Hold non Canadian securities in reg or non reg account?

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tony767p
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Hold non Canadian securities in reg or non reg account?

Post by tony767p »

Hello all,

Having done a preliminary search, I could still use another opinion, so here we go. I asked Mr Google about holding non Canadian securities (stocks and ETF's - XIN, XSP) in registered vs non registered accounts.

The answer that came back was that in general, the most tax efficient securities should be held in non registered accounts, and the least tax efficient (i.e. Fixed Income generating interest payments) in registered accounts. I get that.

I am leaning towards moving GE and XIN out of an RRSP. My logic is as follows. The downside is with holding tax on GE dividends - though some would be recoverable through income tax credits. The upside is more friendly tax treatment on Capital Gains in the non reg account. In the RRSP Capital Gains becomes fully taxable income when it gets deregistered.

So, with holding taxes on dividends vs taxation on potential Capital Gains - I'm thinking the potential savings on Capital Gains would be worth more - am I missing anything?

Thanks in advance,

Tony
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Re: Hold non Canadian securities in reg or non reg account?

Post by Spudd »

Is your RRSP full? If not, I would not move anything out to the non-registered account. You will have to pay tax on the withdrawal and you will be taxed on any gains once it's outside, as well as annual dividend taxes, if applicable. Plus you lose the RRSP contribution room.

If you currently have both non-registered and registered investments then the choice is which is better to hold in the RRSP. But you haven't told us what you're considering replacing GE and XIN with, so it's hard to make an informed decision.
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Re: Hold non Canadian securities in reg or non reg account?

Post by tony767p »

Hi Spudd,

I do have both reg and non reg accounts. I'm retired and not contributing to the RSP any more even though there is room. I look at it as just tax deferal, not avoidance, which is where the thought of Capital gains tax treatment I mentioned upthread kicks in. The TFSA is maxed, full of XSB.

I would sell GE and XIN keeping the cash inside the RSP and buy ZAG with the proceeds, and use some non reg account cash to buy any / all of GE, XSP, or XIN.

If I keep those securities inside the RSP future growth becomes fully taxable upon withdrawl, if I sell inside the RSP and buy outside the RSP future growth gets favorable capital gains treatment (at least the way CRA operates for now - better not go there !)

Hope I've cleared the self created confusion - and sorry about that

Thanks again, cheers,

Tony
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Re: Hold non Canadian securities in reg or non reg account?

Post by Spudd »

All 3 investments are taxed at the highest marginal tax rate (ZAG = interest, GE/XIN = foreign dividends).ZAG, current yield is around 3%. GE's yield is also around 3%. And XIN is 2.35%. So based on just yield, XIN is better in your non-registered account as it has the lowest yield.

However when you look at capital gains, presumably ZAG has the lowest long-term expectation of capital gains. So I would tend to agree, put ZAG in the RRSP and GE/XIN in the non-reg.

I'm far from an expert though, so hopefully someone else will chime in!
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Re: Hold non Canadian securities in reg or non reg account?

Post by patriot1 »

OP seems to be adhering to the fallacy that after tax return on capital gains is higher outside the RRSP than inside. The opposite is true, except for some pathological cases. Remember that RRSP holdings are bought with untaxed income.
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Re: Hold non Canadian securities in reg or non reg account?

Post by 2of3aintbad »

tony767p wrote: 29 Mar 2017 13:02 Hi Spudd,

I do have both reg and non reg accounts. I'm retired and not contributing to the RSP any more even though there is room. I look at it as just tax deferal, not avoidance, which is where the thought of Capital gains tax treatment I mentioned upthread kicks in. The TFSA is maxed, full of XSB.
...
Tony
You don't really hold XSB (short term bond index) in your TFSA, do you? XSP ?
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Re: Hold non Canadian securities in reg or non reg account?

Post by tony767p »

Ok, sigh, let's go through this slowly. Pretend you're talking to an idiot, cause like my wife says - well, never mind, that's a different post, even a different forum.

I'm here to learn, so....

Yup, the XSB is in the TFSA. The theory there was that the least tax efficient securities (those generating interest vs dividends and or capital gains) go into registered accounts. No? I need to hold some fixed income securities, they have to go somewhere. The alternative is to hold XSB in a cash account and pay tax on the interest. That would enable sheltering the dividends and capital gain on XSP - is that the suggestion?
patriot1 wrote: 29 Mar 2017 20:00 OP seems to be adhering to the fallacy that after tax return on capital gains is higher outside the RRSP than inside. The opposite is true, except for some pathological cases. Remember that RRSP holdings are bought with untaxed income.
"After tax return on capital gains" is higher inside the RRSP? I'm thinking that the capital gains tax friendly treatment is lost in the RRSP due to all proceeds of the RSP are fully taxable upon withdrawl, as opposed to 50% taxable in a non reg account. What am I missing?

I do appreciate the feedback, thank you.
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Re: Hold non Canadian securities in reg or non reg account?

Post by tony767p »

The last sentence refers to the capital gain portion of the RSP - I don't know how to edit a post after it's submitted - sorry.
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Re: Hold non Canadian securities in reg or non reg account?

Post by adrian2 »

tony767p wrote: 30 Mar 2017 10:52
patriot1 wrote: 29 Mar 2017 20:00 OP seems to be adhering to the fallacy that after tax return on capital gains is higher outside the RRSP than inside. The opposite is true, except for some pathological cases. Remember that RRSP holdings are bought with untaxed income.
"After tax return on capital gains" is higher inside the RRSP? I'm thinking that the capital gains tax friendly treatment is lost in the RRSP due to all proceeds of the RSP are fully taxable upon withdrawl, as opposed to 50% taxable in a non reg account. What am I missing?
Assuming, for illustrative purposes, MTR = 50%, MTR on CG = 25%.

Scenario 1, non RRSP
$1,000 invested in a 10-bagger
Final value $10,000, subsequently sold
Tax paid $2,250
After tax result = $7,750

Scenario 2, RRSP
Put $2,000 in RRSP, get $1,000 tax refund, net after tax $1,000 (same as in first scenario)
$2,000 invested in a 10-bagger
Final value $20,000, subsequently sold
$20,000 RRSP withdrawal
Tax paid $10,000
After tax result = $10,000
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“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
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Re: Hold non Canadian securities in reg or non reg account?

Post by adrian2 »

tony767p wrote: 30 Mar 2017 10:56 The last sentence refers to the capital gain portion of the RSP - I don't know how to edit a post after it's submitted - sorry.
You just click on the "pencil" icon to the right of your post.
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Re: Hold non Canadian securities in reg or non reg account?

Post by tony767p »

Thank you Adrian2,

The pencil - Ha! Got it.

OK, so, I see the logic in the math re the RSP, but I'm struggling with the concept of an apples to apples comparison.

My tax rate won't likely change from here out, so I just view the RSP as a future tax liability. Lets view the 2 accounts on a go forward basis.

That being the case, the non RSP account gets better capital gains tax treatment.

So, back to the original question of the thread - are foreign securities better held in reg or non reg accounts? As I re-read my original post, I see where I created confusion. I did not mean to imply de registering existing RSP positions, rather potentially selling them and using the cash in the accounts where it currently is to buy other securities.

2of3aintbad raised another possibility. Sell the XSB in the TFSA and hold either XIN or XSP in there, and hold XSB in the non reg account, paying tax on the interest. Is it worth paying tax on XSB interest to shelter the dividends and 'potential' capital gains on GE / XIN / XSP? Buy & sell costs at TDDI are not prohibitive at 9.99 per.

Thoughts?
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Re: Hold non Canadian securities in reg or non reg account?

Post by adrian2 »

tony767p wrote: 30 Mar 2017 12:44 OK, so, I see the logic in the math re the RSP, but I'm struggling with the concept of an apples to apples comparison.

My tax rate won't likely change from here out, so I just view the RSP as a future tax liability. Lets view the 2 accounts on a go forward basis.

That being the case, the non RSP account gets better capital gains tax treatment.
As long as your MTR will not change, the RRSP attracts a zero overall tax rate for anything happening while under the RRSP umbrella.

If the non-registered tax rate is greater than zero, it always loses (for dividends / interest / foreign income / capital gains / etc.)
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Re: Hold non Canadian securities in reg or non reg account?

Post by tony767p »

Thanks adrian2, understood - the RSP will win, tax wise, at least until de registration time.

Any thoughts on the concept of holding a bond ETF in a non reg account to make room for a foreign equity ETF in a TFSA?

Cheers,
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Re: Hold non Canadian securities in reg or non reg account?

Post by 2of3aintbad »

If you are retired, presumably you will soon be required to convert your RRSP to a RRIF, and withdraw an ever increasing % each year. XSB or a GIC ladder would be a logic choice to have the withdrawal amount available with low risk (XSB) or risk free (GIC). The GIC has the added advantage of being transaction cost free. Of course, if the RRSP is not a large part of your investment assets and income, it won't make much difference.

But the TFSA has no such withdrawal requirements and no tax consequences, so it is ideal for a growth strategy. You can withdraw as much and as often as you want, or never. The question is how do you control the risk? My choice for a TFSA would be a Canadian dollar hedged global equity ETF, together with a managed global small cap mutual fund, not hedged.

So definitely don't waste your limited TFSA room on XSB.
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Re: Hold non Canadian securities in reg or non reg account?

Post by patriot1 »

tony767p wrote: 30 Mar 2017 16:38 Thanks adrian2, understood - the RSP will win, tax wise, at least until de registration time.
His whole point is that the RRSP wins after deregistration.
Any thoughts on the concept of holding a bond ETF in a non reg account
Very bad idea if the ETF holds premium bonds, i.e. bonds whose purchase price exceeds the face value. You will receive and be taxed on interest income which exceeds the total return. Interest rates only bottomed in the last year so I would think this includes pretty well all bond ETFs.

Edit: correct terminology.
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Re: Hold non Canadian securities in reg or non reg account?

Post by SueC »

XAW for your TFSA could be an option
TFSA as has been mentioned could hold equities with high potential for capital growth since it can grow tax free

GE in your rrsp would not be subject to withholding tax if it's a US listed stock so I don't know why you want to move it out of there? A TFSA is not a registered acct in the eyes of the tax treaty with the US from what I understood so maybe it would be subject to tax you can't recoup on your return?

Check out the Canadian couch potatoe website as well for info on model portfolios to assist you in your planning- this site explains why the XAW etf might be good in either a registered or non registered account if global diversification outside of Canada is needed. Must not overlook the need for fixed income to help with volatility , in your decision making , its hard for us all 😉
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