# Foreign ETF in RRSP



## 50invester (Feb 10, 2010)

Hello: I am interested in buying some Vanguard ETF's for my SDRRSP. I am aware of the change in the foreign content rules but how do you know what is acceptable and what is not? I am also aware of the issue of currency exchange, but can anyone tell me what are the tax implications with respect to capital gains, if any, when you sell a US fund such as Vanguard. Would there be costs on both sides of the border? Thanks.


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## slacker (Mar 8, 2010)

50invester said:


> Hello: I am interested in buying some Vanguard ETF's for my SDRRSP. I am aware of the change in the foreign content rules but how do you know what is acceptable and what is not? I am also aware of the issue of currency exchange, but can anyone tell me what are the tax implications with respect to capital gains, if any, when you sell a US fund such as Vanguard. Would there be costs on both sides of the border? Thanks.


I have VTI, VEA, VWO in my RRSP, and there should be no capital gain tax as they're in RRSP. As for dividend and distributions, they should not be taxed by the CRA either, but they may have differing withholding tax from the US or other countries. I'll leave others to explain, as I don't fully understand myself.

On foreign exchange rate, if you're investing more than $10,000 CAD, I'd recommend considering something called Norbert's Gambit as described here: http://www.financialwebring.org/forum/viewtopic.php?t=198 Basically it's a way to get around the 2.5% exchange rate that your brokerage will charge you.

You should also familiarize with "wash trades", otherwise, the brokerage will charge you about 2.5% for each buy and sell transaction of foreign equities.

It really is quite outrageous how much they charge !!


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## slacker (Mar 8, 2010)

One more thing. Consider setting synthetic DRIP with your discount brokerage, otherwise, the dividend/distributions from your foreign ETF will be converted to Canadian dollar.

PS: I really hate foreign exchange rates they charge !!


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## young_gun (Jan 20, 2010)

My understanding is you still don't avoid the currency conversion in a CAN$ RRSP.

http://www.canadiancapitalist.com/reader-question-on-us-dollar-dividends-in-a-rrsp/


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## slacker (Mar 8, 2010)

young_gun said:


> My understanding is you still don't avoid the currency conversion in a CAN$ RRSP.
> 
> http://www.canadiancapitalist.com/reader-question-on-us-dollar-dividends-in-a-rrsp/


Damn, I think you maybe right. I just checked my RRSP statement, and indeed the dividend from VTI was converted to CAD at the disadvantaged forex rate. 

The proceeds are then used to purchase an integral number of VTI, but looks like they're using the same rate as above. So looks like they "washed" my divided. So I only suffered from one side of the terrible forex rate. 

I wonder if I could get TDWH to "wash" my dividends into US money market fund... It's really only a few dollars difference, I guess not worth the effort.


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## Soils4Peace (Mar 14, 2010)

So this would work best for US growth stocks then. Not so good for dividend payers. We will be wanting mainly capital gains from these securities, so that, many years from now we can cash out with another wash trade and bring most of our gains home.

EDIT:
But look on the bright side. WE get to keep 98% or so of the dividend, and we gain access to the more diverse and less costly US ETF market.


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## 50invester (Feb 10, 2010)

First off, thanks to all who replied. Always appreciated when someone takes the time to help. I hope to return the offer some day when I am a little more inept or before I get 'fed up' with the 'Industry'. I must say that my eyes are beginning to open wide. I have accounts at Questrade ... both a trading account and an RRSP. With respect to the currency issue, I just have to say that at this point of my understanding...well, only a couple words come to mind ... SCAM and GOUGE. When I get more time I will post some other threads on my opinions on the whole 'Financial Industry' ... but now I understand why the financial industry never loses money. Anyhow, heres what I think I understand .. you can tell me if I'm off track ...

Questrade has told me that if I want to buy a US stock/fund then I have to convert my Canadian currency to US currency (they will not do this automatically and they did not tell me this, but I guess I should have done more reading) ... so to me this is SCAM #1. Next, they said they are going to add 1.25% onto the conversion rate .... this is GOUGE #1. Next, and I am guessing here and based on what 'Slacker' stated they will ding me again when I sell ... thats SCAM #2 and GOUGE #2.

Now, what if the Canadian dollar is worth more when I sell than when I bought! Dinged again and could be big time. Is this correct? ... because the US dollar which I hold is essentially worth less .... or 'worthless'!

Now, how about US taxes .... will there be any .. capital gains tax? Anyboby?

So, what started out looking as a great ETF (Vanguard with there exceptionally low MER's), has now turned into a dog simply because I have to feed the Canadian Financial Industry.

Is there any other way to buy a fund like this without paying some bloodsucking broker a fee to have a computer do a conversion calculation? Can I not go to Vanguard and buy a fund directly without going thru a broker?

And 'Slacker'... have not read the Norbert Gambit link yet but certainly will.

Finally, I did read something quickly (that I do not understand) on Questrade about there being no conversion fees for an RRSP?

p.s. Wash Trades ???? Can anybody explain to someone who is almost financially retarded. 

Thanks again. Always enjoyable!


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## Soils4Peace (Mar 14, 2010)

A wash trade is avoiding currency conversion by trading an interlisted stock. You buy the stock on TSX - TD, ENB, RIM/RIMM or whatever - and sell it on NYSE. At TDW you call the broker and ask for a wash trade. On that day you make your US$ purchases, and at the end of the day they will put the leftover money in TDB166, a US money market fund. You must pay the brokerage charges, and deal with the risk of price changes in the carrier stock and exchange rate while you process all these steps. But you don't have to pay the currency exchange fees because you never bought any currency.


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## slacker (Mar 8, 2010)

Soils4Peace said:


> A wash trade is avoiding currency conversion by trading an interlisted stock. You buy the stock on TSX - TD, ENB, RIM/RIMM or whatever - and sell it on NYSE. At TDW you call the broker and ask for a wash trade. On that day you make your US$ purchases, and at the end of the day they will put the leftover money in TDB166, a US money market fund. You must pay the brokerage charges, and deal with the risk of price changes in the carrier stock and exchange rate while you process all these steps. But you don't have to pay the currency exchange fees because you never bought any currency.


This is basically Norbert's Gambit. There is a variant that involves short selling on a non-registered account. The advantages, disadvantages, risks, and costs had been discussed in detail in the link above.

It is generally believed that it's not worth the trouble unless you're converting over $10,000.


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## slacker (Mar 8, 2010)

I consider VTI and other low cost foreign ETFs to be an essential part of my portfolio. I accept the currency fluctuation risks, but with risks comes potential profit. After all, the CAD->USD exchange rate is at a relative historic high right now. If you do not want exposure to foreign currency, consider a currency hedged ETF like XSP.

I am only aware of one way of getting around the currency exchange problem, and that is described in the link above through Norbert's Gambit. If you can find a better exchange rate through another financial institution, you should be able to convert there, and then deposit to your Questtrade USD account.

Here's an article on wash trade:
http://www.canadiancapitalist.com/how-to-make-a-wash-trade/

Here's an article on Norbert's Gambit:
http://www.canadiancapitalist.com/save-on-canadian-dollar-to-us-dollar-conversions-and-vice-versa/

PS: I share your dislike for foreign exchange costs.


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## 50invester (Feb 10, 2010)

So apparrently, speaking with Questrade I found out that currency conversions within an RRSP cost .5%, instead of the 1.25% in a trading account. Why ... well you don't really get an answer. The only other option I understand would be to bring in a money order in US funds and deposit that, then do the opposite when you redeem your money. I have not checked but I would think that a bank would not charge such a riduculous rate just to convert money. This is a cash cow for brokers .. but what else is new. When I first started reading books such as 'The Naked Invester', it really opened up my eyes to the way the 'Industry' screws you on fees and what it does to your bottom line on the long run.


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## cardhu (May 26, 2009)

young gun said:


> My understanding is you still don't avoid the currency conversion in a CAN$ RRSP.
> http://www.canadiancapitalist.com/re...nds-in-a-rrsp/


Be careful what you use as a reference ... the link you provided assumes a double-currency-conversion exists for the round trip ... but assuming something does not make it so ... TDW, for one, does indeed appear to wash the forex on DRIP transactions. 



slacker said:


> So I only suffered from one side of the terrible forex rate.


No, you suffered no forex cost at all, on the amount that was DRIPed back into more shares ... that’s what “wash” means ... forex conversion appears to apply only on the residual cash that’s left over from their inability to purchase fractional shares. 



Soils4Peace said:


> So this would work best for US growth stocks then. Not so good for dividend payers.


Its fine if you DRIP the dividends ... at TDW, at least. 



Soils4Peace said:


> A wash trade is avoiding currency conversion by trading an interlisted stock.


No ... a wash trade is selling one US security, and buying another (different) US security on the same day, and having the broker wash the rates on currency exchange. TDW does this all the time. You have to call and ask for it each time, though. 



50investor said:


> Questrade has told me that if I want to buy a US stock/fund then I have to convert my Canadian currency to US currency ... so to me this is SCAM #1.


How is that a scam? How else would you buy a US stock but with US currency?



50investor said:


> I have not checked but I would think that a bank would not charge such a riduculous rate just to convert money.


You should check ... banks charge a hell of a lot more than that ... 0.5% is good. 



50investor said:


> Can I not go to Vanguard and buy a fund directly without going thru a broker?


No you can’t ... Canadian residents can’t buy US-domiciled mutual funds, period ... You can only buy the ETFs, and you can only buy them through the exchanges (thus the “E” in ETF”).

At QuestTrade, you can have a US$ RRSP ... why not just place all your US$ holdings in that account ... then you can trade to your heart’s content, with zero forex fees, other than the initial conversion.


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## rookie (Mar 19, 2010)

cardhu said:


> At QuestTrade, you can have a US$ RRSP ... why not just place all your US$ holdings in that account ... then you can trade to your heart’s content, with zero forex fees, other than the initial conversion.


http://www.canadiancapitalist.com/y...ollar-self-directed-rrsp-account-with-qtrade/
link on opening US$ RRSP a/c. wonder if any other broker offers this than qtrade since their fee seems to be a bit high for a person with small portfolio size. scotiaitrade does not offer this product at all.


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## 50invester (Feb 10, 2010)

_Quote:
Originally Posted by 50investor 
Questrade has told me that if I want to buy a US stock/fund then I have to convert my Canadian currency to US currency ... so to me this is SCAM #1. 

How is that a scam? How else would you buy a US stock but with US currency?_

Perhaps you have been paying these fees for this so long that you believe your getting some kind of deal. So if I convert $50,000 from Can to US, with say the Can dollar at par, then I am going to give a broker $625 and then another $625 if I want to convert it back again. And this is before I have made a cent ... and your response is 'HOW IS THIS A SCAM'. Are you employed in the 'Industry'? Anthying can seem normal after a while when left unquestioned! If nobody ever challenged convention then we would still be paying the King his taxes in order to draw water from the well!

_Quote:
Originally Posted by 50investor 
I have not checked but I would think that a bank would not charge such a riduculous rate just to convert money. 

You should check ... banks charge a hell of a lot more than that ... 0.5% is good. _

So, I checked it out. I went to my TD branch and asked them how much it would cost to get a bank draft for $50,000 in *US funds*. They told me that they do the conversion at the 'going rate' and for approx $7.00 (essentially the cost of preparing the draft) I got my money converted. I take draft to my broker and they deposit it into my US trading account. Now unless your going to tell me that the 'going rate' is something other than the 'going rate', then what is the problem?


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## slacker (Mar 8, 2010)

The "going rate" from the teller at your bank is probably on par with what Questrade is offering. As one can easily find out whether this is true or not, I won't argue this point. The only way to find out is to get some real data. Go to your bank, ask what the exchange rate is at that moment (yes it changes through the day), compare it to what Questrade will give you. Please let us know. 

PS: In fact, I applaud Questrade for clearly listing the price of their exchange service. The reason why the banks and other financial institutions don't list what they charge over the "going rate" is to reduce the consumer's ability to price compare. Generally, at TDWH, I found that they charge about a 2% premium for each exchange.


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## m3s (Apr 3, 2010)

Wow you think 0.5% is a rip off you should calculate the spread at your TD you don't even know you're paying

Try xe.com or Interactive Brokers for decent exchange rates...

At least Questrade lets you hold USD in an RRSP so you don't have to find a good stock price and exchange rate at the same moment, plus pay the spread on every trade like almost every other broker


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## cardhu (May 26, 2009)

50invester said:


> your response is 'HOW IS THIS A SCAM'. Are you employed in the 'Industry'?


Your outburst is irrational, but reacting to the truth with indignant outrage when it contradicts their preconceptions is a common theme among newbie DIY investors ... as is the tendency toward conspiracy theory ... part of the learning process, I suppose.

US stock exchanges expect you to pay for your US stock purchases with US dollars ... much like the roadside IHOP in Arkansas would expect you to pay for your triple-stack of pancakes with US dollars ... why would you expect any differently? ... accusing QuestTrade of scamming, for the simple need to convert currency as a result of YOUR order to buy US stocks, is unwarranted ... so I ask again, how is this a scam? 



> _I went to my TD branch ... they do the conversion at the 'going rate' ... _


Yeah, that was my point ... banks charge far more than a typical broker ... if you really did buy that bank draft and march it down to QuestTrade, as opposed to just saying it for effect, then you got taken to the cleaners ... TDCT charges about 2.30% for a walk-in currency exchange (US$) if you don’t have a Borderless account ... about 1.40% if you do ... QuestTrade's 1.25% is good, by comparison, and 0.5% is even better. 



> _Perhaps you have been paying these fees for this so long that you believe your getting some kind of deal. _


This is kind of ironic, don’tcha think?

Minimizing fees is a fine goal, but before you can minimize them, you have to understand them ... start here


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## 50invester (Feb 10, 2010)

> Your outburst is irrational, but reacting to the truth with indignant outrage when it contradicts their preconceptions is a common theme among newbie DIY investors ... as is the tendency toward conspiracy theory ... part of the learning process, I suppose.


How do you consider asking a simple question an outburst? Also, your attempt to belittle me is not appreciated. Arrogance is not an impressive attribute. If you have nothing of value to offer to someone seeking some simple answers then perhaps you need not answer!



> This is kind of ironic, don’tcha think?
> 
> No!
> 
> Minimizing fees is a fine goal, but before you can minimize them, you have to understand them ... start


Are you telling me I need to be a rocket scientist to understand the concept of value? Your not you helping me!


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## slacker (Mar 8, 2010)

@50invester,

Sounds like you're going with the TD Canada Trust route then. Please let us know how much money you saved by going with them instead of QuestTrade. I may go that route too in the future.

Slacker


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## slacker (Mar 8, 2010)

rookie said:


> http://www.canadiancapitalist.com/y...ollar-self-directed-rrsp-account-with-qtrade/
> link on opening US$ RRSP a/c. wonder if any other broker offers this than qtrade since their fee seems to be a bit high for a person with small portfolio size. scotiaitrade does not offer this product at all.


RBC does now. I hope TDWH would jump onboard.

http://www.canadiancapitalist.com/rbc-direct-investing-to-allow-u-s-dollar-registered-accounts/


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## rookie (Mar 19, 2010)

thanks!! this is great info.


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## cardhu (May 26, 2009)

50invester ... I asked a simple question, and you responded with a stream of sarcastic remarks, and shouted my question back at me ... I consider that an outburst ... I consider it irrational because a simple request for explanation ought not to elicit such anger ... I attempted to help you by pointing out that your assumption about banks not charging ridiculous fees was incorrect, and that 0.5% is good, and you responded with a hostile ... _“what’s the problem?”_ . 

You don’t think the juxtaposition of your sarcastic jab about paying fees while thinking its a deal, and your story about quite happily paying an even larger fee while thinking you’re getting a deal, is ironic? I do. 

If you want help, you might consider going easy on the sarcasm & hostility when a response or answer doesn’t confirm your beliefs. 

I don’t see how it is relevant to the matter at hand, but to answer your question, I am not employed in either the industry, nor the ‘Industry’.


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## cardhu (May 26, 2009)

slacker said:


> Please let us know how much money you saved by going with them instead of QuestTrade. I may go that route too in the future.


It didn’t save him money, it cost him money. 



> _RBC does now. I hope TDWH would jump onboard._


I’m glad to see RBC is finally getting their act together on this ... TDW has been working on it (or so I hear), so it shouldn’t be long before they announce as well .. I expect this is the beginning of the dominoes falling into line.


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