Canadian ExPat seeking tax efficient portfolio. Swap based?

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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minster
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Canadian ExPat seeking tax efficient portfolio. Swap based?

Post by minster » 18 Jul 2017 03:56

I recently moved to california, and left funds in my Questrade RRSP account. I verified with them that I can trade in it.
Now uncle sam does not tax my RRSPs due to tax treaty, but California decided that it wants to. Therefore I want to build a tax efficient model in it to compliment my existing US based portfolio.
I am planning to buy in it is Canadian market exposure (which is lacking in the U.S. market), U.S. market, bonds and world, so to match my total asset allocation.

1. For Canadian, I am thinking of HXT.TO instead of something like VCN. So I avoid taxed distributions and let the capital grow. Thoughts?

2. For U.S. I am thinking HXS.TO instead of something like VTI for the same reasons. Does that make sense? Note that I have USD available in my RRSP account so I wouldn't need to convert.

3. I haven't research bonds/world yet, but I would follow the same pattern.

4. Bonus: Anyone has any asset allocation tips for an expat that wants to keep canadian exposure? My planned allocations is as follow:
45% Total US
30% Total International
20% Bonds
5% REITs
I know the canadian % I want to add should be accounted for in my stock allocation, but do i substract it from the U.S. or international? or a bit of both?
Hope this questions makes sense.

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Re: Canadian ExPat seeking tax efficient portfolio. Swap based?

Post by OhGreatGuru » 18 Jul 2017 16:40

minster wrote:
18 Jul 2017 03:56
... Now uncle sam does not tax my RRSPs due to tax treaty, but California decided that it wants to. ...
Welcome to the wonderful world of federated governments. Anybody know if they can actually do this, or are the individual states not bound by the federal treaty?

PS. I answered my own question. Apparently states are not obliged to comply, according to IRS web site. https://www.irs.gov/individuals/interna ... x-treaties

Many of the individual states of the United States tax the income of their residents. Some states honor the provisions of U.S. tax treaties and some states do not. Therefore, you should consult the tax authorities of the state in which you live to find out if that state taxes the income of individuals and, if so, whether the tax applies to any of your income, or whether your income tax treaty applies in the state in which you live.

I thought the Civil War was supposed to have settled the supremacy of the federal government over states' rights, but apparently not.

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Re: Canadian ExPat seeking tax efficient portfolio. Swap based?

Post by AltaRed » 18 Jul 2017 17:05

That has been the case for a very long time. For my employer's appointed cross-border tax accountant, I used to have to keep track of WHICH state I spent time in (to the half day) when I was an ex-pat just in case CA, for example, might have been able to 'confiscate' some of my Cdn RRSP investment income.
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Re: Canadian ExPat seeking tax efficient portfolio. Swap based?

Post by gsp_ » 18 Jul 2017 20:52

minster wrote:
18 Jul 2017 03:56
I recently moved to california, and left funds in my Questrade RRSP account. I verified with them that I can trade in it.
Now uncle sam does not tax my RRSPs due to tax treaty, but California decided that it wants to. Therefore I want to build a tax efficient model in it to compliment my existing US based portfolio.
I am planning to buy in it is Canadian market exposure (which is lacking in the U.S. market), U.S. market, bonds and world, so to match my total asset allocation.
What exact CA taxes are you attempting to avoid? What's the rate? Will they also tax capital gains and if so, at what rate?

Until these questions are answered it's impossible to address your 4 questions competently. Some of the products you are contemplating may have higher added differential costs than the tax burden you are trying to avoid.

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Re: Canadian ExPat seeking tax efficient portfolio. Swap based?

Post by minster » 19 Jul 2017 00:40

gsp_ wrote:
18 Jul 2017 20:52
minster wrote:
18 Jul 2017 03:56
I recently moved to california, and left funds in my Questrade RRSP account. I verified with them that I can trade in it.
Now uncle sam does not tax my RRSPs due to tax treaty, but California decided that it wants to. Therefore I want to build a tax efficient model in it to compliment my existing US based portfolio.
I am planning to buy in it is Canadian market exposure (which is lacking in the U.S. market), U.S. market, bonds and world, so to match my total asset allocation.
What exact CA taxes are you attempting to avoid? What's the rate? Will they also tax capital gains and if so, at what rate?

Until these questions are answered it's impossible to address your 4 questions competently. Some of the products you are contemplating may have higher added differential costs than the tax burden you are trying to avoid.
Did a bit of reading and CA treats all income (wages, interest, dividends, short term and long term capital gains, etc.) the same way. Therefore I am looking at about 9.3% CA tax rate.

When I will withdraw money from the RRSP, if I am still in the US, Canada will withhold a flat rate of 25% or in some circumstances 15%.

Is that enough information or is more needed? thanks

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Re: Canadian ExPat seeking tax efficient portfolio. Swap based?

Post by Peculiar_Investor » 19 Jul 2017 07:57

The OP might also want to review this previous discussion of the topic, Moving from Canada to California with substantial RRSPs.
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Re: Canadian ExPat seeking tax efficient portfolio. Swap based?

Post by gsp_ » 19 Jul 2017 10:18

minster wrote:
19 Jul 2017 00:40
Did a bit of reading and CA treats all income (wages, interest, dividends, short term and long term capital gains, etc.) the same way. Therefore I am looking at about 9.3% CA tax rate.
Will they consider ROC as income? WRT to CGs, are we talking only realized or will there be a deemed disposition if you return to Canada?

HXT will just about always be worth owning but based only on dividend tax, HXS will not. Paying over 40 basis points to save 18 in tax doesn't make a whole lot of sense. There are no good international swap options. HBB seems like a toss up at first look for FI and only if you plan to return to Canada. Likely only worth doing the switch for Canadian equity.

Your previous thread spoke of a year or two in the U.S. You're now mentioning RRSP/RRIF withdrawals, have your long term plans to stay changed?

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Re: Canadian ExPat seeking tax efficient portfolio. Swap based?

Post by minster » 20 Jul 2017 02:16

Peculiar_Investor wrote:
19 Jul 2017 07:57
The OP might also want to review this previous discussion of the topic, Moving from Canada to California with substantial RRSPs.
Thanks, I read through that thread a few times in the past and gave me some good tips.

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Re: Canadian ExPat seeking tax efficient portfolio. Swap based?

Post by minster » 20 Jul 2017 02:52

gsp_ wrote:
19 Jul 2017 10:18
minster wrote:
19 Jul 2017 00:40
Did a bit of reading and CA treats all income (wages, interest, dividends, short term and long term capital gains, etc.) the same way. Therefore I am looking at about 9.3% CA tax rate.
Will they consider ROC as income? WRT to CGs, are we talking only realized or will there be a deemed disposition if you return to Canada?

HXT will just about always be worth owning but based only on dividend tax, HXS will not. Paying over 40 basis points to save 18 in tax doesn't make a whole lot of sense. There are no good international swap options. HBB seems like a toss up at first look for FI and only if you plan to return to Canada. Likely only worth doing the switch for Canadian equity.

Your previous thread spoke of a year or two in the U.S. You're now mentioning RRSP/RRIF withdrawals, have your long term plans to stay changed?
I am not sure about them counting ROC as income. I can't find any specific articles with this information.
As for CGs, I don't think states are allowed charging exit taxes. This can only happen on the federal level.

Woa thank you for eye opening comments on HXT and HXS.
I noticed for HXS that there is 0.10% mangement fee, and up to 0.30% swap fee. Is that the 40 basis points you are mentioning above?
Also where are you getting the 18 points to save from? is it 1.86 (SEC Yield for VTI) * 0.093 CA tax? <-- I hope so because I just calculated this by myself for the first time :D
If this is the case then yea it makes more sense to just buy more VTI for my US exposure.

My long term plans have not really changed, we are still feeling it out here and see where it goes. I mentioned RRSP/RRIF withdrawals because I was reading that it might be efficient to withdraw while I am in the U.S. because of lower taxes then it would if I move back to Canada. But i guess I also need to factor in that I can just let my money grow tax free in there as well, which is certainly an option, and why i'm asking about the Horizon funds. I'm just trying to weigh all my options before I make my decision.

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Re: Canadian ExPat seeking tax efficient portfolio. Swap based?

Post by gsp_ » 20 Jul 2017 03:45

minster wrote:
20 Jul 2017 02:52
Woa thank you for eye opening comments on HXT and HXS.
I noticed for HXS that there is 0.10% mangement fee, and up to 0.30% swap fee. Is that the 40 basis points you are mentioning above?
Also where are you getting the 18 points to save from? is it 1.86 (SEC Yield for VTI) * 0.093 CA tax? <-- I hope so because I just calculated this by myself for the first time :D
If this is the case then yea it makes more sense to just buy more VTI for my US exposure.
HXS's all in fee used to be 47 bps, I'd forgotten they lowered the management fee from 15 to 10 bps. So now we're looking at 41-42 bps(don't forget sales tax). VTI is at 4 so 37-38 bps extra cost on HXS. 18 bps is as you've gleaned(used a marginally higher yield, didn't look it up).

For fixed income you'll have to run the numbers for HBB against some low yielding bond ETFs and the standard broad market ones that will have higher distributions(but lower fees?). Not up to date on bond ETF fees, know there's been a bunch of fee reductions lately.

In any event, the 9.3% state tax on distributions is fairly minor and not likely to warrant a major overhaul. I do wonder about your exit tax reply though as why would expats sell and rebuy upon entry if state tax wasn't due on unrealized capital gains. Perhaps it only applies to active traders? Best to make sure.

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Re: Canadian ExPat seeking tax efficient portfolio. Swap based?

Post by minster » 21 Jul 2017 11:25

gsp_ wrote:
20 Jul 2017 03:45
minster wrote:
20 Jul 2017 02:52
Woa thank you for eye opening comments on HXT and HXS.
I noticed for HXS that there is 0.10% mangement fee, and up to 0.30% swap fee. Is that the 40 basis points you are mentioning above?
Also where are you getting the 18 points to save from? is it 1.86 (SEC Yield for VTI) * 0.093 CA tax? <-- I hope so because I just calculated this by myself for the first time :D
If this is the case then yea it makes more sense to just buy more VTI for my US exposure.
HXS's all in fee used to be 47 bps, I'd forgotten they lowered the management fee from 15 to 10 bps. So now we're looking at 41-42 bps(don't forget sales tax). VTI is at 4 so 37-38 bps extra cost on HXS. 18 bps is as you've gleaned(used a marginally higher yield, didn't look it up).

For fixed income you'll have to run the numbers for HBB against some low yielding bond ETFs and the standard broad market ones that will have higher distributions(but lower fees?). Not up to date on bond ETF fees, know there's been a bunch of fee reductions lately.

In any event, the 9.3% state tax on distributions is fairly minor and not likely to warrant a major overhaul. I do wonder about your exit tax reply though as why would expats sell and rebuy upon entry if state tax wasn't due on unrealized capital gains. Perhaps it only applies to active traders? Best to make sure.
Thanks for the advice. I'll stick to Horizon for HXT and vanguard for the rest.

For the exit tax, I was only referring to money in my RRSPs. I did reset my cost basis for my RRSPs when I left as well in the case that I need to sell any of my assets which would trigger CGs in California.
I don't hold anything Canadian outside of RRSPs and just a savings account.

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Re: Canadian ExPat seeking tax efficient portfolio. Swap based?

Post by Quebec » 27 Jul 2017 16:05

minster wrote:
18 Jul 2017 03:56
45% Total US
30% Total International
20% Bonds
5% REITs
I know the canadian % I want to add should be accounted for in my stock allocation, but do i substract it from the U.S. or international? or a bit of both?
If you think you will probably return to Canada, you might want to have an overall asset allocation that is similar to what you would have in Canada. For example, 25% Canadian eq, 25% US eq, 25% international eq. And the 20% bonds and 5% REITs should be Canadian too.

If the odds of returning to Canada seem small, then you don't really need any Canadian content on the equity or fixed income side, and your proposed AA looks fine.

If you know really know if you are returning or not, then something in between I guess...
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