Author Topic: Help with withholding taxes (Canada)  (Read 1818 times)

mgarf

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Help with withholding taxes (Canada)
« on: October 17, 2016, 01:12:26 PM »
Hey all,

I've recently become aware of withholding taxes. (man what a headache!!!) I've read through https://www.pwlcapital.com/pwl/media/pwl-media/PDF-files/White-Papers/2016-06-17_-Bender-Bortolotti_Foreign_Withholding_Taxes_Hyperlinked.pdf?ext=.pdf but I'm still not 100% on what I should do.

Me, I'm fine... haven't maxed out my RRSP yet so it makes sense to put everything in there. However, my folks have a sizeable investment portfolio, with RRSP max-ed out. I'm trying to figure out where to put everything so maximize their tax savings.

Their portfolio is divided into VCN, VXC, XUU and XUH.

This is what I'm thinking:

1. VCN preferred in RRSP and TFSA. VXC and XUU/XUH preferred in taxable account.

2. VXC = XUU/XUH for preference in the taxable account.

Point 2 I'm still not sure about... will VXC do better in taxable than XUU/XUH, vice versa, or are they indeed the same?

We have elected not to purchase US listed ETFs via Norbit's gambit.

Thanks in advance!
« Last Edit: October 17, 2016, 01:14:02 PM by mgarf »

RichMoose

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Re: Help with withholding taxes (Canada)
« Reply #1 on: October 17, 2016, 02:43:57 PM »
If you are not planning to purchase US-listed ETFs, there are not many potential tax gains regarding withholding taxes. If their assets are significant, why not do a Norbits gambit and hold US ETFs?

I may be misreading the asset allocation, but it appears you have an extremely heaving US weighting? US makes up more than 50% of VXC.TO so why the additional XUU.TO and XUH.TO? What are your thoughts regarding currency hedging with XUH.TO?

Are they not planning to hold any other asset classes, such as REITs, bonds, developed market or emerging market outside VXC.TO?




mgarf

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Re: Help with withholding taxes (Canada)
« Reply #2 on: October 17, 2016, 06:11:12 PM »
- For now, not comfortable enough with the whole process to do the Gambit. Maybe in the future...
- I didn't list the asset proportions... but yes it is weighted heavily in US
- Dunno where the CAD:USD exchange will go, so we are hedging our bets and putting 50/50 in hedged and unhedged (but otherwise I would choose unhedged due to reduced volatility when associated with CA stocks)
- no, just pure stocks, no bonds/reits/other international

Still uber confused about withholding taxes. I'm trying to figure out what I would do come tax-time to calculate exactly what the benefit would be of one or the other ETF in the taxable account, but I haven't found a good resource yet.
« Last Edit: October 17, 2016, 06:18:18 PM by mgarf »

RichMoose

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Re: Help with withholding taxes (Canada)
« Reply #3 on: October 18, 2016, 09:59:25 AM »
Probably the most important thing to know is that withholding taxes is only one aspect to consider when looking at a tax-efficient portfolio. Yes, by holding your international stocks in your taxable account you will be able to claim back a portion of the withholding taxes on your income tax form as "Foreign Tax Credit" as withholding taxes qualify as Non-business income. But are you consider the benefits of holding your Canadian portion in the taxable account so you can benefit from eligible dividend rates? Generally speaking, foreign dividends are taxed at your marginal income tax rate.

The true math depends on the value of your parents' portfolio, their asset allocation, their income needs, province, and some other factors in their personal situation.

Also, if their RRSP is sizeable, they are not making many new contributions, and their desired US holdings are large it may well be worth it to learn the Gambit. There are a few tutorials online that can help - although reading about it can make it seem overwhelming, it's really not very difficult in practice. Having a US dollar RRSP is the easiest way to benefit from withholding tax rules.

TrMama

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Re: Help with withholding taxes (Canada)
« Reply #4 on: October 18, 2016, 03:27:50 PM »
Following

mgarf

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Re: Help with withholding taxes (Canada)
« Reply #5 on: October 18, 2016, 05:40:28 PM »
Ok, I think I've figured it out.

Order of preference in taxable account: VCN >>> XUU/XUH > VXC

Why?

1. Dividends from Canadian equities have stellar tax rebates available. This is why, if you must have a non-registered account, CA stock should fill it up as much as possible.

2. Searching rounds the internets I am reasonably certain that the withholding tax for XUU and VXC are about the same at ~0.3%. This makes point #3 the deciding factor.

3. 12 month avg yield for VXC is 1.9 vs. 1.69 for XUU (1.53 XUH). Since VXC pays, on average, higher dividends, you want this guy in the non-taxable accounts over XUU/XUH.

Hope that made sense!

References:

1. http://www.canadianportfoliomanagerblog.com/war-of-the-worlds-ex-canada/
2. https://www.pwlcapital.com/pwl/media/pwl-media/PDF-files/White-Papers/2016-06-17_-Bender-Bortolotti_Foreign_Withholding_Taxes_Hyperlinked.pdf?ext=.pdf
3. http://canadiancouchpotato.com/2010/03/05/put-your-assets-in-their-place/

GreatLaker

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Re: Help with withholding taxes (Canada)
« Reply #6 on: October 19, 2016, 08:43:30 AM »
3. 12 month avg yield for VXC is 1.9 vs. 1.69 for XUU (1.53 XUH). Since VXC pays, on average, higher dividends, you want this guy in the non-taxable accounts over XUU/XUH.

Not 100% sure, but I think you have it backwards.

Canadian stocks that pay eligible dividends receive the dividend tax credit, so should be held in non-registered accounts.

But dividends on foreign (including US) stocks are taxed at your full marginal tax rates. Therefore preference is to hold non-dividend paying and low dividend paying foreign stocks in non-registered accounts and high dividend paying foreign stocks in RRSP to defer taxes on the dividends until you withdraw from the RRSP (then taxed as income and hopefully at a lower marginal rate).

This explains it: http://www.taxtips.ca/rrsp/investmentsinorout.htm

Also p.9 of this document indicates the same thing, and has a table of tax and dividend rates to illustrate:
https://www.pwlcapital.com/pwl/media/pwl-media/PDF-files/Justin%20Bender%20Assets/2014/PWL_Bender-Bortolotti_Asset-Location-for-Taxable-Investors_v02_hyperlinked.pdf?ext=.pdf

Am I misunderstanding something?

mgarf

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Re: Help with withholding taxes (Canada)
« Reply #7 on: October 19, 2016, 06:35:51 PM »
That's exactly what I'm doing... VCN in non-registered account. high-dividend international in registered account (ie non-taxable.) Maybe you got misunderstood when I said not-taxable account (by this I meant registered account)

K-ice

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Re: Help with withholding taxes (Canada)
« Reply #8 on: October 19, 2016, 11:56:43 PM »
I always like these threads and thanks for the references.

I concur, my Canadian dividend stocks are in a taxable account. I picked VDY instead of VCN.

My TFSA holds VXC and my RRSP primarily holds VAB.

I've been told I don't have enough assets or RRSP room to worry about the Norbits Gambit yet.
$100K in the RRSP is the point that the trouble is worth it.




 




GreatLaker

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Re: Help with withholding taxes (Canada)
« Reply #9 on: October 20, 2016, 08:27:23 PM »
That's exactly what I'm doing... VCN in non-registered account. high-dividend international in registered account (ie non-taxable.) Maybe you got misunderstood when I said not-taxable account (by this I meant registered account)
Oops... I must have read it as non-registered account
You have to admit though, that my examples really did prove your point.

frugal_c

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Re: Help with withholding taxes (Canada)
« Reply #10 on: October 22, 2016, 09:43:41 AM »
I wouldn't hold VXC in your RRSP account.  I think you are getting a 15% withholding tax applied unnecessarily.  I would buy the US listed equivalent fund instead so you don't take the withholding hit.   I know this is getting completely opposite of the point of the thread but that's the one thing I noticed.  VXC is perfect in a TFSA because you will take the withholding hit on the US listed version so for convenience you might as well hold the TSX listed version.
« Last Edit: October 22, 2016, 09:50:18 AM by frugal_c »