The Couch Potato Goes Abroad

Global_Expat_GuideAndrew Hallam’s Millionaire Teacher remains one of the best introductions to index investing. When I reviewed it three years ago, I stressed that Andrew writes with authority because he follows his own advice.

In his new book, The Global Expatriate’s Guide to Investing, Andrew shares more of his first-hand knowledge about managing an indexed portfolio outside your home country. Andrew left Canada in 2003 and spent years as a teacher in Singapore before settling (at least for now) in Mexico earlier this year. So he knows all about the challenges—and the surprising benefits—of being an expat investor.

Most of his book’s advice applies equally to homebodies: the first several chapters lay out the case for using a passive strategy, whether with plain-vanilla ETFs, a fundamental index strategy, or the Permanent Portfolio. Then he explains how expats can put these ideas into practice. I asked Andrew to elaborate on some of the key points for Canadians living abroad.

What are the most important tax issues that Canadian expat investors need to be aware of?

AH: So much depends on where the expat is living. Those in jurisdictions where they won’t be charged capital gains taxes can benefit most. Such places include The Isle of Man, Singapore, New Zealand, Hong Kong, Luxembourg, Belize, Egypt (for holding periods exceeding one year), Kenya, Jamaica, Malaysia, Russia, Sierra Leone. The list goes on.

As long as expat Canadians reside in one of these countries, they shouldn’t have to pay capital gains taxes. But there are a few important things to consider. If the account holder buys US-domiciled stocks or ETFs, their heirs may have to pay US estate taxes when the account holder dies, if the value of the assets exceed $60,000 USD. For this reason, expats are better off not investing on US exchanges. They could instead buy ETFs on the Canadian market. Withholding taxes would be 15% on income and dividends, depending on the tax treaty Canada has with the expat’s adopted residence. But those buying Horizons’ swap-based ETFs could sidestep even this tax.

Expats can keep their TFSA and RRSP accounts open while residing overseas. But they can’t contribute to them. The year after I moved overseas, I sold my RRSPs. I paid 25% tax to do it. But when I first invested that money (as a resident) I had received a 40% tax rebate. So selling the RRSP and reinvesting the proceeds in a tax-free account was worth doing.

Is TD Direct Investing International the best brokerage choice for Canadian expats?

AH: Not necessarily. Canadians living in Malaysia or Hong Kong (to name two examples) could invest with Luxembourg-based TD Direct Investing International. But those same investors could also open a Singapore-based account with Saxo Capital Markets, DBS Vickers, or a variety of other brokerages. In fact, DBS Vickers is much less picky about where investors reside: TD Direct Investing International has greater restrictions. They won’t take expats living in Japan, Indonesia, or Bangladesh, for example. And it’s also one of the most expensive international brokerages.

In the book you mention that the cost of buying ETFs in a foreign currency is “negligible.” For Canadians buying US-listed ETFs in discount brokerages here, the cost is actually very high: about 1.5% on smaller amounts. In general, are these spreads lower at brokerages designed for international investors?

AH: Most offshore brokerages are much kinder with respect to foreign currency spreads. But they gouge expats in other areas to make up the difference! One of my brokerages, for example, charges a 0.5% commission on all trades. And it charges a minimum commission of $30 USD. So while they give a better deal on foreign currency spreads (roughly half what Canadians pay) we get smacked with much higher trading commissions.

Some of the offshore brokerages (like Standard Chartered Bank) offer lower trading commissions, but they hammer their investors on foreign exchange spreads. In the end, we either get kicked in the groin or kicked in the teeth.

One “offshore” brokerage, Interactive Brokers, offers some of the tightest currency spreads in the world for retail investors. And they offer low trading commissions. But because the money is held within the U.S. (regardless of which exchange the purchase is made on) there’s always a risk of having to pay U.S. estate taxes upon death, if the account proceeds exceed $60,000.

You recommend using market orders rather than limit orders when buying ETFs. I have always recommended the opposite (as do all the ETF providers) and I discourage people from placing orders when the markets are closed. I recognize this issue may be different for expats in a time zone where the North American markets are never open during their waking hours. Can you share your thoughts?

AH: Technically, you are right to recommend limit orders. And for investors who are emotionally stoic, I recommend limit orders, too. But a limit order, in my view, is a bit like an addictive narcotic. Many investors get excited as they wonder whether their orders have cleared. They might start looking at market prices more often, figuring they can hold out for a better price. They might start getting the jitters when the markets go bump. Many people, I think, underestimate the emotional control required to invest well, year in and year out. In my view, a market order can offset some of the temptation to speculate. And the downside of the extra market order costs are dwarfed by the upside gained from actually matching the market.

How does your status as an expat change your asset allocation decision? For example, if you plan on living outside Canada for many years, does it really make sense to hold all Canadian bonds for your fixed income? And is there any reason for being overweight Canadian equities?

AH: Once an expat moves overseas, their odds of not retiring in Canada actually increase. So yes, it might make sense to go lighter on Canadian bonds and equities. Until recently, I didn’t own a Canadian stock ETF for that reason. Why overweight a geographic sector that may not become my future home country? Incidentally, I added some Canadian equities recently because the Canadian stock market was lagging global markets. Plus, I was able to buy a Horizons swap-based ETF. As an expat in Singapore, I wouldn’t have paid capital gains taxes or dividend taxes on such a product.

Can you share your own asset mix and the process you used to make that decision?

AH: Roughly 40 percent of my money is in Canadian bonds. It’s split between the Vanguard Canadian Short-Term Bond (VSB) and Horizons Canadian Select Universe Bond (HBB). The Horizons ETF is swap-based. Because my account is domiciled in Singapore, I won’t have to pay capital gains taxes on this product, and there is no interest income. I split my fixed income between the two because I recognize the added third-party risk of owning a swap-based ETF. The rest of my money is split evenly between Vanguard’s FTSE Developed ex North America (VDU), Horizons S&P 500 (HXS), and Horizons S&P/TSX 60 (HXT).

36 Responses to The Couch Potato Goes Abroad

  1. Michael James November 28, 2014 at 10:06 am #

    Good interview. On the question of limit vs. market orders, it seems to me that setting limits fairly far from the current price might satisfy concerns from both sides. For example, if the bid-ask on an ETF is $50.00-$50.02, you could place a limit buy order at $50.20. This protects you from a big price move and will almost certainly be filled.

  2. Canadian Couch Potato November 28, 2014 at 10:18 am #

    @Michael: I agree, and I don’t think you need to go even that high. I think people run into behavioral problems with limit orders when they try to get clever and go above the bid or below the ask. If the ask price is $50.02, for example, they place a buy order for $50.01 and try to get a bargain. That order stands a good chance of not getting filled.

  3. Romain November 28, 2014 at 10:46 am #

    No emerging market in your portfolio (Vanguard’s FTSE Developed ex North America (VDU) does not include China, Brazil etc…)
    Any reason ? Thanks.

  4. George November 28, 2014 at 11:11 am #

    Does this $60,000 limit on American based funds apply to Canadians too, or just expatriates. I understood our limit for American funds is $2 million to $5 million. It also appears he changed his assets from his original book of VTI, VEA, and VSB. Is this due to his move from Singapore?
    Thanks!

  5. Canadian Couch Potato November 28, 2014 at 11:20 am #

    @George: U.S. estate taxes can, in theory, apply to anyone holding at least $60,000 USD worth of so-called “U.S. situs” assets, which includes ETFs and stocks listed on American exchanges. However, the present laws effectively exempt non-residents who have a total estate valued at less than $5.34 million:

    http://www.pwc.com/en_CA/ca/estate-tax-update/publications/pwc-2009-04-13-us-tax-exposure-canadians-2013-02-19-en.pdf
    http://www.bdo.ca/en/Library/Services/Tax/Documents/Tax-Bulletins/US-Estate-Tax-Issues-for-Canadians.pdf

  6. Jim R November 28, 2014 at 12:08 pm #

    Not sure why Mr Hallam says “40 percent of my money is in short-term Canadian government bonds” given that both VSB and HBB have healthy amounts of non-governmental bonds. Additionally, HBB has a duration of 7.21 which I believe is beyond what people normally consider short-term.

  7. Canadian Couch Potato November 28, 2014 at 12:22 pm #

    @Jim: That is true: it’s more accurate to say 40% is in Canadian bonds, period. I’ve changed this in the original post for clarity.

  8. Chris November 28, 2014 at 12:23 pm #

    How does he avoid capital gains taxes on an account domiciled in Singapore if he is a Mexican resident?

  9. Jean November 28, 2014 at 1:50 pm #

    @CCP: Your question to AH about asset allocation and “overweighting” in Canadian equities is something I have been wondering about. Assume a Canadian resident who expects to remain and retire in Canada, with a CCP investment style. This style predicates that one wants to “own the market”. Let’s further assume that I am using a standard Complete Couch Potato allocation, where equities are allocated at 20% CDN, 15% US, and 15% International.

    We know that the Canadian equity market comprises 4% or so of the world equities. What is the rationale for being so overweight on the “home” country, when the “own the market” premise suggests to me that it should be weighted by market capitalization around the world?

    PS: Like many others who track your site, I thank you immensely for the education you provide. I have learned so much in the last two years, and am so much more comfortable with my investment approach and retirement planning now, because I feel I am in control now, and I have an approach that I understand.

  10. Canadian Couch Potato November 28, 2014 at 1:55 pm #

    @Jean: Thanks for the comment. One can certainly make an argument for using an equity allocation in proportion to each country’s market cap. Here are my thoughts on why it’s not unreasonable to overweight one’s home country:
    http://canadiancouchpotato.com/2012/05/22/ask-the-spud-does-home-bias-ever-make-sense/

  11. B November 28, 2014 at 2:44 pm #

    @Romain: I believe that I have read in the past that Andrew doesn’t invest in China because he can’t trust the financial markets (corruption concerns). I’m not sure how Brazil/Russia/India fare on issues of corruption, but it may be hard to find a low-cost way to invest in Emerging Markets ex China. Considering that Emerging Markets are often a small part of one’s portfolio, it might just be easier for Andrew to avoid that asset class. He seems to be doing well enough without 🙂

  12. Tyler November 28, 2014 at 4:33 pm #

    If you’re holding VDU when living in another country, wouldn’t this introduce a *third* level of withholding tax?

  13. RJ November 28, 2014 at 7:04 pm #

    A year or so ago I wrote AH and asked him why he did not include emerging markets. His response was basically that historically they have not had a good risk adjusted return (sort of like growth stocks) and that along with other issues such as cost and transparency lead him to decide to just skip that equity class. He then went on to remind me that sticking with my own asset allocation was more important than the allocation choice itself.

  14. Russ November 28, 2014 at 7:07 pm #

    Regarding US estate taxes, my understanding is, as you say, Dan, that you are exempt for an estate less than several million dollars, but if the $60,000 threshold is passed, you are nevertheless required to file a US tax return. I stand ready to be corrected on that, but that may be enough to incentive to avoid holding US ETFs for any Canadians.

    By the way, I lived overseas for several years, but the nature of my employment was such that I was considered a “factual resident” by the CRA, so I continued to contribute to my RRSP and invest as a physically resident Canadian would.

  15. Andrew Hallam November 28, 2014 at 11:05 pm #

    Hi George,

    I traded my U.S. domiciled ETFs for Canadian domiciled ETFs because of the risk associated with U.S. estate taxes. Canadians, living in Canada, don’t face such a risk (at such a low threshold) as Canadians abroad do.

    Hi Chris,

    I’m not a resident of Mexico. But if I were, I would have to pay capital gains taxes. My wife and I have been here since October, and we are leaving next month. It’s a fantastic country, and we would like to come back at some point. In January, we head back to Asia.

    Hi Romain,

    I don’t beat my fists on a table to suggest that I’m right (and others are wrong) but I don’t invest in emerging markets. I know that GDP growth is far higher than it is in developed economies. But since emerging market stock market growth has been tracked (1985 is the earliest data point for the world bank) such markets have under-performed the aggregate return of developed markets. Not every year, and not every decade. But overall. Legal frameworks are loose in these countries. And minority shareholders don’t earn the profits they deserve. Look at China. Since its markets have been open to foreign investment (1993) the Chinese stock market has been beaten by Canadian government bonds. Yet Chinese GDP runs laps around other countries’ growth rates.

    My wife and I co-founded an educational foundation in Cambodia last year. To get it running, we had to pay an element of bribe money to the Cambodian government. It’s much the same in India, and in most other emerging market countries. Money doesn’t always go where it should. Sound corporate governance is practically non-existent.

    Last week, a friend of mine (a veteran businessman in Ecuador) told me he bought 1000 hectares of land last year. It cost him millions of dollars. Two months ago, he found out that he bought the land off a guy who didn’t even own it. The more traveling I do in emerging markets (and I do plenty) the less interested I am in ever owning real estate, pieces of businesses, or equities in those countries.

    Again, this isn’t a recommendation I have for others. It’s just a very personal decision. And I’m not entirely convinced that I’m right, either. Emerging markets could end up out-performing developed markets over my lifetime. But years ago, after already traveling prolifically, I told myself that I wouldn’t invest where I couldn’t drink water out of the tap.

  16. Dave November 29, 2014 at 9:13 am #

    Hrm, I just opened an Interactive Brokers account. Their Canadian office is in Montreal.

    What’s the deal with US estate taxes for Canadian residents? Do I have to worry about domicile here (I own no US ETFs, but Canadian and UK/Irish ones).

  17. Canadian Couch Potato November 29, 2014 at 9:27 am #

    @Andrew: Many thanks for the replies!

    @Tyler: Interesting question, but no, I don’t believe there would be a third level of withholding taxes. The withholding tax would apply once at the fund level (the underlying companies withhold tax from the dividends paid to the fund) and a second time at the individual investor level (the fund withholds tax from the dividends before passing them on to the investor). This second level of tax would vary depending on whether the the investment is held, but it should be applied only once.

    @Russ: My understanding is the same as yours: although you would not be on the hook for paying US estate taxes unless you were very wealthy, your estate is still expected to file a tax return with the IRS if you own $60,000 in US situs assets.

    @Dave: If you hold Canadian, UK and Irish securities you should not be a concern for the IRS. But I would check with a specialist in this area if the amounts are significant.

  18. RJ November 29, 2014 at 2:34 pm #

    Three questions about US estate taxes after reading the two links provided by the CCP.

    Are VEA and VWO considered a US situs assets because it is vanguard even though it only holds non-US stocks?

    Am I correct that as a Canadian resident if the value of my US situs assets is only 20% of my entire estate (including non-liquid assets) then I am only entitled to 20% of the unified tax credit or 1,068,000?

    Of course I may also be able to benefit from the marital credit relief or the small estate relief depending on the circumstances.

    If I understand correctly my preference for VEA, VWO and VTI will mean that I will have to file a US tax return, but under the current tax rules I cannot see having to pay any tax.

    As long as all my Vanguard holdings are in registered accounts I do not have to declare foreign property greater than $100,000 on my Canadian tax return right?

  19. Canadian Couch Potato November 29, 2014 at 3:07 pm #

    @RJ: I’m not comfortable commenting on your specific tax obligations, but to answer your first question, yes, VEA and VWO are definitely US situs assets. Although their underlying holdings are foreign stocks, both are US-domiciled mutual funds.

  20. CharlieF November 29, 2014 at 3:12 pm #

    Yes! Great timing! Visiting relatives in HK soon and was wondering if I should get an brokerage account there also.
    I’m assuming I’ll just buy all HXS when I’m HK then? Or some other ETF that tracks SouthEastAsia that’s on the HK exchange?

    As for the estate tax, I wouldnt worry too much about it as I’d be dead. That and I plan to use up all of my money when I die so I doubt I’d have enough left to be over the threshold to be taxed.

  21. Chris November 29, 2014 at 5:45 pm #

    @CharlieF: If you’re a Canadian resident and don’t plan to become a Hong Kong resident, there’s no benefit to opening a brokerage account in Hong Kong, as you’re subject to Canadian capital gains taxes (as a Canadian resident) regardless of where the account is domiciled. It used to be that you could set up an “offshore arms-length trust” in Hong Kong to avoid Canadian taxation, but after a series of reforms starting from 1999, it’s no longer possible to do that.

    The one loophole that is still available is you can set up an offshore arms-length trust to receive gifts from non-residents, which can be useful for example if you have a family member who plans to sell real estate in Asia and gift you with the proceeds. You need an accountant to set this up for you, because if you don’t structure the trust properly, CRA will come calling.

  22. CharlieF November 30, 2014 at 1:33 am #

    I’m an HK resident. Was born there. I have the HK permanent ID. Does that change anything or still the same?

    If I still get taxed when selling HXS in HK, then I might as well buy HXS in Canada instead.
    But if I buy ETF’s that are SouthEastAsia based and I’m investing in non-Canadian funds, would the CRA still taxed that as ‘foreign interest/income/dividends’?

  23. Chris November 30, 2014 at 11:15 am #

    @CharlieF: The question is are you a Canadian resident for tax purposes? If so, there is no benefit to opening a brokerage account in Hong Kong. (And, conversely, if you’re not, there’s no reason to have brokerage accounts in Canada.) Canadian residency for tax purposes is assessed by CRA on a combination of factors, some of which are: do you live and work in Canada? do you maintain accounts for services like cellular service and utilities in Canada? do you rent a storage location in Canada? do you maintain bank accounts in Canada? If you believe that you are a non-resident but have previously been filing tax returns as a Canadian resident, you should file CRA’s form NR73 so that they don’t come after you later for capital gains in your Hong Kong accounts.

  24. My Own Advisor November 30, 2014 at 1:06 pm #

    Great interview! I just got a copy of Andrew’s book and I’m looking forward to reading it (thanks Andrew!)

    A few things to ask…

    Andrew and Dan, I thought you only have to pay, as a Canadian, US estate taxes when the account holder dies if:

    1) the value of the assets exceeds $60,000 USD
    AND
    2) The worldwide assets of the deceased are more than $5.25 million USD.

    ?

    Even if an investor only meets one of these conditions, US estate taxes do not apply.

    Secondly, Andrew, I recall you used to own VTI, VEA and VSB. I read above you no longer hold your U.S. listed ETFs. Are you keep your Canadian bonds because you plan to retire in Canada? Why not bonds from other markets?

    Lastly, are you worried about any capital gains using swap-based ETFs like HXT? Are you doing this because capital gains are one of the least forms of taxation (vs. dividends?)

    Again, great stuff.
    Mark

  25. Andrew Hallam November 30, 2014 at 5:23 pm #

    Hi Mark,

    Canadians residing in capital gains free jurisdictions (like Singapore) don’t have to pay capital gains taxes on their investments if they’re located in the same jurisdiction.

    Cheers,
    Andrew

  26. My Own Advisor December 2, 2014 at 8:47 pm #

    Thanks Andrew.

  27. CharlieF January 17, 2015 at 10:09 am #

    Why cant expats just change the currency that they get paid in (eg HKD) back to CAD and then invest using VB/QT/eseries/etc?
    Does the tax free on capital gains really outweigh the higher commission fees? (It’s free to buy/sell some ETFs on VB and QT.)

  28. Andrew Hallam January 17, 2015 at 4:53 pm #

    Hi Charlie,

    You mention VB and QT but I don’t know what those stand for.

    Cheers,
    Andrew

  29. Andrew Hallam January 17, 2015 at 8:28 pm #

    Charlie,

    Dan filled me in on what the initials mean.

    To the best of my knowledge, Virtual Brokers and Questrade won’t allow expatriate Canadians to open accounts with them.

    Cheers,
    Andrew

  30. CharlieF January 18, 2015 at 11:17 pm #

    Oh. So basically it’s cause of home address?

    So if I open an account with VB/QT before going abroad does that work or is that illegal?
    Like open an account with VB/QT and then link (EFT) the brokerage account with TD/CIBC/RBC/etc in order to fund the brokerage account. And then transfer the money to those bank via a local bank (eg HSBC/BoC/HangSeng/etc).

  31. Scott Rousseu February 10, 2015 at 8:21 am #

    Charlie/Andrew,

    I have a non-resident Canadian friend here who just opened a non-resident account with Questrade and is trading with them.

    Charlie, if you do what you have suggested, but want to be considered a non-resident for tax purposes, then Questrade will need to open a non-resident account for you.

  32. Ed February 12, 2015 at 7:14 pm #

    I’m going to be a non-resident Canadian soon. Having spoken to Questrade, the customer service rep stated I could continue trading (buying and selling) as long as I lived in a country that was not on their sanctioned countries list (the same goes with TD Direct Investing and RBC Direct Investing).

    Anyways, as I understand it, I’m liable for capital gains tax on securities I own until the day I leave Canada (something known as “Deemed Disposition of Property”).

    The big question I have is this: if I live in a non-sanctioned country and continue trading with my QuesTrade account as a non-resident after I leave Canada, will I be subject to capital gains taxes for growth in the securities I own AFTER the day I leave Canada?

  33. Dave March 17, 2015 at 10:25 pm #

    US Estate taxes…US situs assets, look at the securities ISIN, if it starts with ‘US’ except for ADR foreign securities these are not US situs assets and neither are most US bank deposits and US bonds … Just because a security is traded on a US exchange does not make it a US situs aset

  34. Dave March 17, 2015 at 10:27 pm #

    The same with AH comment about Interactive US, your holdings with them does not make them US situs assets….as he suggests

  35. Dave March 18, 2015 at 1:42 am #

    To ED, the day you become nonresident in Canada, you become the tax resident of your new country. Any income incurred from that point, interest salary, capital gains etc..is taxable in your new country, not Canada. Canada may withhold taxes, but any double tax agreements can then come into force

  36. David June 4, 2015 at 7:48 am #

    I’m a Canadian who is a permanent resident in Japan. Have an RBC Direct Investing Non-Resident account in Canada. What is the downside of this? Some of my ETF are in US and in US currency! What is the downside of this?

    Thanks

    Dave

Leave a Reply