but sometime in my 50's that will stop and I'll start drawing down my RRSP.

-- Vik

[Retire-Canada]

I notice you guys are suggesting some CDN equities ETFs other than VCE.

Just wondering about why you selected the ETFs you did?

-- Vik

VCE is fine but VCN is more "complete" and same MER

I hold ZCN and XIC wich are competitors but all the same index and MER

Thanks. I'll have a look at VCN.

-- Vik

[Kaspian]

Dan at CCP has the best article EVER written about this subject:

http://canadiancouchpotato.com/2013/10/30/making-smarter-asset-location-decisions/

[FI40]

Dan at CCP has the best article EVER written about this subject:

http://canadiancouchpotato.com/2013/10/30/making-smarter-asset-location-decisions/

It's a great post to read. You also may find the white paper useful:

https://www.pwlcapital.com/en/The-Firm/White-Papers go to February 2014, and if the paper is too long for you simply scroll down to the Appendix. You may need to adjust some of the numbers as some MERs have changed, but it's a great indication of the tax impact of various funds.

[Retire-Canada]

Dan at CCP has the best article EVER written about this subject:

http://canadiancouchpotato.com/2013/10/30/making-smarter-asset-location-decisions/

It's a great post to read. You also may find the white paper useful:

https://www.pwlcapital.com/en/The-Firm/White-Papers go to February 2014, and if the paper is too long for you simply scroll down to the Appendix. You may need to adjust some of the numbers as some MERs have changed, but it's a great indication of the tax impact of various funds.

Thanks both are good reads.

=-)

Vik

[daverobev]

VUN is sub-optimal in your RRSP. You are losing withholding because VUN is a Canadian wrapper around US stuff. Currency exchange should cost you two trades - a buy of DLR.TO and a sell of DLR.U.TO. It's called Norbert's Gambit, you ask the brokerage to journal one to the other.

It's not the end of the world, but maybe 0.3 or 0.4% you're losing each year.

[Heckler]

Dan at CCP has the best article EVER written about this subject:

http://canadiancouchpotato.com/2013/10/30/making-smarter-asset-location-decisions/

It's a great post to read. You also may find the white paper useful:

https://www.pwlcapital.com/en/The-Firm/White-Papers go to February 2014, and if the paper is too long for you simply scroll down to the Appendix. You may need to adjust some of the numbers as some MERs have changed, but it's a great indication of the tax impact of various funds.

here's another.

http://www.moneysense.ca/invest/asset-ocation-everything-in-its-place

[Retire-Canada]

VUN is sub-optimal in your RRSP. You are losing withholding because VUN is a Canadian wrapper around US stuff. Currency exchange should cost you two trades - a buy of DLR.TO and a sell of DLR.U.TO. It's called Norbert's Gambit, you ask the brokerage to journal one to the other.

It's not the end of the world, but maybe 0.3 or 0.4% you're losing each year.

I understood that Norbert's gambit wasn't an effective option for lots of smaller [$1K-$5K/month] vs. fewer large lump sum transactions.

-- Vik

[Retire-Canada]

Dan at CCP has the best article EVER written about this subject:

http://canadiancouchpotato.com/2013/10/30/making-smarter-asset-location-decisions/

It's a great post to read. You also may find the white paper useful:

https://www.pwlcapital.com/en/The-Firm/White-Papers go to February 2014, and if the paper is too long for you simply scroll down to the Appendix. You may need to adjust some of the numbers as some MERs have changed, but it's a great indication of the tax impact of various funds.

here's another.

http://www.moneysense.ca/invest/asset-ocation-everything-in-its-place

Thanks. That's good info. I've bookmarked for reference.

-- Vik

[daverobev]

VUN is sub-optimal in your RRSP. You are losing withholding because VUN is a Canadian wrapper around US stuff. Currency exchange should cost you two trades - a buy of DLR.TO and a sell of DLR.U.TO. It's called Norbert's Gambit, you ask the brokerage to journal one to the other.

It's not the end of the world, but maybe 0.3 or 0.4% you're losing each year.

I understood that Norbert's gambit wasn't an effective option for lots of smaller [$1K-$5K/month] vs. fewer large lump sum transactions.

-- Vik

True. Don't you have quite a nice sum in your RRSP now, though? If so, I'd suggest selling all your VUN.TO, gambiting it over to US$, and buying the other side.

[Retire-Canada]

True. Don't you have quite a nice sum in your RRSP now, though? If so, I'd suggest selling all your VUN.TO, gambiting it over to US$, and buying the other side.

And then dripping in new contributions into VUN and do the same once I have say $100K socked away?

-- Vik

[Le Barbu]

There is a lot of effective way to do this. In my personnal RRSP, I use to buy index funds with no load cost every month and transfert to ETF only once a year (Norbert's Gambits etc). My rational is the following:

1,500$/month x 12 = 18k$/year
average balance of index funds +/- 9k$ over 12 months*
9k$ @ 0.70%MER (RBF556, RBF557 and RBF559) = 63$ (50$ more than my ETFs but no transaction fees)
usualy 4 trades/year (2 for the NB and 2 for buying ETFs) = 40

*in fact, average is lower than that because I try to time all this with tax return, so probably around 5k$ on average...

[Retire-Canada]

Thanks. That's something to think about. I don't pay any fees to buy ETFs so that's why I figured buying VUN and transferring it when the $ value was worth it.

-- Vik

[daverobev]

Thanks. That's something to think about. I don't pay any fees to buy ETFs so that's why I figured buying VUN and transferring it when the $ value was worth it.

-- Vik

If your buys are free then yeah, just do it yearly, or every 6 months. But I wouldn't keep $100k of VUN in an RRSP.

0.4% = $400 a year (15% withholding on 2% divis plus the slightly higher MER).

[Retire-Canada]

Thanks. That's something to think about. I don't pay any fees to buy ETFs so that's why I figured buying VUN and transferring it when the $ value was worth it.

-- Vik

If your buys are free then yeah, just do it yearly, or every 6 months. But I wouldn't keep $100k of VUN in an RRSP.

0.4% = $400 a year (15% withholding on 2% divis plus the slightly higher MER).

There are no withholding taxes from US equities on RRSP accounts.

http://business.financialpost.com/2015/01/14/your-rrsp-why-it-is-the-best-home-for-your-u-s-stocks/

-- Vik

[Cathy]

The US nonresident alien tax (codified at 26 USC § 871, and subject to any modifications contained within tax conventions (treaties)) applies to most income received by a nonresident alien of the US from sources within the US.

VUN is a resident of Canada, and thus it is a nonresident alien of the US. Thus, when VUN receives income from US sources (such as dividends from the US stocks held by it), VUN has to pay the nonresident alien tax. VUN then distributes the net income to its shareholders.

Since the distribution from VUN is not income from a source within the US, the US nonresident alien tax does not apply to that distribution, regardless of what account it is held in -- even in a taxable account, that distribution is not subject to US nonresident alien tax. However, since the IRS took 15% of the dividend payments received by VUN, the distribution you are receiving is still only 85% of the gross dividend, regardless of whether VUN is held inside an RRSP.

[Retire-Canada]

The US nonresident alien tax (codified at 26 USC § 871, and subject to any modifications contained within tax conventions (treaties)) applies to most income received by a nonresident alien of the US from sources within the US.

VUN is a resident of Canada, and thus it is a nonresident alien of the US. Thus, when VUN receives income from US sources (such as dividends from the US stocks held by it), VUN has to pay the nonresident alien tax. VUN then distributes the net proceeds to its shareholders.

Since the distribution from VUN is not income from a source within the US, the US nonresident alien tax does not apply to that distribution, regardless of what account it is held in -- even in a taxable account, that distribution is not subject to US nonresident alien tax. However, since the IRS took 15% of the dividend payments received by VUN, the distribution you are receiving is still only 85% of the gross dividend, regardless of whether VUN is held inside an RRSP.

Interesting. Thanks for that.

So if I hold VTI in a RRSP I'd save that US witholding tax because of the relevant tax treaties?

-- Vik

[Cathy]

I don't like the term "withholding tax", although everybody calls it that. 26 USC § 871 calls it the "tax on nonresident alien individuals". Persons having control of certain enumerated payments to a nonresident alien are required by 26 USC § 1441 to withhold an amount equal to the nonresident alien tax. So there are actually two separate concepts: (1) the nonresident alien tax, which is imposed on nonresident aliens, and (2) the requirement to withhold amounts, which is imposed on persons having control of income paid to nonresident aliens. The term "withholding tax" conflates the concepts and makes analysis harder.

That said, if you're willing to deal with imprecise terminology, Canadian Couch Potato has an article that discusses the various practical outcomes: http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/

[Le Barbu]

To be 100% tax efficient and low cost, I would like my RESP to be 100%ZCN (I dont want any bonds*) but that would also mean the overall of my investments being 35%Canadian stock instead of my 30% target. What if I split say, 55%ZCN and 45%XAW? Final MER is 0.12%, diversification of this is 55%Can, 25%US and 20%Int. The summ of all my investments (target & real) is 30%Can, 45%US and 25%Int. What do you think?

*If I do include bonds someday, it's gonna be in registered accounts and something like VSB

[Spudd]

So if I hold VTI in a RRSP I'd save that US witholding tax because of the relevant tax treaties?

Correct.

As to your AA, I personally would rather diversify by adding some international instead of just having US/Canada. But that's up to you.

[Retire-Canada]

Thanks to everyone that has replied. This has been a very useful discussion.

-- Vik

[Retire-Canada]

VCE is fine but VCN is more "complete" and same MER

I bought $1K of VCN as part of my monthly additions in my Non-Registered account and the GF bought ~$35K in her TFSA [transfer from a different TFSA investment]

I bought $1K of VUN in my RRSP as part of my monthly additions....after the advice here I'll be buying VTI in my RRSP for future additions.

I appreciate all the advice. Thanks.

-- Vik