New Canadian Investor - Questions

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pauliec84
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New Canadian Investor - Questions

Post by pauliec84 »

Hello all. I am an American Boglehead investor who is immigrating to Canada this June. I was hoping everyone could help me with a few administrative questions as I try to invest in Canada in as efficient and low-cost manner as possible.

Retirement Account Questions:
1) Through my Employers Pension, I will hit the RRSP limit. However, my understanding is I can still contribute $5,500 to a TFSA account. Is this correct?
2) Although my wife will not initially be working, my understanding is that I can contribute my own income to an RRSP ($24,930) and TFSA ($5,500) account in my wife's name. I would be able to deduct this contribution (for the RRSP) from my income tax, and this would bring my total potential tax-sheltered contribution to $24,930*2 + $5,500*2 = $60,860. Is this correct?
3) The US Govt will honor the tax-sheltered nature of the RRSP and TFSA account?

Brokerage Questions:
1) What is everyone's preferred brokerage? In the US I used Vanguard which provided no transaction costs in their products and very low costs in non-Vanguard funds.
2) What is everyone's preferred method to exchange into US dollar? I have read online a bit about Norbert's Gambit. This seems a bit tricky though, and if there was an almost as cheap alternative method I would consider it.

Thanks for all the help. Once I get these administrative issues sorted out, I am excited to read and contribute to the more exciting asset allocation topics.
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Re: New Candian Investor - Questions

Post by AltaRed »

Welcome to FWF! You may wish to read our own finiki for a lot of information that will be helpful to you to understand the nuances of Canadian based investing.

One thing is changing tax residency to Canada will not change the long arm of the IRS if you are an American citizen (still must file US tax returns 1040NR on worldwide income) but tax residency in Canada will make you eligible to contribute to RRSPs (based on earned income) and TFSAs.

However:
1) Since RRSP room is based on last year's employment income, you will not be able to contribute to an RRSP until 2015
2) You can contribute to your own RRSP, or a spousal RRSP, or some combination of same based on your RRSP contribution room which Canada's CRA will advise you in a Notice of Assessment you will get mid-2015 based on your income tax filing for 2014 in April 2015.
3) Your wife will have no RRSP contribution room if she has no employment earnings
4) IRS does not recognze the TFSA as a retirement vehicle in the US-Can tax treaty and thus income is not sheltered. I believe there are onerous IRS filing requirements if you open a TFSA and it is highly recommended you do not do it.

It seems most people here have their discount brokerage accounts with TD Direct Investing, BMO Investorline, RBC Direct Investing or Scotia iTrade. All of these are about the same with some pluses and minues here and there. BMO and RBC are the only 2 of the 4 mentioned that also permit a USD side in their RRSP offerings. Some folks use CIBC Investor's Edge, Questrade, Interactive Brokers (amongst others) but both Questrade and Interactive Brokers are razor thin in their customer service and seem to have problems with handling tax slips, etc. Given, from a Canadian's perspective, that $10 commissions to buy/sell equities is 'cheap', I would most likely recommend BMO or RBC (I have accounts with BMO, RBC and Scotia).
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Re: New Canadian Investor - Questions

Post by pauliec84 »

Thank you for the quick replay and the link to the wiki. I hope to quickly sort out all of the nuances of Canadian based investing.

That is disappointing about both the TFSA and the one year delay on the RRSP (and in the second year I will miss out on the max as I will only have income for 7 months in year 1).

In that case, it seems like it might make sense for me to transfer my savings to the US and invest there so that I will have lower capital gains taxes and availability to the lower-fee US based products.
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Re: New Canadian Investor - Questions

Post by AltaRed »

I may be misunderstanding your comment on 7 months, but RRSP contribution room is not based on time...it is based on a percentage of employment earnings.

You may not be able to hold US domiciled brokerage accounts once you have a Canadian postal/mailing address and/or Canadian tax residency. For sure, Vanguard will not permit you to keep your US account, or at least you will not be permitted to trade in your US account. Others may have comments on whether the TD companies might allow you to do that via their US subsidiaries.

I am not sure your comment on lower capital gains taxes in the USA is correct because as a Canadian tax resident, you must pay Canadian income taxes on your worldwide income. Any capital gains you might achieve in the USA have to be reported on your Canadian tax return. Capital gains taxes in Canada are taxed at a 50% rate, so if you have a 30% tax rate in Canada on your overall income, cap gains would be taxed at 15%. Capital gains are handled differently in Canada though in that there is no first in, first out, etc. All purchases of a security are lumped together to obtain one Adjusted Cost Base for that security even if that security is held in multiple accounts.

You would be wise to talk to a cross-border tax accountant to sort out the nuances between Canadian and US tax law as it pertains to capital purchases/sales and investment income.
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Re: New Canadian Investor - Questions

Post by pauliec84 »

Per the 7th months. I will be working in Canada starting June. So in 2014, my annual income will be artificially low as I would have only worked from July - August in Canada (unless they count my US income).

That would be tough if they made me close down my US accounts, as it would result in a lot of messy transaction costs. Hopefully they just prohibit me from trading in those accounts. I will have to look into this further and yes, sitting down with a cross-border tax accountant is in the plans.

Per the comment of lower capital gains taxes in the USA, my thought was that if my move to Canada is not permanent (I am uncertain how long I will be there, I hope I love it as much as I think I will and stay forever). If I moved back to the US and sold those assets, I would not have to worry about Canadian taxes. I will need to sort out, maybe it would be easier to hold US denominated assets even if I had to invest in Canada, so that if I were to move it would be a more seemless inkind transfer.

Thanks for all the help. Not being so oblivious to these details will hopefully help me avoid a lot of costly mistakes.
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Re: New Canadian Investor - Questions

Post by brucecohen »

You might find this book useful.

Yes, Norbert's Gambit does sound complex when described but these step-by-step instructions make it pretty simple. Note that the mechanics depend on which investment dealer you use.

RE: having to close your US accounts. Stocks and ETFs can be transferred to a Canadian brokerage account without having to be sold. Some/many of the Vanguard mutual funds can be converted to their ETFs which can then be transferred to a Canadian brokerage account. One of FWF's members checked this out in January and found this on the VG website:
Can I convert conventional Vanguard mutual fund shares to Vanguard ETFs?

Shareholders of Vanguard stock index funds that offer Vanguard ETFs may convert their conventional shares to Vanguard ETFs of the same fund. This conversion is generally tax-free, although some brokerage firms may be unable to convert fractional shares, which could result in a modest taxable gain. (Four of our bond ETFs—Total Bond Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond—do not allow the conversion of bond index fund shares to bond ETF shares of the same fund; the other eight Vanguard bond ETFs allow conversions.)

There is no fee for Vanguard Brokerage clients to convert conventional shares to Vanguard ETFs of the same fund. Other brokerage providers may charge a fee for this service. For more information, contact your brokerage firm, or call 866-499-8473.

Once you convert from conventional shares to Vanguard ETFs, you cannot convert back to conventional shares. Also, conventional shares held through a 401(k) account cannot be converted to Vanguard ETFs.
Some Americans moving to Canada simply use the address of their parents, another relative or a trusted friend to keep their US accounts alive. Note that this does not avoid Canadian tax. While you're a Canadian resident you'll be taxed on your worldwide income. The US will also tax you, but you get credit from one country for the tax paid to the other.

Here's a summary of differences in how Canada and the US tax capital gains and dividends. Note: Canada taxes all cap gains the same no matter how long or short the holding period.

RE: RRSP. When you file your 2014 Canadian tax return you'll get RRSP based on your six months of earnings. You can contribute that amount but defer claiming the tax deduction until the following year or later when your full year's salary will likely put you in a higher bracket.
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Re: New Canadian Investor - Questions

Post by pauliec84 »

Bruce.

Thanks for the reply. I just order the book, so hopefully that will help answer most of questions. It is also comforting to know that I won't have too much trouble with my US accounts.

Also I suppose I will implement Norberts Gambit. Although, I know suspect it will be utilized more for investing in US based products via a Canadian account rather transferring money to my US brokerage account.

I do have one other question that is a bit pressing. This year I will be in the US for 5 months (but will be paid through August), and Canada for the other 7. I have been contributing to a US 401K that I was planning on maxing out, and am worried that I will somehow be penalized for this when I get to Canada. Especially if I also get pension contributions from my employer (not sure yet how that is going to work out). So I am trying to figure out, should I stop my 401K contributions at my current employer to avoid a potential penalty.
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Re: New Canadian Investor - Questions

Post by brucecohen »

pauliec84 wrote: I do have one other question that is a bit pressing. This year I will be in the US for 5 months (but will be paid through August), and Canada for the other 7. I have been contributing to a US 401K that I was planning on maxing out, and am worried that I will somehow be penalized for this when I get to Canada. Especially if I also get pension contributions from my employer (not sure yet how that is going to work out). So I am trying to figure out, should I stop my 401K contributions at my current employer to avoid a potential penalty.
This might be of help. It's too late and I'm too tired to absorb and decipher it, but you might be able to.

Just found this and this. Don't know if they're relevant to your case.
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Re: New Canadian Investor - Questions

Post by parvus »

What is your country of citizenship (not residence or landed/alien status)?

That's important for tax considerations regarding U.S. accounts. If you are a U.S. citizen, then you can keep your U.S. accounts (and the U.S. will keep track of you in perpetuity), but you will still face dual tax-filing obligations in Canada and the U.S. It should be mostly a wash whilst you're here in Canada, but could become burdensome upon death, depending on U.S. estate tax rules.

If you are only a U.S. resident, then things may look very different as you change countries of residence.
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Re: New Canadian Investor - Questions

Post by pauliec84 »

I am a US citizen. I am not sure how long I will be in Canada, but I will probably go down the Canadian citizenship path as long as I'm there.

And yes, I know the US never takes it claws out of you per taxes... It seems like the big disadvantage of this is the pain of dual filing as well as the inability to use a TFSA.
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Re: New Canadian Investor - Questions

Post by ig17 »

pauliec84 wrote:2) What is everyone's preferred method to exchange into US dollar? I have read online a bit about Norbert's Gambit. This seems a bit tricky though, and if there was an almost as cheap alternative method I would consider it.
Most of us use the gambit. Forex at Interactive Brokers is another competitive option. Unfortunately, IB doesn't offer RRSPs and TFSAs. Taxable accounts only.
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Re: New Canadian Investor - Questions

Post by parvus »

Okay, so as a U.S. citizen still working in the U.S., contributions to a 401(k) should be unproblematic (but I'm not an expert) -- since U.S. and Canadian retirement accounts enjoy mutual recognition for tax purposes. You're still there till August, so why not? You won't have Canadian employment income till then, so no RRSP room, which always lags by a year.

As for permanent residence status, I believe it takes about three months after arrival before you qualify for health benefits. Presumably that would also apply to TFSA status. But, you won't know your RRSP/TFSA status till you make your first Canadian tax filing.

So you're looking at next May or June before being able to make a useful decision. I suspect you will be disappointed: your Canadian earned income will not be very high (though you can tuck away 18% of it) and your TFSA eligibility room might be limited to $5500 for your first year of residence, depending whether RevCan dates that as 2014, or 2015.

But you also mentioned a pension plan. Is this different from the 401(k)? Will you have the same employer in Canada? Is this different from a 401(k) match? &c?
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Re: New Canadian Investor - Questions

Post by brucecohen »

parvus wrote: That's important for tax considerations regarding U.S. accounts. If you are a U.S. citizen, then you can keep your U.S. accounts
Not really. Securities laws and regs plus post-9/11 money tracking paranoia have made US brokers reluctant to hold non-resident accounts. I believe the OP's brokerage has already told him they'll kick him out.
Presumably that would also apply to TFSA status.
US citizens are customarily advised not to open TFSAs. US tax on the account negates a lot of the advantage. More significantly, the paperwork compliance burden is atrocious. I tried to complete the filings and gave up. Id say that only tax pros are equipped to do it and they typically charge several hundred dollars just for that one filing.

Paulie, here is a little pamphlet that Canada Revenue Agency (CRA) published for people moving to Canada during the year.
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Re: New Canadian Investor - Questions

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pauliec84 wrote:Per the comment of lower capital gains taxes in the USA, my thought was that if my move to Canada is not permanent (I am uncertain how long I will be there, I hope I love it as much as I think I will and stay forever). If I moved back to the US and sold those assets, I would not have to worry about Canadian taxes.
There are others here more qualified than I - but no-one has picked-up on this statement. Would there not be a "deemed acquisition" on arrival, and a "deemed disposition" on departure - and would not capital gains taxes be due on any increase in value?
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Re: New Canadian Investor - Questions

Post by pauliec84 »

Thank you again for all the reply. It is very helpful, and I am getting a better understanding of the best actions given my situation.

My main concern now revolves around my mid-year job change. A little more detail about the issue.

I will move to Canada at the end of may.

US Job: Although I will stop working in May. My contract calls for me to be paid through August. In June, July August I will be receiving salaries from both my old (US) and new (Canadian) job. I have been maxing up my US 401K every year on this job, and planned to make the majority of my contributions this year during the June-August period when I get salary from both jobs.

Canadian Job: Starts June 1st. There is a pension associated with job (whose contributions count towards my RRSP). It is a little unclear what the status of this pension will be in my first year before I am eligable for the RRSP (as people mentioned this is on a 1 year lag with salary).

So some questions are:
1) Will I be able to contribute the income earned after June into the 401K as planned, or should I front-load my contributions so that I hit the maximum before I move to Canada?
2) As I will be making a pension contribution (or at least think I am) to my new Canadian job (which counts towards an RRSP max). Will maxing out the American 401K for the year somehow interfere with the pension contribution (if this is the case I would stop all contributions)?
3) Will the Income I recieve from the American Job in June/July/August be taxable in Canada?
4) I was initially planing on coming to Canada in late May. Should I wait until June so that my May paycheck from my US job is not subject to Canada?

Thanks again for the help. The American 401K questions are a bit pressing as I would need to change my contribution ASAP to take effect before my paycheck at the end of the month.
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Re: New Canadian Investor - Questions

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pmj wrote:
pauliec84 wrote:Per the comment of lower capital gains taxes in the USA, my thought was that if my move to Canada is not permanent (I am uncertain how long I will be there, I hope I love it as much as I think I will and stay forever). If I moved back to the US and sold those assets, I would not have to worry about Canadian taxes.
There are others here more qualified than I - but no-one has picked-up on this statement. Would there not be a "deemed acquisition" on arrival, and a "deemed disposition" on departure - and would not capital gains taxes be due on any increase in value?
That is an important issue IF the OP is considering a return to the USA and IF Canada dings non-Canadians the same way on non-Canadian domiciled investments. I don't know the answer myself BUT I would believe that to be the case. An important question for the cross-border tax accountant perhaps.

Pauliec, if so, what we are saying here is if you come to Canada and become a resident for tax purposes, Canada deems that you acquire all your existing investments that you own at the time, at the Fair Market Value of those investments on the day you enter Canada. That becomes your ACB for these investments. Should you return to the USA and again become a non-resident of Canada, Canada will deem that you will have sold your investments at the Fair Market Value on the day you left Canada. You will have to declare cap gains (or losses) on each of those investments in your final tax return due to Canada.

I did this as a Canadian going the other way a number of times in the 80's, 90's and the last decade. When I left Canada, it was deemed that I had sold all my investments the day I left Canada and I paid tax on the cap gains. Then when I returned to Canada, I was deemed to have acquired them again at the new Fair Market Value which then becaome my new ACB.

I don't know if the USA has any such rules, i.e. deemed disposition of assets on exiting country, but I doubt it for US persons...since they continue to be taxed on worldwide income until the next ice age.
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Re: New Canadian Investor - Questions

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pauliec84 wrote:So some questions are:
1) Will I be able to contribute the income earned after June into the 401K as planned, or should I front-load my contributions so that I hit the maximum before I move to Canada?
2) As I will be making a pension contribution (or at least think I am) to my new Canadian job (which counts towards an RRSP max). Will maxing out the American 401K for the year somehow interfere with the pension contribution (if this is the case I would stop all contributions)?
3) Will the Income I recieve from the American Job in June/July/August be taxable in Canada?
4) I was initially planing on coming to Canada in late May. Should I wait until June so that my May paycheck from my US job is not subject to Canada?

Thanks again for the help. The American 401K questions are a bit pressing as I would need to change my contribution ASAP to take effect before my paycheck at the end of the month.
I cannot respond to 1) or 2) specifically but regarding 3) and 4), the Can-US tax treaty has tie-breaking rules on determining whether you would be a resident of Canada (or USA) for tax purposes. A key point here is where have you spent more than 50% of the year. You will most likely be deemed to be a tax resident of Canada for 2014 if you physically move here before July 1st. If so, your primary tax return will be the Canadian T1 General for 2014 and your USA one will likely be a 1040NR (but I am not the expert for US persons/citizens).

IF that is the case, it might impact contributions to your 401k effective the date you move to Canada. I think I'd make all 401k contributions before leaving the USA. I don't think there is any issue with the overlaps between contributions to 401k and employer contributions to a Canadian DC pension plan (or group RRSP). Someone else will need to address regarding your employer contributing to your DC pension plan before you have RRSP room (but these things happen all the time with all the people moving back and forth across the border so there must be provisions to handle this). You should definitely talk to that cross-border tax accountant sooner rather than later.

Added: There are thousands, if not tens of thousands, of people every year doing the sort of thing you are doing and so there will/should be established rules/patterns of what to do. At the risk of being repetitive, talk to your cross-border tax accountant. My employer gave me access to cross-border tax accountants whenever I went to/from assignments.... at the principal level in firms like Price Waterhouse, Deloitte, etc.
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Re: New Canadian Investor - Questions

Post by queerasmoi »

I mentioned it recently in another thread but it bears repeating since it hasn't come up in this thread.

Yes, TFSAs have onerous reporting requirements for US citizens. The other category of onerous reporting is Canadian-domiciled mutual funds or ETFs in taxable accounts which will typically fall afoul of the PFIC reporting requirements.

Hence in a taxable account you will also want to avoid CDN domiciled mutual funds and ETFs. The IRS is just that mean-spirited.
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Re: New Canadian Investor - Questions

Post by pauliec84 »

AltaRed: Thanks for the info. I am sort of up in the air now if I should try to max out my 401K in the next 3 months (and leave myself with very little cash then). Or, for one moment in my life, not being hyper efficient with my investments.

queerasmoi: Thanks for the info on the Canadian MF and ETFs. I guess I will have to do a lot of Gambits, and invest in US denominated funds. This is not too bad, as they have lower fees and more options for multi-factor investor.
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Re: New Canadian Investor - Questions

Post by AltaRed »

Tax efficiency is not everything if it leaves you short of cash. There is a time to be super efficient and a time not to be.

Regarding doing things by Norbert's Gambit, another option is if you have interest in holding Canadian interlisted stocks in their own right, as compared to only being a Norbert's Gambit vehicle, there is many that you could buy on the TSE and then ultimately hold them in (journal to) the USD side of the account. http://www.tmx.com/en/pdf/Interlisted.txt Then at your liesure, sell them and buy your US domiciled Vanguard ETFs.

After my last assignment to the USA ended in 2006, I had a lot of USD hanging around. I simply bought Cdn interlisted stocks I wanted to own anyway on the NYSE and then had them journalled over to the CAD side of my account after settlement. I have since sold a few for CAD
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Re: New Canadian Investor - Questions

Post by Peculiar_Investor »

Another wiki article that might be helpful to the OP, Canadian-US investing differences. Investing in Canada is similar and familiar to an American, but there are key differences that are useful to know.
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Re: New Canadian Investor - Questions

Post by Flaccidsteele »

pauliec84 wrote:Hello all. I am an American Boglehead investor who is immigrating to Canada this June. I was hoping everyone could help me with a few administrative questions as I try to invest in Canada in as efficient and low-cost manner as possible.

Retirement Account Questions:
1) Through my Employers Pension, I will hit the RRSP limit. However, my understanding is I can still contribute $5,500 to a TFSA account. Is this correct?
2) Although my wife will not initially be working, my understanding is that I can contribute my own income to an RRSP ($24,930) and TFSA ($5,500) account in my wife's name. I would be able to deduct this contribution (for the RRSP) from my income tax, and this would bring my total potential tax-sheltered contribution to $24,930*2 + $5,500*2 = $60,860. Is this correct?
3) The US Govt will honor the tax-sheltered nature of the RRSP and TFSA account?

Brokerage Questions:
1) What is everyone's preferred brokerage? In the US I used Vanguard which provided no transaction costs in their products and very low costs in non-Vanguard funds.
2) What is everyone's preferred method to exchange into US dollar? I have read online a bit about Norbert's Gambit. This seems a bit tricky though, and if there was an almost as cheap alternative method I would consider it.

Thanks for all the help. Once I get these administrative issues sorted out, I am excited to read and contribute to the more exciting asset allocation topics.
Retirement
1) Yes.
2) RRSPs are tax-deferred and TFSA contributions are after-tax contributions where capital gains are tax-free. With regards to what you want to do with your wife's accounts, I would conduct more research. I personally don't know.
3) This needs more research. I don't know.

Brokerage
1) I use TD Waterhouse. I purchase individual securities so I can't speak to "no transaction cost" products and "low cost" funds.
2) I have assets that throw off both CAD and USD so I never need to conduct foreign exchange with regards to CAD or USD. I can't help here.

Good luck!
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Re: New Canadian Investor - Questions

Post by queerasmoi »

If you end up buying individual equities for your taxable account (esp. since CDN ETFs are not tax-recommended for US citizens), maybe Virtual Brokers would be a good match as they have good reviews and charge 1¢/share with 1¢ minimum commission. Comparing VB's fee schedule versus Questrade, the only reasons I haven't switched are 1) my US RRSP has no admin fee at Questrade whereas it'd be $50/year at VB, and 2) some of the ETFs I buy commission-free at Questrade are not on VB's commission-free list.
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Re: New Canadian Investor - Questions

Post by always_learning »

Hey there. I'm a US citizen living in Canada. When I moved here, I had to shut down my US brokerage account (because of my Canadian mailing address), but I don't recall any transaction costs. Positions were simply transferred to (the US$ side of) my Canadian brokerage without having to be sold. If there were any transfer fees, they were certainly reimbursed by the receiving institution (BMOIL, in my case). What transaction costs do you foresee?

BTW, my accountant told me that my cost basis for Canadian purposes is the fair market value on the day I became a Canadian permanent resident.

I'm very pleased with BMOIL, but then I trade so rarely I don't mind $10 commissions.

I exchange to/from US$ using Norbert's Gambit inside my BMOIL account. The gambit may sound complicated, but you would get used to it quickly.

Don't open a TFSA, or use a Canadian-domiciled mutual fund or ETF outside of an RRSP. The tax filing requirements for PFICs are ridiculous.

Re. Avoiding PFICs: for my Canadian exposure I use my C$ to buy individual Canadian stocks and effectively make my own Canadian mutual fund. That would be another option (besides US-based ETFs).

I'd recommend having your taxes done by a pro at least the first year. If each country gives you a foreign tax credit on the tax you pay to the other country, things get very complicated very quickly IMO. Although I always did my own taxes in the US, I hire a cross-border specialist now.

Sorry, can't comment on the 401K and mid-year tax issues.

Some forms you may grow to love (and there may be others): IRS 8891 and 8938, and FinCEN 114.
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Re: New Canadian Investor - Questions

Post by Bylo Selhi »

always_learning wrote:When I moved here, I had to shut down my US brokerage account (because of my Canadian mailing address), but I don't recall any transaction costs. Positions were simply transferred to (the US$ side of) my Canadian brokerage without having to be sold. If there were any transfer fees, they were certainly reimbursed by the receiving institution (BMOIL, in my case). What transaction costs do you foresee?
This is quite dated (circa 2000) but I used to hold US-domiciled Vanguard mutual funds and some US stocks through TD Waterhouse/Amertrade. When they were forced by the OSC to repatriate Canadian accounts, they told me they could transfer both US stocks and US-domiciled mutual funds to my Canadian TD Waterhouse account. There would be no fees to do this. Of course that may have been because both accounts were within the TD empire.

However one important additional point that may be of use to you. TDW said I could hold the Vanguard mutual funds in the TDW Canada account indefinitely. They would continue to pay distributions but only in cash. I couldn't have the distributions reinvested and I couldn't buy more units. My only options were to hold or sell. I opted instead to move the stocks to TDW Canada and the mutual funds to Vanguard. (Then came 9-11 and in the aftermath Vanguard told me to take my money back to Canuckistan.) But the transfer and hold option may be useful to US investors who may be here temporarily or plan eventually to return to the US.

Now this is also before Vanguard introduced ETFs. As posted upthread you could also convert MFs to ETFs, then move the ETFs to Canada. However Vanguard does not allow conversion of ETF shares into conventional MF shares.
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