Retirement planning advice for US Citizen living in Canada
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  1. #1
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    Retirement planning advice for US Citizen living in Canada

    I am already 42, so I'm late to the planning for retirement game, but I'm trying to get things taken care of now. I've already taken care of any debts, and have a good 6+ months of emergency savings, and have deferred all the taxes I can with registered accounts.The level of knowledge I have I'm just wanting to stick to a index-balanced strategy. However, I have a few circumstances that are making me wonder if I'm doing the right thing.

    The most important is I am a US citizen, living in Canada. I've lived here now for 5 years, and am working towards citizenship. However, I don't know if I will be here indefinitely, and if I would retire here. Interestingly, I get paid in USD, which I currently benefit from because the exchange rate is good. I've learned how to do Norbert's Gambit to convert USD->CAD at a good price.

    If I lived in the US, I would use Vanguard, and build a balanced portfolio with their index funds, but because I am outside of the US, I can't technically use them (yes, I know that some people maintain a US address so they can do this). There is a Canadian Vanguard, but because I am a US citizen, there is this annoying thing that the US does called a PFIC (Passive Foreign Investment Company) which makes life hell for taxes. Basically, my tax adviser has convinced me to just invest in US domiciled holdings, and to do that I am wanting to get ETFs and build a simple Index-based strategy for retirement.

    I've already got 60k USD in a US Fidelity account (traditional and roth IRAs) that is currently balanced between US Bond index (35%), US Stock index (36%) and International Stock index (30%). I saw that Vanguard now recommends an international bond index as well, so I was going to balance these holdings better by using Questrade to buy equivalent iShares ETFs in the non-registered account (12.9% international bonds (IAGG), 27.7% US bonds (IUSB), 35.6% US Stocks (ITOT), and 23.8% (IXUS) international stocks). This all seems to be a reasonable strategy, based on what I've been reading here. I can't get the Vanguard Canadian instruments, because they are PFIC, so I'm going with the ETF strategy, picking ones that are US-based. However, I'm very interested to know if I'm doing something really wrong here. I've got about 80k CAD and 30k USD to build this portfolio with at the moment.

    Because I get paid in USD, I can just buy these ETFs in USD, and not convert to CAD first, and then buy them. When they get sold, I can also settle in USD as well. This seems like a good strategy because I dont pay currency conversion, although if I end up staying and retiring in Canada, I would need to convert it at some point... So I'm left with a currency speculation question - would it be better to convert all of that to CAD now, while the exchange rate is really good (USD/CAD is at 1.3478), or is it better to keep it in USD for the long run? I've read somewhere suggesting that you can manage long-term currency risk by matching the currency denomination of your investments with the currency in which you expect to incur the bulk of your future expenses, which would suggest that I should convert it now.

    Another confusion I have is if I should invest in some Canadian index (it would still need to be domiciled in the US though), such as EWC (iShares MSCI Canada ETF) or HEWC (iShares Currency Hedged MSCI Canada ETF)? I have an international index in the plan, but is there some benefit in specifically investing in the country that I am living in?

    Thanks!


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    Yes the PFIC issue is a huge problem, I agree. I am not a tax expert but as far as I know, the following Canadian investments are free from PFIC concerns:

    * savings accounts including ISAs held at brokerages (traded like mutual funds but they are not mutual funds)
    * individual Canadian stocks, provided they are regular corps and not PFICs
    * GICs
    * individual bonds
    * anything inside RRSP, including Canadian mutual funds and ETFs

    Those are quite a few options to invest in Canada. I invest with all of the above, entirely domiciled in Canada with Canadian institutions, and do not have any PFIC exposure.

    Realistically if you hold some US based international fund, you should be fine. You probably don't need to specifically increase your Canadian stock exposure. Others may disagree.

    Quote Originally Posted by lipsync View Post
    Another confusion I have is if I should invest in some Canadian index (it would still need to be domiciled in the US though), such as EWC (iShares MSCI Canada ETF) or HEWC (iShares Currency Hedged MSCI Canada ETF)?
    The following is just in case you decide you want to increase your Canadian stock exposure. I've done something with individual stocks that I believe approximates holding the TSX Index pretty well. Details are in this thread:
    http://canadianmoneyforum.com/showth...thing-like-ZLB

    So though I am holding individual stocks, this is just to replicate the TSX Index. I hold equal weights from the largest XIU holding in each of these sectors: financial, energy, industrial, telecom, utilities. This means that the current basket of stocks is: RY, ENB, CNR, BCE, FTS. If you have large amounts of money to invest, you could just as well hold the top two weights in each sector. I simply look at the holdings of XIU as a guide.

    That's my overall approach to Canadian investment while avoiding PFIC problems. A mix of savings accounts, GICs, individual bonds, and a small basket of stocks to approximately replicate XIU.
    Last edited by james4beach; 2017-05-11 at 08:22 PM. Reason: Added RRSP

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    Quote Originally Posted by james4beach View Post
    Yes the PFIC issue is a huge problem, I agree. I am not a tax expert but as far as I know, the following Canadian investments are free from PFIC concerns:

    * savings accounts including ISAs held at brokerages (traded like mutual funds but they are not mutual funds)
    * individual Canadian stocks, provided they are regular corps and not PFICs
    * GICs
    * individual bonds

    Those are quite a few options to invest in Canada without needing a mutual fund or ETF. I invest with all of the above, entirely domiciled in Canada with Canadian institutions, and do not have any PFIC exposure.


    a small point but i'm curious ... ok you have no canadian ETFs because in the evil eye of the IRS these are PFICs.

    but somewhere in the welter of posts about holding synthetic XIU, you mentioned you were holding XIU calls which had risen nicely.

    how does Evil Eye regard options on PFICs? usually the same rules apply to options as to their underlyings ...

    .

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    I can hold XIU, options, and other ETFs in my RRSP. Unfortunately I don't have much spare room in the RRSP which is why I had to look for a non-registered method. I currently have a few XIU shares in my RRSP, but no options on it. Assets in the RRSP are sheltered from PFIC reporting rules.

    That might be something for the OP to consider. If you have RRSP contribution room, this is one place you can put Canadian ETFs.

    XIU calls non-registered, I don't know if that's a PFIC but it's a good question!
    Last edited by james4beach; 2017-05-11 at 08:19 PM.

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    Quote Originally Posted by james4beach View Post
    That might be something for the OP to consider. If you have RRSP contribution room, this is one place you can put Canadian ETFs.

    the above is a useful tip for the OP & everyone in the same boat.

    it looks like the inverse of what is normally recommended for a all-canadian taxpayer's RRSP. Such registered retirement accounts will often hold US securities because there is no withholding tax on US dividends.

    but for a US person working in canada or a canadian working in the US who remains a canadian taxpayer, the same RRSP can shelter canadian ETFs from washington. Good tip!



    XIU calls non-registered, I don't know if that's a PFIC but it's a good question!
    often with options it turns out that the tax authorities have no opinion. The important thing is for the taxpayer to be consistent.

    i would tend to think that, if canadian ETFs are PFICs that are unwelcome in washington, then options on em would or should be equally unwelcome. On a more positive scale, i would definitely think that if a certain canadian worker in the US happened to own a couple XIU options in unregistered account, the IRS would pay no more attention to em than it would to a gnat ...

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    I considered using EWC for Canadian exposure, but as far as I can tell it has performed significantly worse than XIU over several years.

    Maybe the XIU calls non-registered are a viable option. I'm sticking to the outright stock ownership method though, and I'll put any ETF positions into my RRSP.

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    Quote Originally Posted by james4beach View Post
    I considered using EWC for Canadian exposure, but as far as I can tell it has performed significantly worse than XIU over several years.

    Maybe the XIU calls non-registered are a viable option. I'm sticking to the outright stock ownership method though, and I'll put any ETF positions into my RRSP.

    i thought your 6 stock picks as a proxy for the best side of XIU (i remember the thread where you set forth your rationale for picking the top 6 XIU performers) is a fine strategy for just about everybody, instead of holding XIU itself.

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    Quote Originally Posted by humble_pie View Post
    i thought your 6 stock picks as a proxy for the best side of XIU (i remember the thread where you set forth your rationale for picking the top 6 XIU performers) is a fine strategy for just about everybody, instead of holding XIU itself.
    Yes I think it's a fine strategy for just about everybody, as long as you rebalance annually and look back at XIU composition. For example, the top weight in the energy sector recently changed from SU to ENB. Some years ago, the stock for industrials changed from BBD.B to CNR. These are easy annual adjustments to make, but you have to do this management activity to get the good results. The point is to mirror XIU, and XIU is constantly changing.

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    Quote Originally Posted by james4beach View Post
    Yes I think it's a fine strategy for just about everybody, as long as you rebalance annually and look back at XIU composition. For example, the top weight in the energy sector recently changed from SU to ENB. Some years ago, the stock for industrials changed from BBD.B to CNR. These are easy annual adjustments to make, but you have to do this management activity to get the good results. The point is to mirror XIU, and XIU is constantly changing.

    good point about having to monitor

    monitoring & editing the 6 top XIU stocks once a year is not too onerous. Surely there could not be more than one, at the most 2, stocks to replace each year? some years perhaps no stocks to replace? in other words, everything proceeding in slow motion.

    in a nearby thread kcowan is talking about an annual discipline he performs for his dividend stocks; he, too, is only carrying out the task once a year, although the editing is a bit more sophisticated

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    Yes with my method (5 stocks by the way: financial, energy, industrial, telecom, utility) there is not much to replace year to year. On average, less than 1 change per year. The five have been static and unchanged for about the last five years, and SU -> ENB is the first change in years. Minimal effort, and the changes are "robotic" ... straight form XIU ... no judgement calls to make.

    It also seems to outperform XIU and I'm downplaying that aspect and saying "can be used to mimic XIU". Historically, it's done better.


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