Author Topic: Replacing VXC with VTI and VXUS within RRSP  (Read 7979 times)

sieben

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Replacing VXC with VTI and VXUS within RRSP
« on: May 03, 2015, 09:20:13 PM »
Hi all!

I've got a fairly simple portfolio right now split between VXC and VCN in a TFSA and RRSP that I have at Questrade.
My balance is not huge right now, around 25k (only 11 months out of post-secondary) but I'm hoping to keep throwing in at least 30k a year for the foreseeable future.

I'm wondering how many of you are using VTI in your RRSP accounts to avoid the foreign-withholding tax. Is having to deal with Norbert's Gambit and everything else involved worth it? Is there any extra paperwork/figuring required to make this happen?

The idea of saving on taxes appeals to me but I also enjoy simplicity, I'd love to hear from anyone who has had some experience with this!

Thanks!

ChrisCraft2015

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Re: Replacing VXC with VTI and VXUS within RRSP
« Reply #1 on: May 04, 2015, 01:21:49 PM »
Hi all!

I've got a fairly simple portfolio right now split between VXC and VCN in a TFSA and RRSP that I have at Questrade.
My balance is not huge right now, around 25k (only 11 months out of post-secondary) but I'm hoping to keep throwing in at least 30k a year for the foreseeable future.

I'm wondering how many of you are using VTI in your RRSP accounts to avoid the foreign-withholding tax. Is having to deal with Norbert's Gambit and everything else involved worth it? Is there any extra paperwork/figuring required to make this happen?

The idea of saving on taxes appeals to me but I also enjoy simplicity, I'd love to hear from anyone who has had some experience with this!

Thanks!

I use VTI for my US holdings and do use Norberts Gambit a couple of times a year for exchanging cash.  I have a substantial 7 figure portfolio and would suggest you try VUN for now.  It's a lot easier.  Maybe split your portfolio into 3 and use VCN (I use XIC), VUN and VEF (to add the international).  Cheap and simple!!

sieben

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Re: Replacing VXC with VTI and VXUS within RRSP
« Reply #2 on: May 04, 2015, 08:59:15 PM »
Hey guys, thanks for the responses.

BNgarden, yeah I believe I've read similar numbers. I guess my thinking was that since my portfolio with hopefully get there eventually I liked the idea of buying VTI in the first place instead of selling and moving to a new fund at some point in the future.

ChrisCraft, it seems like if I were to use with VUN and VEF/VDU then I may as well stick with VXC for all the difference it would make?

daverobev

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Re: Replacing VXC with VTI and VXUS within RRSP
« Reply #3 on: May 05, 2015, 01:49:15 PM »
VXUS is better for multiple reasons - it is cheap, it holds stocks directly, and the US has better double taxation agreements than Canada, apparently.

VXC is a wrapper around US funds. The nice thing about the RRSP is that the DTA with the US means you are NOT taxed at 15% by the US. With VUN, you ARE losing that 15% on dividends. Yes, I know, at 2% yield that's only 0.3% But when you add that to the lower cost to begin with...

I mean, if you're dripping $100 biweekly then no of course don't do a N's G. But once a year, or maybe every other year, it's worth doing the switch.

Work it out. On $1k, 0.5% is $5. N's G costs two trades at Questrade (SELL your current holding, assuming only one - VUN), and SELL DLR.U.TO to get US$. The buys are free. So a grand total of $10, plus 5 days out of the market.

Ugh, sorry this is marginally incoherent and I know I'm not lining up funds correctly, head's tired from coding.

Retire-Canada

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Re: Replacing VXC with VTI and VXUS within RRSP
« Reply #4 on: May 05, 2015, 05:42:10 PM »
VXUS is better for multiple reasons - it is cheap, it holds stocks directly, and the US has better double taxation agreements than Canada, apparently.

VXC is a wrapper around US funds. The nice thing about the RRSP is that the DTA with the US means you are NOT taxed at 15% by the US. With VUN, you ARE losing that 15% on dividends. Yes, I know, at 2% yield that's only 0.3% But when you add that to the lower cost to begin with...

Doesn't the withholding tax agreement only apply to US equities held by a CDN in a RRSP so VTI would get you a benefit, but VXUS is mostly non-US international equities and I don't think you see any benefit.

I'm no expert, but that's my understanding.

-- Vik

sieben

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Re: Replacing VXC with VTI and VXUS within RRSP
« Reply #5 on: May 05, 2015, 05:45:40 PM »
Hey daverobev,

Thanks for the response! Yeah, I'm definitely not planning on doing the switch on a monthly basis. I'm envisioning doing this at most twice a year, more then likely once. I'd be moving at least 5k at a time which makes me feel like it may be worth the time/effort.

Hey Vikb, that's what I've been reading as well. I may have made a mistake putting VXUS in the title of the thread. Looks like maybe VDU would be a better option since there is no tax advantage to VXUS?

Retire-Canada

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Re: Replacing VXC with VTI and VXUS within RRSP
« Reply #6 on: May 05, 2015, 06:10:25 PM »

Hey Vikb, that's what I've been reading as well. I may have made a mistake putting VXUS in the title of the thread. Looks like maybe VDU would be a better option since there is no tax advantage to VXUS?

My thought goes something like this. Let's assume you pay 2% exchange penalty converting CDN to USD so you can buy VTI instead of VUN in a RRSP.

On $10K that's $200.

You are a buy and hold person so you are keeping it for decades.

Every year you save:

- MER VTI = 0.05% vs VUN = 0.16% = 0.11%
- withholding tax 15% on ~2% dividends = 0.3%
-- Total = 0.41% or on $10K that's $41/yr

So time to break even = $200/$41 = 4.9yrs

And if you want to convert those USD VTI shares back to CDN you need to pay a conversion fee again. Say it's 2% on $10K again makes your break even period = 9.8yrs.

That's not a slam dunk either way in my opinion without Norbert's Gamble. For a long term investor there is a benefit if you have a multi-decades long perspective.

With NG on one or both end's of the transaction it starts to look better and better. Maybe you drip small increments in during your accumulation phase and then make one large NG assisted withdrawal each year during your FIRE phase?

A lot of my travel is to the US so I'd be able to use USD even though I am a CDN resident so I'm not sure I'd convert much USD back to CDN.

For rebalancing purposes I can also keep any USDs I have converted in that currency and buy US based ETFs if I need to rebalance to hit my asset allocation without dealing with currency conversions.

The only situation I need to convert back to CDN is if I need the $$ during FIRE and I want to spend them in Canada.
 
-- Vik
« Last Edit: May 05, 2015, 06:13:39 PM by Vikb »

sieben

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Re: Replacing VXC with VTI and VXUS within RRSP
« Reply #7 on: May 05, 2015, 09:34:56 PM »
Hi Vikb,

That makes a lot of sense, thanks for the well thought out post. Do you know if there are any issues with withdrawing USD directly from an RRSP?

tyir

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Re: Replacing VXC with VTI and VXUS within RRSP
« Reply #8 on: May 05, 2015, 10:50:15 PM »
VXUS is better for multiple reasons - it is cheap, it holds stocks directly, and the US has better double taxation agreements than Canada, apparently.

VXC is a wrapper around US funds. The nice thing about the RRSP is that the DTA with the US means you are NOT taxed at 15% by the US. With VUN, you ARE losing that 15% on dividends. Yes, I know, at 2% yield that's only 0.3% But when you add that to the lower cost to begin with...

Doesn't the withholding tax agreement only apply to US equities held by a CDN in a RRSP so VTI would get you a benefit, but VXUS is mostly non-US international equities and I don't think you see any benefit.

I'm no expert, but that's my understanding.

-- Vik

Vik, you are correct in that the tax agreement only applies to US equities, however you are a bit off about the benefit to VXUS in an RRSP, compared to VXC. It's actually very complicated why - I will do my best to explain:

VXUS holds the stocks directly. It gets a withholding tax foreign to US. However, then, since it is a US-indexed fund, and we are holding it as foreigners (Canadians), the US charges an additional 15% FWT on us. Note this is applied *on top* of the foreign->US withholding tax. If it is held in a RRSP, due to Canada-US tax treaties, this 15% FWT is recovered, but the foreign/US withholding is lost. So in the end we pay the "correct" amount - just the regular overseas foreign withholding.

Now, VXC.  If you look up the prospectus: https://www.vanguardcanada.ca/individual/mvc/loadImage?docId=506
"Vanguard FTSE All-World ex Canada Index ETF
In order to achieve its investment objective, Vanguard FTSE All-World ex Canada Index ETF employs a
“passive management” - or indexing - investment approach designed to track the performance of the FTSE AllWorld
ex Canada Index. This Vanguard ETF invests primarily in U.S.-domiciled Vanguard Funds, such that the
resulting portfolio has investment characteristics that closely match the characteristics of the FTSE All-World ex
Canada Index."
You can also see the details here: http://quote.morningstar.ca/quicktakes/etf/etf_ca.aspx?t=F00000TVGA&region=can&culture=en-CA

So what happens in VXC? First off, the foreign part of VXC (such as Europe ETF) will get foreign tax withheld when put into the US-listed fund. Then when it is put into a Canadian-listed fund, there is the normal 15% US FWT applied. However this is not going to be recoverable, since this tax is totally shielded from the investor. If you hold VTI for example in a regular account, you report the withholding on your taxes, but if you have a fund which holds VTI you can't apply for it. Same here.

Complicated. But basically because of how VXC works, we lose the 15% on the wrapped US funds.
All that being said, VXC is a great fund, and sometimes simplicity is worth a small percentage lost, roughly .3% (15% * 2% dividend).

My sources are mostly from CCP, the articles and reading the comments:
http://canadiancouchpotato.com/2014/07/10/under-the-hood-vanguard-ftse-all-world-ex-canada-vxc/
http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/
and probably other articles of his.

Retire-Canada

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Re: Replacing VXC with VTI and VXUS within RRSP
« Reply #9 on: May 06, 2015, 06:58:53 AM »
Hi Vikb,

That makes a lot of sense, thanks for the well thought out post. Do you know if there are any issues with withdrawing USD directly from an RRSP?

If you transfer USD from a brokerage in that currency to a USD bank account I don't see the problem. You can then pay for stuff on a USD credit card and pay the CC from that USD account. You just need to have a path for the money that doesn't require conversion to CDN.

That said I have never withdrawn from a RRSP in any currency so take that with a grain of salt.

-- Vik

Retire-Canada

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Re: Replacing VXC with VTI and VXUS within RRSP
« Reply #10 on: May 06, 2015, 07:07:30 AM »

Vik, you are correct in that the tax agreement only applies to US equities, however you are a bit off about the benefit to VXUS in an RRSP, compared to VXC. It's actually very complicated why - I will do my best to explain:


Thanks. That was a useful explanation. I didn't appreciate the situation with the int'l equities held by a CDN via the US.

-- Vik

daverobev

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Re: Replacing VXC with VTI and VXUS within RRSP
« Reply #11 on: May 06, 2015, 08:33:38 PM »
You do NOT pay anything like 2% when you do CAD-USD forex by Norbert's Gambit; you are basically getting spot.

Buy DLR.TO. Journal to DLR.U.TO. The former is in CAD, the latter in USD. Can also be done with large interlisted stocks like RY.

Journaling is exchanging a share on one exchange for 'the same share' but on a different exchange, or with the same holding underlying on the same exchange (so RY lists in Toronto and New York so US buyers will buy! And the whole point of DLR is that it is USD underneath).

For the VXUS stuff, it's been summarised correctly. It is also why I buy XEF or ZEA rather than VDU, say.

sieben

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Re: Replacing VXC with VTI and VXUS within RRSP
« Reply #12 on: May 09, 2015, 08:40:15 PM »
Hey guys,

Thanks for the informative answers, I think I'm going to end up trying out Norbert's Gambit next time I move money into my RRSP and see how things go.

Thanks!

My Own Advisor

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Re: Replacing VXC with VTI and VXUS within RRSP
« Reply #13 on: May 11, 2015, 06:12:48 PM »
Big fan of VTI and VXUS inside RRSP.

I do a modified gambit, MOA gambit :)  I buy an interlisted CDN stock that pays US $$ dividends and journal it over to US side of RRSP to earn more US $$ dividend income.  As USD $$ builds up I buy some VTI.  I buy VTI once per year usually and DRIP it otherwise.

VUN is about 8 times more expensive (MER) than VTI.  VUN, about 0.40% cost is still rather cheap all things considered.

VUN or VTI.  VXUS or VDU or VXC, all great products.