Taxable Account Planning - US Expat

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AnimExpat22
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Taxable Account Planning - US Expat

Post by AnimExpat22 » 18 Oct 2016 02:05

Hi there,

First time poster here. I have some investing/overall planning questions that I hope I can get some advice with here. I appreciate any and all input.

Background Information

-Age: 30
-US Citizen working and living in Vancouver BC, Canada. I have a 2 year old son and my wife is also a US Citizen. She does not work as currently. We are new to Canada and still working on getting PR but hopefully should have it within the next 12 months. I work in the film industry which is quite big here at the moment and we'd love to be able to settle here permanently but ultimately unsure whether retirement is in USA or Canada.
-Salary: $110k CAD
-Saving around $35k-40K CAD annually in addition to maxing out my RRSP of approximately $20K.
-Zero Debt
-Have a 3-6 month emergency fund plus ample credit to cover immediate emergencies if needed.
-Maintain an address in the States with a relative to keep my banking with US addresses. Already have a Vanguard taxable brokerage plus my retirement accounts (see below) are all there as well besides one account at Fidelity from a previous employer.
-I am aware of the taxation issues with TFSAs as well as not being able to contribute to US Tax sheltered accounts (Roth IRA, IRA, 401k, etc). We have filed taxes in Canada so I've encountered some of the basic issues already.
-Ideally we would like to buy property someday but it's insanely expensive here. Would not be in the foreseeable future.
-80/20 Asset allocation goal for retirement accounts. Need a bit of rebalancing currently a bit heavy on stocks currently.


USA Accounts

$7,300 USD VTI - Rollover IRA (Vanguard)
$17,700 USD - VTI - Rollover IRA (Fidelity)
$11,700 USD -VTI - Roth IRA (Vanguard)
$11,500 USD - BND - Roth IRA (Vanguard - Spousal)
$8,300 USD - VTI - Taxable Brokerage (Vanguard)
$9,400 USD - VXUS - Taxable Brokerage (Vanguard)
$45,000 USD - Savings Account

Total: $110,900

Canada Accounts
$7,700 USD - VTI - Questrade RRSP
$7,385 CAD - US Equity Index (TDAM) Great West Life Employer RRSP
$1400 CAD - Canadian Bond Index (TDAM) Great West Life Employer RRSP
$43,000 CAD - Savings Account



Questions:

-What are my options for the money I cannot tax shelter? Should I continue funding my taxable account in the States? Open a non registered account here in Canada?

-What funds should I use in my taxable account? Continue balancing my VTI/VXUS/BND portfolio?

-How should I treat all of these accounts? Separate portfolios based on country or combine them as a worldwide portfolio? If so, how would I go about organizing that?

-Should I treat my taxable account with a different asset allocation than my retirement accounts if we do eventually need the money sooner?

-Any other comments/suggestions/ideas are welcome.
Last edited by AnimExpat22 on 19 Oct 2016 14:29, edited 3 times in total.

gobsmack
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Re: Taxable Account Planning - US Expat

Post by gobsmack » 18 Oct 2016 21:01

AnimExpat22 wrote:-Any other comments/suggestions/ideas are welcome.
Two things come to mind:

1. Do not use US money market accounts. In the US, it is common to use both savings and money market accounts as a convenient way to park money. But the CRA treats them differently. US Money Market accounts receive the same treatment as something like VTI even though the NAV never changes.

2. Avoid TFSA and RESP as I believe the IRS will tax them.

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Re: Taxable Account Planning - US Expat

Post by always_learning » 19 Oct 2016 07:54

I'm also a US citizen living in Canada. Been living in this great country over 20 years now. If you were to open a Canadian non-registered account, avoid Canadian-based mutual funds and ETFs, as the IRS considers them passive foreign investment corporations. You could buy individual Canadian stocks in a Canadian non-registered account, but then you likely wouldn't be very diversified.

I agree with the advice to avoid TFSAs and RESPs.

Lucky you, to have access to a US address. If I were you, for the money you cannot tax shelter, I would not open a Canadian non-registered account, but would instead convert your C$ to US$ and continue to invest using your Vanguard mutual funds. (Why? To obtain the benefits --both financial and psychological -- of diversification. I think they would be worth the transaction costs of the currency exchange.)

If you've not seen it, finiki has a good article on Canadian-US investing diferences, including tax differences.

Oh, and Canadian Couch Potato -- a site I find very useful -- has a good piece on how to use your RRSP efficiently. I find this article so useful, I've bookmarked it. :D

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Re: Taxable Account Planning - US Expat

Post by AnimExpat22 » 19 Oct 2016 12:48

Thank you for the responses always_learning and gobsmack.

Yes, I am aware of the TFSA and RESP account issues. It's a shame because it would be nice to utilize them but definitely not worth the headache.

I was unaware of the money market account treatment, although I don't use them so it's not much of an issue. Good to know though!

Your response always_learning is very helpful. I bookmarked the CCP link as well. I was not 100% sure what I could hold in a non registered account here in Canada but now it's pretty clear I can either hold US listed ETFs only or continue using my US taxable account and just exchange currency myself...so basically the same thing in a nutshell, right? (Being a US account I am able to use mutual funds, but technically it's still US investments in USD only.) I also did not think of the benefits it provides over Canadian investments as it is much more diversified.

How should I balance my portfolio then assuming I continue to fund my US taxable and keep the three fund VTI, VXUS and BND funds. Do I separate my RRSP and my US accounts? Combine the total and convert it to CAD? USD? Perhaps I'm over thinking this.
Last edited by AnimExpat22 on 19 Oct 2016 14:23, edited 1 time in total.

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Re: Taxable Account Planning - US Expat

Post by adrian2 » 19 Oct 2016 13:55

AnimExpat22 wrote:How should I balance my portfolio then assuming I continue to fund my US taxable and keep the three fund VTSAX, VTIAX and VBTLX funds.
Remember that Canadians are forbidden to open an account and buy Vanguard USA mutual funds, only ETF's are available for most of us. Therefore, the fund symbols you list, familiar as they may be to Bogleheads, mean nothing to us,
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Re: Taxable Account Planning - US Expat

Post by AnimExpat22 » 19 Oct 2016 14:23

Apologies, I will refer to the ETF versions. I posted on the US Bogleheads forum but was quickly sent here instead. I did not think of it. My post has been edited for clarity.

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Re: Taxable Account Planning - US Expat

Post by gobsmack » 19 Oct 2016 14:59

AnimExpat22 wrote:How should I balance my portfolio then assuming I continue to fund my US taxable and keep the three fund VTI, VXUS and BND funds. Do I separate my RRSP and my US accounts? Combine the total and convert it to CAD? USD? Perhaps I'm over thinking this.
The general advice is to consider your portfolio as a whole instead of trying to create a special plan/allocation for each account. Your goal is an 80/20 allocation distributed across all accounts. When deciding what goes into the IRA/RRSP accounts, give preference to the investments that are less tax efficient so that you can save on tax. Since VTI has the lowest div yield, my suggestion would be to try and fit BND and VXUS in the IRA/RRSP accounts.

VTI/VXUS/BND is a good plan. In the future, if you decide to stay in Canada, you can adjust your plan in order to increase Canadian exposure.

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Re: Taxable Account Planning - US Expat

Post by LadyGeek » 19 Oct 2016 19:26

Welcome (again)!

Did you know that Vanguard is in Canada? When you want to invest on the Canadian side, here's the equivalent: Three fund portfolios
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Re: Taxable Account Planning - US Expat

Post by AnimExpat22 » 19 Oct 2016 21:21

Thank you LadyGeek! Yes I am aware Vanguard is in Canada and that is my goal when next year rolls around to incorporate the CCP model into my RRSP.

In regards to balancing my 80/20 allocation across all accounts, what is the best route when considering how much US stocks vs Canadian? Of the 80/20 allocation, should I aim for a 50/50 split? ((50% VTI and 50% VCN?) Generally I was aiming for 80/20 with a 75 US / 25 international. Would I now include Canada into that International?

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Re: Taxable Account Planning - US Expat

Post by gobsmack » 19 Oct 2016 22:11

AnimExpat22 wrote:In regards to balancing my 80/20 allocation across all accounts, what is the best route when considering how much US stocks vs Canadian? Of the 80/20 allocation, should I aim for a 50/50 split? ((50% VTI and 50% VCN?) Generally I was aiming for 80/20 with a 75 US / 25 international. Would I now include Canada into that International?
VXUS already has some Canadian exposure but it is small because of the relative small size of the Canadian economy. The main benefit of a larger exposure to Canadian equities is the preferential tax treatment of Canadian dividends in your taxable account. If you want to go down that path, one option is to replace VXUS with IEFA+IEMG, which would allow you to eliminate Canada. After that, you can tweak your exposure to Canadian equities by buying VCN or XIC in your taxable account. Since you don't know yet if you will be staying in Canada long term, if I were you, I would continue to invest as though I had never left the US.

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Re: Taxable Account Planning - US Expat

Post by gsp_ » 19 Oct 2016 22:48

The basic strategy for Canadian indexers is 1/3 each in Canada/US/International equity. This is unlikely to make sense in your situation, both because you are unsure to remain in Canada and because of PFIC/tax concerns.

Your 75/25 US/International desired allocation represents a strong home bias, maybe consider reducing it to something like 60/40? I'd likely stick with VXUS for its 7% Canadian component.

You could stuff your employer RRSP with Canadian bonds, allowing more VTI holdings in your US accounts. Depending how the TDAM US index fund is setup, it is likely to have a .3% US withholding tax drag.

Not sure there's much else to change, perhaps revisit if you ever decide that you would like to retire here, become a resident and renounce your US status or simply accumulate large unregistered assets making individual Canadian securities a possibility.

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Re: Taxable Account Planning - US Expat

Post by AnimExpat22 » 20 Oct 2016 02:06

gobsmack wrote:
AnimExpat22 wrote:In regards to balancing my 80/20 allocation across all accounts, what is the best route when considering how much US stocks vs Canadian? Of the 80/20 allocation, should I aim for a 50/50 split? ((50% VTI and 50% VCN?) Generally I was aiming for 80/20 with a 75 US / 25 international. Would I now include Canada into that International?
VXUS already has some Canadian exposure but it is small because of the relative small size of the Canadian economy. The main benefit of a larger exposure to Canadian equities is the preferential tax treatment of Canadian dividends in your taxable account. If you want to go down that path, one option is to replace VXUS with IEFA+IEMG, which would allow you to eliminate Canada. After that, you can tweak your exposure to Canadian equities by buying VCN or XIC in your taxable account. Since you don't know yet if you will be staying in Canada long term, if I were you, I would continue to invest as though I had never left the US.
Thanks. It sounds like until we become PR here and decide to stay long term we'll just stick to the same strategy we've been doing and adjust for a slight bit more Canadian exposure than I normally would have in the States alone.

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Re: Taxable Account Planning - US Expat

Post by LadyGeek » 20 Oct 2016 20:24

AnimExpat22 - I've bumped your thread in the Bogleheads forum. If you decide to move to Canada, consider revisiting the US tax regulations from the perspective of someone who is no longer a resident of the US.

Subject: Taxable Account Planning - US Expat [Canada]
LadyGeek wrote:AnimExpat22 - To supplement your discussion in Taxable Account Planning - US Expat - Financial Wisdom Forum, I'd like to be sure you're aware of tax issues if you decide to move to Canada.

See the wiki: Taxation as a US person living abroad

You may already be aware of the US tax concerns, but consider revisiting this topic from the perspective of becoming a Canadian resident (or dual US-Canadian citizen). The IRS may treat your situation differently than how you're handling it now. Read the IRS references at the bottom of the wiki article.

This IRS page might be of interest: U.S. Citizens and Resident Aliens Abroad:
IRS wrote:Expatriation Tax
(for US citizens/residents who have renounced their US citizenship and long-term permanent residents who have ended their US resident status for federal tax purposes)
I am by no means an expert in this area; I only want to make sure that you've taken a look at the details.

If you have any questions, feel free to post a new thread in the Personal Finance (Not Investing) forum which is focused on tax issues.
There are quite a number of cross-border US / Canadian experts in this forum as well. :wink:
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Re: Taxable Account Planning - US Expat

Post by AnimExpat22 » 21 Oct 2016 01:37

Thanks LadyGeek, however I don't believe I fall into any of those categories nor do I plan to give up my US citizenship. I have already been in Canada for almost two years so I am aware of the basic tax information/issues.

These are good links though. Definitely bookmarked!

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Re: Taxable Account Planning - US Expat

Post by gobsmack » 21 Oct 2016 06:21

If you do decide to leave Canada at some point, just beware of deemed disposition rules that may force you to declare capital gains. You don't have much invested at this point so this is not likely to be a huge issue.

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Re: Taxable Account Planning - US Expat

Post by AnimExpat22 » 21 Oct 2016 13:00

I have a local cross-border tax guy and he mentioned this but it's obviously a bridge i'll cross if or when that happens.

All of these extra links are fantastic, thanks all!

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Re: Taxable Account Planning - US Expat

Post by Jasonbull » 01 Dec 2016 23:46

[quote="AnimExpat22"]I have a local cross-border tax guy and he mentioned this but it's obviously a bridge i'll cross if or when that happens.

On the side, who is your cross border tax guy?

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Re: Taxable Account Planning - US Expat

Post by timage2006 » 12 Jun 2017 16:08

AnimExpat22 wrote:
19 Oct 2016 12:48
I was not 100% sure what I could hold in a non registered account here in Canada but now it's pretty clear I can either hold US listed ETFs only or continue using my US taxable account and just exchange currency myself...so basically the same thing in a nutshell, right? (Being a US account I am able to use mutual funds, but technically it's still US investments in USD only.) I also did not think of the benefits it provides over Canadian investments as it is much more diversified.
I'm in a similar situation as OP (US citizen in Canada). Can anyone comment on the tax preparation implications of the choice between (A) non-registered Canadian accounts (e.g., RBC DI) invested in US-listed ETFs (e.g., VTI) vs. (B) US-based brokerages (e.g., currency conversion CAD->USD and then US Vanguard account investment in VTI)?

I'm under the impression---please correct if mistaken---that RBC Direct Investing will produce 1099 tax forms for US citizens, as well as Canadian T3 or T5 forms. So case A seems like it will be straightforward for DIY tax preparers. For case B, will there be difficulties when it is time to report the taxable part of the investment returns on Canadian income taxes?

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Re: Taxable Account Planning - US Expat

Post by brucecohen » 13 Jun 2017 09:21

timage2006 wrote:
12 Jun 2017 16:08
I'm under the impression---please correct if mistaken---that RBC Direct Investing will produce 1099 tax forms for US citizens, as well as Canadian T3 or T5 forms. So case A seems like it will be straightforward for DIY tax preparers. For case B, will there be difficulties when it is time to report the taxable part of the investment returns on Canadian income taxes?
I'm with TDDI and they send me a 1099. I don't know if that's because they know I'm a US filer or if they send one to everyone holding US-listed dividend payers.

I question whether you really have a choice. Most, if not all, US brokers refuse to maintain taxable trading accounts for residents of Canada, even if they're US citizens and current clients. Have you asked your US broker? Canadian tax reporting would be no problem if you do maintain a US account. You'd simply convert your income and gains to C$ and, if they ask, send CRA copies of the tax slips from your US broker. The same holds with IRS if you maintain a Canadian account. You'll convert all income and gains to US$ and, if asked, be prepared to send IRS copies of your T3s and T5s.

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Re: Taxable Account Planning - US Expat

Post by AltaRed » 13 Jun 2017 10:38

I am guessing the bigger discount brokerages will send 1099's if the account holder has filled out a W-9 rather than a W-8BEN. I'd suggest phoning around to one of the big bank discount brokerages to find out.

I don't know about Interactive Brokers. They have operations on both sides of the border but I've read that they tend to screw up tax slips (or did at one time).
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Re: Taxable Account Planning - US Expat

Post by DanH » 13 Jun 2017 14:27

AnimExpat22 wrote:
18 Oct 2016 02:05
Hi there,

First time poster here. I have some investing/overall planning questions that I hope I can get some advice with here. I appreciate any and all input.

Background Information

-Age: 30
-US Citizen working and living in Vancouver BC, Canada. I have a 2 year old son and my wife is also a US Citizen. She does not work as currently.

...

-Salary: $110k CAD
-Saving around $35k-40K CAD annually in addition to maxing out my RRSP of approximately $20K.
-Zero Debt
You have some good advice on the tax and investing side of things. My question for you is a more basic one and it's more a curiosity than anything.

You claim to be saving ~$60k per year (i.e. ~$40k + $20k RRSP). But your spouse does not work and you make $110k per year. Is there something missing here or are you really cheap...frugal...a savvy cash flow manager? ;) Just based on these #s you are saving something like 2/3 of your net cash flow (after factoring in tax savings from RRSP contributions). That leaves about $3k monthly to live which doesn't sound like a lot for a young family in an expensive housing market. (You say you don't own a place but presumably renting for a small family isn't cheap either.) It might be possible but reading this made me wonder if you have other income not mentioned or if there's something else I'm missing.

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Re: Taxable Account Planning - US Expat

Post by AltaRed » 13 Jun 2017 14:34

Dan, as an FYI, that fellow last posted on Oct 21, 2016 so I wouldn't hold my breath that he is returning.
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Re: Taxable Account Planning - US Expat

Post by DanH » 13 Jun 2017 17:58

Oops...didn't even notice the date. Thanks for pointing that out. But I still want to know how a family of three is living on $3k monthly when rent along has to eat up most of that.

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Re: Taxable Account Planning - US Expat

Post by gsp_ » 14 Jun 2017 03:27

brucecohen wrote:
13 Jun 2017 09:21
timage2006 wrote:
12 Jun 2017 16:08
I'm under the impression---please correct if mistaken---that RBC Direct Investing will produce 1099 tax forms for US citizens, as well as Canadian T3 or T5 forms. So case A seems like it will be straightforward for DIY tax preparers. For case B, will there be difficulties when it is time to report the taxable part of the investment returns on Canadian income taxes?
I'm with TDDI and they send me a 1099. I don't know if that's because they know I'm a US filer or if they send one to everyone holding US-listed dividend payers.
I've never received a 1099 so it's based on them knowing you're a US filer, likely based on previously filing the proper form as mentioned by AR.

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Re: Taxable Account Planning - US Expat

Post by adrian2 » 14 Jun 2017 14:48

gsp_ wrote:
14 Jun 2017 03:27
I've never received a 1099 so it's based on them knowing you're a US filer, likely based on previously filing the proper form as mentioned by AR.
+1
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