Canada: US-listed ETFs (withholding taxes, currency exchange fees)

[scrubbyfish]

Pushing myself a bit here, but it was stunning what I managed to learn in a couple of recent weeks, and I prefer to get this right before finalizing investments (I don't want to move things again shortly after).

Edited to add: I think I narrowed my question down better thanks to the first reply from Tuxedo below. So, please consider reading this post before replying: http://forum.mrmoneymustache.com/investor-alley/canada-us-listed-etfs-%28withholding-taxes-currency-exchange-fees%29/msg488275/#msg488275

I'm interested in the Canadian Couch Potato Model Portfolios:
http://canadiancouchpotato.com/model-portfolios/

I am not interested in the UberTuber -too complex for me.
I am most interested in the Complete Couch Potato re: lowest fees, and real estate inclusive.
Moving from .44% fees to .18% fees saves me $520/yr.
The $520 isn't enough to move me, but the increased diversification is.

But then we get into two matters:
US withholding taxes, and
currency exchange fees

I'm not quite grasping those, even though I have read and re-read the following pages, too:
http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/
http://canadiancouchpotato.com/2012/09/20/foreign-withholding-tax-which-fund-goes-where/
https://www.pwlcapital.com/en/Advisor/Toronto/Toronto-Team/Blog/Justin-Bender/September-2012/Foreign-Withholding-Tax-Revisited

I plan to allocate a lump sum annually, buy and hold, rebalance annually if that.
So, not lots of trading.
At this point I will not be using an RRSP (long story) or other recognized retirement account (any of which would be exempt from US withholding taxes).

Money would be in an RESP (withholding taxes applied and not recoverable), RDSPs (for now I assume withholding taxes applied and not recoverable), and non-registered accounts (withholding taxes applied but recoverable).

Questions:

1. If I'm not trading regularly, are currency exchange fees largely moot for me? Can I take those out of the equation?

2. Eliminating bonds, and putting half my money into non-registered accounts and half into accounts for which withholding taxes are not recoverable, what might I do?

I think CPP is maybe saying, for lowest fees:

Put into non-registered account any of the following US Equities:
iShares S&P 500 (IVV)
Vanguard S&P 500 Hedged to CAD (VSP)
Vanguard S&P 500 (VFV)

Put into non-registered account the following International equities:
TD International Index (TDB911)

3. For the RESP and RDSPs, to which the US withholding tax is applied and not recoverable, how do I determine what way to go? I am taxed at the lowest rate in Canada (15%, and $0 on the first $42,000 income).

[RichMoose]

Here's some answers to your questions:

1. I would say that currency exchange fees are generally moot for a person who does little trading. You can use the Norbert Gambit (DLR/DLR.U) through a broker and convert your CAD to USD at minimal costs.
http://www.milliondollarjourney.com/save-money-with-usd-to-cad-foreign-exchange-using-norberts-gambit.htm
http://www.milliondollarjourney.com/low-cost-currency-conversion-with-dlrdlr-u-etf.htm
http://www.canadiancapitalist.com/a-foolproof-method-to-convert-canadian-dollars-into-us-dollars/

2. General rule would be putting Canadian Index ETF in your registered accounts. This would include Canadian REIT. US would go in your non-reg account. International would be a bit better in non-reg, but I would consider it in your registered accounts as well. Depends on your desired AA and values of each account.

3. I'm not quite sure if I understand the question, but for your R(_)SP accounts go with the Canadian options. I would say Index ETF and REIT ETF if those are in your playbook.

The real question is how valuable that withholding tax really is. You should do the math to figure it out. Personally, in my accounts I just opted to go with Canadian listed ETF's (non-hedged) for now because yields are currently quite low for US index ETF's. Take for example VFV.TO, its trailing yield is 1.35%. Your 15% tax on that distribution isn't huge. You could also consider HXS.TO that follows a total return index through a derivative-swap contract. It has performed very well relative to the index (and other Canadian listed US Index ETFs) since inception because of its unique setup, even with the somewhat higher fees.
Also, the Canadian ETF market is a lot more competitive than it was a few years ago. You can get S&P 500 for a MER .08% now. That was unheard of just two years ago. So the case for lower fee benefit is starting to wash as well.

[scrubbyfish]

Thanks, Tuxedo!!

Your reply helped me realize that what I'm essentially asking is:

How do I achieve the diversification of the Complete Couch Potato (below), while simultaneously:
filling my RESP and two RDSPs, and
having the rest in a non-registered account, and
avoiding bonds in all of the above at this stage in my game,
all while achieving the greatest net gain (best results after taxes, fees, etc)?

Canadian equity 20% Vanguard FTSE Canadian All Cap (VCN)
US equity 15% Vanguard Total Stock Market (VTI)
International equity 15% Vanguard Total International Stock (VXUS)
Real estate 10% BMO Equal Weight REITs (ZRE)
Real-return bonds 10% iShares DEX Real Return Bond (XRB)
Canadian bonds 30% Vanguard Canadian Aggregate Bond (VAB) > I will be avoiding bonds at this stage.

I'm now going to study your reply again with this clarification (inside my head) in mind.

[deborah]

Withholding Taxes - In the US, when they pay you dividends companies keep (withhold) the income tax the investor would have to pay. So, if you were in a 30% tax bracket, and the shares earnt $100 dividend, they would keep $30 in withholding tax to give to the US government, and give you a $70 dividend. International investors can claim the withholding tax back under certain circumstances (it is a pain in the neck - and as the US government withholds the tax, it can't be reclaimed on your own Canadian tax return - it is something you have to do separately - or at least that is what happens here in Australia).

The CCP is saying under what circumstances you can claim it back.

Currency exchange fees - Whenever money goes between countries you get a currency exchange fee. Say, as was recently the case, the $A and the $US are at parity - $1A = $1US. However, when I buy something in the US, my bank needs to convert my $A to $US, and they charge a fee for the conversion by making the conversion rate something like $1.10A = $1US - so I need to pay $110A for something that is $100US. This is even worse if the stupid US supplier has none of the items they have sold me - sure they return my fee, but the $100US they credit back to my bank is automatically converted into $90.01A and I have lost $20 FOR NOTHING!!! And because they are in the US and it is the centre of the universe, they can't even understand why I am upset (because it couldn't possibly work that way) and I will never buy anything from them again (it is REALLY bad if you use PayPal). Sorry for the rant but it really annoys me how these people make money hand over fist.

This is just background - Tuxedo as covered what to do.

[Heckler]

I'm just in the process of supplying my signed forms for withholding tax and am also trying to understand it. 

I bought VUN in my RRSP, and likely in my TFSA soon - a Canadian listed version of VTI.  Will VUN be subject to withholding tax?  Should I be expecting a tax bill?

[Shooter_D]

I'm just in the process of supplying my signed forms for withholding tax and am also trying to understand it. 

I bought VUN in my RRSP, and likely in my TFSA soon - a Canadian listed version of VTI.  Will VUN be subject to withholding tax?  Should I be expecting a tax bill?

Heckler, from my understanding, if you hold VUN in an RRSP or TFSA you will be subject to withholding tax that will automatically be taken out (no actual tax bill) and paid to the USA as Cathy says.

From Canadian Couch Potato:
Canadian ETF that holds a US-listed ETF of US stocks.
Vanguard US Total Market (VUS and VUN)
Vanguard S&P 500 (VSP and VFV)
iShares S&P 500 (XSP and XUS)

In a taxable account, US withholding taxes apply, but are recoverable.
In a RRSP or TFSA, US withholding taxes apply and are not recoverable.

If you held VTI,  you would not have to pay withholding tax if you held it in a RRSP. You would have to pay withholding tax if you held this in a TFSA.

US-listed ETF that holds US stocks.
Vanguard Total Stock Market (VTI)
iShares S&P 500 (IVV)

In a taxable account, US withholding taxes apply, but are recoverable.
In an RRSP, US withholding taxes do not apply.
In a TFSA, US withholding taxes apply and are not recoverable.

This info is from the link posted by scrubbyfish from CCP: Foreign Withholding Tax Explained.

[RichMoose]

I'm just in the process of supplying my signed forms for withholding tax and am also trying to understand it. 

I bought VUN in my RRSP, and likely in my TFSA soon - a Canadian listed version of VTI.  Will VUN be subject to withholding tax?  Should I be expecting a tax bill?

VUN.TO is subject to withholding taxes in all accounts. It's a Canadian listed ETF. The tax is kind of hidden in the form of a smaller distribution. For example in 2013, total distributions per unit were $0.197; however the withholding tax reduces the actual money you would've seen to $0.176.

If you have a US dollar RRSP and purchase VTI instead, you will get the full distribution credited to your account. No taxes withheld at all.

This is important to understand... you have to directly hold US-listed ETFs or stocks to benefit from the exemption.

As far as the TFSA goes, you're paying withholding taxes regardless of where the ETF is listed, so you may as well go with the Canadian version.