# Why invest in Canada at all?



## Chris L (Nov 16, 2011)

Canada is such a small portion of the world economy, so what's the point in investing in Canadian stock/ETFs? Say I put together a couch potato portfolio, why not just go with international and US ETF equities? If I'm young I might even consider dropping the bond portion too. Inside a typical TFSA I just don't understand the point.

Canadian equities is so small and our personal debt load so high, I don't see any business upside here. Going with bonds seems like a dead end too because interest rates have only one direction to travel. Besides that, if you own a house, carry CAD and have a job in Canada you have enough local exposure already.

So why not just stuff a TFSA with a pile of US and international ETF's? Maybe two representing the market/index internationally and US?

Thoughts?


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## GoldStone (Mar 6, 2011)

I will give you a few quick reasons.

1. *Dividend Tax Credit.* It's valuable in a taxable account. A retiree with no other income can get about $40K-50K in dividends tax free.

2. *Currency risk.* If you are a retiree living in Canada year round, the bulk of your expenses are in Canadian dollars. It's prudent to match the currency of your assets to the currency of your liabilities.

3. *Oligopolistic nature of Canadian market.* Banks, telecoms, and a few other Canadian industries are cozy, protected oligopolies. Companies enjoy higher margins, compared to the more open international markets. That's exactly what you want to see as an investor.


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## GoldStone (Mar 6, 2011)

One more.

4. *Valuations.* Canadian market is cheaper than US as measured by CAPE.

US=25
Canada=19


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## Jon_Snow (May 20, 2009)

Beat me to it Goldstone.... Canadian Dividend Tax credit - 40k -50k tax free dividend income is going to allow me to retire early.... real early. :tongue-new:


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## al42 (Mar 5, 2011)

Just hoping they don't take this away from us anytime soon.


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## Jon_Snow (May 20, 2009)

Yeah, always seemed a bit too good to be true... but as long as its there, I'm taking advantage...


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## Chris L (Nov 16, 2011)

Basically inside a TFSA that tax benefit does not apply? I like the reason that some companies are essentially protected. Thanks, that helps me make up my mind about Canadian equities.

Totally forgot about the div tax credit. So this would apply to a regular investment account, not a TFSA which is already protected. I read an article on that a while ago (linked below), but essentially you need to get to about a mil invested in div companies, or how about 1 paid for rental, 1 paid for house to live in and $500k invested in div companies. Give or take of course.

http://www.theglobeandmail.com/glob...-in-earned-dividends-0-in-tax/article4599950/


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## humble_pie (Jun 7, 2009)

look at the track records of those international etfs & you'll get your answer. They probably won't inspire you.

many canadian companies are multinationals in their own right. Many companies HQ'd in canada have 80% of their business or more in the US or overseas. Most of our resource & agricultural industries sell principally outside canada. Some even operate principally outside canada.

plus canadian companies respect known accounting standards. Plus their news is easy to obtain. Plus their dividend tax credits. Plus their executives, often skilled multinational managers in a tradition dating back to the years right after WW II. Potash. Scotiabank. Bombardier. Valeant. What's not to like?

then there are countless "canadian" companies whose head offices are nominally situated between our shining seas, but 100% of their business is overseas, or in the US of A.


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## Eclectic12 (Oct 20, 2010)

Chris L said:


> Canada is such a small portion of the world economy, so what's the point in investing in Canadian stock/ETFs?
> Say I put together a couch potato portfolio, why not just go with international and US ETF equities?


One reason is that a "Canadian" company may make little of their money in Canada. 

Most will think of Bank of Nova Scotia as "Canadian" yet when you check their annual report, 1/3 of their business/income is from Latin/South America. A lot of the mining or resource companies have 90% of their assets/business outside of Canada. So by buying them - one is benefiting from that area of the world without having to deal with foreign currencies, foreign stock exchanges, foreign withholding taxes & in a taxable account, receive the benefit of the DTC.

Another example whose name I'm forgetting is a Canadian REIT whose properties are almost exclusively in Europe.





Chris L said:


> So why not just stuff a TFSA with a pile of US and international ETF's?


You are aware that US stocks/ETFs/MFs that pay dividends will be paying to the US gov't (i.e. the IRS) the 15% withholding tax in a TFSA that they could be exempt from in an RRSP, right?

http://www.moneysense.ca/save/tfsa/taxes-on-u-s-stocks-in-tfsas

In a taxable account, one can report foreign taxes paid but in a TFSA, since it is not subject to Canadian taxes - it's a straight loss.



Cheers


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## Retired Peasant (Apr 22, 2013)

Given all this, Why invest _outside _Canada at all?


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## Chris L (Nov 16, 2011)

Retired Peasant said:


> Given all this, Why invest _outside _Canada at all?


Okay, point received 

Are the suggestions in the couch potato subject to the 15% withholding tax inside a TFSA?

[Disregard the %, as these are from the various portfolios.]

US and international equity 40% iShares MSCI World (XWD)
US equity 20% TD US Index – e (TDB902) 
US equity 20% TD US Index – I (TDB661)
US equity 15% Vanguard Total Stock Market (VTI)
US equity 12% Vanguard Total Stock Market (VTI)
US small-cap value	6% Vanguard Small Cap Value (VBR)

I was under the impression that even if it was a US equity, if it was traded on the TSX it would be therefore be Canadian and not US? Maybe I got that wrong? If it is CAN, I suppose the tax is buried into the actual ETF when all it's all transferred around?

Sorry, I'm a little confused now


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## Eclectic12 (Oct 20, 2010)

Chris L said:


> Okay, point received
> 
> Are the suggestions in the couch potato subject to the 15% withholding tax inside a TFSA? ...


If the MF/ETF holds US dividend paying stock and is Canadian - then yes, it will be subject to the 15% withholding tax in the TFSA.

Here's a couple of links:

http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/
http://canadiancouchpotato.com/2012/09/20/foreign-withholding-tax-which-fund-goes-where/





Chris L said:


> I was under the impression that even if it was a US equity, if it was traded on the TSX it would be therefore be Canadian and not US? Maybe I got that wrong? If it is CAN, I suppose the tax is buried into the actual ETF when all it's all transferred around? ...


The US gov't sees the Canadian MF/ETF the same as you or I (i.e. Canadian resident) and therefore takes the 15% withholding tax.

In a taxable account, the Canadian entity will report the foreign tax paid on a T form & you can report/recover it on your tax return.
Since an TFSA or RRSP has no Canadian tax to report, there's no T form and no method to recover the foreign taxes paid.


The difference seems to be the RRSP where the MF/ETF will still be charged the withholding tax, likely as the US gov't has not record of the MF/ETF being held in the RRSP. Whereas if an investor holds the US stock in the RRSP, that is reported & the 15% withholding tax is waived.


Cheers


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## Eder (Feb 16, 2011)

Don't discount geo political risk. The are no real rights for shareholders outside of Can, USA, and most of Europe.


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## Chris L (Nov 16, 2011)

Crap, that makes things much more complicated!

Looks like I need to look into a RRSP. I have lots of room in there since I have none 

I have a certain portion of the proceeds from RE that I want to allocate to TFSA, but with the tax situation, it looks like it's wiser to put some stuff in the TFSA and some in the RRSP? 

From Couch potato:
RRSP
Vanguard Total Stock Market (VTI)
Vanguard Europe Pacific (VEA)
Vanguard Emerging Markets (VWO)
iShares Canadian Bond (XBB)

TFSA
iShares Canadian REIT Sector (XRE)
Cash (GICs or money market fund)

Taxable account (assuming no more RRSP or TFSA room)
iShares Canadian Composite (XIC)
Claymore S&P/TSX Preferred Share (CPD)

Man, not simple at all.


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## Eclectic12 (Oct 20, 2010)

Chris L said:


> Crap, that makes things much more complicated! ...


Yes ... though a quick glance at the listing seems to show you've adjusted well.  

Also - bear in mind that in the grand scheme of things, I suspect paying the 15% withholding tax on US dividends by mistake for a while & fixing it down the road beats letting the concern stop one from investing at all. The US withholding is not going to affect Canadian dividends or US share/ETF capital gains.


Cheers


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## My Own Advisor (Sep 24, 2012)

For what's it worth Chris, I keep U.S. investments (stocks and ETFs) strictly in the RRSP for the reasons above and Canadian investments in the TFSA and non-registered.

More specifically, Canadian REITs go into the TFSA with Canadian ETFs and other Canadian dividend-paying stocks.


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## humble_pie (Jun 7, 2009)

an argument could be made in favour of those canadian multinationals that are already far out in front of the starting gate with their international business activities. The same argument would discount those canadian domestic companies that are sticking to a 100% maple syrup diet.

CN Rail ships goods via a rail line that runs from northern canada to argentina, check.

SNC lavalin's infrastructure business is global, check.

the 5 big chartered canadian banks have added international legs over the past 10-15 years, check.

*but* we all saw recently how the 3 established canadian telcos plunged on a whiff of a hint that verizon might come here & buy bandwidth.

some would say that the episode shows how weak protected canadian industries are. Please see Goldstone's remarks upthread. How long can these domestic monopolies last?


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## Chris L (Nov 16, 2011)

Say If I'm happy to do a couch potato style portfolio and come new year can do $61k via wife and my TFSA, and didn't want to bother with an RRSP (coupled with my rental and possible desire to buy more in the distant future, don't feel I need one or it suits me much), should I just go ahead and stuff everything into the TFSA including US? Is it really that big of a difference? Okay, so I lose 15% right off the top...but I'm protecting the equity gain or do I not pay taxes on the equity anyway? 

I'm going to crawl back to rentals soon  j/k

I really have to think about this some more!

Thanks for all the replies, eventually this is going to sink in.


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## humble_pie (Jun 7, 2009)

Chris L said:


> Say If I'm happy to do a couch potato style portfolio and come new year can do $61k via wife and my TFSA, and didn't want to bother with an RRSP (coupled with my rental and possible desire to buy more in the distant future, don't feel I need one or it suits me much), should I just go ahead and stuff everything into the TFSA including US? Is it really that big of a difference? Okay, so I lose 15% right off the top...but I'm protecting the equity gain or do I not pay taxes on the equity anyway?
> 
> I'm going to crawl back to rentals soon  j/k
> 
> ...



please don't go back to rentals, we'll miss you. You're catching on quick.

here's a philosophical POV about stuffing everything in the tax-free. Suppose some US dividends in tfsa do get clipped with the 15% US withholding tax rate & there's no way to claim this on one's tax return.

what is your marginal tax rate? if it's greater than 15%, then losing 15% to uncle sam might not seem like such a tragedy. It might seem like just the price one pays to take advantage of all the other TFSA benefits.

plus here's a practical POV. Some countries that have no withholding taxes host important companies with ADRs that trade on new york. Being ADRs, these are denominated in USD. However, they have no withholding tax for residents of canada.

great britain & hong kong are 2 of those countries. A while ago, a cmf forum member - i believe it was liquid finance - posted a link to a website that lists *all* of the british companies with US ADRs. I wish i could give you this link but (long story) my hard drive was reformatted recently & i lost a bunch of stuff, including this particular link.

the list was impressively substantial. Those were not fly-by-night companies. The point is, you could hold em in tfsa, they'd be denomnated in US dollars, they'd trade in US markets, they'd pay dividends in USD ... but a canadian resident taxpayer would not suffer any 15% non-resident withholding tax.

among the brits was vodaphone. Among the candidates from hong kong was china mobile.


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## Eclectic12 (Oct 20, 2010)

Chris L said:


> Say If I'm happy to do a couch potato style portfolio and come new year can do $61k via wife and my TFSA, and didn't want to bother with an RRSP (coupled with my rental and possible desire to buy more in the distant future, don't feel I need one or it suits me much), should I just go ahead and stuff everything into the TFSA including US?
> 
> Is it really that big of a difference?
> Okay, so I lose 15% right off the top...but I'm protecting the equity gain or do I not pay taxes on the equity anyway? ...


No taxes on the capital gain ... the dividends for sure and I though someone listed "interest" or some other class.
Everything I have that US based is in my RRSP so I can't say for sure.

If you want to estimate - take a took at what the distributions are classed as dividends.
If the investment is paying $1.25 - the 0.15 times $1.25 is going to be about $0.18.

Of course - one question is what the broker is going to do with USD being contributed to the TFSA. If they automatically convert it from USD to CAD, I suspect there's also going to be a current conversion charge in there as well.


Cheers


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## james4beach (Nov 15, 2012)

humble_pie alluded to this advantage of domestic Canadian investment.

These companies follow accounting standards we're used to, and perhaps more importantly, are subject to domestic laws. This is a *local* playing field... this means that we citizens have an element of control over these companies (as Canadian domiciled companies and investment firms are subject to laws of this country) as per our elected government.

Think of an extreme counter-example like China or Russia. When you invest in those stocks, you're at the whims of _their_ governments. Perhaps they have minimal regulation and accounting oversight (as in China). Or perhaps the country suddenly decides to take assets or control away from you... nationalize assets, steal from foreigners. What is your recourse? Tough beans, Investor. It's _their_ country and they set the rules. All you can do is watch from a distance.

Even just across the border in the USA, there is talk of America bringing in stricter capital controls. Due to the horrendous fiscal condition of the US government, it wouldn't be surprising if the USA took actions (tax or regulatory) that can be very hurtful to foreign investors, which means us. Read this famous paper by the Wegelin investment bank. They describe why they are avoiding American investments and I think they make an important point. When you invest in American stocks, you're operating on _their_ turf. If they decide to heavily tax you, or enact capital controls, you're screwed.

You may have heard in the news recently that Canadian banks now have to report directly to the IRS. You are watching the points made by Wegelin being played out right before your eyes... America, desperate for tax revenue, is broadening the scope of who it comes after. It's not just American citizens but many other people. You may be a "U.S. Person" and not even know it. For instance, snowbirds who spend more than X days in the USA, or people who temporarily work in the USA may face more American taxation, or tax penalties, ahead. It's an evolving situation but it's clear which direction it's evolving in: more tax collection from more non-residents.

That means you

Get ready for this one. If someone dies with more than $60k in US assets (like stocks) they may have significant US tax obligations if their worldwide assets exceed $5 million. They were very close to dropping that threshold to $1 million. Again, it's an evolving situation and it's clear which direction it's evolving in.

I share Wegelin's view, and try to keep my American investing to a minimum. I would much, much rather invest domestically than in the USA.


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## humble_pie (Jun 7, 2009)

i spoke too soon. The list of british ADRs did survive the hard drive purge in an obscure bookmark. Link is below. As i mentioned, i believe the list was originally offered by liquidfinance.

some of these british ADR companies are very well-known. AFAIK their dividends are paid to canadian residents without british or US withholding tax.

i wouldn't take a dumb crumb's word for it, though. I'd check with the ADR vendor (might be necessary to work one's way up the bureaucracy, those are giant NYC banks.) Or else i'd check with the broker (at a discount broker it's necessary to find a licensed representative who knows how to check.)

still missing chez cmf forum is a handy list of hong kong ADRs which, one hears, have no withholding tax either.

assuming a british or hong kong ADR does get the no-NR-tax green light, these would be a way to hold USD securities in any kind of account without paying withholding tax on the dividends.

the only caveat would be the brokers - most brokers - who offer monocurrency CAD registered accounts. These brokers will charge FX fees to convert the dividends, tch.

http://topforeignstocks.com/foreign-adrs-list/the-full-list-of-british-adrs/


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## GoldStone (Mar 6, 2011)

james4beach said:


> Even just across the border in the USA, there is talk of America bringing in stricter capital controls. Due to the horrendous fiscal condition of the US government, it wouldn't be surprising if the USA took actions (tax or regulatory) that can be very hurtful to foreign investors, which means us. Read this famous paper by the Wegelin investment bank. They describe why they are avoiding American investments and I think they make an important point. When you invest in American stocks, you're operating on _their_ turf. If they decide to heavily tax you, or enact capital controls, you're screwed.
> 
> ...
> 
> Get ready for this one. If someone dies with more than $60k in US assets (like stocks) they may have significant US tax obligations if their worldwide assets exceed $5 million. They were very close to dropping that threshold to $1 million. Again, it's an evolving situation and it's clear which direction it's evolving in.


I'm not concerned at all. The rules, as they stand, do not affect me. If they ever come close to affecting me, I can liquidate my US investments with a few clicks of a mouse at 9:30am. They don't change the rules overnight. There is always a lead time to react while they debate the changes.

Certain domestic companies can destroy my capital far quicker and more efficiently than "evil foreign governments". Think crappy resource companies... the godawful gold miners in particular.


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## 6811 (Jan 1, 2013)

LOL +1 :highly_amused:


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## Eclectic12 (Oct 20, 2010)

GoldStone said:


> ... Certain domestic companies can destroy my capital far quicker and more efficiently than "evil foreign governments".
> 
> Think crappy resource companies... the godawful gold miners in particular.


 ... which raises the question of whether having more choices is going to result in more bad choices, more so-so choices or more better choices. ;-)


Cheers


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## humble_pie (Jun 7, 2009)

(to gold) what's crappee about resource companies? they are just at the low end of their typical boom/bust cycle. Some market theoreticians hold that this is always the beginning of the next bull, others say it's the last stage of the old. 

whatever, it doesn't look as if they've quite troughed. The times look good for selling puts in crappee golds though.

(to james4) no need to worry about US estate taxes in cmf forum, few of us serfs have crossed the $5 million threshhold.

(but to those on the cusp of $5M) for US estate tax reasons, be careful not to die during resource market peaks.

also remember that the US of A is going to include all rrsp, all registered accounts, all real estate including personal residence plus pensions in the "estate" aggregate.


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## atrp2biz (Sep 22, 2010)

For those with US assets, there are ways to circumvent the $5 million threshold and avoid US estate taxes. RRSP holdings are exempt from US estate taxes, so as mentioned earlier, this is another advantage of holding US assets in an RRSP. [This is so wrong.] Also, one could hold US holdings in a corporation and avoid estate taxes.


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## humble_pie (Jun 7, 2009)

atrp2biz said:


> RRSP holdings are exempt from US estate taxes


is this really true? when i was looking at the provisions for alien non-resident estate taxes 2 or 3 years ago, RRSP was included in the definition of an "estate." At that time a low ceiling at the $1 million level was being discussed.

republican lobbying got the ceiling raised, but it strikes me as unusual that the taxation of deceased alien non-residents' RRSPs would have changed from the original plans. Who would have lobbied on behalf of DANRs? certainly not the GOP ...


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## CanadianCapitalist (Mar 31, 2009)

atrp2biz said:


> RRSP holdings are exempt from US estate taxes...


Are you sure about this? Reference? Last time I looked, I made the same conclusion as humble_pie. RRSP balances are part of the estate per US law.


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## houska (Feb 6, 2010)

GoldStone said:


> 2. *Currency risk.* If you are a retiree living in Canada year round, the bulk of your expenses are in Canadian dollars. It's prudent to match the currency of your assets to the currency of your liabilities.


I agree in theory on this one, but in practice it's a lot more complicated. Even if you are living in Canada and paying for things in CAD, it's not necessarily a Canadian dollar exposure. A lot of consumer electronics and durable goods is basically priced in USD and then the prices converted to USD. Conversely, a lot of Canadian equities are traded in CAD and pay dividends in CAD, but compete in global markets and their earnings are in CAD only on paper.


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## atrp2biz (Sep 22, 2010)

I am so wrong.


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## humble_pie (Jun 7, 2009)

houska said:


> ... a lot of Canadian equities are traded in CAD and pay dividends in CAD, but compete in global markets and their earnings are in CAD only on paper.


these tend to be interlisted equities that trade both toronto & stateside. Their books are kept basically in USD, accounting standards in the US of A are different (more stringent, actually,) so when canadian companies trade also in US markets they are required to adhere to those reporting standards.

many are in the resource sector. A catching-up sector these days seems to be software. Increasingly these companies are paying their dividends in USD only. Talisman energy was a recent convert, in 2012.

which brings me to my favourite rant, the brokers' hidden FX fees on those dividends ...

ok i'll bypass the rant ... but please check the currency of your dividend! the TSX has excellent data, kept right up to date. Ignore what your broker front-line licensed rep has to say on the subject ...


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## Canadian (Sep 19, 2013)

humble_pie said:


> accounting standards in the US of A are different (more stringent, actually,) so when canadian companies trade also in US markets they are required to adhere to those reporting standards.


I thought the NYSE permitted inter-listed companies to report either IFRS or US GAAP. Or is it just the TSE that permits both reporting standards?


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## humble_pie (Jun 7, 2009)

i believe accounting standards are SEC regs, not any individual US exchange


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## Canadian (Sep 19, 2013)

Yes, the SEC. Its name escaped my mind for a moment when I wrote that post :beaten:

Either way, I believe the SEC permits IFRS as well as US GAAP.


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## MrMatt (Dec 21, 2011)

Because there is stuff worth buying?

Valuations are more attractive, many strong companies with good profits and prospects that are well positioned in their industry.
Canada is secure, politically stable, less currency risk. It's easier and cheaper than international investing.

A better question is why would you invest anywhere else? I do for additional exposure I don't get in Canada, but you really don't need to go far from the US to get real global exposure. 
Finally the Globe is a big crazy place, and not all of it is doing that well, why not stick to the well managed parts?


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## londoncalling (Sep 17, 2011)

humble_pie said:


> i spoke too soon. The list of british ADRs did survive the hard drive purge in an obscure bookmark. Link is below. As i mentioned, i believe the list was originally offered by liquidfinance.
> 
> some of these british ADR companies are very well-known. AFAIK their dividends are paid to canadian residents without british or US withholding tax.
> 
> ...


Thanks HP. I was lookin for that. And thanks liquid for posting it originally.

Cheers


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## PuckiTwo (Oct 26, 2011)

humble_pie said:


> http://topforeignstocks.com/foreign-adrs-list/the-full-list-of-british-adrs/


HP, this link doesn't seem to work. When I try to open it it came up with all kind of weird pages.


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## humble_pie (Jun 7, 2009)

pucki it works fine for me. Is it possible that it might be an issue with your browser?

you could try another navigation. Go to the website itself. Topforeignstocks dot com. There you will be able to find the british ADRs plus i see that there is also a list of china ADRs. Plus there's a lot of useful info about ADRs in general.

re the china ADRs, at first glance it appears that hong kong companies are mixed in with ADRs from people's republic. I have no idea what kind of withholding tax might be imposed by beijing government; all i know is that hong kong ADRs are said/thought/rumoured/believed to have no NR withholding tax.


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## humble_pie (Jun 7, 2009)

re foreign allocations, what i question is the traditional quatre-quart recipe.

25% canadian equity, 25% US equity, 25% international equity, 25% bonds.

quatre-quart makes fine, buttery pound cake & delicious french madeleines. But i think it's missing out on the high quality that some canadian multinationals can offer, by virtue of their global exposure.

to my way of thinking, a rough allocation of 35-40% canadian equity including carefully selected canadian multinationals, 20-25% US equity, 10-15% international equity, 25% bonds would work for me.

global financial markets are pretty much correlated these days, they say. Dividing up & allocating investments according to the country in which head offices happen to hang their hats no longer seems to make sense. For example, there is not really a heck of a lot of difference between total pete (french) & exxon (US).

CN Rail? it's the 2nd biggest railroad in the US, after union pacific.


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## james4beach (Nov 15, 2012)

I'm not so worried about the $5 million threshold, I'm worried about how they are clearly going to drop it. It almost came down to $1 million this year.

Soon it will be even lower and all of us will qualify.

Also it's quite easy to become a "US Person" if you look at the definition of that. Spend enough days in the USA and bam, you're a US Person.


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## Eder (Feb 16, 2011)

I spend a lot of time in the USA ...we always file this form each year to prevent getting hit with taxes here

IRS form 8840 (Closer Connection Exemption Statement for Aliens)


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