Canadian ex-pat living in Panama seeking advice for Interactive Brokers

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ushermocha
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Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by ushermocha »

I'm a Canadian citizen living in Panama about six years and in the Bahamas for thirteen years before that. (My family moved because a job opportunity came up for my wife, not specifically for any tax or lifestyle reasons.) I've read quite a bit of the non-US information on the site but I'm still having trouble connecting a few of the dots.

I have a relatively recent account with Interactive Brokers (two years old). It's a joint personal account with my wife. I don't manage it too actively, it's balanced between BND, BNDX, IVV, VNQ, VTI, and VXUS. I have some VBAL.TO in Panama that I'm likely going to transfer shortly as it looks less and less likely we'll retire in Canada.

There are three main questions I've tried to get answers on but the answers have all been either too complicated for me or just plain not forthcoming:

1) What happens to the account in the event that either my wife or I die?
2) What happens to the account in the event that both my wife and I die?
3) What are the tax implications of the stocks/ETFs I buy with Interactive Brokers

Here's what I think are the answers based on what I've learned so far:

1) It automatically transfers over to the other person; there's no real risk here
2) It's subject to estate tax in the US which means we are taxed based on the value of the entire portfolio, not just the capital gain. But I'm not sure what triggers this process or what instructions we'd have to put in place in our respective wills.
3) Stocks/ETFs that are US-domiciled are subject to income tax on dividends, which Interactive Brokers automatically deducts when they are paid

Assuming all that is true, I'm not 100% sure what to do about numbers 2 and 3. Someone suggested setting up a trust in the US to deal with the inheritance of the account in the event both my wife and I die. Which I think means we set up the trust entity and then transfer ownership of the account to it? And then leave instructions on what to do if we both die? Something along the order of "cash everything in and distribute it among these people then dissolve the trust"?

For the non-domiciled ETFs/stocks, I haven't found anything on the site about specific ETFs to purchase. This page gives some sample portfolios but I'm not 100% sure if the funds indicated are US-domiciled or not and if they are, is there anything special I need to do to purchase them in Interactive Brokers. I ran through the Boglebot which gave me 60% VWRA for equity and 40% AGGU for bonds. But again, I'm not sure if these are US-domiciled and if not, what that means.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by brrio »

VWRA is domiciled in Ireland. It's listed on London Stock Exchange. When you open your IB account you can inform in their form that you want to trade in UK.

https://www.justetf.com/en/etf-profile. ... 00BK5BQT80
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galeno
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by galeno »

Assume Canadian citizen retired in Panama.

The US vs non-US domiciled investor considers 2 things:

1. L1/L2 Dividend withholding taxes.

2. Inheritance taxes.

I believe Canada has excellent tax treaties with the USA for both 1. and 2. above.

If I'm correct a Canadian should use USA- domiciled ETFs jist like an US investor.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by TedSwippet »

galeno wrote: Tue Jan 25, 2022 12:06 pm I believe Canada has excellent tax treaties with the USA for both 1. and 2. above.
Right.
galeno wrote: Tue Jan 25, 2022 12:06 pmIf I'm correct a Canadian should use USA- domiciled ETFs jist like an US investor.
However, no. Unlike other countries, the US and Canada have a single tax treaty that covers both income taxes and estate taxes. This treaty only applies to residents of Canada.

The topic author is resident in Panama, and so is presumably no longer a Canadian tax resident. This would make them ineligible for US/Canada treaty benefits. Panama has no US tax treaties. The topic author therefore needs to use non-US domiciled ETFs, and avoid US domiciled ones, for the same reasons as any other resident of a country without a US tax treaty.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by galeno »

@TedSwippet

I KNEW I was missing some f***ery. Thanks. OP needs to invest like us. We are Costa Ricans. I.e. no tax treaties with USA.

"The topic author is resident in Panama, and so is presumably no longer a Canadian tax resident. This would make them ineligible for US/Canada treaty benefits. Panama has no US tax treaties. The topic author therefore needs to use non-US domiciled ETFs, and avoid US domiciled ones, for the same reasons as any other resident of a country without a US tax treaty."
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by galeno »

@ushermocha

Before the Pandemic I'd frequently go to Nicaragua and Panama.

As soon as I get my CV19 booster and the Pandemic insanity subsides I'm going to start again.

Where do you live in Panama? Let's have a coffee one of these days soon.
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ushermocha
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by ushermocha »

Sorry for the vagueness. Yes, I'm a tax resident of Panama. Still working so I'm subject to Panama taxes, at least for income that's sourced in Panama. I'm going to read the guidance on Ireland-domiciled ETFs more closely but from the looks of it, buying something like VWRA means it goes through the London Stock Exchange. And dividends paid to me are subject to 0% income tax and dividends paid back to the fund are subject to 15% income tax. Which, if I'm reading the examples in that link correctly, is much better than a US-domiciled ones even if you factor in a higher total expense ratio. Is that accurate?

What about the estate taxes? If, for the sake of argument, my entire portfolio consists of VWRA, what are the taxes on this (if any) if both my wife and I die? Is it based on where I live (currently Panama), my nationality (Canadian), where the funds are domiciled (presumably Ireland), or where Interactive Brokers is based (not sure, US?)?
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by galeno »

As a Panamanian resident you will pay dividend withholding taxes = 12.4% on VWRA. IBKR automatically pays these. You recieve the net.

As long as you keep CASH < $60K in IBKR's MMF the only inheritance issues you'll have are the inheritance taxes in Panama.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by Peculiar_Investor »

Since the OP mentioned holding Balanced ETF Portfolio (VBAL) - en | Vanguard Canada it would seem you have the ability to purchase ETFs that trade on the Toronto Stock Exchange.

Have you looked at any of the other Vanguard Canada ETFs? Many are wrappers of the underlying US ETFs and theoretically shield you from US tax issues.

You could replace VTI with U.S. Total Market Index ETF (VUN) | Vanguard Canada for example.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by galeno »

Terrible idea. OP should stay away from Canada and the USA. OP is resident domiciled in Panama.

He will pay 12.4% in L1/L2 DWH and whatever inheritence taxes that Panama will impose on his estate.
Peculiar_Investor wrote: Wed Jan 26, 2022 10:03 am Has the OP looked at the Vanguard Canada ETFs? Many are wrappers of the underlying US ETFs and theoretically shield you from US tax issues.

You could replace VTI with U.S. Total Market Index ETF (VUN) | Vanguard Canada for example.
Last edited by galeno on Wed Jan 26, 2022 10:11 am, edited 1 time in total.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by Peculiar_Investor »

galeno wrote: Wed Jan 26, 2022 10:08 am Terrible idea. OP should stay away from Canada and the USA. OP is resident domiciled in Panama.
Understood but a previous post indicated they've bought holdings on the Toronto Stock Exchange. If that's a still an option why not use it rather than using Ireland domiciled ETFs versus Canadian domiciled ETFs?
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by galeno »

Because, IIRC, Canada has lots and lots of taxes? Panama has very low taxes.
Peculiar_Investor wrote: Wed Jan 26, 2022 10:10 am
galeno wrote: Wed Jan 26, 2022 10:08 am Terrible idea. OP should stay away from Canada and the USA. OP is resident domiciled in Panama.
Understood but a previous post indicated they've bought holdings on the Toronto Stock Exchange. If that's a still an option why not use it rather than using Ireland domiciled ETFs versus Canadian domiciled ETFs?
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ushermocha
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by ushermocha »

@Peculiar_Investor That's something to consider though we'll likely stick with Ireland-domiciled ETFs. I purchased VBAL through our Panamanian bank right at the beginning of the pandemic when we had a lump sum and I wanted to take advantage of the low prices. That was before we set up the Interactive Brokers account and I wanted to invest in something and this was easiest. But it's expensive to do that through the Panamanian bank and (I think) not as tax friendly as the Ireland-domiciled ETFs.

@galeno I'm close to Panama City. Reach out next time you're in town.

Thanks all for the advice. I admit the estate tax part was the most troubling for me so I'm glad I have a clearer path forward. I'll start migrating everything toward VWRA and AGGU.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by TedSwippet »

Peculiar_Investor wrote: Wed Jan 26, 2022 10:10 am
galeno wrote: Wed Jan 26, 2022 10:08 am Terrible idea. OP should stay away from Canada and the USA. OP is resident domiciled in Panama.
Understood but a previous post indicated they've bought holdings on the Toronto Stock Exchange. If that's a still an option why not use it rather than using Ireland domiciled ETFs versus Canadian domiciled ETFs?
Turning the question on its head though ... why might VUN (MER 0.16%, traded in Toronto in CAD) be better than VUSD (TER 0.07%, traded in London in USD)?

Would Canada's 25% dividend withholding tax for dividends paid to non-Canadian residents apply? If yes, that would make them considerably worse than Ireland domiciled ETFs. Otherwise, for non-Canadian residents, Canadian domiciled funds and ETFs just look like they are a bit more expensive and more hassle than the more commonly used Ireland domiciled ones.

Otherwise, if there is a plan to return to Canada while retaining these ETF holdings, that might I suppose be one reason. Does Canada have any analogue to the US's appalling PFIC tax rules?
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by gougou »

If you have a large portfolio and you are worried about US estate tax, maybe you should consider creating a Panamanian holding company or an offshore company in a tax haven and hold stocks through that company? In case you both die, the company will be passed to your heirs, without triggering any US estate tax even if you were holding cash/US stocks.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by galeno »

IBKR will NOT open a corporate account for ANY Latin American IBC (i.e. "SA"). New rule from 2 years ago.
gougou wrote: Wed Jan 26, 2022 12:33 pm If you have a large portfolio and you are worried about US estate tax, maybe you should consider creating a Panamanian holding company or an offshore company in a tax haven and hold stocks through that company? In case you both die, the company will be passed to your heirs, without triggering any US estate tax even if you were holding cash/US stocks.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by galeno »

IBKR will NOT open a corporate account for ANY Latin American IBC (i.e. "SA"). New rule from 2 years ago.

Current LATAM corporate accounts may SELL but may not BUY.
gougou wrote: Wed Jan 26, 2022 12:33 pm If you have a large portfolio and you are worried about US estate tax, maybe you should consider creating a Panamanian holding company or an offshore company in a tax haven and hold stocks through that company? In case you both die, the company will be passed to your heirs, without triggering any US estate tax even if you were holding cash/US stocks.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by gougou »

galeno wrote: Wed Jan 26, 2022 2:33 pm IBKR will NOT open a corporate account for ANY Latin American IBC (i.e. "SA"). New rule from 2 years ago.

Current LATAM corporate accounts may SELL but may not BUY.
gougou wrote: Wed Jan 26, 2022 12:33 pm If you have a large portfolio and you are worried about US estate tax, maybe you should consider creating a Panamanian holding company or an offshore company in a tax haven and hold stocks through that company? In case you both die, the company will be passed to your heirs, without triggering any US estate tax even if you were holding cash/US stocks.
Can you provide a link for this new rule or some online discussions about this rule? It seems strange to me that IBKR would open individual accounts for Panamanian persons but not corporations.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by galeno »

I discussed this problem 1.5 years ago.

https://bogleheads.org/forum/viewtopic. ... Bvi+panama

"Can you provide a link for this new rule or some online discussions about this rule? It seems strange to me that IBKR would open individual accounts for Panamanian persons but not corporations."
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by gougou »

galeno wrote: Wed Jan 26, 2022 3:17 pm I discussed this problem 1.5 years ago.

https://bogleheads.org/forum/viewtopic. ... Bvi+panama

"Can you provide a link for this new rule or some online discussions about this rule? It seems strange to me that IBKR would open individual accounts for Panamanian persons but not corporations."
Thanks. That’s a good read. So it looks like my recommendation is still valid. OP could create a Panamanian corporation to hold stocks (just not through IBKR but OP can use other brokers such as Schwab or Fidelity). Or, OP could create a BVI/Cayman corporation to hold stocks and still use IBKR.

This will help OP completely avoid US estate tax, but there is complexity and there will be annual costs to maintain the corporation. So OP will have to weigh whether this is worth it.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by galeno »

@gougou

The IBC will help avoid the estate tax problem. It does NOTHING for the USA domiciled L1/L2 DWT when one uses USA domiciled ETFs. VT vs VWRA.

VT: ER = 0.08%. Div Yield = 1.91%. 60% USA + 30% non-USA developed + 10% EM

1.91 x 0.3 = 0.5730 (L1/L2 DWT USA)
0.3 x 1.91 x 0.10 = 0.0573 (L1 DWT non- USA developed)
0.1 x 1.91 × 0.11 = 0.0210 (L1 DWT EM)
Total = 0.6513.

L1/L2 DWT = 0.6513/1.91 = 34.1%.


VWRA: ER = 0.22%. Div Yield = 1.95%. 60% USA + 30% non-USA developed + 10% EM

L1/L2 DWT = 12.9%.

We pay around $1,250 / yr to maintain the IBC.
Last edited by galeno on Wed Jan 26, 2022 5:59 pm, edited 1 time in total.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by gougou »

galeno wrote: Wed Jan 26, 2022 5:36 pm @gougou

The IBC will help avoid the estate tax problem. It does NOTHING for the USA domiciled L1/L2 DWT when one uses USA domiciled ETFs. VT vs VWRA.

VT: ER = 0.08%. Div Yield = 1.91%. 60% USA + 30% non-UDA developed + 10% EM

1.91 x 0.3 = 0.5730 (L1/L2 DWT USA)
0.3 x 1.91 x 0.10 = 0.0573 (L1 DWT non- USA developed)
0.1 x 1.91 × 0.11 = 0.0210 (L1 DWT EM)
Total = 0.6513.

L1/L2 DWT = 0.6513/1.91 = 34.1%.


VWRA: ER = 0.22%. Div Yield = 1.95%. 60% USA + 30% non-USA developed + 10% EM

L1/L2 DWT = 12.9%.

I believe we pay around $1,250 every one, two, or 3 years to maintain the IBC. My wife pays all the bills. So I know the approximate amount but not the frequency.
You could use index futures such as MES (SP500) or index options such as SPX to replicate the performance of the indexes without paying any withholding taxes.

You could also sell SPY before ex-dividend date and immediately buy VOO, and sell VOO before ex-dividend and immediately buy SPY. As long as you never hold it on ex-dividend date you don’t pay any withholding taxes.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by galeno »

@gouguo

Trading options is expensive. The other way is too busy. I'm a very lazy Boglehead. The L1/L2 DWT on our 50% VWRD + 45% AGGG + 5% CASH port = 6.5%.

"You could use index futures such as MES (SP500) or index options such as SPX to replicate the performance of the indexes without paying any withholding taxes.

You could also sell SPY before ex-dividend date and immediately buy VOO, and sell VOO before ex-dividend and immediately buy SPY. As long as you never hold it on ex-dividend date you don’t pay any withholding taxes."
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by gougou »

galeno wrote: Wed Jan 26, 2022 6:14 pm @gouguo

Trading options is expensive. The other way is too busy. I'm a very lazy Boglehead. The L1/L2 DWT on our 50% VWRD + 45% AGGG + 5% CASH port = 6.5%.

"You could use index futures such as MES (SP500) or index options such as SPX to replicate the performance of the indexes without paying any withholding taxes.

You could also sell SPY before ex-dividend date and immediately buy VOO, and sell VOO before ex-dividend and immediately buy SPY. As long as you never hold it on ex-dividend date you don’t pay any withholding taxes."
Sure, but OP might be OK with making a few trades per year to completely avoid dividend withholding taxes, and with an offshore corporation to completely avoid estate taxes on US stocks and US-domiciled ETFs. OP is asking for advice on exactly this topic.

And the index options such as SPX and index futures such as MES are extremely liquid and not expensive to trade. But they are somewhat complicated to understand.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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ushermocha
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by ushermocha »

If I'm understanding correctly, as long as the cash portion of our portfolio in IBKR is less than $60k, I don't need to worry about estate taxes, even if the account is a joint personal one. Is that correct? I.e. there are no estate taxes on the ETF portion of the portfolio.
galeno wrote: Wed Jan 26, 2022 9:54 am As long as you keep CASH < $60K in IBKR's MMF the only inheritance issues you'll have are the inheritance taxes in Panama.
On the other hand, setting up an IBC is another option to do the same thing in which case I can set up an inheritance plan for it and potentially avoid a bunch of legal issues. Though it sounds like IBKR won't let me use one based in Panama.

With respect to the IBC, how does that affect the dividends? I'm assuming I could still buy VWRA on IBKR with the IBC as the account holder and pay the corresponding taxes like I would now as a non-US/non-EU resident?
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by galeno »

@ushermocha

Correct. A joint account holding less than $60K in IBKR's MMF (considered a USA-domiciled asset) you solved the DWT and US inheritance problems.

If you want to form an IBC and open a corporate account at IBKR you should call them and ask which countries' IBCs are acceptable.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by gougou »

ushermocha wrote: Thu Jan 27, 2022 8:14 am If I'm understanding correctly, as long as the cash portion of our portfolio in IBKR is less than $60k, I don't need to worry about estate taxes, even if the account is a joint personal one. Is that correct? I.e. there are no estate taxes on the ETF portion of the portfolio.
galeno wrote: Wed Jan 26, 2022 9:54 am As long as you keep CASH < $60K in IBKR's MMF the only inheritance issues you'll have are the inheritance taxes in Panama.
US stocks and ETFs are also subject to the estate tax. So you need to avoid all US-domiciled stocks and ETFs such as VNQ and VTI if you are using a US-based broker such as IBKR.

The benefit of an IBC is to act as an estate tax blocker, which allows you to hold cash or any stocks without worrying about estate taxes.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by ushermocha »

The benefit of an IBC is to act as an estate tax blocker, which allows you to hold cash or any stocks without worrying about estate taxes.
Right that makes sense since the entity would continue to exist regardless of the status of my and my wife's earthly existence. If I don't use an IBC then I have to avoid US-domiciled ETFs.

Assuming @galeno's post from 1.5 years ago is still true, it sounds like a Panamian-based IBC won't do me much good anyway. I did have one based in the Bahamas that I let lapse a couple or three years ago. It's possible I could resurrect that if I pay the outstanding fees on it. I'm not super keen on the prospect of shelling out three years of management fees (roughly $4000, I believe) and then going through the process of setting up a new IBKR account in the IBC's name (assuming they'll allow it) and then setting up an inheritance/succession plan for it, which I didn't do before because it had no assets. I don't suppose someone knows a rough break-even point for one's portfolio value where the benefits of purchasing US-domiciled ETFs outweighs the ongoing maintenance of the IBC?
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by galeno »

My post is still true. I just tried to buy 10 shares of AGGG. Our corporate IBKR account refused the transaction.
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by gougou »

ushermocha wrote: Sun Jan 30, 2022 9:46 pm
The benefit of an IBC is to act as an estate tax blocker, which allows you to hold cash or any stocks without worrying about estate taxes.
Right that makes sense since the entity would continue to exist regardless of the status of my and my wife's earthly existence. If I don't use an IBC then I have to avoid US-domiciled ETFs.

Assuming @galeno's post from 1.5 years ago is still true, it sounds like a Panamian-based IBC won't do me much good anyway. I did have one based in the Bahamas that I let lapse a couple or three years ago. It's possible I could resurrect that if I pay the outstanding fees on it. I'm not super keen on the prospect of shelling out three years of management fees (roughly $4000, I believe) and then going through the process of setting up a new IBKR account in the IBC's name (assuming they'll allow it) and then setting up an inheritance/succession plan for it, which I didn't do before because it had no assets. I don't suppose someone knows a rough break-even point for one's portfolio value where the benefits of purchasing US-domiciled ETFs outweighs the ongoing maintenance of the IBC?
The IBC is still subject to 30% dividend withholding tax. So there isn’t much benefit unless you want to actively swap your ETFs to avoid the withholding tax.

US ETFs such as SPY and VOO are extremely liquid, so you can sell any ETF right before ex-dividend date and buy a similar ETF and earn the total return without paying dividend withholding tax. Transaction costs should be almost negligible and fully offset by the lower expense ratio of US ETFs.

The savings over an Irish ETF is 15% of the dividend, which is about 0.2%/yr on SPY. So if you have $1M you save about $2k/yr. If you are OK with making those trades every year and the saving is bigger than your IBC maintenance expenses then you should get it set up.

This strategy is best suited for holding some high dividend US ETFs/stocks. SPY pays very little dividend so you need a very large account for it to make sense.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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ushermocha
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Re: Canadian ex-pat living in Panama seeking advice for Interactive Brokers

Post by ushermocha »

I think I'll stick with the Irish-based ETFs for now. With the volume I'm talking, having to pay about $4k to resurrect the IBC, having to set up another IBKR account, and remembering to make the required trades each year, it isn't exactly what I had in mind as a lazy investor. Especially for a 0.2% difference. The approach I take is that if I'm getting the return I want and the effort is low, I'm okay with being 80% optimal instead of 90%.

That said, this whole conversation has really eased my mind about the options available and the risks involved. A thousand thanks to everyone for their input. I've taken copious notes from it so I can review them in the future.
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