Australian living in Canada

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Topic Author
westcoastcammee
Posts: 2
Joined: Wed Apr 14, 2021 5:17 pm

Australian living in Canada

Post by westcoastcammee »

Country of Residence: Canada (Australian non-resident)

International Lifestyle: Leaving the door open to retire in either Australia or Canada - hence the global weighting.

Currency: AUD

Emergency funds: 20k

Debt: 5k owing on mortgage (350k redraw available) - Generating rental income ($750/month AUD after tax)

Age: 32

Current retirement assets

General investment account, taxable
40% VTS - 16k
35% VEU - 15k
12.5% VAS - 5k
12.5% Cash - 5k

I plan on investing 2k every 3 months (or as my rental income allows) and reinvesting dividends.

Before I begin is there any point holding on to VAS since VEU contains a small weighting of AUD?

_______________________________________________________________
Questions:

Hey everybody, I've learnt so much from these forums. So, before I begin, thank you!

I moved to Canada several years ago, and have decided to stay for the medium to long term. However, I am not ruling out returning to Australia at some stage. Ideally my goal would be to have meaningful ties with both countries.

In regards to this post, I want to concentrate on my AUD strategy. After researching some great information regarding global weighting for those undecided (like me), I have decided to go with the common VTS/VEU combo.

I am aware of the US domiciled estate issues. Where I am confused is when it comes to my position with tax drag. Generally speaking my Canadian income tax bracket would be 15%. Am I doing myself a disservice by holding US-domiciled funds, being in a low tax bracket? Would switching to the Irish domiciled equivalent be more beneficial to my situation?

Right now I'm just trying to keep it simple. Is there anything more I could do to streamline my portfolio?

Cheers.
Valuethinker
Posts: 48944
Joined: Fri May 11, 2007 11:07 am

Re: Australian living in Canada

Post by Valuethinker »

Clearly you moved to Canada for the weather? ;-).

Generally this is about tax.

I don't know how CCRA (ie IRS for Canadians) treats non Canada, non US domiicled funds. The reverse situation (Canadian fund in the UK) turned out to be very painful indeed.

Also whether RRSP and Australian super are protected from the Canadian tax (or Australian for RRSP) ie country of residence?

There is a Canadian forum the Financial Wisdom Forum, and it is linked through from here. Worth posting there as well?
Valuethinker
Posts: 48944
Joined: Fri May 11, 2007 11:07 am

Re: Australian living in Canada

Post by Valuethinker »

westcoastcammee wrote: Wed Apr 14, 2021 6:29 pm Country of Residence: Canada (Australian non-resident)

International Lifestyle: Leaving the door open to retire in either Australia or Canada - hence the global weighting.

Currency: AUD

Emergency funds: 20k

Debt: 5k owing on mortgage (350k redraw available) - Generating rental income ($750/month AUD after tax)

Age: 32

Current retirement assets

General investment account, taxable
40% VTS - 16k
35% VEU - 15k
12.5% VAS - 5k
12.5% Cash - 5k

I plan on investing 2k every 3 months (or as my rental income allows) and reinvesting dividends.

Before I begin is there any point holding on to VAS since VEU contains a small weighting of AUD?
Andrew9999 will hopefully come along this AM and tell us.

The main reason to hold an overweight in Australian stocks, is, to my mind, the franking of dividends. Since you are AU non resident, I see no reason to overweigth that small market? (Like the Canadian market, heavily overweight in banks and natural resource companies).

I am afraid I don't keep ticker codes in my head, so without the fund names I can't make any comment on asset allocation.
TedSwippet
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Location: UK

Re: Australian living in Canada

Post by TedSwippet »

Welcome.
westcoastcammee wrote: Wed Apr 14, 2021 6:29 pm I am aware of the US domiciled estate issues. Where I am confused is when it comes to my position with tax drag. Generally speaking my Canadian income tax bracket would be 15%. Am I doing myself a disservice by holding US-domiciled funds, being in a low tax bracket? Would switching to the Irish domiciled equivalent be more beneficial to my situation?
On this point, and on the information given, I think you're probably fine with US domiciled.

Assuming Canada allows you credit for the full 15% US tax paid, your tax drag is about as low as you can get it. Moving to Ireland domiciled could well move the US tax to a point where you can no longer get a credit for it; no idea specifically on Canada, but that's how things seem to work for most countries in general. (Also, Canada might I suppose have some analogue to the US's horrible PFIC funds tax rule that could apply to Ireland domiciled but unlikely for US domiciled, given the physical proximity -- folks on the Canadian forum will know more about that.)

On US estate tax, you should be fine also. Both Australia and Canada have usable US estate tax treaties that should protect you, either fully or at least up to around USD 11mm.
Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: Australian living in Canada

Post by Valuethinker »

TedSwippet wrote: Thu Apr 15, 2021 2:51 am Welcome.
westcoastcammee wrote: Wed Apr 14, 2021 6:29 pm I am aware of the US domiciled estate issues. Where I am confused is when it comes to my position with tax drag. Generally speaking my Canadian income tax bracket would be 15%. Am I doing myself a disservice by holding US-domiciled funds, being in a low tax bracket? Would switching to the Irish domiciled equivalent be more beneficial to my situation?
On this point, and on the information given, I think you're probably fine with US domiciled.

Assuming Canada allows you credit for the full 15% US tax paid, your tax drag is about as low as you can get it. Moving to Ireland domiciled could well move the US tax to a point where you can no longer get a credit for it; no idea specifically on Canada, but that's how things seem to work for most countries in general. (Also, Canada might I suppose have some analogue to the US's horrible PFIC funds tax rule that could apply to Ireland domiciled but unlikely for US domiciled, given the physical proximity -- folks on the Canadian forum will know more about that.)

On US estate tax, you should be fine also. Both Australia and Canada have usable US estate tax treaties that should protect you, either fully or at least up to around USD 11mm.
AFAIK there are no Canadian tax issues with US domiciled funds or ETFs *except* dividend tax recapture. I really don't know re Irish or other domiciles.

I don't understand quite how this works, but I think dividends on US ETFs, if held in an RRSP (our version of Australian Super or British SIPP - you can have personal RRSPs and employer ones, but the same total limits on annual contributions apply) get an advantageous treatment.

If OP has any intention of staying long term in Canada then RRSPs and ?TFSAs? are the way to go. However the latter is equivalent to our ISAs and will not be covered (usually) by tax treaties - if you leave Canada, you probably have to just fold them. With RRSPs you can do that, but from memory will pay 25% tax when you do. If you move to California, say, from Canada, then RRSPs have no protection in their tax law, so you might as well collapse them and start again.

I am surprised OP's tax rate is as low as 15%? I am way out of date but with provincial tax as well (calculated on the same basis, unless you live in Quebec I think - i.e. calc as %age of Federal Tax owing) then rates were a lot higher than that. Even on investment income.

https://www.taxtips.ca/taxrates/bc.htm suggests that 15.5% is a combined Federal & Provincial tax rate on capital gains (depending on total income).
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andrew99999
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Re: Australian living in Canada

Post by andrew99999 »

If you are unsure where you will be retiring, I'd probably stick with global cap-weighted equities.

12.5% VAS (Australian equities) is neither good nor bad IMO, and you could include or leave it out, and it isn't likely to make a huge difference. You don't get franking credits, so there is a little bit of downside in that regard, but at 12.5%, not much of a problem. Whatever you do, try and find an allocation you will keep indefinitely.

On the Canadian tax side, no idea.

If you go back to Australia, what happens with embedded capital gains you owe to the Canadian tax office? If you have to pay it out (which you want to do if the situation was reversed and you were leaving Australia), you might choose what is easiest for your Canadian tax reporting now and sell and re-buy if you return to Australia. When you rebuy, I would stick with Australian domiciled funds:
• VGS — developed LC/MC
• VISM — developed SC (optional)
• VGE — em
Topic Author
westcoastcammee
Posts: 2
Joined: Wed Apr 14, 2021 5:17 pm

Re: Australian living in Canada

Post by westcoastcammee »

Valuethinker wrote: Thu Apr 15, 2021 12:40 am Clearly you moved to Canada for the weather? ;-).
And the women ;)
Valuethinker wrote: Thu Apr 15, 2021 12:43 am
Andrew9999 will hopefully come along this AM and tell us.

The main reason to hold an overweight in Australian stocks, is, to my mind, the franking of dividends. Since you are AU non resident, I see no reason to overweigth that small market? (Like the Canadian market, heavily overweight in banks and natural resource companies).

I am afraid I don't keep ticker codes in my head, so without the fund names I can't make any comment on asset allocation.
Sorry, I should've given more detail.

VTS = Vanguard Total US (S&P 500)
VEU = Vanguard All World Ex-US
VAS = Vanguard ASX (S&P 300)
Valuethinker wrote: Thu Apr 15, 2021 4:52 am
AFAIK there are no Canadian tax issues with US domiciled funds or ETFs *except* dividend tax recapture. I really don't know re Irish or other domiciles.

I don't understand quite how this works, but I think dividends on US ETFs, if held in an RRSP (our version of Australian Super or British SIPP - you can have personal RRSPs and employer ones, but the same total limits on annual contributions apply) get an advantageous treatment.

If OP has any intention of staying long term in Canada then RRSPs and ?TFSAs? are the way to go. However the latter is equivalent to our ISAs and will not be covered (usually) by tax treaties - if you leave Canada, you probably have to just fold them. With RRSPs you can do that, but from memory will pay 25% tax when you do. If you move to California, say, from Canada, then RRSPs have no protection in their tax law, so you might as well collapse them and start again.

I am surprised OP's tax rate is as low as 15%? I am way out of date but with provincial tax as well (calculated on the same basis, unless you live in Quebec I think - i.e. calc as %age of Federal Tax owing) then rates were a lot higher than that. Even on investment income.

https://www.taxtips.ca/taxrates/bc.htm suggests that 15.5% is a combined Federal & Provincial tax rate on capital gains (depending on total income).
Living in BC would my lowest combined tax bracket be 15% (federal) + 5.06% (BC) = 20.06% ?

I've already shifted some savings over to a TFSA with intentions of a more aggressive, riskier, strategy in order to try grow a deposit to buy a house here. One of the only progressive finance vehicles I've found in an otherwise archaic Canadian banking system!

For now though, my concern lies with over complicating my situation with AUD investing, by holding US domiciled funds, whilst being a Canadian tax resident. I'm thinking to smooth the situation out it may just be easier to reconfigure my portfolio out to hold only Australian domiciled funds, like the ones andrew99999 suggested ? VGS could be a satisfactory substitute for VTS, even with higher MER?

That way the tax implications would only lie between Canada and Australia. For the sake of MER, leaving out the US would make things more straight forward?
Valuethinker
Posts: 48944
Joined: Fri May 11, 2007 11:07 am

Re: Australian living in Canada

Post by Valuethinker »

westcoastcammee wrote: Thu Apr 15, 2021 12:10 pm
Valuethinker wrote: Thu Apr 15, 2021 12:40 am Clearly you moved to Canada for the weather? ;-).
And the women ;)
And the skiing. Western Canada undoubtedly has better skiing than, probably, even New Zealand?
Valuethinker wrote: Thu Apr 15, 2021 12:43 am
Andrew9999 will hopefully come along this AM and tell us.

The main reason to hold an overweight in Australian stocks, is, to my mind, the franking of dividends. Since you are AU non resident, I see no reason to overweigth that small market? (Like the Canadian market, heavily overweight in banks and natural resource companies).

I am afraid I don't keep ticker codes in my head, so without the fund names I can't make any comment on asset allocation.
Sorry, I should've given more detail.

VTS = Vanguard Total US (S&P 500)
VEU = Vanguard All World Ex-US
VAS = Vanguard ASX (S&P 300)
Thank you. Not singling you out, but the tendency of posters here to use ticker codes is one of my pet peeves. I don't know what the tickers are for the (Irish domiciled) funds which I hold.

Basically you have a world market, and the US is about 55-60% of that (depends how you treat emerging markets). So there's your target weighting.

The one thing about the EM index is it has a heavy China weighting, and Australia's own economy and financial markets are quite linked to China. So whether one needs to hold EM + Australia I don't know -- I suspect in fact the Australian stock market has a higher correlation with developed country indices *but* the Australian housing market has a higher correlation with Chinese GDP.

There are dividend franking reasons to hold Australian shares. I wouldn't hold more than 20% of my portfolio in Australian shares (and in truth, less than that). As I am not Australian, I don't really have a handle on this issue but I don't think it can overturn the fact that 80% of Australian market is banks + natural resource companies? In the same way as Canada.

I am surprised OP's tax rate is as low as 15%? I am way out of date but with provincial tax as well (calculated on the same basis, unless you live in Quebec I think - i.e. calc as %age of Federal Tax owing) then rates were a lot higher than that. Even on investment income.

https://www.taxtips.ca/taxrates/bc.htm suggests that 15.5% is a combined Federal & Provincial tax rate on capital gains (depending on total income).
Living in BC would my lowest combined tax bracket be 15% (federal) + 5.06% (BC) = 20.06% ?[/quote]

It's been so long since I did a Canadian tax return that you may well be right. Capital gains tax rates used to be higher than that.
I've already shifted some savings over to a TFSA with intentions of a more aggressive, riskier, strategy in order to try grow a deposit to buy a house here. One of the only progressive finance vehicles I've found in an otherwise archaic Canadian banking system!
The big problem is the expense ratios and mutual fund loads (still). You can get around that with ETFs, also TD Greenline had relatively simple set of mutual funds (but there may now be others).

If you are planning to buy a house in Canada and you invest in equities to build up the deposit, just be aware of the risk it can go the other way. Typical bear market in equities is around -30-35% (stock market 2000-03) but you also get -30% months (March 2020) and -50% bear markets (2008-09). The belief that Central Banks can and will always stop a bear market is one I remember from 1999, and it is not necessarily true.

What I considered to be crazy valuation bubbles in Greater Toronto Area and Greater Vancouver Area (and I have been saying this for at least 10 years) and in particular in condo construction, has now apparently spread across Canada to other smaller cities. This now looks worse than the US did at 2006 in peak of its housing boom. This will not end well for Canadians.

If you look at the rental yields on Vancouver condos = cap rate = net operating income/ value, I believe they are less than 2%? This really is a very inflated market. At a cap rate of 1.5% your landlord is basically subsidising you living there (in the long run) and will probably be cash flow negative on the property (so betting entirely on capital appreciation to make a profit - the definition of a speculative market, in fact).

I read one blog poster who estimated that a new condo in Toronto (and in Vancouver) is cash flow negative month on month for the 80% leveraged investor. And people are buying with 100% leverage (theoretically illegal but I can think of a number of ways speculators get round this).
For now though, my concern lies with over complicating my situation with AUD investing, by holding US domiciled funds, whilst being a Canadian tax resident. I'm thinking to smooth the situation out it may just be easier to reconfigure my portfolio out to hold only Australian domiciled funds, like the ones andrew99999 suggested ? VGS could be a satisfactory substitute for VTS, even with higher MER?

That way the tax implications would only lie between Canada and Australia. For the sake of MER, leaving out the US would make things more straight forward?
Your only real problem with US funds, as long as you are not a US resident, Green Card holder or citizen of USA, is there may be dividends paid with tax withheld, that you cannot get back (it depends on the tax treaty between the country where you are resident, and the USA).

You don't owe any personal tax to USA unless you are resident there or a US citizen.

Your other problem is US estate taxes, as Ted Swippet points out, resident in Australia or Canada the minimums are in the millions. So not a worry.

Then it comes down to your portfolios. You will be liable for Canadian tax on that while you are resident in Canada.

I don't know what the rules are for Canadian residents re offshore funds, eg Australian. They could be pretty awful. Hopefully though your Super doesn't count, as a pension - there's often mutual recognition of pensions in the tax treaties. I am pretty sure that Canadians holding US domiciled ETFs and funds don't encounter too many problems *except* those funds won't provide you with the nice tax slips (T4s? or T5s?) that Canadian funds do (you owe tax on the interest, capital gains and dividends in the funds, even if they don't pay those out to shareholders).

Canadian Financial Wisdom Forum here is a good place to ask.

Your other Australian investments you could sell, and move the cash to Canada and invest through your Canadian accounts? You would then get the same exposures.

I would recommend world weighting on equities, although you have to make a call on Emerging Markets (depending on which source, around 15% of total global equities, but could be up to 20%).
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Re: Australian living in Canada

Post by Peculiar_Investor »

Valuethinker wrote: Fri Apr 16, 2021 4:48 am Canadian Financial Wisdom Forum here is a good place to ask.
The OP has followed that recommendation, Australian expat living in Canada - Financial Wisdom Forum.

Disclosure: I'm a member of both the Bogleheads and Financial Wisdom Forum (FWF).
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