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Investment Services

Investment ServicesCanadians making the transition to the US typically leave some investment accounts or RRSPs/RRIFs in Canada thinking they will just continue managing their accounts as they always have.  The reason most often quoted for leaving these investments in Canada is they will lose money if they convert loonies to US dollars now.  What folks don’t realize is that it is not “business as usual” and there are complications with the accounts in Canada while you are resident in the US.

If the decision to move the investment assets to the US is made, there are other complications and unforeseen obstacles to overcome.  Following are some of the things you should consider when looking at investment services:

Moving Investments to the US

Another confusing and potentially frustrating area often encountered is in moving your Canadian investments to the US .  Let’s dispel a common myth right off . . . yes, it is possible to move Canadian investments to the US without having to sell them first.  However, as some members of our firm have experienced, the simplest transfers can take months for the unwary. Following is some information to consider when moving your investment services to the US:

Setting Up Accounts in the US

WHERE TO SET-UP – A common question we get from our clients is “Where should I set up an investment account in the US ?” We believe the best value for the dollar are investment services at one of the large discount brokerage firms like TD Ameritrade.  They offer low commission rates, a wide array of low cost mutual funds and exceptional internet-based services. TD Ameritrade is the second largest discount brokerage firm in the world and we used TD Ameritrade Institutional to custody client assets. In Canada, we use NBIN Institutional ™ for their low fees and to provide a consolidated investment services solution when your assets span both the US and Canada.

SSN/ITIN – For those making the transition to the US and wanting to open an account as a US resident, you must have a Social Security Number or an Individual Tax Identification Number. This is to ensure any income from the account can be tracked for income tax purposes. For those with non-working spouses, you will need to apply for an ITIN first before opening up a joint account with the spouse that has a Social Security Number.

TITLING YOUR ACCOUNT – The other question you will see on the account application form asks how you want the account titled; joint tenants with rights of survivorship, tenants in common, community property, sole and separate property, etc. Most Canadians have no idea so they check any box or they don’t check any at all, and the brokerage firm uses their default. In reality, the option selected can have potentially profound estate planning effects on your family in the event one of you dies or becomes incapacitated. This is not a decision that should be taken lightly as the answer is probably none of the options provided, but an ownership option that never appears on the form at all!

CANADIAN LOONIE ACCOUNTS – Another big question we get from our clients is “Can you can set up a Canadian dollar account in the US?” At the heart of this question is the issue of losing money when exchanging Canadian loonies into US dollars. The answer to the question is essentially, no, you cannot open a Canadian dollar account in the US whereas in Canada, it is commonplace to open a US dollar account at a Canadian brokerage firm. Once, we succeeded in opening a Canadian dollar account at a US brokerage firm but some of the problems we encountered were:

  • It is very difficult to just find a brokerage firm in the US that will set-up a Canadian dollar account to begin with.
  • There is no end of paperwork to set-up a Canadian dollar account and once submitted, you have to follow-up to explain to them what you are doing and the standard answer is “we can’t do that”.
  • The investment holdings are still reported on the monthly statement in US dollars so you still have the “discomfort” of seeing your portfolio in US dollars anyways.
  • When a dividend is paid or a bond matures, the Canadian dollars are automatically converted to US dollars at the prevailing rate plus whatever “shaded” amount the brokerage firm decides.
  • To get paid dividends or matured bond payouts converted back to Canadian dollars is a lot of calls, paperwork, etc.

The bottom line is the US brokerage firms are just not capable of opening and managing Canadian dollar denominated accounts at this time. With all of these factors listed above, why would you want to?

Keeping Accounts in Canada

Often times, relocating investment services to the US is followed shortly by a notice from your brokerage firm saying they can no longer hold your account and you must move it immediately because you are non-resident of Canada. This may be due to an over zealous compliance officer that doesn’t know what to do with a US address on a Canadian account or, a brokerage firm that is not registered in your state of residence in the US. In reality, there is no legal reason for you to have to move your registered accounts anywhere as securities regulations permit Canadian brokers to hold accounts for Canadian non-residents (see below). However, due to securities regulations that we haven’t been able to clearly identify, regular brokerage accounts have to be closed and those funds moved to the US. You simply cannot keep a regular, taxable brokerage account open in Canada when you are a resident of the US due to silly securities regulations.

To get around this issue, some Canadian expatriates think they will “trick” the broker and the securities regulators by providing a Canadian address of a family member, friend or post office box to the broker.  Besides breaking Canadian and US securities laws and being subject to fines and penalties, there are several other problems with doing this:

  • Your brokerage firm, if aware of your US residency, could be subject to harsh fines and penalties for putting a Canadian address on your account when residing in the US.
  • For ANY dividends and interest paid into your brokerage account, no withholding will be taken as required by the Canada/US Tax Treaty and you are then required to remit the correct withholding on a Part XIII tax return to Canada.  This income must also be reported on your US tax return resulting in potential double taxation.
  • Lump-sum RRSP withdrawals or RRIF payments will most likely have the incorrect withholding taken as required by the Canada Income Tax Act and you will be required to remit the correct withholding on a Part XIII tax return to Canada.  In addition, ANY income that has accrued inside your RRSP/RRIF must be reported on your US tax return.
  • You will not receive your monthly investment statements in a timely fashion because you will be reliant on your family, friends to send them to you when it is convenient for them.
  • Your confidentiality could be compromised if your confidential information ends up at a “trusted” friend or relatives house.

Another issue often overlooked are the restrictions on trading in your Canadian RRSPs and other registered accounts while resident in the US .  Until recently, the Securities & Exchange Commission prohibited Canadian brokerage firms from making trades in these accounts for US residents because of fears of insider trading and proper accounting of the income in these accounts.  The Investment Dealers Association in Canada successfully lobbied the SEC and in 2000, they agreed to allow trading in these accounts.  However, the States did not readily follow along and now the Investment Dealers Association has negotiated with all 50 states to allow Canadian dealers and advisors to continue working with US residents.  So far, about 35 states have some form of approval in place, but it depends on the state and which resolution they have adopted.  Before making trades in your account, you should inquire with your broker to make sure they are registered with the SEC and with the state you reside in (your state must have adopted the appropriate legislation or policies).

Another common area overlooked is what happens to accounts in Canada if the account holder dies while resident in the US?  Typically, the probate process has to be endured twice, once in Canada and once in the US .

Investing in the US

There are several differences between Canada and the US when it comes to investing your money.  Unfortunately, for most making the transition to the US, they are unaware of these differences and end up making some costly mistakes or paying too much. This is typically the result of an over zealous broker, a smooth talking mutual fund salesman or variable annuity provider.  Following are some of the things you need to consider before investing your hard-earned dollars in the US:

INVESTMENT EXPENSES – The US is the most inexpensive place in the world to invest, far below the expenses seen in Canada .  Brokerage fees, commission rates, mutual fund expenses and the advent of index funds and exchange-traded funds have reduced investment expenses far more in the US than in Canada .  With some of these discount brokerage firms and mutual fund companies beginning to move into Canada, reduced investing expenses are on their way up there as well.  The most insidious thing about these fees is most investors don’t even know they are paying them unless you look at the prospectus sent to you (most don’t).  Most mutual funds in Canada typically have a 2% – 3.5% expense ratio compared to an average 0.25% – 1.0% in the US.  In addition, there is a much larger selection of low-cost mutual funds in the US with expense ratios as low as 0.09%.

TAX-PREFERENCE INVESTMENTS – There are several tax-preference investment alternatives available in the US that are not available in Canada .

They include:

  • Municipal Bonds – If you purchase bonds issued by the municipal governments in your state of residency, the interest is both federal and state tax-free (if applicable).  As expected, the interest rates on the tax-free bonds are typically lower than fully taxable bonds because of their tax-free status.  Interest from municipal bonds purchased from outside your state of residency are tax-free federally, but taxable on your state return (if applicable).
  • Federal US Obligations – The interest from US government bonds, T-bills, etc. is tax-free at the state level (if applicable) but still taxable at the federal level
  • Exempt Money Market – Another alternative is to purchase an exempt money market.  These are money market mutual funds that only invest in federal or municipal government bonds that will provide the tax benefits as outlined above.
  • Annuities – You make a contribution to an annuity on a one-time or on-going basis and the earnings grow tax-deferred.  When you are eligible to make withdrawals, your initial contribution is returned tax-free and the earnings are all taxed as ordinary income.  You should seek counsel before entering these annuities as they can lock you in for some time and typically have high expenses associated with them.
  • Roth IRA – As a result of the 1997 Taxpayer Relief Act, a new individual retirement account became available in the US .  If you have earned income, you are eligible to make a contribution to this account, invest it and it grows tax-free (versus tax-deferred).  This may be a wonderful alternative for you depending on your unique circumstances.

MONEY MARKET “SWEEP” – Dividends or interest payments, maturing bonds or the sale of an investment results in cash in your account.  In Canada, this cash sits in a savings type account earning “savings” account interest rates unless you choose to invest the cash in a money market mutual fund.  These money market funds in Canada typically have a deferred sales charge and/or a high management expense ratio.  In the US, any cash in your account is typically “swept” on a daily basis into a money market mutual fund automatically.  The nice thing is these are low cost funds that allow you to take money out at any time penalty-free.  As a result, you earn the higher money market rate starting the same day your cash hits the account versus a savings account rate, which can be 1% – 2% less.

MUTUAL FUNDS – Some investors in Canada have researched and become familiar with the different mutual fund families in Canada such as Altamira , MacKenzie, AIM, Royal Funds, etc.  In the US , however, no such funds exist.  The question then becomes “Which mutual fund families should I use in the US?”  Vanguard? Dimensional Fund Advisors?  There are in excess of 10,000 mutual funds you can select from but “Which mutual fund is right for your unique circumstances?”

Interesting Links

TD AmeritradeDiscount brokerage firm in the US
NBIN ™Discount brokerage firm in Canada
Index FundsGood information on these low cost vehicles
Dimensional Fund AdvisorsMutual funds available exclusively to clients of fee-only advisors like us in Canada and the US
VanguardMutual funds not available in Canada
iSharesThe pre-eminent provider of exchange-traded funds in both Canada and the US
SPIVA ReportS&P Index Versus Active Funds Scorecard
Morningstar CanadaInformation on Canadian stocks, mutual funds
Morningstar USInformation on US stocks, mutual funds
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