# Generating US$ income for Snowbirding



## agent99 (Sep 11, 2013)

I am sure that many here have same situation:

We spend about 3 months of each year in USA.

Almost all of our investment income is in C$ and in form of dividends or ROC. Plus CPP/OAS. We have usual type portfolio that includes a number of dual listed stocks (banks, pipelines, etc). Have about $80k in TFSAs.

Wondering how other snowbirds have arranged their portfolios so that they receive tax efficient income in US$ (without being overly exposed to foreign exchange risk).

Ideally, we would like about 10-15% of our income in US$. But how do we do this in a tax efficient way?


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## Spudd (Oct 11, 2011)

You could buy Canadian stocks that pay their dividends in USD, and keep them in a USD account. That would be tax-friendly (as they're still eligible dividends).


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## james4beach (Nov 15, 2012)

You can also keep a generic US portfolio in a US$ account (for example SPY, VTI, etc), and just sell some shares every year, or twice a year, to generate the income you need. These are tax-efficient capital gains. Would that work?

Remember that selling shares to generate income is no different than taking a dividend; both have the same effect on total return. The two methods (divs vs selling shares) also have the same effect of drawing down capital and impeding further capital appreciation.


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## My Own Advisor (Sep 24, 2012)

Spudd said:


> You could buy Canadian stocks that pay their dividends in USD, and keep them in a USD account. That would be tax-friendly (as they're still eligible dividends).


+1


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... Remember that selling shares to generate income is no different than taking a dividend; both have the same effect on total return. The two methods (divs vs selling shares) also have the same effect of drawing down capital and impeding further capital appreciation.


True ... though won't the USD to CAD conversion for the capital gain means a bigger tax bill versus the eligible dividends paid in USD?


Cheers


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## Spudd (Oct 11, 2011)

Eclectic12 said:


> True ... though won't the USD to CAD conversion for the capital gain means a bigger tax bill versus the eligible dividends paid in USD?
> 
> 
> Cheers


Well, you have to convert the eligible dividends to CAD too, so I don't see the conversion as an issue. It depends on your tax bracket whether the dividends or capital gains would be more tax-friendly.


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## agent99 (Sep 11, 2013)

Spudd said:


> Well, you have to convert the eligible dividends to CAD too, so I don't see the conversion as an issue. It depends on your tax bracket whether the dividends or capital gains would be more tax-friendly.


My concern in selling securities for income, is that it exposes us to volatility in the market. If we sell Canadian stocks to generate cash for conversion to US$ we are exposed to both market and FX volatility. In fact this is what we do now. We make our RRIF withdrawal mostly in-kind. Then sell something on the US side to generate the US$ we need at whatever the prevailing FX rate is.

Spudd - We don't have new cash to BUY Canadian stocks that pay their dividends in US$. We already own dual listed stocks such as all the major banks and several others. These are all held on the Canadian side and dividends are paid in C$. We could move some of the stocks to the US side so that dividends would be paid in US$. But what I would need to check, is if that would be considered a trade by CRA. Most of the stocks would have significant capital gains if sold. 

Then question would be - Is it better to turn RRIF withdrawals into US$ cash to spend or move existing stocks to US side and spend the dividends.


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## james4beach (Nov 15, 2012)

agent99 said:


> My concern in selling securities for income, is that it exposes us to volatility in the market.


This is a common fallacy. You're overcomplicating things based on an incorrect idea.

If a dividend comes out of the stock during a time the share price is depressed, it causes the same "damage" as if you sold shares. In both cases, you are removing value from the equity. At a given point in time, whether you get a dividend or sell shares, both methods dig into the capital in the same way and *both expose you to stock volatility.*

From http://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/

_Why do shareholders believe so strongly that a $1 dividend is preferable to a $1 capital gain? Meir Statman looked at this question in a 1984 article called Explaining Investor Preference for Cash Dividends, coauthored by Hersh Sheffrin. He also reviews the idea in his new book, What Investors Really Want, pointing out that receiving $1,000 in dividends is no different from selling $1,000 worth of stock to create a “homemade dividend.”

Even when this idea is explained to people, most refuse to accept it. Statman suggests that it comes down to a cognitive bias called mental accounting. Investors categorize $1,000 in dividends as income that they will happily spend, but the idea of selling $1,000 worth of stock is “dipping into capital,” which causes them great anxiety. This idea is deeply ingrained in many investors, but it is an illusion, because a company that pays a dividend to shareholders is depleting its own capital.
_


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## james4beach (Nov 15, 2012)

By the way, if you think that me and Canadian Couch Potato are making up this stuff about dividends being no different than selling shares, then I also encourage you to read Warren Buffett's explanation of this on page 19 onwards of this report. He describes it another way, but illustrates how the sell-off method does not (as people seem to fear) destroy growth versus the dividend method.

So going back to the original question, I'd say the answer is simple: hold whatever shares you want, and sell whatever you need on a fixed schedule such as twice a year. You've basically just created your own dividend.


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## Eclectic12 (Oct 20, 2010)

Spudd said:


> Well, you have to convert the eligible dividends to CAD too, so I don't see the conversion as an issue. It depends on your tax bracket whether the dividends or capital gains would be more tax-friendly.


For the Ontario 2016 numbers ... one needs the income before the converted USD income from whatever source to be over $90,563 for the eligible dividends to pull into the lead, tax wise. Probably the income of over $86,176 is the better dividing line as that is the 1.16% spread. The next income level down is a slightly over 5% spread in the tax rates.
http://www.taxtips.ca/taxrates/on.htm

Both have to convert from USD to CAD so unless there's some way to pick when the exchange rate is relatively lower while the US stock being sold is high ... the differential for the tax rate is going to be the bigger driver ... is it not?


Cheers


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## agent99 (Sep 11, 2013)

james4beach said:


> This is a common fallacy. You're overcomplicating things based on an incorrect idea.


Sorry, but I think your ideas are based on reading too much theory. My guess is that you are a lot younger than I am and not experienced in managing a retirement portfolio. I was hoping for input for those who are actually IN retirement and how they were funding their snowbirding. Anyway, lets forget I asked the question.


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## james4beach (Nov 15, 2012)

I gained a lot of assets early in life and have managed my own portfolios for 16 years (through two bear markets), and much larger family portfolios for 9 years. Because I ran a small business and had periods without work, I also lived off this money so I know about living off income and investments in practice.

The things I wrote about dividends aren't just theory. This is how it works. I think you're just looking at the daily volatility and the rising share prices of a bull market, which mask the effect of dividends removing value from the company.


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## humble_pie (Jun 7, 2009)

Spudd said:


> You could buy Canadian stocks that pay their dividends in USD, and keep them in a USD account. That would be tax-friendly (as they're still eligible dividends).



the problem is that most of the 23 or 24 canadian-companies-paying-USD-dividends are very low payors. Their yield is now - & always has been - insignificant. Most in this group originally were the big multinational resource stocks - historically with low dividends - but they were soon joined by multinationals from other sectors such as thomson, brookfield & magna.

potash for a time was the highest dividend payor in this group, but POT recently cut its divvie & one can see some in cmf forum who are expecting further cuts.

bref relying on USD dividends to be paid by canadian corporations would require a gigantic awesome-sized portfolio of those stocks, before a couple or family would have enough income to live on.

owning & managing a portfolio of US stocks that pay USD dividends would likely yield higher but this approach has its own problems. Problems such as 1) US dividends in non-registered accounts are treated as 100% straight income for canadian tax purposes; 2) parties owning US or foreign stocks worth more than $100k CAD must report these holdings to the CRA every year; & 3) the US will likely seek to become ever more aggressive in its estate taxation of foreign nationals who happen to die while holding US securities and/or vacation properties.

what to do? if you are comfortable with your present investment portfolio - & it sounds as if you are - i would keep things as they are, if i were in your place. Three months' sojourn in the US of A is not enough to disrupt a well-managed portfolio imho. If you happen to have some US cash from capital gain/loss selling, then fine, you could & would use those greenbacks first; but it makes no sense to turn a lifetime portfolio upside down imho.

me i would bite the harsh FX bullet & i'd exchange CAD for USD as needed, in order to fund my 3 months snowbird loop. Might i suggest that you consider currency gambit trading - there are countless how-to threads in cmf forum - so that you can exchange your CAD for USD at favourable spot rates, with no FX fee to be charged by brokers or banks?




.


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## agent99 (Sep 11, 2013)

humble_pie said:


> me i would bite the harsh FX bullet & i'd exchange CAD for USD as needed, in order to fund my 3 months snowbird loop. Might i suggest that you consider currency gambit trading - there are countless how-to threads in cmf forum - so that you can exchange your CAD for USD at favourable spot rates, with no FX fee to be charged by brokers or banks?
> .


Thanks - that is what we have been doing. Don't really do the gambit. Just sell something we already own on US side. And use Chase card while in US. I may make some minor changes so we have a small amount of US$ cash generated throughout year. If FX becomes too onerous, we may just stay home or go elsewhere. Or play less golf


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## humble_pie (Jun 7, 2009)

agent99 said:


> Don't really do the gambit. Just sell something we already own on US side.



it's what i call a half-gambit. It is the real thing - a form of arbitrage - except it's on the instalment plan. Good for you.

when i first came to cmf forum, i noticed member Scomac doing this. It's an ace idea

i frequently do a version i call option gambits. Many canadians practice these. One keeps one's optionable canadian stocks mostly in CAD account (usually although not always to benefit from their CAD dividends), while one sells the options in US market.

i first learned about stock arbitrage to avoid FX fees from a TD representative. He noticed my US options & asked if i realized that i was receiving those greenbacks without ever paying any FX fee. When i said Yes Indeedy Isn't It Wonderful? he then explained how to do bigger trades by buying interlisted shares in one market & immediately selling them in the opposite market. This was way back in the late 1990s.

all your other steps to handle the unfavourable currency exchange problem seem very sensible. Your small cutbacks & tweaks probably won't even be noticeable. Wishing you a happy vacation.


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## agent99 (Sep 11, 2013)

humble_pie said:


> all your other steps to handle the unfavourable currency exchange problem seem very sensible. Your small cutbacks & tweaks probably won't even be noticeable. Wishing you a happy vacation.


Thanks. C$ has strengthened today and it is raining, so we won't be spending $$ on greenfees. Time to work on investments


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## Jaberwock (Aug 22, 2012)

I have a US$ based investment account, which I use primarily to invest in US stocks and provide me with extra diversity. I partially fund my snowbirding from that account.

However, I also have investments in my RRIF, which is a Canadian dollar account, but contains some shares that pay dividends in US dollars. 
BIP.UN, BEP.UN and AQN are three companies that pay in US dollars. All three trade on the TSX in CDN dollars and typically raise their dividends annually, and all three are currently paying better than 5%.

You could also consider one of the ETFs that are linked to the S&P 500, but trade on the TSX. Avoid the ones that use currency hedging because you are looking to track the US dollar for your snowbirding expenses.


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## james4beach (Nov 15, 2012)

Jaberwock said:


> You could also consider one of the ETFs that are linked to the S&P 500, but trade on the TSX. Avoid the ones that use currency hedging because you are looking to track the US dollar for your snowbirding expenses.


That's interesting. For example something like ZSP.U which trades on TSX in US$. Do these actually pay their dividends in US$ ? I suspect it does because the ZSP.U profile page shows different distributions than ZSP
http://www.etfs.bmo.com/bmo-etfs/glance?fundId=92495


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## AltaRed (Jun 8, 2009)

I own ZSP.U and yes, it issues distributions in USD


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## agent99 (Sep 11, 2013)

At 1.86% distribution yield, I am afraid that won't help much with our snowbirding expenses


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## AltaRed (Jun 8, 2009)

agent99 said:


> At 1.86% distribution yield, I am afraid that won't help much with our snowbirding expenses


That is not a bad yield. It is the S&P500 after all. High yielding stocks are not what matters, it is Total Return. A person sells a few ETF units along with the yield to get the US$ desired.


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## agent99 (Sep 11, 2013)

AltaRed said:


> That is not a bad yield. It is the S&P500 after all. High yielding stocks are not what matters, it is Total Return. A person sells a few ETF units along with the yield to get the US$ desired.


It wouldn't be hard to have a negative Total Return over the short term. Perhaps US$ fixed income might be a better choice for this purpose, rather than being exposed to markets?


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## AltaRed (Jun 8, 2009)

True, short term pain is always possible over short term corrections/bears. One idea is to generate cash in good times (taking some profits off the table) and hold it to manage one's USD needs. My retirement includes mostly ex-Canada vacations and snowbirding. My USD need is generated via a combination of income (dividends/distributions) and capital sales at appropriate times. I sold some shares back in 2014 to shore up my USD cash cushion. I hope not to sell anything more until the market recovers.

The problem with USD fixed income is return is terrible. Pretty much everything is below 1% unless one goes medium term in duration. I will stick with a combination of dividend income and stock sales.


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## atrp2biz (Sep 22, 2010)

Private equity. Five years ago, when the CAD was at parity with the USD, we were fortunate enough to invest (at the time, a good chunk of our net worth) in a PE fund that I used to work with that provides distributions of 12% p.a. but no upside potential. Although no longer with the firm, we added another tranche of equity a couple of years ago. We now get a significant stream of USD income which we generally use to add to our BRK position. Taxes and admin are a pain (had to start a U.S. C-Corp because Cdn tax laws do not recognize the LLC structure) but the returns are high enough to justify the burden. The appreciation of the USD has certainly been a boon.


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## humble_pie (Jun 7, 2009)

Jaberwock said:


> I also have investments in my RRIF, which is a Canadian dollar account, but contains some shares that pay dividends in US dollars.
> 
> BIP.UN, BEP.UN and AQN are three companies that pay in US dollars. All three trade on the TSX in CDN dollars and typically raise their dividends annually, and all three are currently paying better than 5%.



this is off-topic, hope the OP will forgive. But i am wondering how, if your RRIF account is monocurrency Canadian dollar, it is possible for such an account to receive USD dividends in USD without FX fees?

there is also the matter of how to withdraw US dollars from a registered account, including RRIFs, RRSPs & TFSAs, although the last might be easier. AFAIK it is possible to withdraw US currency but the difficulty ranges from a bit tricky at some brokers to impossible at other brokers. One way to accomplish might be to withdraw US securities in kind from a registered into a non-registered USD account, then sell them there if necessary.

your 3 stock holdings - the 2 brookfields & algonquin - look like good choices for a registered account, especially with that lovely yield in USD. But then the problem is that, in a registered account, one is losing all those lovely eligible dividend tax credits.

recently i bought BAM dot A & sold USD calls in US market, for a thumping 5% return right off the top. Dividends to come later, in BAM dot A they are low. But US options in BAM are decent.


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## peterk (May 16, 2010)

humble_pie said:


> recently i bought BAM dot A & sold USD calls in US market, for a thumping 5% return right off the top. Dividends to come later, in BAM dot A they are low. But US options in BAM are decent.


Could you explain this? I think I've seen others do it before on CMF as well. What is the rationale behind buying a stock and then immediately selling covered calls against it? I understand the appeal of selling covered against a holding that has run up in price, and you are hesitant to sell, so sell calls instead to lessen the downside risk through premium collecting.

I don't get it for a stock that you've recently bought with the presumption that it's a good purchase that will go up and make you money. Or are you not just selling simple covered calls as indicated above but as part of a more complex spread (or whatever) strategy?


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## james4beach (Nov 15, 2012)

AltaRed said:


> That is not a bad yield. It is the S&P500 after all. High yielding stocks are not what matters, it is Total Return. A person sells a few ETF units along with the yield to get the US$ desired.


I know you guys didn't like my reply earlier, but I agree with AltaRed. Just hold standard investments: S&P 500 or a stock/bond mix according to your usual allocation.

The goal for everyone -- whether young or old -- is achieving the best total return. And standard index funds are the best way to do that.

Then you extract cash from it using the distributions + selling off shares. This really is the proper way to solve the original question without getting into anything exotic.


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## RBull (Jan 20, 2013)

+1 with what j4b and AltaRed stated. This is what I do.


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## My Own Advisor (Sep 24, 2012)

AltaRed said:


> True, short term pain is always possible over short term corrections/bears. One idea is to generate cash in good times (taking some profits off the table) and hold it to manage one's USD needs. My retirement includes mostly ex-Canada vacations and snowbirding. My USD need is generated via a combination of income (dividends/distributions) and capital sales at appropriate times. I sold some shares back in 2014 to shore up my USD cash cushion. I hope not to sell anything more until the market recovers.
> 
> The problem with USD fixed income is return is terrible. Pretty much everything is below 1% unless one goes medium term in duration. I will stick with a combination of dividend income and stock sales.


That seems pretty smart.


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## agent99 (Sep 11, 2013)

My Own Advisor said:


> That seems pretty smart.


I don't get the part that says "The problem with USD fixed income is return is terrible. Pretty much everything is below 1% unless one goes medium term in duration"

Just checked BMOIL offerings and I don't see much difference between C$ and US$ offerings for investment grade bonds. For example, on US$ side for 3-5yr maturity, they had 3-3.5% yield on bonds issued by companies like Credit Suisse, HSBC, etc 3.1-3.8% on 5-7yr bonds. 

That is the sort of thing I was suggesting when I said "Perhaps US$ fixed income might be a better choice for this purpose, rather than being exposed to markets?"


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## humble_pie (Jun 7, 2009)

peterk said:


> Could you explain this? I think I've seen others do it before on CMF as well. What is the rationale behind buying a stock and then immediately selling covered calls against it? I understand the appeal of selling covered against a holding that has run up in price, and you are hesitant to sell, so sell calls instead to lessen the downside risk through premium collecting.
> 
> I don't get it for a stock that you've recently bought with the presumption that it's a good purchase that will go up and make you money. Or are you not just selling simple covered calls as indicated above but as part of a more complex spread (or whatever) strategy?




what you've asked is an important question. This isn't the right thread, though - thread is about USD income for snowbirds - so here's a short reply for now.

it's true that conventional option teaching favours close-to-the-money short term options. Vacuum the pennies or even the $$ out of volatility before the things expire, goes the conventional wisdom.

that, i believe, is what you are thinking, no? you're asking - quite properly - why on earth would anyone bother to buy a stock if one were already planning to sacrifice it at a gain of only 1 or 2%?

as mentioned, it's an excellent question.

short answer: don't do this.
long answer: there are much better approaches imho. Possibly to discuss in another thread.


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