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Email this5:10 pm
Hey Folks,
Rare earths has taken a severe beating since the Japanese earthquake. Maybe it's a good time to jump in?
I'm contemplating buying into an ETF, but I can't find any Canadian ones. Has anyone seen anything interesting?
8:43 am
hi Arjun,
I personally would not consider such a focussed play right now purely due to the size (or rather lack thereof) of my portfolio. I have however been doing a little research lately and have found something that may be of interest to you..
Morningstar article – What Canadians should know before investing in U.S.-traded ETFs:
http://www.morningstar.ca/glob.....eid=316704
I don't like the Canadian ETFs that I have looked at so far because of the high MERs, so I'm considering trading on the US market. In particular I like Vanguard MSCI Emerging Markets ETF but I would only keep a single digit percentage into it for diversification.
There are some other interesting ones with very low MERs that I'd get into as well through the US market like US small cap etc.
One interesting thing I've noticed; in the Morningstar article linked to above it says that there is no withholding tax at all if the US-traded ETFs are held in an RRSP or a RRIF.
This is useful information to know. If your taxable income is low enough that you can't write off the 15% withholding tax that the US charges us on dividends then it would probably be preferable to keep any US-traded ETFs in your RRSP or RRIF.
3:06 pm
I think your US etf dividends are subjected to the 15% with-holding (outside a Registered account and in TFSA) but then you get to claim it as a tax credit (it is treated as income, though) which means if your marginal tax rate is 25%, you are only paying 10% US dividends to CRA, as 15% is your tax credit. Better, if your marginal tax rate is 5%, you get a 10% credit towards taxes you paid (ie Canada refunds 10% of the 15% that the US withheld). Quick/Turbo tax does this automatically. So, with-holding tax really is a secondary concern. For really low taxable income people, the cost of the US etf in terms of taxes is missing the generous Canadian tax credit, which can wipe out most or all taxes on Canadian dividends (again for low taxable income people). (Other costs are possible estate taxes, exchange rates. And benefits can also be exchange rates, diversification and low mgt fees)
So if you value foreign diversification (I do) and you are under 30,000 taxable income I wouldnt worry about the with holding tax. If you are over, you might consider buying VUG (Vanguard growth) to reduce your US dividends and get your return in capital gains instead. (Indeed you are less diversified in just growth, but there my method below to keep diversified.)
My case is slightly more complicated, I personally replaced Vanguard's VTI (total index) with MGK and VBK: large-cap and small-cap growth. This return comes mostly in capital gains which has no witholding tax on it. And I bought Berkshire(which is like an active etf run by conservative Warren Buffet) to round out my US exposure as Berkshire (BRK.B) buys mostly value stocks that pay large dividends TO Berkshire, but Berkshire doesnt pay dividends to its stock holders, so I avoid again getting dividend with-holding taxes for my whole US exposure, eventhough it is still based on many dividend paying companies.
Hope to win the prize of the week, if there still is this custome. I see last time I wrote in the spring on travelling with US Dollars, I got the prize of the week, but I dont know how to claim it so I would appreciate any info. Maybe i never got the e-mail, if one was/is sent. I'll try using a different e-mail in case that was the problem.
6:26 am
paj said:
I think your US etf dividends are subjected to the 15% with-holding (outside a Registered account and in TFSA) but then you get to claim it as a tax credit (it is treated as income, though) which means if your marginal tax rate is 25%, you are only paying 10% US dividends to CRA, as 15% is your tax credit. Better, if your marginal tax rate is 5%, you get a 10% credit towards taxes you paid (ie Canada refunds 10% of the 15% that the US withheld). Quick/Turbo tax does this automatically. So, with-holding tax really is a secondary concern. For really low taxable income people, the cost of the US etf in terms of taxes is missing the generous Canadian tax credit, which can wipe out most or all taxes on Canadian dividends (again for low taxable income people)…
…So if you value foreign diversification (I do) and you are under 30,000 taxable income I wouldnt worry about the with holding tax.
Federal Foreign Tax Credits:
Your tax credit is the lesser of:
1: Net non-business tax paid to a foreign country
2: (net foreign non-business income divided by net income) X (basic federal tax)
So if your taxable income is low enough that you pay little or no federal tax (say maybe $12-13,000), then you're pretty much paying the full 15% when receiving dividends from foreign-held shares outside a registered account.
It's always a good idea to fill out the form anyways, even if you don't think you have to pay federal tax on any given year. Once CRA is done reworking your numbers you could be in for a surprise, as I was.
7:41 am
paj said:
(Other costs are possible estate taxes, exchange rates. And benefits can also be exchange rates, diversification and low mgt fees) …
… And I bought Berkshire(which is like an active etf run by conservative Warren Buffet) to round out my US exposure as Berkshire (BRK.B) buys mostly value stocks that pay large dividends TO Berkshire, but Berkshire doesnt pay dividends to its stock holders, so I avoid again getting dividend with-holding taxes for my whole US exposure, eventhough it is still based on many dividend paying companies.
For me estate taxes (US) are definitely not a concern. Although the rules keep changing it seems that right now the first 5 Million is tax-free:
http://en.wikipedia.org/wiki/E.....ted_States
Low management fees are a big one. 1% difference or even a half a percent can make a huge difference over time.
Personally, I find growth stocks a little scary, as I consider them to be defined as the latest popular thing, but thanks for the tip about Berkshire!
It definitely looks worth looking into as a foreign investor.. the plus of owning value stocks and dividend stocks without having to worry about the dividend tax, nice 
9:19 am
I agree, I mostly want to reduce my mgt fees and hold safe securities.
I heard a guy on BNN say that "Most of American Small Cap are bigger companies than the ones listed as Canadian Large Cap on the TSX 60/XIU." In any case Vanguards VB small caps (based on Russel 2000 stocks)will be incomparably larger than smaller pool, way smaller cap Canadian companies. Vanguards large cap growth (MGK) are often multinational companies, (natural diversification!) like CocaCola, many that regularly buy back shares instead of pay dividends, so they are actually somewhat like a dividend company. So i find these growth etfs not too unsafe. But i agree with you that I am afraid of growth stocks too. But I buy the index for a second reason:
But what we really want is to reduce our ownership fee, not just mgt fee. An extra 2% foreign dividend realized by just buying the whole S&P(VTI) over my method, at a 25% marginal tax rate would add for canadians 2%x25% or .5% to VTI mgt fee of say .09% for a "total ownership fee" of .59%, vs if you just bought XIU eft and, in my case pay little on the dividend because of the divid tax cr, so "total ownership fee" is about the same as "total mgt fee" of say .17%. Thus America's much lower etf mgt fee attractiveness vs those of Canada is reversed because of what we have to pay on fx divid taxes making the ownership expense of even the cheapest American etf more expensive than owning XIU.
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