# Retirement planning advice for US Citizen living in Canada



## lipsync (Jan 28, 2017)

I am already 42, so I'm late to the planning for retirement game, but I'm trying to get things taken care of now. I've already taken care of any debts, and have a good 6+ months of emergency savings, and have deferred all the taxes I can with registered accounts.The level of knowledge I have I'm just wanting to stick to a index-balanced strategy. However, I have a few circumstances that are making me wonder if I'm doing the right thing. 

The most important is I am a US citizen, living in Canada. I've lived here now for 5 years, and am working towards citizenship. However, I don't know if I will be here indefinitely, and if I would retire here. Interestingly, I get paid in USD, which I currently benefit from because the exchange rate is good. I've learned how to do Norbert's Gambit to convert USD->CAD at a good price.

If I lived in the US, I would use Vanguard, and build a balanced portfolio with their index funds, but because I am outside of the US, I can't technically use them (yes, I know that some people maintain a US address so they can do this). There is a Canadian Vanguard, but because I am a US citizen, there is this annoying thing that the US does called a PFIC (Passive Foreign Investment Company) which makes life hell for taxes. Basically, my tax adviser has convinced me to just invest in US domiciled holdings, and to do that I am wanting to get ETFs and build a simple Index-based strategy for retirement. 

I've already got 60k USD in a US Fidelity account (traditional and roth IRAs) that is currently balanced between US Bond index (35%), US Stock index (36%) and International Stock index (30%). I saw that Vanguard now recommends an international bond index as well, so I was going to balance these holdings better by using Questrade to buy equivalent iShares ETFs in the non-registered account (12.9% international bonds (IAGG), 27.7% US bonds (IUSB), 35.6% US Stocks (ITOT), and 23.8% (IXUS) international stocks). This all seems to be a reasonable strategy, based on what I've been reading here. I can't get the Vanguard Canadian instruments, because they are PFIC, so I'm going with the ETF strategy, picking ones that are US-based. However, I'm very interested to know if I'm doing something really wrong here. I've got about 80k CAD and 30k USD to build this portfolio with at the moment.

Because I get paid in USD, I can just buy these ETFs in USD, and not convert to CAD first, and then buy them. When they get sold, I can also settle in USD as well. This seems like a good strategy because I dont pay currency conversion, although if I end up staying and retiring in Canada, I would need to convert it at some point... So I'm left with a currency speculation question - would it be better to convert all of that to CAD now, while the exchange rate is really good (USD/CAD is at 1.3478), or is it better to keep it in USD for the long run? I've read somewhere suggesting that you can manage long-term currency risk by matching the currency denomination of your investments with the currency in which you expect to incur the bulk of your future expenses, which would suggest that I should convert it now.

Another confusion I have is if I should invest in some Canadian index (it would still need to be domiciled in the US though), such as EWC (iShares MSCI Canada ETF) or HEWC (iShares Currency Hedged MSCI Canada ETF)? I have an international index in the plan, but is there some benefit in specifically investing in the country that I am living in? 

Thanks!


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## james4beach (Nov 15, 2012)

Yes the PFIC issue is a huge problem, I agree. I am not a tax expert but as far as I know, the following Canadian investments are free from PFIC concerns:

* savings accounts including ISAs held at brokerages (traded like mutual funds but they are not mutual funds)
* individual Canadian stocks, provided they are regular corps and not PFICs
* GICs
* individual bonds
* anything inside RRSP, including Canadian mutual funds and ETFs

Those are quite a few options to invest in Canada. I invest with all of the above, entirely domiciled in Canada with Canadian institutions, and do not have any PFIC exposure.

Realistically if you hold some US based international fund, you should be fine. You probably don't need to specifically increase your Canadian stock exposure. Others may disagree.



lipsync said:


> Another confusion I have is if I should invest in some Canadian index (it would still need to be domiciled in the US though), such as EWC (iShares MSCI Canada ETF) or HEWC (iShares Currency Hedged MSCI Canada ETF)?


The following is just in case you decide you want to increase your Canadian stock exposure. I've done something with individual stocks that I believe approximates holding the TSX Index pretty well. Details are in this thread:
http://canadianmoneyforum.com/showthread.php/100322-Slicing-XIU-may-give-something-like-ZLB

So though I am holding individual stocks, this is just to replicate the TSX Index. I hold equal weights from the largest XIU holding in each of these sectors: financial, energy, industrial, telecom, utilities. This means that the current basket of stocks is: RY, ENB, CNR, BCE, FTS. If you have large amounts of money to invest, you could just as well hold the top two weights in each sector. I simply look at the holdings of XIU as a guide.

That's my overall approach to Canadian investment while avoiding PFIC problems. A mix of savings accounts, GICs, individual bonds, and a small basket of stocks to approximately replicate XIU.


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## humble_pie (Jun 7, 2009)

james4beach said:


> Yes the PFIC issue is a huge problem, I agree. I am not a tax expert but as far as I know, the following Canadian investments are free from PFIC concerns:
> 
> * savings accounts including ISAs held at brokerages (traded like mutual funds but they are not mutual funds)
> * individual Canadian stocks, provided they are regular corps and not PFICs
> ...




a small point but i'm curious ... ok you have no canadian ETFs because in the evil eye of the IRS these are PFICs.

but somewhere in the welter of posts about holding synthetic XIU, you mentioned you were holding XIU calls which had risen nicely.

how does Evil Eye regard options on PFICs? usually the same rules apply to options as to their underlyings ...

.


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## james4beach (Nov 15, 2012)

I can hold XIU, options, and other ETFs in my RRSP. Unfortunately I don't have much spare room in the RRSP which is why I had to look for a non-registered method. I currently have a few XIU shares in my RRSP, but no options on it. Assets in the RRSP are sheltered from PFIC reporting rules.

That might be something for the OP to consider. If you have RRSP contribution room, this is one place you can put Canadian ETFs.

XIU calls non-registered, I don't know if that's a PFIC but it's a good question!


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## humble_pie (Jun 7, 2009)

james4beach said:


> That might be something for the OP to consider. If you have RRSP contribution room, this is one place you can put Canadian ETFs.



the above is a useful tip for the OP & everyone in the same boat.

it looks like the inverse of what is normally recommended for a all-canadian taxpayer's RRSP. Such registered retirement accounts will often hold US securities because there is no withholding tax on US dividends.

but for a US person working in canada or a canadian working in the US who remains a canadian taxpayer, the same RRSP can shelter canadian ETFs from washington. Good tip!





> XIU calls non-registered, I don't know if that's a PFIC but it's a good question!


often with options it turns out that the tax authorities have no opinion. The important thing is for the taxpayer to be consistent.

i would _tend to think_ that, if canadian ETFs are PFICs that are unwelcome in washington, then options on em would or should be equally unwelcome. On a more positive scale, i would _definitely think_ that if a certain canadian worker in the US happened to own a couple XIU options in unregistered account, the IRS would pay no more attention to em than it would to a gnat ...

.


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## james4beach (Nov 15, 2012)

I considered using EWC for Canadian exposure, but as far as I can tell it has performed significantly worse than XIU over several years.

Maybe the XIU calls non-registered are a viable option. I'm sticking to the outright stock ownership method though, and I'll put any ETF positions into my RRSP.


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## humble_pie (Jun 7, 2009)

james4beach said:


> I considered using EWC for Canadian exposure, but as far as I can tell it has performed significantly worse than XIU over several years.
> 
> Maybe the XIU calls non-registered are a viable option. I'm sticking to the outright stock ownership method though, and I'll put any ETF positions into my RRSP.



i thought your 6 stock picks as a proxy for the best side of XIU (i remember the thread where you set forth your rationale for picking the top 6 XIU performers) is a fine strategy for just about everybody, instead of holding XIU itself.

.


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## james4beach (Nov 15, 2012)

humble_pie said:


> i thought your 6 stock picks as a proxy for the best side of XIU (i remember the thread where you set forth your rationale for picking the top 6 XIU performers) is a fine strategy for just about everybody, instead of holding XIU itself.


Yes I think it's a fine strategy for just about everybody, as long as you rebalance annually and look back at XIU composition. For example, the top weight in the energy sector recently changed from SU to ENB. Some years ago, the stock for industrials changed from BBD.B to CNR. These are easy annual adjustments to make, but you have to do this management activity to get the good results. The point is to mirror XIU, and XIU is constantly changing.


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## humble_pie (Jun 7, 2009)

james4beach said:


> Yes I think it's a fine strategy for just about everybody, as long as you rebalance annually and look back at XIU composition. For example, the top weight in the energy sector recently changed from SU to ENB. Some years ago, the stock for industrials changed from BBD.B to CNR. These are easy annual adjustments to make, but you have to do this management activity to get the good results. The point is to mirror XIU, and XIU is constantly changing.



good point about having to monitor

monitoring & editing the 6 top XIU stocks once a year is not too onerous. Surely there could not be more than one, at the most 2, stocks to replace each year? some years perhaps no stocks to replace? in other words, everything proceeding in slow motion.

in a nearby thread kcowan is talking about an annual discipline he performs for his dividend stocks; he, too, is only carrying out the task once a year, although the editing is a bit more sophisticated

.


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## james4beach (Nov 15, 2012)

Yes with my method (5 stocks by the way: financial, energy, industrial, telecom, utility) there is not much to replace year to year. On average, less than 1 change per year. The five have been static and unchanged for about the last five years, and SU -> ENB is the first change in years. Minimal effort, and the changes are "robotic" ... straight form XIU ... no judgement calls to make.

It also seems to outperform XIU and I'm downplaying that aspect and saying "can be used to mimic XIU". Historically, it's done better.


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## Eclectic12 (Oct 20, 2010)

lipsync said:


> ... If I lived in the US, I would use Vanguard, and build a balanced portfolio with their index funds, but because I am outside of the US, I can't technically use them ... Basically, my tax adviser has convinced me to just invest in US domiciled holdings, and to do that I am wanting to get ETFs and build a simple Index-based strategy for retirement ...


I am not sure I follow this ... though I don't have the same issues.

My understanding is that while you won't have the same range of Vanguard US choices - a lot of the ETFs can be bought from a Canadian discount broker. As long as the range the Canadian brokerage is enough - wouldn't buying the US domiciled Vanguard ETFs take care of the PFIC issues?

For example, I can order VOO through my broker. I'd have the challenge of currency exchange but as you are paid in USD, that shouldn't be an issue for a taxable account. An RRSP would need either a USD version or the ability to do a NG easily.




humble_pie said:


> the above is a useful tip for the OP & everyone in the same boat.
> 
> it looks like the inverse of what is normally recommended for a all-canadian taxpayer's RRSP. Such registered retirement accounts will often hold US securities because there is no withholding tax on US dividends.
> but for a US person working in canada or a canadian working in the US who remains a canadian taxpayer, the same RRSP can shelter canadian ETFs from washington. Good tip!


+1 ... there would need to be some planning once the withdrawals start as an RRSP won't last forever.


Cheers


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## james4beach (Nov 15, 2012)

An old thread but I'm still curious if anyone has updated information. Normally a "US person" would not be able to hold XIU or any Canadian ETF non-registered due to PFIC concerns.

Does anyone know about the status of XIU options and whether these are PFICs? For example, holding deep in the money XIU call options is just about equivalent to going long XIU itself.


( By the way, for more diversified investment options for US persons also see thread: https://www.canadianmoneyforum.com/showthread.php/137384-Diversified-ETFs-for-US-Persons )


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## diharv (Apr 19, 2011)

i got all caught up and relinquished years ago , to much anguish ,stress and financial hardship.doing I guess what I thought was the right thing for my peace of mind and security for my family .Was it worth robbing one of my kid's worth two years of university? Because that is how I see it , money taken from my family and for that I will never forgive the US. If I knew then what I know now , I would have ignored it all . PFIC crap and all. FATCA has no teeth in Canada.


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## humble_pie (Jun 7, 2009)

james4beach said:


> Does anyone know about the status of XIU options and whether these are PFICs? For example, holding deep in the money XIU call options is just about equivalent to going long XIU itself




re DITM options as proxies for underlying XIU, this question should really be addressed to an expert in US taxation

do tax authorities in the US regard options as interchangeable proxies, therefore restrictions on underlyings apply equally to their derivative products? canadian tax authorities do so regard but i don't know about american


re holding XIU calls as "just about equivalent to going long XIU itself," this is not quite the case. A party simplistically holding the call is not going to receive the dividend distributions.

naiive parties might bet on capital gains by buying a call; but XIU is a terrible choice for that purpose. It's a slowpoke. Not enough volatility. Speculators hoping for leveraged gains normally go for more volatile underlyings.

a mildly workable strategy would be to purchase DITM call that's very far out in time (this will be hard to buy since it will be necessary to outwit the market maker) plus at the same time one would sell an ATM or even OTM call that is much closer in time.

assignment would mean a capital gain. If no assignment occurs the trader methodically sells another short-term call. The strategy is akin to covered write except that the long leg is a DITM LEAPs call, not the stock itself.

.


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## james4beach (Nov 15, 2012)

Thanks humble_pie, these are good points. It looks like the options route has more challenges beyond the PFIC question, especially with all those trades.

Then I will stick to my XIU sampling/unpacking method, and at least there are zero PFIC concerns. { SU, RY, CNR, BCE, FTS } has returned 14.5% year-to-date, compared to XIU 14.7% ... tracking really nicely including dividends for total return. I have nothing to complain about, really.


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## nwboater (Jun 3, 2019)

james4beach said:


> ..............and at least there are zero PFIC concerns. { SU, RY, CNR, BCE, FTS } has returned 14.5% year-to-date, compared to XIU 14.7% ... tracking really nicely including dividends for total return. I have nothing to complain about, really.


I'm a dual citizen of US & Canada and just starting to research and buy stocks here in Canada. I'm very concerned about the PFIC issue and want to avoid it like the plague!

From lots of Googling it appears that FTS and BCE might be PCIF's. They seem to be Holding Companies and it appears that Holding Companies can often be considered PFIC's.

I haven't looked into SU or RY, although RY is on my list so I plan to check it out.

Cheers,
Rod


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## AltaRed (Jun 8, 2009)

I doubt companies like FTS and BCE can be considered PFICs. They are publicly traded incorporated structures with wholly owned subsidiaries. 

Those business structures organized as trusts are more likely to be PFICs, e.g. with .UN trading symbols and of course, ETFs and Mutual Funds.


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## james4beach (Nov 15, 2012)

I really doubt that FTS and BCE are PFICs. The designation refers to a passive flow-through corporation, but Fortis and BCE are nothing like that (structurally). They have all kinds of business operations, revenue, etc.

I still have a US Person designation and continue to use the individual stocks to replicate the TSX Index, avoiding PFIC issues. Still working well, I have no reason to stop doing it. The trailing 1 year return for those 5 stocks equal weighted is 11.0% compared to just 5.5% for XIU


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## nwboater (Jun 3, 2019)

Hi AltaRed & james4beach,

Thanks very much for your responses and clarifications. When I was Googling PFIC's (dangerous in the wrong hands!) I saw some information that said Personal Holding Companies can be considered PFIC's, What I overlooked was the term "Personal" Holding Company. Of course the stocks we are discussing here certainly can't be considered as 'Personal'.

So this is a big relief for me and will allow me to invest in the portfolio I desire.

Thanks again,
Rod


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## james4beach (Nov 15, 2012)

To recap, all Canadian domiciled ETFs are taboo, unless you shelter them inside an RRSP.

US-based ETFs such as SPY, IVV (for S&P 500) or something like VT (whole world) are not PFICs and sound like they are "safe" for a US Person to hold.

But does anyone know if they must be held at an American brokerage to get the blessing of American authorities? I've been holding mine in a Canadian discount brokerage and assumed that what matters is the fund's domicile, not the country of the brokerage.


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