# What ETF's to hold in TFSA?



## qwimjim (Mar 17, 2015)

Hi, if I have 35,000 in RRSP and 35,000 in TFSA, nothing in taxable account. 35 years old, won't touch money for 25 years. Would this be a good allocation?

RRSP USD: 25,000 VTI + 10,000 VXUS
TFSA: 20,000 XIC + 15,000 International ETF???

For the ??? in the TFSA, what would be the best International ETF (similar to VXUS) that would be the best choice, low MER, tax wise, etc.. ?

At this age, is there any reason to hold a bond ETF like VAB in RRSP/TFSA that is strictly for retirement if I can stomach the up's and down's?

And I also have an RESP account for my kids, will buy XIC and VAB for canadian equity and bonds, but what would be best ETF's for US and International exposure inside an RESP?

Thanks!


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## Eclectic12 (Oct 20, 2010)

Depending on whether there is a tax treaty, the international ETF might be subject to source country withholding taxes, which in a TFSA won't be recovered. So you might lose a bit from what is paid out.


Cheers


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## My Own Advisor (Sep 24, 2012)

+1 what Eclectic said 

You can consider a two-fund equity approach: VCN + VXC + a bond ETF. That would be fairly simple.


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## qwimjim (Mar 17, 2015)

Eclectic12 said:


> Depending on whether there is a tax treaty, the international ETF might be subject to source country withholding taxes, which in a TFSA won't be recovered. So you might lose a bit from what is paid out.
> 
> 
> Cheers


Yes this was my concern, I was wondering if there are some international ETF's that would not have that problem, or is it a problem no matter what in an TFSA


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## qwimjim (Mar 17, 2015)

My Own Advisor said:


> +1 what Eclectic said
> 
> You can consider a two-fund equity approach: VCN + VXC + a bond ETF. That would be fairly simple.


But VXC includes US stock market so there would be a lot of overlap with my VTI in the RRSP right? 
Is there a good international ETF ex USA that would make sense in a TFSA with regards to withholding taxes? 
Or would I be better off with VXC and lowering my VTI allocation in the RRSP to not overweight the US?


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## AltaRed (Jun 8, 2009)

qwimjim said:


> Yes this was my concern, I was wondering if there are some international ETF's that would not have that problem, or is it a problem no matter what in an TFSA


Any International jurisdiction that does not recognize Canada's TFSA as a registered account, or does not recognize registered accounts at all will have withholding taxes on income generated. It is pretty much guaranteed you will have that leakage in a TFSA. But are you being pennywise and pound foolish? If an International ETF has a yield of 2% and withholding is 15%, then your unrecoverable leakage is 0.3%. At 25% withholding, unrecoverable leakage would be 0.5%. That is not the end of the world. Consider it an 'extra' MER.

OTOH, if you put your Canadian holdings in the TFSA, you will forego the dividend tax credit. It all depends on your asset allocation mix and how best to place them.


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## qwimjim (Mar 17, 2015)

AltaRed said:


> Any International jurisdiction that does not recognize Canada's TFSA as a registered account, or does not recognize registered accounts at all will have withholding taxes on income generated. It is pretty much guaranteed you will have that leakage in a TFSA. But are you being pennywise and pound foolish? If an International ETF has a yield of 2% and withholding is 15%, then your unrecoverable leakage is 0.3%. At 25% withholding, unrecoverable leakage would be 0.5%. That is not the end of the world. Consider it an 'extra' MER.
> 
> OTOH, if you put your Canadian holdings in the TFSA, you will forego the dividend tax credit. It all depends on your asset allocation mix and how best to place them.


Right, correct me if I'm wrong.. but if I understood everything: if I buy a US listed ETF like VXUS in my TFSA so I lose the international withholding tax and then the US withholding tax on top of it? And so I need to make sure I buy a TSX listed international ETF, and since I will forfeit the withholding tax which will increases costs by 0.3-0.5% I should try to find the ETF with the lowest possible MER?

Regarding losing the Canadian dividend tax credit, can you explain how that's an issue? Wouldn't the dividend tax credit only have value if I hold investments outside of my TFSA/RRSP? I will not have any unsheltered investments for the foreseeable future.


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## Eclectic12 (Oct 20, 2010)

qwimjim said:


> Yes this was my concern, I was wondering if there are some international ETF's that would not have that problem, or is it a problem no matter what in an TFSA


As I understant it, the source country only knows who bought the equity ... so they will apply whatever their tax treaty is with the buying agent (in this case, ETF). Then the ETF company will apply whatever the tax treaty is with Canada.

If it is a US based ETF, the US to source country treaty will affect what is taken by the source country. When the ETF pays the TFSA, as long as the correct paperwork identifies the TFSA holder as Canadian, the US 30% withholding tax will be reduced down to 15%. If the account was an RRSP instead, the tax treaty would reduce the US 30% withholding tax to 0%.

If it is a Canadian based ETF, only the source country to Canada treaty will matter as Canadian ETFs know that the TFSA is Canadian tax free.


As AltaRed points out ... it might not be worth sweating the dividend withholding taxes as dividends may represent only a small part of the overall growth, where say 15% withholding taxes of a 2% dividend pales compared avoiding a large capital gain from rising share prices that say went up 800%.


Cheers


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## AltaRed (Jun 8, 2009)

qwimjim said:


> Right, correct me if I'm wrong.. but if I understood everything: if I buy a US listed ETF like VXUS in my TFSA so I lose the international withholding tax and then the US withholding tax on top of it? And so I need to make sure I buy a TSX listed international ETF, and since I will forfeit the withholding tax which will increases costs by 0.3-0.5% I should try to find the ETF with the lowest possible MER?


Yes, you can lose both any International withholding tax between the country of domicile and the USA, as well as the USA withholding tax between the US and Canada. That happens when you hold a US listed ETF (for ex-USA stocks) and it also happens when you hold a Canadian listed ETF that actually simply holds the underlying US ETF. Only a few Canadian listed International ETFs hold the international stocks directly and that would be the one you would want to hold (if any) in the TFSA. Look each of them over for their holdings!

I brought up the dividend tax credit because at some point in the future you will likely have a non-registered account and that is where you would preferentially put your Canadian stocks.


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## qwimjim (Mar 17, 2015)

AltaRed said:


> Yes, you can lose both any International withholding tax between the country of domicile and the USA, as well as the USA withholding tax between the US and Canada. That happens when you hold a US listed ETF (for ex-USA stocks) and it also happens when you hold a Canadian listed ETF that actually simply holds the underlying US ETF. Only a few Canadian listed International ETFs hold the international stocks directly and that would be the one you would want to hold (if any) in the TFSA. Look each of them over for their holdings!


Ok thanks, that really clears it up. If anyone has any suggestions on Canadian listed International ETF's that hold stocks directly and have a low MER feel free to share and save me some legwork  I guess it comes down to the usual suspects, Vanguard and iShares. 



AltaRed said:


> I brought up the dividend tax credit because at some point in the future you will likely have a non-registered account and that is where you would preferentially put your Canadian stocks.


Oh ok, I figure it will be a long while before we start investing in non registered accounts as we'll have a $150,000 mortgage to pay down, and have to save $20,000 a year just to fund TFSA/RRSP/RESP accounts. But it will be easy enough to shift XIC/VCN to outside the TFSA when the time comes.


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## My Own Advisor (Sep 24, 2012)

Yes, VXC owns the U.S stock market.

I guess I meant to suggest VCN + VXC and your bond.
Or 
VCN + VTI + International ETF and your bond.

Maybe check out this white paper to help your with decision:
http://www.pwlcapital.com/pwl/media...ithholding-Taxes_v04_hyperlinked.pdf?ext=.pdf


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## Eclectic12 (Oct 20, 2010)

qwimjim said:


> ... it will be easy enough to shift XIC/VCN to outside the TFSA when the time comes.


Easy enough to transfer ... but will you want to take care of the bookkeeping required as well as the different types of income to report yearly on one's tax return?

This year is the first in the last fourteen years that return of capital (RoC) is not paid. RoC has to subtracted by the investor from the adjusted cost base (ACB) manually. 
http://howtoinvestonline.blogspot.ca/2010/07/return-of-capital-separating-good-from.html

In a more complicated year such as 2013, there's eligible dividends, non-eligible dividends, other income to report on one's tax return plus a phantom distribution to deal with.
http://www.theglobeandmail.com/glob...by-phantom-etf-distributions/article18225076/
http://www.blackrock.com/ca/individ...ex-etf?locale=en_CA&siteEntryPassthrough=true

In several years (2013, 2009, 2008 etc.) there's also capital gains to report.


In a TFSA, one can track these to see how the investment performed ... but there's nothing to report on one's tax return.


Personally ... I'm trying to keep the more simple types in my taxable account and anything complicated in a registered account.


Cheers

*PS*

With a good system setup and updates when the info is fresh ... it's not horrible but it is work similar to reconciling a cheque book or credit card statement.


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## qwimjim (Mar 17, 2015)

Eclectic12 said:


> Easy enough to transfer ... but will you want to take care of the bookkeeping required as well as the different types of income to report yearly on one's tax return?
> 
> This year is the first in the last fourteen years that return of capital (RoC) is not paid. RoC has to subtracted by the investor from the adjusted cost base (ACB) manually.
> http://howtoinvestonline.blogspot.ca/2010/07/return-of-capital-separating-good-from.html
> ...


I'm sorry but that really confused me, what are you saying? That holding XIC in a non registered account is ideal or that it incurs complicated bookkeeping?

Also, in a TFSA if I'm holding XIC, why would I have to report anything? Perhaps I should not have used the word transfer? 

Example: In 10 years my TFSA is at $100,000.. 50K XIC and 50K VUN. I finally have money to invest in my non registered account, 20K. I want to maintain my 50/50 allocation between XIC and VUN but move XIC into my non registered account to take advantage of the Canadian dividend tax credit. So I just sell 10K XIC in the TFSA and purchase 10K of VUN. And then in the non registered I buy 20K of XIC. What is wrong or complicated about that?


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## AltaRed (Jun 8, 2009)

qwimjim said:


> Example: In 10 years my TFSA is at $100,000.. 50K XIC and 50K VUN. I finally have money to invest in my non registered account, 20K. I want to maintain my 50/50 allocation between XIC and VUN but move XIC into my non registered account to take advantage of the Canadian dividend tax credit. So I just sell 10K XIC in the TFSA and purchase 10K of VUN. And then in the non registered I buy 20K of XIC. What is wrong or complicated about that?


Nothing wrong or complicated with that at all. You describe it the way it should be done. What the prior poster was talking about is a different issue altogether... which is some of the pain that goes with keeping appropriate records for ETFs for taxation purposes in non-registered accounts. Things like ROC, reinvested distributions, etc. that change one's ACB down/up accordingly. The T3 tax slip provides the necessary information for almost all of it.

It is really no big deal if all one has is 1-2 ETFs in the taxable account. Broad market ETFs are still the best couch potato investing vehicle around for 95% of the population. I have kept track of ACBs for ETFs for several years now. Perhaps half hour of work once a year for buy and hold types.


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## qwimjim (Mar 17, 2015)

AltaRed said:


> Nothing wrong or complicated with that at all. You describe it the way it should be done. What the prior poster was talking about is a different issue altogether... which is some of the pain that goes with keeping appropriate records for ETFs for taxation purposes in non-registered accounts. Things like ROC, reinvested distributions, etc. that change one's ACB down/up accordingly. The T3 tax slip provides the necessary information for almost all of it.
> 
> It is really no big deal if all one has is 1-2 ETFs in the taxable account. Broad market ETFs are still the best couch potato investing vehicle around for 95% of the population. I have kept track of ACBs for ETFs for several years now. Perhaps half hour of work once a year for buy and hold types.


Ah ok, well unfortunately that is a problem I won't have for a while


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## Spudd (Oct 11, 2011)

qwimjim said:


> Ok thanks, that really clears it up. If anyone has any suggestions on Canadian listed International ETF's that hold stocks directly and have a low MER feel free to share and save me some legwork  I guess it comes down to the usual suspects, Vanguard and iShares.


I use ZEA for this.


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## gardner (Feb 13, 2014)

Spudd said:


> I use ZEA


Me too, although it is somewhat illiquid. VDU is more widely traded but I believe it's a wrapper for a US fund.


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## GreatLaker (Mar 23, 2014)

qwimjim said:


> If anyone has any suggestions on Canadian listed International ETF's that hold stocks directly and have a low MER feel free to share and save me some legwork


XEF also holds developed market (EAFE) stocks directly.


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## Eclectic12 (Oct 20, 2010)

qwimjim said:


> I'm sorry but that really confused me, what are you saying? That holding XIC in a non registered account is ideal or that it incurs
> complicated bookkeeping?


I'm saying that once an ETF, MF REIT or whatever that pays multiple types of income, especially RoC is in a taxable account, there is extra bookkeeping and typically multiple types of income to report yearly on one's tax return.

Where one has prepared for it - it is tedious but not that difficult or time consuming ... where one did not plan for it and the info is not easily available - it is a pain. Failing to do it properly can mean paying double the taxes or owing more than expected.


Some posters here on CMF don't like the two things ... the bookkeeping for phantom distributions to avoid paying extra taxes as well as where RoC is paid. Secondly, they don't like having to wait so long for the tax info to be published .... so they avoid it by keeping these types of investments in a registered account.


The brokers are getting better at it but no one cares about how much tax one is paying as much as the owner does.




qwimjim said:


> Also, in a TFSA if I'm holding XIC, why would I have to report anything?
> Perhaps I should not have used the word transfer?


The point is in a registered account such as the TFSA ... the bookkeeping is optional (some do it to accurately understand what they have made) and nothing needs to be reported on one's yearly tax return.

As soon as one transfers "in-kind" out of the TFSA - even if one trust's the broker's bookkeeping, there will be taxable income to report. (I have not done an "in-kind" TFSA withdrawal so I don't know how accurately the broker's bookkeeping will be ... the withdrawal will set a new baseline for the cost.)

In comparison - if the stock does not pay dividends, there's nothing to report on the yearly tax return and no additional bookkeeping. If the stock pays dividends, there's only one form of taxable income to report (i.e. taxable dividends). Depending on the year, XIC can have up to four or more types of income to report as a minimum.


At the end of the day ... whether one does a transfer or outright buys an investment such as an ETF - there is going to be work to do. My advice is to learn it at your own pace now and plan for it to make it easier down the road.




qwimjim said:


> ... move XIC into my non registered account to take advantage of the Canadian dividend tax credit. So I just sell 10K XIC in the TFSA and purchase 10K of VUN. And then in the non registered I buy 20K of XIC. What is wrong or complicated about that?


First ... how much advantage for the DTC are you going to get with XIC?

2001 through 2005 have zero eligible dividends ... from a quick scan of the rest - the low year has only 30% of the cash paid as eligible dividends and 2013 seems to be the high at 92%.

At the end of the day - I'm saying be prepared.


Your example of "sell in the TFSA and buy in the taxable account" makes no difference for needing to do the bookkeeping and starting to report the yearly taxable income. It is not a complicated plan ... but it does add a sell commission in the TFSA and a buy commission in the taxable account that an "in-kind" TFSA withdrawal would avoid.


Cheers

*PS*

I chose to transfer my RioCan REIT into my TFSA as when I checked the history of distributions, a high percentage (I recall 40% or better) was being paid as regular income so that it was being taxed at the highest tax rate.

The transfer reduced the taxes being paid yearly plus meant that I no longer had to report multiple types of income and do the RoC bookkeeping.


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## Eclectic12 (Oct 20, 2010)

Perhaps a clearer way of putting it is that using a taxable account turns what is optional in a registered account into a requirement. 

For this work, the investment sets how complicated. An ETF tends to be on the more complicated so use the time now to learn as well as plan. AltaRed is correct but that assumes one is not intimated by the complexity (as some are), is familiar with what info is needed and keeps up with it.


I did not do my homework with REITs for the tax implications as I assumed it would be similar to the tax reporting/cost calculations for a dividend paying stock. When I sold the REIT and discovered it was different - the calculations were a pain as a buyout had removed the needed info from easy access. Capturing the info as it becomes available yearly and doing the updates is simple in comparison.


Cheers


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## My Own Advisor (Sep 24, 2012)

Eclectic12 said:


> *PS*
> 
> I chose to transfer my RioCan REIT into my TFSA as when I checked the history of distributions, a high percentage (I recall 40% or better) was being paid as regular income so that it was being taxed at the highest tax rate.
> 
> The transfer reduced the taxes being paid yearly plus meant that I no longer had to report multiple types of income and do the RoC bookkeeping.


+1

This is why I prefer CDN dividend stocks that pay only eligible dividends, for the DTC (dividend tax credit), in my non-registered account. REITs and other investments are in registered accounts to avoid any more tax number-crunching than necessary.

BTW / FYI - XIU is very tax friendly non-registered.


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## arc (May 19, 2012)

I'd recommend some ETFs for a sideways market: 
http://www.etfs.bmo.com/bmo-etfs/glance?fundId=83031
http://www.etfs.bmo.com/bmo-etfs/glance?fundId=86810


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## Eclectic12 (Oct 20, 2010)

My Own Advisor said:


> Eclectic12 said:
> 
> 
> > ... I chose to transfer my RioCan REIT into my TFSA as when I checked the history of distributions, a high percentage (I recall 40% or better) was being paid as regular income so that it was being taxed at the highest tax rate...
> ...


I checked back through RioCan's web site ... the top tax portion has been 30% through 61% of the cash paid since 1998. 

With "Foreign Non-Business Income" starting 2009 to add to the portion heavily taxed (ex. 2013 totals out to 69%+ heavily taxes and the tax advantaged part summing to 30.6%), the TFSA looked *much better*.


Cheers


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## AltaRed (Jun 8, 2009)

The OP has only registered accounts at this time and no bookkeeping is required (I record nothing other than performance in my registered accounts). 

If and when the OP starts a taxable account potentially several years down the road, the OP can then decide what investment strategy is desired, and to be aware EFTs have slightly more complexity to them (not unlike mutual funds) and other trusts such as REITs. Taxation law may have even changed by then as it has many times in the past.


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## Eclectic12 (Oct 20, 2010)

^^^^

... which is why I commented there's time to learn at one's own pace as opposed to possibly being in a rush down the road.


As for changes to the taxation law .... maybe we can lobby to go back to having no capital gain tax? :biggrin:
It would take care of that pesky RoC stuff ... 


Cheers


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## My Own Advisor (Sep 24, 2012)

No capital gains would be great...!!


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## tinypotato (Jul 27, 2010)

Hi, don't mean to hijack the thread...but this sparked my interest.

So, to avoid losing out on the withholding tax with Canadian listed ETF holding underlying US ETF...in the example of VGG, are we better off converting to USD and buying VIG (the US listed counterpart) instead?


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## james4beach (Nov 15, 2012)

arc said:


> I'd recommend some ETFs for a sideways market:
> http://www.etfs.bmo.com/bmo-etfs/glance?fundId=83031
> http://www.etfs.bmo.com/bmo-etfs/glance?fundId=86810


I still don't understand the appeal of the ZWB covered call ETF. Compare its performance to ZCN benchmark:

YTD: -6.5% worse than ZCN
1 yr: -1.8% worse than ZCN
2 yr: -1.7% worse than ZCN
3 yr: +1.8% better than ZCN

More to the point, the sideways market you speak of happened on the 1 yr and YTD time scale... which are exhibiting poor performance. So why covered calls? What's the appeal? I see the opposite of what you're recommending. You really *don't* want these in a sideways market.

Not to mention a sky high MER of 0.73% with ZWB ... versus a mere 0.06% MER for ZCN

You're paying 12x, twelve times as much fees with the covered call ETF


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## Eclectic12 (Oct 20, 2010)

tinypotato said:


> Hi, don't mean to hijack the thread...but this sparked my interest.
> 
> So, to avoid losing out on the withholding tax with Canadian listed ETF holding underlying US ETF...in the example of VGG, are we better off converting to USD and buying VIG (the US listed counterpart) instead?


Only in an RRSP as by the Canada - US tax treaty, the RRSP is exempt ... the TFSA does not enjoy this exemption.

http://www.moneysense.ca/columns/foreign-withholding-tax-explained


Cheers


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## jerryhung (Mar 28, 2011)

james4beach said:


> I still don't understand the appeal of the ZWB covered call ETF. Compare its performance to ZCN benchmark:
> 
> YTD: -6.5% worse than ZCN
> 1 yr: -1.8% worse than ZCN
> ...


But only because CAD Financials were down big?
If they were up up up, ZWB would do even better? 

but you may be right anyway, I compared ZWB with XFN and XFN seemed to do better in any periods (~0.7% MER too though)


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