My previous post on foreign withholding taxes included a lot of information for investors to puzzle over. But unless you’re an accountant, you probably don’t care too deeply about the finer details. Most investors just want to answer a simple question: which fund should I put in which account?
Recall from the earlier post that there are five broad categories of funds you can use for US and international equities:
A. Canadian mutual fund or ETF that holds US or international stocks directly.
B. US-listed ETF that holds US stocks.
C. US-listed ETF that holds international stocks.
D. Canadian ETF that holds a US-listed ETF of US stocks.
E. Canadian ETF that holds a US-listed ETF of international stocks.
To help you make the most tax-efficient choice for each type of account, see the tables below. I’ve specified which of the above fund categories are the most tax-efficient, and which ones carry the largest withholding tax burden. Then I’ve included some comparisons of specific funds. In each case, the pairs track the same index and use the same currency hedging strategy. Once again, a big thanks to Justin Bender at PWL Capital for helping me sort through these details.
An important note before you make your decision: foreign withholding taxes are just one of many costs of investing, so they should not be the only factor in your fund choices. Management expense ratios are just as important: it makes no sense to pay an extra 0.50% in MER to save 0.30% in withholding taxes. Similarly, a US-listed ETF may be more tax-efficient than a Canadian one, but your overall cost will still be higher if you’re paying 1.5% in currency exchange fees. Make sure you’ve thought this through before making any changes to your portfolio.
Even more important, you need to consider your income tax situation when deciding where to hold your fund. While holding foreign equities in a non-registered account (as opposed to an RRSP) allows you to claim the foreign tax credit, the dividends are taxed at your full marginal rate, and any capital gains are also taxable. In an RRSP, these taxes can be deferred until retirement. Justin illustrates this idea with a dramatic example on his blog.
US Equities
For non-registered accounts choose A, B or D.
For RRSPs choose B. Avoid A and D.
| iShares S&P 500 (IVV) | is more tax-efficient than | TD U.S. Index (TDB902) |
| Vanguard S&P 500 Hedged to CAD (VSP) | is equal to | TD U.S. Index Currency Neutral (TDB904) |
| Vanguard Total Stock Market (VTI) | is more tax-efficient than | Vanguard US Total Market (VUN) |
| BMO S&P 500 (ZSP) | is equal to | Vanguard S&P 500 (VFV) |
| PowerShares FTSE RAFI 1000 (PRF) | is more tax-efficient than | iShares US Fundamental (CLU.C) |
International equities
For non-registered accounts choose A. Avoid C and E.
| TD International Index (TDB911) | is more tax-efficient than |
Vanguard FTSE Developed Markets (VEA) |
| TD International Index Currency Neutral (TDB905) | is more tax-efficient than |
iShares MSCI EAFE CAD-Hedged (XIN) |
| iShares International Fundamental (CIE) | is more tax-efficient than |
 PowerShares FTSE RAFI Developed Mrkts ex-U.S. (PXF) |
| Vanguard FTSE Emerging Markets (VWO) | is equal to | Â Vanguard FTSE Emerging Markets (VEE) |
For RRSPs choose A or C. Avoid E.
| Â TD International Index (TDB911) | is equal to | Vanguard FTSE Developed Markets (VEA) |
| Â TD International Index Currency Neutral (TDB905) | is more tax-efficient than |
iShares MSCI EAFE CAD-Hedged (XIN) |
| Â iShares International Fundamental (CIE) | is equal to | Â PowerShares FTSE RAFI Developed Mrkts ex-U.S. (PXF) |
| Â Vanguard FTSE Emerging Markets (VWO) | is more tax-efficient than |
 Vanguard FTSE Emerging Markets (VEE) |
Let me go back and read and understand. I currently have VEA in non-registered account …
@Slacker: Case in point: VEA has a management fee of just 0.12%, while the TD e-Series fund as a fee of 0.51%. Is there any overall savings if you use the mutual fund rather than ETF? That also depends whether you’re also incurring currency exchange fees and trading commissions with the ETF. It’s important to consider all of these things before making any changes.
Frankly, it’s also important not to tie yourself in knots over these decisions. For those of us with modest portfolios, withholding taxes are worth understanding but not worth obsessing about.
How about some thoughts on holdings within the TFSA?
I can’t recover foreign withholding tax from, say, the TD e-Series US Index fund (TDB902) held within a TFSA but neither will I be taxed by the Canadian Government on the growth.
@CJ: That’s the tradeoff exactly. If you have no need to use non-registered accounts (because you still have room in TFSAs and RRSPs), your are likely to be better off using tax-sheltered accounts even if you pay foreign withholding taxes. If you have maxed out these tax-sheltered accounts, then asset location becomes more important, but still not straightforward.
I’m surprised you don’t have any info on VTI and VXUS in this post. Is it because there are no comparable funds/ETFs?
@Joel: Yes, that’s the reason. Just treat VTI like IVV (category B) and VXUS like VEA (category C) for purposes of withholding tax.
I want to stress that one should not, for example, choose one fund over another based solely on withholding tax is the funds track different indexes with different strategies. That’s putting the cart before the horse.
For international non-registered equity, where would ZDM fit in your table? Thx.
@AltaMan: ZDM is category A.
I have the bulk of my investments in an online brokerage; however, I have my PAC going into TD e-series funds. Even though I would like to have them invested in my strategy of ETF’s; I feel it is not efficient to wait and hold your money and make bulk buys. I have a mix of e-series funds including the US index, and International Index. After reading this article it seems like I should only invest in Canadian funds in the e-series and make appropriate distributions %’s of International and US securites in the brokerage account.
Do you agree?
I have a TFSA and RRSP, both buying TD e-Series funds for retirement and a downpayment. For the US and Int’l components, is there really a large (if any) tax difference with regards to the hedged or n0n-hedged versions? I’m currently with the non-hedged version (as per your model portfolio), but I see you mention the hedged versions above.
Thanks
Do you need to set up a DRIP with the broker when you buy an ETF? (RRSP/TFAS)
Thanks!
@Joe: I would not make any wholesale changes to your portfolio based only on this info. Make sure you have thought it through, comparing MERs and trading costs, not just withholding tax.
@Truck: Hedging has no effect on withholding taxes: the only relevant factor is the fund
structure.
@HD: Nope, totally optional.
Sorry Dan, I don’t understand how you determined which fund is more tax-efficient than the other.
For example, you say ZUE is more tax-efficient than XSP while being held in an RRSP account. I understand the difference between the two are that ZUE holds US stocks directly, and XSP holds US ETF IVV. I thought you mentioned in your previous post that withholding taxes apply and are not recoverable for both these types in an RRSP account.
Also, would there be an easy equation to work out which would be better between a tax friendly higher MER fund, versus a lower MER not so tax friendly fund?
Thanks,
Que
Just to add to my second question:
In the comments under :
https://canadiancouchpotato.com/2010/03/05/put-your-assets-in-their-place/
you say:
…”with US stocks paying about a 2% yield these days, the withholding tax amounts to about $30 annually for every $10,000 invested. So you can think of the withholding tax as an extra cost of 0.30%.”…
This might be the answer…
@Que: You win the prize for spotting my error. :) ZUE is indeed in category A, so withholding taxes would apply in an RRSP and are not recoverable. I have corrected the error in the post.
Yes, a rough way to make your calculation would be to assume that withholding taxes are about 15% of the fund’s current yield. So if US stocks are yielding about 2%, assume a drag of 30 basis points. If Fund X is more tax-efficient than Fund Y, but its MER is 40 basis points higher, then you may well be better of with Fund Y. With international stocks the drag is larger because the dividend yield is much higher.
A reminder that you also need to consider the other factors (trading costs, currency exchange, index/strategy, internal tracking error, etc.).
Couple points on TFSAs: In both cases, they act the same as *unregistered accounts*.
IE, in a TFSA:
US equities: Choose A, B, or D.
International equities: Choose A. Avoid C and E.
(Or course, that’s just the effect of withholding taxes. It still might make sense to choose C if the difference in MER were sufficient to make up for the added taxes.)
Also, for US equities, if you have the choice the best option is to use an RRSP instead of a TFSA, and choose B.
Naturally as long as you have contribution room, either RRSP or TFSA will always be better than a taxable count, regardless of withholding tax differences!
Currently, I have TD e-series in my RRSP but am looking to reallocate the US e-fund (TDB902) into the new Vanguard product when it comes out (Vanguard S&P 500 unhedged). Would you say that this woud be more or less tax efficient?
@Leeds: The two would be equivalent in an RRSP. The TD fund is category A, while the Vanguard ETF will be category D. In both cases, withholding taxes apply and cannot be recovered.
Dan,
I need to clarify the international selection. Please, let me know if my understanding is correct.
The only type of fund that international withholding taxes apply, but are recoverable, are Canadian funds that hold international stocks directly and is located in a taxable account? That would mean that you couldn’t take advantage of both RRSP benefits and avoid foreign withholding tax with international equities? “Can’t have your cake and eat it too”?
VXUS is your choice because of its diversification and low MER? Would this change if a Canadian one opened that wasn’t hedged and had an MER that was at least close to VXUS (thereby, avoiding any exchange costs)?
Thanks,
Que
@Leeds:
If you’re switching to an ETF for US Equities anyway, why not look at a US-based one like Vanguard’s VTI or Schwab’s SCHB? You get broader diversification, lower fees, and more tax efficiency in your RRSP. The only down-side is the one-time (or two-time including withdrawl) currency exchange cost. That should be vastly outweighed over a standard investing horizon by the lower costs. And it can be reduced to almost zero using ‘Norbert’s Gambit’, as CCP discussed a while back:
https://canadiancouchpotato.com/2010/10/19/reducing-the-cost-of-currency-exchange/
Indeed, a TD Waterhouse RRSP is one of the easiest places to perform the gambit:
http://www.canadiancapitalist.com/easy-norbert-gambit-in-td-waterhouse-rrsp-accounts/
@Nathan I disagree with
“(…) for US equities, if you have the choice the best option is to use an RRSP instead of a TFSA (…)”.
That would depends on the tax rate at retirement and the dividend yield.
Take for example VTI and VXUS for long term investment. Assume that you have the same tax rate in retirement as you have before to remove that part from the equation for the RRSP.
In TFSA, the capital gain will be free of taxes (and cannot claim a loss) but you will pay withholding taxes and cannot recover them. In RRSP, the capital gain will become taxable when you retire them from RRSP but you will never pay the withholding taxes.
I think VTI and VXUS get more returns from capital gains than dividends and therefore TFSA would be better in the situation described.
@Tommy,
Assuming you have the same tax rate in retirement as before, there is no effective tax difference on capital gains between TFSA and RRSP. Yes, the capital gain will be taxable on withdrawal from the RRSP. However, you get a tax rebate on the initial investment, so you have more to invest in the first place. The end result is the same. An example:
Say you earn $100 (before tax). You can put the full amount it in your RRSP effectively tax free (because by doing so, you get a rebate for any income tax you paid on that $100). Alternatively, you could pay income taxes on it (let’s say 30%), then invest the remaining $70 in a TFSA.
Now, say you buy something that doesn’t have withholding taxes, like XIC, and hold it over a long period of time, resulting in a 400% total gain. So in your RRSP you now have $100 x 5 = $500, and in your TFSA you have $70 x 5 = $350. You can withdraw the $350 from the TFSA tax free. The $500 in the RRSP is taxed at withdrawal. Assuming the same 30% tax rate, the tax is $500 x 0.3 = $150, so you’re left with the same amount, $350.
The reason for this is that multiplication is ‘commutative’. ie: the order doesn’t matter. So it doesn’t matter if we take the 30% tax hit at the beginning or the end.
Certainly, there are other factors to take into consideration between TFSAs and RRSPs: particularly, as you say, whether you expect to be in a higher or lower tax bracket, and possibly whether you expect tax rates overall to have increased or decreased, by retirement. Also when you deposit to an RRSP there is a slight delay before you receive and can invest the tax refund, and you have to have the discipline to do so. But theoretically if your tax rate doesn’t change, the results are the same.
So all else being equal, a US-domiciled fund is better held in an RRSP. At the very least, if both TFSA and RRSP are being used, it would make more sense to have (say) XIC in the TFSA, and VTI in the RRSP.
@ Nathan: I am an unsophisticated investor and didn’t want to go through the Norbert’s gambit in order to purchase VTI (scared to screw it up). If the new Vanguard S&P 500 (unhedged) trades in the Canadian exchange, follows S&P 500 index fairly closely, and only has a MER of 0.15%, then I wouldn’t have to pay that extra commission fee and go through the whole currency washing process yearly. That’s my thought process anyway….
@Leeds:
Fair enough. The thing is though, in combined withholding taxes and MER difference, you’re giving up about 0.38% *per year* compared to VTI. So even if you just bought VTI with Canadian dollars and let TD sort it out, you’d make up the currency exchange costs (in both directions) in about 5 years. Everything after that is profit. If you’re investing over, say, 30 years, that could be a difference of 10%. And that doesn’t even take into account the added diversification you get with VTI (3000 stocks vs 500).
Regardless, you might as well at least call TD and ask them to turn on “automatic washing” for US dollar trades, and “automatic DRIP”. That way if you do buy US ETFs you can rebalance between them without paying currency exchange costs, and dividends (US or Canadian) will be automatically reinvested with no currency exchange or commissions.
(Do check out that canadiancapitalist post I linked to about Norbert’s gambit though. If you’re still nervous, try it on a small amount like $100 first to test. Only costs you $20 to try and you can see how the whole thing works.)
Cheers
@Nathan Hum. I made a mistake. I agree with you. With same tax rate,
TFSA = RRSP – withholding taxes.
Therefore, RRSP is better.
Thank you
@Nathan: Thanks for your suggestion, and I’ll definitely keep it in mind. So if I do invest in VTI in my TD waterhouse acct but I don’t have enough invested to have the dividend reinvested, where would the dividend go?
@Leeds: It appears that at least as of a year ago, TD did not auto-wash dividend proceeds: http://www.canadiancapitalist.com/automatic-wash-trading-at-td-waterhouse/
So in that particular case, the dividend would be converted to CAD at TD’s standard rates. However, that will only cost you about 1% of the dividend, compared to the 15% you’d lose to withholding taxes. So still far better. And once you build your portfolio to the size where dividends payments are sufficient to buy single shares, the effect will only apply to the remaining bit.
@Nathan: You actually lose 1.5% or more on the dividend you receive and another 1.5%+ if you buy the same US$ security.
Anohter alternative to norbit’s gambit if you are with Scotia iTrade is their US$ friendly RRSP. It costs $30 per quarter so you need to consider if your savings are worth the fee.
https://canadiancouchpotato.com/2011/07/21/review-scotia-itrades-us-friendly-rrsp/
@Joe: I’ve generally seen spreads closer to 2% than 3%, but either way, my point is it’s better than 15%. I’ve found on the fraction of a share that doesn’t get reinvested, it doesn’t make a whole lot of difference.
That said, I hadn’t heard of that US-friendly RRSP. It does look like that might be a good alternative to Norbert’s Gambit for some. Of course, every brokerage has pros and cons. The big pro of TD is their e-funds. Unless you have a fairly large portfolio, it makes sense IMO to accumulate deposits in e-funds then potentially switch them into ETFs every year or two, to avoid paying too much in commissions. (iTrade does have some commision-free ETFs, on the other hand, but not all the ones I’m looking for.) On the other, other hand, TD is better if you’re buying individual bonds.
Basically it’s important to look at the whole picture when choosing a discount brokerage. :) Presumably we can agree though that it doesn’t make sense to pay an extra 38bps per year for an S&P 500 ETF over VTI, just to avoid currency exchange, regardless of how you end up doing that exchange. :)
@Nathan: Joe is actually correct. TD Waterhouse charges 1.5% each way, for a round trip cost of 3%. (I know Million Dollar Journey’s page has 1.4% for TD Waterhouse, but s/he’s not correct either.)
OK, thanks both. I always gambit so it’s been a while since I paid attention to the spread. Must be remembering outdated info, or maybe even a different brokerage. Still though, the cost savings of VTI would make up that whole spread for Leeds in just 7 years, even without a gambit. Of course, gambit would be even better.
@Leeds: If you’re still on the fence about the gambit, there’s actually a new product out that makes it “foolproof”. See here: http://www.moneysense.ca/2011/05/25/a-foolproof-method-to-convert-canadian-dollars-into-us-dollars/
It’s only VERY slightly more expensive than using a large stock like POT as described in the first post I linked you to (perhaps 0.1%), and you completely remove any risk of market movements.
In a TDW RRSP, you don’t even need to do the “call to journal” step, and you shouldn’t have to wait three days to sell. (But even if you did, it wouldn’t hurt.) Just make sure to call them to set up auto-washing first. Otherwise when you sell it for US dollars, TD would helpfully convert it back to Canadian dollars for you at their standard rates, which wouldn’t be good at all!
@Nathan: Thanks for the info!
Here’s I understand the steps of Norbert’s Gambit – please correct me if I’m wrong (and for those who are irritated that we are far off the original topic, please bear with me…:))
1) Call TD Waterhouse and ask them to activate ‘automatic wash’ and ‘DRIP’ in my RRSP account
2) Buy a Canadian stock that is also interlisted in the US exchange
3) Sell the Canadian stock in the US exchange (Question: does it have to be immediate? What happens if during the buy/sell, the stock price changes?)
4) Because of automatic washing, the proceeds will automatically go into TDB166 – US Money Market Fund
5) After it has settled in TDB166, when I want to buy a US equity, I just put in a normal buy order for that particular US equity. TDW would automatically draw from the amount in TDB166. (Would I have to pay any commission for the purchase?)
Additional question: If, after some time, I want to sell the US equity, would the proceeds go back into TDB166?
No problem. Glad to help!
1) Just to clarify, DRIP isn’t technically required to do a gambit, but it is helpful to prevent US dividends from being converted into Canadian dollars (except part shares as mentioned above). They have the option to turn on DRIP for a single stock in your account, or to turn on auto-DRIP, in which case it will automatically done for every stock. For RRSPs and TFSAs there’s really no disadvantage to doing so. (In taxable accounts I prefer to leave it off, since DRIP can make calculating Adjusted Cost Bases difficult.)
Also note that due to a quirk in their system, TD can’t turn on auto-DRIP until you have a DRIP-eligible stock in your account. So if you don’t have one already, you might have to do the gambit and buy your US stock first, then turn on auto-DRIP.
You definitely DO want to have auto-washing for US dollars on first though.
2) Yes. The best choice is a liquid stock with a tight spread (smallest percentage difference between bid and ask). Right now, the best stock is “POT” – Potash Corp. of Saskatchewan.
3) Correct. Note that for some stocks the symbols are different on the US and Canadian side, so make sure you have the right ones. For POT it’s the same though.
It is best to do it immediately, because you avoid that issue of the stock price potentially moving. If it does move in the interim, you could make or lose money on the price of the stock. Since you will be selling within a few seconds of buying though, generally the only difference between your buy and sell prices will be the amount of the spread – a few hundredths of a percent, compared to 1.5% for standard currency exchanges. (Plus your buy and sell commissions of $9.99 assuming total accounts of > $50k. Otherwise $29.99 or so.)
If you want to be absolutely certain that there will be no stock movements between buying and selling, you can use DLR/DLR.U (Canadian/US symbols). DLR is a ‘currency’ ETF, so while you’re holding it, it basically just tracks the value of the US dollar… which is exactly what you want to do. Otherwise it works the same as the standard Gambit. The spread is slightly wider than POT, but the difference will be very minimal – hundredths of a percent. If you’re nervous about the whole thing, it’s probably the best one to use. That second Canadiancapitalist post I linked to above has more details.
4) Correct.
5) Correct. You would have to pay the standard commission for a stock purchase ($9.99 or $29.99 or whatever, depending on your account size), but there’s no added fee for the swapping in and out of their money market fund.
Bonus) As long as you have auto-washing turned on, yes.
@ Leeds
Use DLR and DLR.U it’s very straightforward and your exchange rate is set when you buy it in Canadian dolllars NOT 3 days later when it settles and you convert it over. Good for peace of mind. See the following link for details…
http://www.horizonsetfs.com/Pdf/Education/Converting%20Currencies%20Using%20ETFs.pdf
Make sure you use limits (NOT market purchase). The people at Horizons were very helpful as well, so don’t hesitate to phone if you have questions.
@Nathan
The risk isn’t only with the stock price but also with the currency fluctuation. If you use DLR, then the moment you buy the exchange rate is set. The USD equivalent (DLR.U) is constant, it does not fluctuate with currency.
With POT or RBC or RIM you have to wait at least 3 days for the transaction to settle before you can convert it. The Canadian dollar could fall during that time. This does not hold true though when purchasing the USD equivalents and converting back to Canadian dollars since these stocks are set to the Canadian dollar (more or less).
A good rule of thumb (if you like to stay in control of the timing of conversion) is use DLR when converting to USD and use something like POT when converting back to Canadian dollars.
Hi everyone,
Just wanted to call out that Questrade also offers USD RRSPs and USD TFSAs, if you’re so inclined. Trading costs start from $4.99 up to $9.99 and they support DRIPs.
@Ryan:
In a TD RRSP you can sell immediately. No need to wait for settlement or to call TD at any point.
If you had to wait for settlement, yes, currency could move, but so could the stock, which would be a much greater potential risk. (If currency moves, it’s just as if you performed the exchange a few days later. You could lose a bit or gain a bit, but you’re not taking on a completely different kind of risk.)
In taxable accounts you can avoid waiting for settlement by shorting one side, then buying on the other, and finally waiting 3 days to call them to flatten the position, but that’s a bit more complicated and doesn’t apply to Leeds.
@ Nathan If TD allows you to article over and sell without delay, then that’s a very good feature. With Qtrade I have to wait about 3 days for it to settle, which is a little annoying. I have never used shorting, but that certainly would eliminate most of the risk (both currency and stock changes).
@Leeds
When I used DLR I ended up paying about 0.3% on the conversion. It’s pretty straightforward process. This link explains it well and if you call horizons (as I did) they are very good about answering questions.
http://www.horizonsetfs.com/Pdf/Education/Converting%20Currencies%20Using%20ETFs.pdf
Thanks for your extensive answer, Nathan.
I just want to follow up on point #5 above. What do you mean by no fee for swapping in and out of the money market fund? From what I can tell, if I were to buy VTI right now, I would have to incur the $9.99 commission times 3. First $9.99 for purchasing a Canadian share. Second $9.99 (in USD?) for selling the US share and getting the proceeds in the money market fund. Third $9.99 (in USD?) for purchasing VTI. Please correct me if I’m wrong….
On a side note, you briefly mentioned a Schwab ETF in an earlier post. Quite intriguing, especially since they lowered their MER to match Vanguard. Do you have any opinion on Schwab vs Vanguard for US and International ETF (while we’re waaay off topic anyway…. :p)?
Sorry, yes, you’re right – there will be two commissions involved in doing the currency exchange, then one to buy the ETF you want. The cost of the currency exchange using Norbert’s Gambit is essentially those first two commissions plus the spread of the stock you use for the gambit. When exchanging small amounts (less than $10k or so) the commissions will have a greater effect than the spread. On larger amounts, the spread will be larger than the commissions. On amounts less than $1800 or so, those commissions mean you’re actually better off with the $1.5% TD would charge you. That’s why what I usually recommend is socking away money in TD e-funds throughout the year, then once a year or so, selling them*, converting the money all at once, and buying your US ETFs. That way you only pay $20 per year in commissions to exchange funds, and only one commission per year for each ETF you’re buying. The mutual funds have slightly higher MERs, but only half a year’s investment’s sit in them on average, instead of your whole portfolio.
As to your side note, Schwab recently cut their MERs across the board, making their funds more attractive. That said, their broad market index tracks the MSCI Investible Market index (2500 stocks), whereas Vanguard’s tracks the Russel 3000 index (3000 stocks). So the latter has very slightly more diversification, and is still only 0.02% more expensive. It’s also much larger and there’s a better chance the fees will stay low. So personally I’d stick with Vanguard, but honestly I don’t think it makes any real difference.
On the international side, Vanguard has VXUS, which gives you all your international exposure, developed and emerging, large and small, in one fund. So in my mind that’s a clear winner for most people.
*Note: you can’t sell e-funds you’ve purchased within the past 30 days (or possibly 90 for some funds, although I believe they’re all 30 now). Best to check with TDW before selling if unsure.
One clarification with a TDW account.
DRIP of a US$ security will NOT save you the conversion fees with dividends paid out.
@Joe:
Hmm.. have you seen that in your own account? I took a look online and there appear to be reports both ways. For example, http://forums.redflagdeals.com/archive/index.php/t-1212085.html.
So I called TD Waterhouse and their Rep assured me that the portion used to re-buy the US stock or ETF is *not* converted. (So no conversion fee except on the partial share portion that isn’t reinvested.)
Now, TD Waterhouse reps have been known to be wrong, so ideally I would like to check myself, but I don’t personally have any US stocks in my TDW RRSP.
Even if it were the case that they convert the dividends, IMO TDW would still be the best option for most people, except those with particularly large accounts, due to their e-funds. But it would be good to know for sure, especially since it would mean DRIPping the US ETFs would be slightly less efficient than having the dividends paid out, and rolling them into your regular contributions. Does anyone have a TDW RRSP with US holdings to check?
@Nathan:
For what it’s worth the TD representative that I just spoke to (likely not the same one) confirmed what you stated about the conversion fee NOT applying to the Dripped US stock or ETF purchase – only the remaining dividend.
Question though. Is there a down side to setting up the automatic wash if I need to use the proceeds of the sale of US stock/ETF to purchase a CANADIAN stock or ETF (portfolio re-balancing)? I assume I would just sell some of the automatically purchased TDB166 myself and use the proceeds to buy the Canadian stock or ETF. Is the end result of this any different from selling a US stock/ETF and buying a Canadian stock/ETF without a wash trade occurring?
@MTDDC: Nope, there shouldn’t be any difference if you just sell TDB166 then buy the CAD stock with the proceeds. (Worst case you would have to wait for your stock sale to settle before you could sell the TDB166 for CAD, in which case you would get whatever the rate was three days later, instead of when you sold the stock. Haven’t done it myself though, so not certain on that.)
Even better though, if it was a significant amount, you’d do another Norbert’s Gambit in the other direction. IE: buy an interlisted US stock, for which TD will automatically sell your TDB166 money market fund, then sell it on the Canadian side for CAD.
Just spoke to another TD Rep on an unrelated issue, so asked this same question. He confirmed that DRIPped dividends are not currency-converted, and helpfully pointed out why this makes sense: DRIPs are offered by the underlying companies. So TD doesn’t receive a cash dividend then reinvest it for you, it actually receives shares instead, which just go straight into your account. From wikipedia:
” A dividend reinvestment program or dividend reinvestment plan (DRIP) is an equity investment option offered directly from the underlying company. The investor does not receive quarterly dividends directly as cash; instead, the investor’s dividends are directly reinvested in the underlying equity. The investor must still pay tax annually on his or her dividend income, whether it is received or reinvested.
This allows the investment return from dividends to be immediately invested for the purpose of price appreciation and compounding, without incurring brokerage fees or waiting to accumulate enough cash for a full share of stock.”
http://en.wikipedia.org/wiki/Dividend_reinvestment_plan
He also mentioned something else interesting: he 100% guaranteed that TD will soon have the ability to hold US dollars in an RRSP. He couldn’t give me an exactly timeline, but he said it is “definitely happening”.
I don’t use TD Waterhouse, so I can’t be certain about their practice, but I do think it’s important to understand the DRIP issue in the context of ETFs. While it’s true that many companies offer direct DRIP programs, I am not aware of an US provider of ETFs that does this.
Many brokerages do not allow DRIPs on US ETFs at all, and those that do are likely using “synthetic DRIPs,” which are initiated at the brokerage level, not at the ETF level. I’m not sure how currency conversion is handled in this case, though I will look into it and see if I can find an answer.
When I was investigating different brokerages the answer I got for synthetic DRIPS was that there was a conversion fee. This was with TDW and iTrade. It is possible the reps gave me incorrect information.
At that time it seemed the only way to avoid the conversion fees for US$ dividends was to have a US$ RRSP account.
Ah, I was unaware that ETF DRIPs worked differently (synthetic). Didn’t ask them specifically about those.
Hopefully they come out with that USD RRSP soon so this becomes a non-issue!
If TDW does come out with US$ RRSP, would it still require the hassle of the Norbert’s gambit to purchase US equities without going through the bank’s foreign currency conversion? That said, it is indeed good news for TDW users. I wish I knew more behind the scenes as to what else TDW has planned to attract investors.
Presumably yes, unless they decide to offer a flat rate conversion service like the Scotia account mentioned above. There’s no motivation for discount brokerages to just let you exchange currency for free when most are happy with (or completely ignorant of) the standard spreads charged.
Fortunately, Norbert’s Gambit gives those of us willing to put in a relatively small amount of effort access to near-institutional conversion rates as individuals. I personally kind of of enjoy doing the Gambit, since each time I get to see just how much I’ve saved over standard conversion rates. It’s like free money. :) Plus, as a Couch Potato investor, it’s an opportunity to ‘day trade’ a stock (and benefit from it too, unlike most real day trading)!