# What's in your couch potato?



## Franko (Mar 31, 2012)

Hey all,

So after a fair bit of work, I've drawn up my couch potato portfolio to my satisfaction (emphasis on small caps, value stock and emerging markets). I'm curious as to what you fellow couch potatoers are holding in yours, and your rationales for choosing the funds in them?

My portfolio:

25% CDN: ZCN and XCS
25% US: VTI and VBR
35% Int'l: VEA, VWO and DGS
15% Bond: VAB

It's a bit bloated at 8 ETFs, so I do have concerns about efficiency. I only plan to rebalance once per year, and the holdings will be for the long haul, so this should minimize fees. Once I start making regular contributions, I'll likely use the TD e-series to avoid repeated trading fees.


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## Jungle (Feb 17, 2010)

14% TDB909

All the rest is split into three:
TDB900
TDB902
TDB911

Why do I hold these? Because in 4 accounts, I do not have enough for ETFS. Aggregate, I would. 

I do love the low cost, no fee to buy and transparancy of e-series. Very easy to maintain.


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## longinvest (Sep 12, 2012)

Here's my target:

25% VCE
25% VFV
25% VEF
25% VEE

The equal percentages simplify things. I rebalance by using each new contribution to buy the lowest of the four.

I know it's considered an aggressive allocation for some, but I lived through 2008 without losing any sleep over it; I happily continued regular contributions and lowered my cost average basis. I was using index funds, at the time.


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## RedRose (Aug 2, 2011)

Thanks for sharing guys. This looks a good strategy.


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## Ihatetaxes (May 5, 2010)

Target is as follows (actual is close but I have more cash and not enough VTI right now)

20% Canada - XIU
20% US - VTI
15% International - VWO/VEA/DEM (5% of each)
10% Preferred - XPF
10% Short term bond - XSB
10% GIC's
10% Individual stocks (currently Cisco, Apple)
5% Reit - REI


Its been tough to get away from individual stocks but I'm down to two. Should probably move REI to XRE and probably will this year. Sold all my VTI for a nice gain which is not a realy couch potato thing to do but I have done it before and then bought back in when there was a drop.


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## Barwelle (Feb 23, 2011)

My retirement savings are a couch potato portfolio (all in TFSA). Dollar cost averaging by making automatic contributions each week, with some cash on the side for rebalancing and doing a tiny bit of timing (buying in the dips).

40% TD e-Series Canadian Equity
30% TD e-Series US Equity (unhedged)
30% TD e-Series Int'l Equity (unhedged)

Sometime later this year I'll move lump sums into ETFs while continuing to DCA into e-Series. I'm not set on these choices but right now I'm thinking:

VCE Vanguard MSCI Canadian Equity
VFV Vanguard S&P500 US Equity (unhedged)
VEF Vanguard EAFE Int'l Equity (hedged... because there is no unhedged option as far as I know)

Portfolio isn't large enough to go any more complicated than that.

Since my investment horizon is 40+ years for this portfolio, I've gone 100% equity. Though I'm debating whether or not I should add 5-10% bonds.


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## Xoron (Jun 22, 2010)

I'm couch potatoed (or at least index ETFd) on my bonds, International and Canadian Allocations. My US allocation is where I stock pick (big market, lots of data).

So I'm setup like this:
CRQ.TO ...................30% (Canadian)
CIE.TO ...................25% (International)
VWO .......................5% (International - Emerging Markets)
CLF.TO ...................10% (Canadian Laddered Bonds)
Individual US Stocks .....30%

I like the hands off part of the ETF Selections. With the ability to pick individual stocks for my US exposure.


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## mrPPincer (Nov 21, 2011)

Barwelle you probably know this, but when inside your TFSA, the US dividends will be subject to an unrecoverable 15% withholding tax and the VEF dividends will be taxed as US dividends as well (after any other unrecoverable european w/h taxes have already been applied), because it's main holding is the U.S.-domiciled Vanguard MSCI EAFE ETF, which will be considered a US etf inside your canadian version by the IRS.


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## Barwelle (Feb 23, 2011)

I did know that US divs were subject to 15% withholding tax... I didn't know that this would apply to VEF though. Thanks for pointing that out.

Though this raises some more questions from me. This withholding tax is something that's been on my list to research further because I don't understand it entirely. I did a search and (interestingly) came up with a thread started by you on this topic. I'll post in there later because this is getting off topic.


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## My Own Advisor (Sep 24, 2012)

@Barwelle,

U.S-dividend paying stocks do not recieve any favourable tax treatment from our government. So, by keeping U.S. stocks inside an RRSP...you avoid paying withholding taxes.

• U.S. stocks held inside an RRSP or LIRA – no withholding taxes.
• U.S. stocks held inside an RESP or TFSA - pay 15% withholding taxes.
• U.S. stocks held in unregistered accounts - pay 15% withholding taxes + taxes at marginal tax rate.


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## mrPPincer (Nov 21, 2011)

Two points should be noted here;

1. If it's a Canadian ETF holding primariy a US-domiciled ETF your dividends are not protected inside an RSP, in fact you are taxed at 15% and it is unrecoverable.

2.If US stocks or ETFs are held in an unregistered account they are subject to the 15% w/h tax but you can claim that as a credit against any Canadian taxes paid that year, but if your situation is such that you are not paying significant taxes anyway then the 15% is lost as well.

Back to the original question, my Couch Potato right now is
10% cash
10% REITs CDN & US
30% CDN equity including TDB900, VCE, REI.UN
30% US, 20% including TDB902, TDB903, TDB908, VTI, VNQ, 
with the other 10% being TDB904 and VUS (hedged). -> I've been thinking of replacing this 10% with Canadian based stocks that have a lot of exposure to the US market.
5% emerging markets, VWO, with $25/month going into CIB519
25% foreign, for the reasons above (w/h tax considerations along with the overpricedness of the CDN-based ETFs) is all still in equal parts TDB905, TDB906, TDB907, TDB911, but I have been considering getting some of the foreign exposure through individual stocks here as well.
Still undecided about it, plus I still have a lot more to learn before doing so.


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## Barwelle (Feb 23, 2011)

I guess I'll just reply here.

Yea My Own Advisor, as mrP points out, it's a little more complicated because it is ETFs and index mutual funds we're talking about.

mrP I've been doing some reading and came here to say exactly what you've said.

So, if we say that it does not matter if the investments are in TFSA or RRSP, the best option for ETFs is to hold US and Int'l equity in an RRSP using US$ funds, because I will not be charged the 15% w/h tax.

But then comes the issue of currency conversion. Since I would have to pay three commissions instead of just one (using Norbert's Gambit) to buy a US-domiciled ETF, I have extra costs. Is it worth it for 15% of dividends? Yield on VOO is 2.24%, so it's a currency conversion to avoid a tax that would reduce the investment by 0.336%.

Something else to consider is MER: VOO's MER is 0.05%, while VFV's MER is 0.15%.

Now I'm interested to see how much I would have VOO I would have to buy to pay for the extra commission with the savings in withholding tax and MER... the breakeven amount.

You could say that the total cost of VFV is 0.15% (MER) + 0.336% (withheld tax) = 0.486%, while VOO is 0.05% + commission, and two trades is $9.90 at Questrade.

So to get the breakeven amount (after one year): $9.90 / (0.486% - 0.05%) = $2,271

How's my math? That was lengthy. But if I'm right, I'm surprised. I thought the breakeven point would be higher than that. I guess it would be a little higher because there is a hidden cost in the spread when you use Norbert's Gambit.

--------

The difference is more pronounced with int'l ETFs, since the Canada-domiciled VEF's MER is 0.37% while the US-domiciled equivalent VEA has a MER of 0.12%, so VEF costs 0.706%, or a difference of 0.586%, giving a break-even amount of $1,689.

--------

Okay that was an interesting exercise. Hopefully that helped somebody think about what's in _their_ couch potato!


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## andrewf (Mar 1, 2010)

I'm wondering how much we should be letting withholding tax wag the investment dog. If a fund is yielding 2% -2.5%, the witholding tax is 30-45 bps per year. That a 'drag' (  ), but compared to many of the other drags investors are subjected to such as currency hedged funds, high MER MFs, this seems like a modest sin.

I think the diversification benefit is worth the withholding tax hit, if necessary (ie, not enough RRSP room).


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## jslmsca (Aug 26, 2012)

I'm planning to start my CCP in August/September after the purchase and sale of stock options. I can't make up my mind between the following two portfolios:

Fixed-Income..........(VAB)
Canadian Equity.......(VCE)
American Equity.......(VTI)
International Equity..(VEA)
Emerging Markets......(VWO)
Real Estate...........(VRE)

MER 0.17

Fixed-Income..........(XBB,XRB)
Canadian Equity.......(XIU,XMD)
American Equity.......(VTI)
International Equity..(EFA,SCZ)
Asian Equity..........(AAXJ,AXJS)
Real Estate...........(VRE)

MER 0.35

The all-Vanguard one has a lower MER and four fewer funds. The other one is iShares Canada and US (except for the real estate component). Rebalancing is only going to happen once a year in August/September which should mitigate against transaction costs. I'm not too concerned about managing an additional four funds. My brain says go with #1 but my gut says #2. :smile:


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## Barwelle (Feb 23, 2011)

andrewf said:


> I'm wondering how much we should be letting withholding tax wag the investment dog.


I was going to post further about how the bigger question really for my situation is whether TFSA or RRSP is more appropriate for my income level, but the post was long enough already. 

The withholding tax doesn't make much damage unless you've got a large portfolio. And as you say, you wouldn't want to reduce your US/International allocation just because of the w/h tax.


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## mrPPincer (Nov 21, 2011)

I know there's a drag on those currency-hedged funds/etfs, but for me it seemed like a good idea at the time because I thought the lower corelation of that slice of the pie would balance it out and possibly add some value over time but I'm not so sure about that now.

I've been drawing down my RSP (actually converted it to a RIF a couple years ago) so I'm in that exact situation (not enough RRSP room) and unnecessary w/h tax drag is one of those things that just annoy me too much so I go for the best alternatives I can find.


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## mrPPincer (Nov 21, 2011)

Barwelle you could put contributions into your RRSP now, and save the deductions on those contributions for later when your income is higher, and enjoy the tax-free growth now.


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## Franko (Mar 31, 2012)

@Barwelle: VEA is the unhedged VEF equivalent I believe.



My Own Advisor said:


> • U.S. stocks held inside an RRSP or LIRA – no withholding taxes.
> • U.S. stocks held inside an RESP or TFSA - pay 15% withholding taxes.
> • U.S. stocks held in unregistered accounts - pay 15% withholding taxes + taxes at marginal tax rate.


Can someone explain the reason behind why a US stock inside an RRSP isn't subject to a withholding tax, but yet a US stock inside a TFSA _is_? Since the TFSA should be tax exempt too, there must be something else going on that I'm not following. And I thought the 15% tax was levied by the US government...it seems weird that the withholding tax can be avoided in a RRSP, as the dividend payment is still going to Canadian citzen, from the US govt's point of view.

My portfolio is unhedged and holds a lot of US-based funds (VTI, VBR, VEA, VWO and DGS). Based on the conversations here, it seems like it would be a better idea for me to max out my RRSP first over my TFSA, in order to minimize withholding tax. Does that sound appropriate? 

Also, are there any tax implications to holding the majority of my RRSPs in US stocks? And how are international-based, US-traded ETFs taxed?

Thanks for all of the replies folks, this is all gold to a new investor like me!


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## Xoron (Jun 22, 2010)

Franko said:


> Can someone explain the reason behind why a US stock inside an RRSP isn't subject to a withholding tax, but yet a US stock inside a TFSA _is_


It has something to do with the reciprocal agreement with the United States Govt (IRS) to make dividends paid in Retirement accounts not subject to the withholding tax. This applies to US domiciled stocks. So the stocks of US companies, paying taxes in the US pass the dividends along to RRSP accounts without withholding the tax. TFSA and RESP accounts are NOT retirement accounts, so the withholding tax applies.

IF for example you US Listed, Irish domiciled stock (STX - Seagate Technologies) for example, the withholding tax is by the country where the business is registered. I've had this happen to me, holding STX in my RRSP.


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## Spudd (Oct 11, 2011)

I hold my couch potato in my work-sponsored RRSP, which is limited to only a few choices. 

40% BlackRock CDN MSCI ACWI ex-Canada Index Fund
40% BlackRock Canada Universe Bond Index D
20% BlackRock Canadian Equity Index Class D

I used to have a US index too, but I realized recently that the ex-Canada fund that I have is about 50% US, so I was massively overweighted in US. So I switched my 20% US into the ex-Canada.


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## Barwelle (Feb 23, 2011)

mrPPincer said:


> Barwelle you could put contributions into your RRSP now, and save the deductions on those contributions for later when your income is higher, and enjoy the tax-free growth now.


Ah, that's true... I hadn't thought of that. Thanks for the idea.



Franko said:


> @Barwelle: VEA is the unhedged VEF equivalent I believe.


You just reminded me of an interview that Canadian Capitalist did with Vanguard: They are supposed to release unhedged Canadian-listed versions of VEF and VUS this year. That would give an unhedged option that you wouldn't be required to do a currency conversion for. (Though withholding taxes would still be applied in RRSP and TFSA)


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## jgood76 (Apr 3, 2009)

30% VCE - held in my RRSP & both our TFSAs
10% VRE - held in my RRSP
30% VTI - held in spouse's RRSP
30% VXUS - held in spouse's RRSP

When calculating the asset allocations, I have reduced the investments within RRSP by 30% (estimated future tax) so as to ensure the proper allocation is achieved when comparing to TFSAs and unregistered investments. Both of our RRSPs and TFSAs are maxed out.

Other than some funds held in a high interest savings account, we currently have no unregistered investments.

You don't see any fixed income above, as I have a defined-benefit pension plan.


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## Belguy (May 24, 2010)

Some might consider that to be quite a brief portfolio until you realize how many stocks it comprises!!! It's all you need. Simplicity defined and cheap and easy to manage as well. You don't need a portfolio of dozens of individual investments.

:02.47-tranquillity::encouragement:


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## Franko (Mar 31, 2012)

Xoron said:


> IF for example you US Listed, Irish domiciled stock (STX - Seagate Technologies) for example, the withholding tax is by the country where the business is registered. I've had this happen to me, holding STX in my RRSP.


So if I am holding $USD funds such as VEA or VWO in my RRSP, funds that invest internationally and in many different countries, and the dividend is paid from the corporations held in those funds, then is it correct to say that I'd still be paying whatever the withholding tax is from each of those international companies, barring other Canadian reciprocal agreements with the parent countries? 

So essentially, what I am asking is: would there be no withholding tax benefit from holding VEA/VWO within my RRSP? Is this benefit then only largely limited to ETFs tracking US stocks?


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## mrPPincer (Nov 21, 2011)

Franko said:


> So if I am holding $USD funds such as VEA or VWO in my RRSP, funds that invest internationally and in many different countries, and the dividend is paid from the corporations held in those funds, then is it correct to say that I'd still be paying whatever the withholding tax is from each of those international companies, barring other Canadian reciprocal agreements with the parent countries?


Whatever w/h tax is paid to the foreign countries where the individual stocks come from is dependant on the trade agreements that those countries have with the US, and that amount would be very difficult for us to go after, besides, who in their right mind wants to deal with the IRS if they don't have to? :hopelessness:



Franko said:


> So essentially, what I am asking is: would there be no withholding tax benefit from holding VEA/VWO within my RRSP? Is this benefit then only largely limited to ETFs tracking US stocks?


If you hold those two in your RRSP you will avoid paying the 15% w/h tax that you would otherwise pay on dividends; these are US ETFs and are subject to the withholding tax to Canadians even though they hold foreign stocks, (or even if they held canadian stocks for that matter)

*But*, if you were to hold the Vanguard Canada version of these funds, VEF, or VEE, then it would not be good to hold them in the RRSP, because they will have been subject to the 15% tax regardless of where you keep them, so if you did hold them in a RRSP or TFSA then that 15% on your dividends would be unrecoverable.
For that reason the best place for the Vanguard Canada non-canadian-stock-holding ETFs is in a non-registered account.


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## longinvest (Sep 12, 2012)

mrPPincer said:


> For that reason the best place for the Vanguard Canada non-canadian-stock-holding ETFs is in a non-registered account.


Is that true even if you have not yet exhausted your RRSP and TFSA contribution limits? Before then, aren't you better investing your money in your RRSP and TFSA, as taxes on your dividends in taxable accounts are likely to be higher than 15%?


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## Barwelle (Feb 23, 2011)

@Franko: mrP has explained it well. If you have time, you can also check out Canadian Couch Potato's posts on withholding tax: here and here. I had to read them through a few times to wrap my head around it but I think I've got a good handle on it.

@longinvest: I've been thinking about that too. I think you hit the nail on the head with the last sentence. There's also capital gains that would be tax-free or tax-deferred if held in a registered account.


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## mrPPincer (Nov 21, 2011)

Yeah I should have qualified that statement, it does depend on each individual's situation where it's best to keep them.
I guess I should have said that in comparison there are alternatives for the RRSP that won't get dinged the US 15% dividend tax, such as the european td e-fund for example.


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## mrPPincer (Nov 21, 2011)

Any Canadian domiciled ETF that is essentially a shell holding a US domiciled ETF will get dinged that 15% US dividend tax which will be unrecoverable if held in A RRSP or a TFSA. 
But a Canadian domiciled ETF that holds the shares of stock directly will not be subject to that US tax inside an RRSP, 
but if it's holding US stock directly it will be subject to the w/h tax inside a TFSA (unrecoverable) or unregistered (recoverable).


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## andrewf (Mar 1, 2010)

Too bad the swap ETFs like HXS and CHB are currency hedged.


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## none (Jan 15, 2013)

*Proposed complete couch potato*

Here is my proposed couch potato. I'm going skiiing for the weekend and I'm hoping I can get some feedback next week on it (and also the most efficient way to post tables).

Glad to be here!


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## Jungle (Feb 17, 2010)

I know, I would love HXS. If our dollar really drops again to like 0.60. I would consider some currency hedged products.


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## My Own Advisor (Sep 24, 2012)

@Franko,

It all has to do with the Canada - U.S. tax treaty:
http://www.fin.gc.ca/treaties-conventions/usa_-eng.asp

In short, my understanding is the TFSA is not recognized as a "retirement" account in the treaty. It is for me 

As such....

If you have investments outside of your RRSP, your first choices should be CDN dividend-paying stocks, ETFs holding CDN dividend-paying stocks and stocks or ETFs where the majority of the return is in capital gains.

This is because dividends from Canadian corporations and capital gains from any source attract the least tax. 


If you own any of the following investments, they should be held inside your RRSP, because 100% of the income is taxed 
money market funds; bonds; high dividend-paying foreign stocks or foreign ETFs.


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## Franko (Mar 31, 2012)

@Barwelle: Thanks muchly for those links, they really clear things up!



My Own Advisor said:


> @Franko,
> If you own any of the following investments, they should be held inside your RRSP, because 100% of the income is taxed
> money market funds; bonds; high dividend-paying foreign stocks or foreign ETFs.


Just wondering, did you also name foreign ETFs because of the full taxation on their dividends? Or was there another reason?

Right now, I think I'm planning on dividing up my portfolio as such:

RRSP - US equity, some foreign equity ETFs (but US-domiciled)
TFSA - CDN Bonds, CDN equity, and the remainder of my foreign equity that I couldn't fit into the RRSP.

I'm trying to minimize taxes with this setup. The only weak spot (that I can see) is the foreign equity (US-traded) ETFs - VEA and VWO, that I have in my TFSA, as the US withholding tax is unrecoverable. Still, as others have mentioned, taking the 15% hit on the dividend seems preferable to capital gains tax and full taxation at my marginal rate on the remaining dividend payout.


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## leeder (Jan 28, 2012)

My understanding is that international equities (US domiciled) have the withholding tax applied and are not recoverable regardless if it is in your RRSP or TFSA. Best tax treatment for international equities is to hold Canadian listed fund/ETF that holds international equities in your taxable account.

In essence, my understanding of the best tax treatment for all accounts:

Taxable: Canadian dividend paying equities (for dividend tax credit); Non-dividend paying equities (for capital gain/loss); Canadian listed ETF/fund that holds international equities (recoverable withholding tax)
TFSA: Income producing investments (GICs, bonds, REITs); dividend paying stocks (dividend is tax free)
RRSP: US listed stocks that hold US equities (withholding tax do not apply); income producing investments (GICs, bonds, REITs)


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## My Own Advisor (Sep 24, 2012)

Sounds pretty good leeder.

For me...

RRSP = Vanguard ETFs, iShares ETFs and US stocks.
TFSA = CDN dividend paying stocks and CDN REITs
Unregistered = CDN dividend paying stocks only


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## leeder (Jan 28, 2012)

My Own Advisor said:


> Sounds pretty good leeder.
> 
> For me...
> 
> ...


My current holdings are allocated pretty similar to yours:

Nonreg: Cdn dividend paying stocks
TFSA: VXUS, ZDV, HR.un
RRSP: VTI, TDB900

Just recently sold my bonds component in my RRSP, as it wasn't doing much for me. I also contribute to a govt DB pension at work....


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## Franko (Mar 31, 2012)

leeder: I thought the US-withholding tax was still recoverable from US-based international ETFs?

http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/


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## leeder (Jan 28, 2012)

Franko said:


> leeder: I thought the US-withholding tax was still recoverable from US-based international ETFs?
> 
> http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/


Frankie, you may only recover the US withholding tax. In fact, in a RRSP account, the US withholding tax does not apply. As per the post from CCP, "The downside is that when a US-listed ETF holds international stocks there’s an extra layer of withholding tax applied by the stocks’ native countries. There is no way to recover that tax."

Now, one thing for those who are allocating purely based on tax treatment, you should also consider that, if you are putting international equities in your non-registered account just because it is most tax efficient, you are still paying taxes on the capital gains and distributions. While you might not recover withholding tax in TFSA/RRSP, you are also not paying any taxes at all (or at least deferring if you allocate to your RRSP). Please keep that big picture in mind.


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## My Own Advisor (Sep 24, 2012)

@leeder, I have a pension from work, I consider that a big bond. No bonds in my RRSP anymore.


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## leeder (Jan 28, 2012)

I was just saying in another thread, and it applies to this couch potato thread as well, that people may be better off putting fixed income portion in cash or cash equivalents. For example, Canadian Direct Financial (or Canadian Western Bank, for those that live in Western Canada) offers 2.55% TFSA HISA. For RRSP, if people want fixed income, CDF/CWB offers a 14 month 1.875% GIC (plus a promotion that allows people to scratch & earn... I've been told that most time the promotion adds an extra 0.1% onto the existing GIC rate). I admit that these rates aren't spectacular, but you know what you get. Bond funds, on the other hand, have lots of factors that can affect your return (e.g., interest rate change, MER, etc.). I think I will go back to bond funds when there is no longer a threat of increasing interest rates. Disclosure: I do have a portion of my TFSA in CWB's 2.55% HISA.


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## Franko (Mar 31, 2012)

Slightly off-topic question: Are there any limits to the amount of foreign equity allowed in an RRSP or TFSA?


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## mrPPincer (Nov 21, 2011)

nope


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