# US stock in SM account



## Loon (Apr 12, 2012)

Can I buy US stock in a Smith Manoevre account? I guess it wouldn't be as tax efficient as CDN stock with eligible dividends, not to mention the conversion costs if you want to use the yield to pay down non-deductible CDN debt. I'm just thinking about it for diversification. Is it even allowed and is anyone doing it?


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## Daryl-Manitoba (Sep 14, 2010)

I'm not an expert but I don't believe there is any problem with this. The main idea of the SM is essentially just an investment loan being use to purchase income producing investments. Note that the investments you purchase must either pay income (dividends) or have a chance of paying dividends in the future. Companies that have explicitly stated that they will never offer a dividend are not eligible for an investment loan as capital gains are not considered "income" for these.


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## Loon (Apr 12, 2012)

I just heard back from RBC Direct Investing about transferring dividends from US stock to a US checking account.

_"Kindly note that you are not able to transfer U.S. funds automatically to your U.S. dollar bank account. You are only able to transfer Canadian funds automatically to any Canadian bank."_

Is there an easy way for a Canadian living in Canada to get US$ yield from US stock without paying to convert to Canadian?


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## HaroldCrump (Jun 10, 2009)

Loon said:


> Is there an easy way for a Canadian living in Canada to get US$ yield from US stock without paying to convert to Canadian?


The only way to do this is a round-trip currency gambit.
Take CAD cash from your bank account > Deposit into CAD trading account > Gambit CAD for USD into your USD trading account
Collect dividends in USD account until you are ready to move it back.
Gambit USD to CAD back into your CAD trading account > remit back to your bank account for paying mortgage or spending, etc.


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## humble_pie (Jun 7, 2009)

... thought i'd mention in passing.

it's perfectly possible for bank-owned brokers to allow chequing/withdrawals/deposits directly on brokerage accounts.

cheque-writing & cash WDs from ATMs are principal ways that BMO investorline clients can get funds out of their accounts, for example. Cheques can be written in USD, although to get cash US dollars a bmo client has to go to a teller inside the branch.

tdw is also capable of these services & does presently offer these services to a limited number of clients. Including cheque-writing in US $$ drawn directly on a USD investment account.

in the past - although extremely rarely - i used to be able to obtain a physical USD cheque from tdw, written on paper, payable to myself, without any charge. Haven't tried this for a number of years, though.

there are definitely certain costs to the bank/brokers, so they do limit the direct services. Clients should be prepared to accept the limitations imho. BMO for example limits withdrawals from investment accounts to 2 per month; after that a charge applies. TDW limits the number of clients who benefit. To me, the BMO approach is hugely preferable.

cmfers unite! you have nothing to lose but excessive bank charges! ask for increased banking services on bank-owned discount broker investment accounts!


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## HaroldCrump (Jun 10, 2009)

HP, why would someone with chequing accounts and brokerage accounts with the same bank need to write a self-cheque though?
These transfers can be done online.
From a US chequing account into a USD trading account and back again.
Even easier from a CAD chequing account to/from a CAD trading account.

IMHO, it is potentially safer not to have trading accounts exposed directly via cheques and ATM cards.
Transfer in/out as needed.

I don't believe any of the big 5 charge any fees for such intra-account transfers.


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## Loon (Apr 12, 2012)

Sorry for the confusion. I just got off the phone with RBC DI. In my message I had asked them about _automatic_ transfers. They can't do automatic transfers but they can mail me a check in $US for a $10 fee. Then can also transfer the money to US$ bank account at RBC.


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## Loon (Apr 12, 2012)

Can I avoid requesting a check or opening a US$ checking account by doing the following steps?

1. Borrow 10K CAD from HELOC, gambit over and buy PM. 
2. Wait a year, then have $400 US in dividends. 
3. Buy $400 US more of PM stock
4. Borrow $(400*exchange_rate) CAD from my HELOC for mortgage, spending, etc

Would I still maintain interest deductibility of my HELOC? Steps 3 and 4 have the same result as borrowing $400 and buying stock.


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## andrewf (Mar 1, 2010)

No, you can't do that. But you can borrow to make payments on the HELOC (which you don't seem to be accounting for).


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## HaroldCrump (Jun 10, 2009)

No, you can't do that.
What you can do, instead, is after step # 2, gambit the $400 over to your CAD trading account, then over to your regular chequing account for mortgage, spending, etc.
So, your steps #3 and #4 will be:
3. Gambit $400 USD to CAD trading account
4. Transfer $(400*exchange_rate) to your regular chequing account for mortgage, spending, etc.

Of course, it is not worthwhile gambitting for $400, but that's another matter.


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## Loon (Apr 12, 2012)

andrewf said:


> No, you can't do that. But you can borrow to make payments on the HELOC (which you don't seem to be accounting for).


That's too bad, I thought maybe with meticulous bookkeeping I could get away with that. Yes I know, I can and would borrow the $350 in interest incurred that year on the borrowed 10K. 



HaroldCrump said:


> Of course, it is not worthwhile gambitting for $400, but that's another matter.


Understood. This is why my actual steps will be 
3. Borrow the $350 incurred in interest for the year, use some of it to pay the tax on the dividends, the rest is gravy.
4. Transfer the $400 USD to US chequing
5. Withdraw and take on next cross border shopping trip. 

I appreciate the input. Still I'm curious why this little move wouldn't be legit. I assume it's just the lack of paper trail.


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## andrewf (Mar 1, 2010)

CRA doesn't treat money as fungible. Otherwise you could say that your primary residence mortgage was really an investment loan to finance your non-registered portfolio.

It's not allowed because the borrowed funds are not being used for investing, but rather for consumption.


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## Loon (Apr 12, 2012)

I have another question about buying US Stock as part of a Smith Manoeuvre. From a tax perspective is this less efficient than buying CDN equity with eligible dividend and if so by how much? For example, is it true that there is witholding tax on dividend but then I get it all back at tax time? Are there other considerations? 

I have thus far only bought CDN stock with eligible dividends for SM, and am specifically avoiding ROC to simplify bookkeeping. Assuming I can absorb the US dividends by spending it in the US, then I'm not losing money in the conversion (aside from the initial Norbert move to buy the stock). This frees up cash on the CDN side for extra mortgage payments, at least in theory. I'm currently at 35% CDN equity overall (RRSP+TFSA+SM account) but am feeling that 35% is too high and want to drop to more like 25% or even 20%, but just how much will depend on how much US income I can make use of but also this tax angle which I need some help quantifying.


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## andrewf (Mar 1, 2010)

US dividends are not taxed favourably like Canadian eligible dividends. You pay the full marginal tax rate on US dividends (it's 'foreign income').

It may still be worthwhile to use leverage to invest in foreign companies, but if you have RRSP room, better to hold them there.


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## Loon (Apr 12, 2012)

andrewf said:


> You pay the full marginal tax rate on US dividends (it's 'foreign income').


Sorry I don't do my own taxes. If my taxable income is 78K after RRSP contributions, deductions, etc. does this mean 33% tax on foreign income vs about 14% for eligible dividends? Would I be giving up 19% of my dividends? 

I'm getting these numbers from here. http://www.taxtips.ca/taxrates/on.htm I just want to know if I'm interpreting them correctly.


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## andrewf (Mar 1, 2010)

Yes, that's right.


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## Loon (Apr 12, 2012)

Thanks Andrew. 19% sounds like a big tax hit for the diversity, but if I do only CDN equity for my SM then I'm going to end up heavy in CDN. I generally use about 2/3 of my RRSP limit to get down to 78K, so I let the remaining room accumulate in case I get a higher income later. After that I prefer either TFSA for its flexibility or SM as I feel it's a better wealth builder. But projecting into the future, unless my income goes up fast, my SM, and with it CDN equity, is likely to dominate my portfolio. 

Is there an efficient way to hold foreign income-generating content in a non-registered account? 

Are capital gains of foreign holdings income as well, or is that still realize as the more favorably taxed capital gains?


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## My Own Advisor (Sep 24, 2012)

CGs of foreign holdings are income and must be treated as much. You have withholding taxes in a non-registered account but those are recoverable, it is my understanding.


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## humble_pie (Jun 7, 2009)

Loon said:


> (1) Is there an efficient way to hold foreign income-generating content in a non-registered account?
> 
> (2) Are capital gains of foreign holdings income as well, or is that still realize as the more favorably taxed capital gains?



(1) it comes to mind that a few countries do not withhold taxes, at least not to the US of A. Most of these countries - lithuania is an example - are so small that they do not host any large cap multinationals that are capable of generating high income.

however, great britain & hong kong are 2 large economies within this small group. Reportedly, US-traded ADRs based on companies HQ'd in GB or HK are exempt from withholding taxes in their country of origin. Also reportedly, the US does not charge withholding tax on these foreign ADRs.

this last point - about no US withholding tax - should be re-checked by anyone contemplating british or hong kong ADRs in non-registered because i don't have direct experience on this issue. Obviously if in rrsp there will be no US withholding tax. However the question is, would withholding tax be charged in non-registered? it's as well to remember that canadian tfsa will be treated by the US the same as a non-registered holding.

2 companies in this narrow category that come to mind are vodaphone of the UK & china mobile of hong kong.

(2) capital gains realized anywhere in the world are all eligible for the 50% gains/loss exclusion rate (that's why, whispers pie, foreign options taxable at 50% are better than foreign dividends taxable at 100%)


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## andrewf (Mar 1, 2010)

My Own Advisor said:


> CGs of foreign holdings are income and must be treated as much. You have withholding taxes in a non-registered account but those are recoverable, it is my understanding.


Maybe I'm mistaken, but I don't think this is correct.

All distributions (even 'capital gains' distributions) from foreign securities is treated as income, but when you earn a capital gain due to change of value (in CAD terms), that is treated as a capital gain.


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## andrewf (Mar 1, 2010)

Loon said:


> Is there an efficient way to hold foreign income-generating content in a non-registered account?


Unfortunately, no. Any distribution (no matter how it is classified in the foreign jurisdiction) is classified as foreign income and taxed at the full marginal rate. Your best bet is to go with lower yielding foreign companies...


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## humble_pie (Jun 7, 2009)

My Own Advisor said:


> CGs of foreign holdings are income and must be treated as much.


no, foreign capital gains wheresoever situated are treated exactly like canada-based capital gains. All are subject to the 50% gains/loss exclusion rate.


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## Loon (Apr 12, 2012)

humble_pie said:


> (that's why, whispers pie, foreign options taxable at 50% are better than foreign dividends taxable at 100%)


Can I use options to generate free cash flow that does not require repayment of SM loan?


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## andrewf (Mar 1, 2010)

Like a covered call?


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## My Own Advisor (Sep 24, 2012)

Sorry, I was under the impression he was selling, which means he has a capital gain, which means it will be taxed.


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## andrewf (Mar 1, 2010)

CG is still only taxed at half the marginal rate.


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## Loon (Apr 12, 2012)

andrewf said:


> Like a covered call?


Thanks for the tip. I'm just reading up on this now. Let me see if I have this, wrt SM and US stock. 

I buy a US stock with borrowed money. Then I write/sell a call option on the shares I just bought. The money I receive for the option premium is mine free and clear to spend on mortgage or whatever, not affecting the deductibility of my investment loan. 

Scenario A) Stock goes up beyond strike price. Option buyer buys my shares at strike price and I take a capital gain, though not as much as the market would have paid. I buy another lot of shares, repeat. 

Scenario B) Stock flat/goes down. Option expires, stocks are still mine, so repeat. 

I pay capital gains on the option premium. Dividends, if any, go to me, taxed as income

Is this correct?


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## humble_pie (Jun 7, 2009)

Loon said:


> ... Scenario A) Stock goes up beyond strike price. Option buyer buys my shares at strike price and I take a capital gain, though not as much as the market would have paid. I buy another lot of shares, repeat.
> 
> Scenario B) Stock flat/goes down. Option expires, stocks are still mine, so repeat.
> 
> ...



imho this is not a good idea. The SM already conveys a degree of risk because if the capital gain-plus-dividends do not exceed the home loan interest rate, then the entire smith manoeuvre is toast. It seems to me the SM is plenty leverage enough for any prudent home owner.

adding covered calls to the brew is nowhere near as simple as you are posting. Scenario A) for example is the very strategy that has put most of those covered call etf funds into so much trouble. Getting called frequently & having to buy back at a higher price means erosion of the capital.

your scenario B) does not make sense to me. You own shares; they go down; your SM is already in trouble. This should be consuming all of your attention. Yet you blithely say you will "buy anoher lot of [losing] shares, repeat."

so in this scenario i am left wondering with what will you buy them, how will you pay for another round of shares.

bref i believe one could go SM or go CC but not a wise idea to mix the 2.


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## Spudd (Oct 11, 2011)

I think for scenario B he means he would sell another set of call options on the same shares, not buy more shares.


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## Loon (Apr 12, 2012)

Spudd said:


> I think for scenario B he means he would sell another set of call options on the same shares, not buy more shares.


Yes, this.

Admittedly I'm new to this concept but the wheels are turning. What I read on writing covered calls is that I give up the right to participate in any gains above the strike price, but the premium I receive protects me to some degree from the downside risk. This would appear to reduce volatility. 

I always understood that buying options was a risky investment which is why I've never done it, but doesn't it follow that selling them reduces risk? It seems like that would be neutral/good for SM, and the CG tax treatment good.


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## andrewf (Mar 1, 2010)

I'm not sure about the proceeds from the sale of options on investments you borrowed to invest. You should talk to a good tax accountant about that one--it's a bit more aggressive than how most people use leveraged investing.


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## My Own Advisor (Sep 24, 2012)

andrewf, ever borrowed to invest? 

I'm guessing no. If so, when and why? 

(I haven't, for the record, although I am curious about using the SM but I fear it's too much risk for me).


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## humble_pie (Jun 7, 2009)

ah, i see, repeating means selling calls again. But this, too, has complications, which means that if a smith manoeuvre is layered on top of the covered call strategy, there can quickly be too much risk.

for example, as stk drops under scenario B), new options that are issued every 3 months will have lower & lower strike prices. Soon, our smith manoeuverer could be agreeing - through his sold calls - to sell his stock at a price less than he paid, ie he will be locking in a loss sale if exercise occurs.

suppose also that a company which has fallen on hard times were to stop its dividends. Now the 2 streams of income upon which the SM was relying have been terminated.

a prudent covered call seller operating outside the pressure of making SM payments can wait out periods of low stock prices by selling no calls. Perhaps by selling puts, but not calls. 

lastly, i would like to go back, if i may, to the OP's message upthread where he posts that the amount involved will be around USD 10,000. In addition, the impression i have is that the OP is a newcomer to both options & smith manoeuvering. This is just my opinion so it doesn't matter in the least ... but i think that 10k is too small an amount for a newcomer to try to wrestle into such a difficult & convoluted challenge.

"good" chartered accounts with extensive options knowledge are scarce as hen's teeth. Little jurisprudence has built up in canada while taxation acts are vague about options reporting, so it's an open invitation to any accounting firm to prepare a huge "study" advising a smith-manoeuvering-plus-call-option-selling client as to what he should or should not do ... for a bill of several thousand $$. Personally i think it's simpler to stay far away from complicated situations like this.


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## andrewf (Mar 1, 2010)

MOA:

I have a small margin account with IB that I use for some leverage. I don't own a house to leverage against, though, so I can't use a SM-like approach. I'd be comfortable with borrowing to invest though.


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## My Own Advisor (Sep 24, 2012)

The SM seems rather risky to me. You have interest rate risk, tax consequences not to mention the psychological risks with leverage. It's not for me right now, mainly because I have a fat mortgage. At some point, I might strongly consider it but by then, interest rates will likely be higher and potentially it won't be worth it.


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## Loon (Apr 12, 2012)

This discussion on covered calls has been highly interesting. I'll ask my tax guy about it and maybe read a book. Humble you bring up some interesting points. Thanks for helping me start the learning process. 

My goal is to get my 4 to 5% payout in a way that is tax-efficient and diversified (non-CDN), but I expect this is more hands on than I would want. I like it when dividends just appear


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## Loon (Apr 12, 2012)

My real purpose of this thread is to figure out how not to bloat my portfolio with CDN blue chip if I let SM run its course as I pay down my mortgage. IMO I maintain 10% of my total portfolio value as available credit in my HELOC. Even with that buffer I still project adding more CDN equity than I want in not too many years. 

I would like to add US bluechips and/or something like PM for overseas exposure to my SM account without paying too much tax. So far I feel I have 2 options:

1. Add PM, JNJ, etc to hit my target allocation and just pay the extra tax, or

2. Treat my SM account as a second portfolio with only CDN blue chip, balance by sector, let it bloat, but try to pick companies with lots of foreign exposure. 

Option 2 seems easiest and most tax efficient, but how non-CDN can I get on a CDN exchange? Is there a way to screen stocks for foreign interest?


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