Q: I am a Canadian citizen. I live in the USA with a permanent residency card. I have come into an inheritance from my Canadian father. I want to leave my money in Canada as the Canadian dollar is so low now.
Can I open an RRSP in Canada and invest the money there? Can I invest the Canadian dollars in an ETF from the U.S.?
The purpose is to try to grow my money while I am waiting to transfer it to the U.S. I have no time limit on this.
A: First, a little background on inheritances. They’re received tax-free in Canada – at least kind of tax-free. The estate of the deceased pays income tax and potentially probate fees on their assets before there is a distribution to their beneficiaries. So the beneficiaries get the money after any associated tax has been paid.
The U.S. also has income tax and estate taxes that may apply when someone dies. These taxes are also paid by the deceased, if applicable, not the recipient. So unless your father was a U.S. citizen or owned U.S. assets, Margaret, he would not have had any U.S. income or estate tax payable on his death. And as beneficiary, these taxes aren’t applicable to you on the inheritance either.
Your concern about the low Canadian dollar is a valid one. It’s trading at the low end of the range it’s been in over the past 10 years, although it’s around the mid-point of where it’s traded over the past 50 years.
I hear from a lot of people that they are reluctant to exchange currency from Canadian to U.S. dollars right now. Many seem convinced that the Canadian dollar will move higher. It may, Margaret. Or it may not.
Prices – whether currencies, stocks, commodities, etc. – trade at the value established by all of the buyers and sellers in the market. If everyone universally thought the Canadian dollar would go up, everyone would buy Canadian dollars now so they could make a profit and that universal optimism would push the Canadian dollar higher. At any given time, one could argue that half the market thinks the Canadian dollar is overpriced and half thinks it’s underpriced.
Regardless, if you are in the underpriced camp and want to keep your money in Canadian dollars, Margaret, there are a few ways you can do it.
You can literally keep the money in Canada and invest it here. There may be limitations on how you can invest given you are a U.S. resident, as most investment advisors, many financial institutions and some investment products are not options for U.S. residents.
You will need to find a U.S.-licensed investment advisor or open a self-directed account where you can buy GICs, stocks, bonds or exchange-traded funds (ETFs). Keep in mind that holding foreign investments, particularly ETFs, may create some tax-reporting complexities for U.S. taxpayers.
You may be able to move the money down to the U.S. and keep the money in Canadian dollars – literally or effectively.
The money could literally stay in Canadian dollars if you have a U.S. account that allows you to hold Canadian dollars or buy Canadian stocks, bonds or ETFs. Canadian mutual funds won’t be an option in the U.S. And not all U.S. financial institutions allow you to hold Canadian investments.
You could also convert the money into U.S. dollars and use some or all of it to buy U.S.-dollar denominated investments that represent Canadian dollar-denominated assets, Margaret.
As an example, you could buy one of the hundreds of Canadian stocks listed on U.S. exchanges like the New York Stock Exchange (NYSE) or Nasdaq. Or you could buy a U.S.-listed ETF that tracks Canadian stock exchanges or indices.
Even though these investments are denominated in U.S. dollars, they’re technically Canadian dollar investments. That’s because if you own Royal Bank shares on the NYSE and the Canadian dollar rises 5% against the U.S. dollar, your RBC shares will also rise 5% in value since this Canadian dollar asset is suddenly worth 5% more in U.S. dollar terms.
Another indirect option is to convert the money into U.S. dollars and maintain an overweight exposure to the energy sector, given how closely the Canadian dollar tracks the price of oil.
You asked about investing in a Registered Retirement Savings Plan (RRSP). You may or may not have existing RRSP room from your time in Canada, but it may not be beneficial to contribute anyway. Even if you do have RRSP room, you won’t get an RRSP deduction against your U.S. income. Furthermore, when you take a withdrawal, you’ll have withholding tax in Canada and income tax consequences in the U.S. as well. On that basis, I would suggest an RRSP isn’t a good option, Margaret.
Tax-Free Savings Accounts (TFSAs) aren’t an option for a U.S. resident either. Non-residents are subject to a CRA penalty tax if they contribute to the account. And your TFSA may not be tax-free in the U.S. either.
On that basis, Margaret, I think you start by determining whether you want to limit yourself to keeping your money in Canadian dollars or even in Canada. You can still technically keep your Canadian dollars, while investing in the U.S., in a variety of ways. But I might be more inclined to invest more holistically anyway. Start by asking yourself – if you had inherited this money in U.S. dollars, would you have converted it all into Canadian dollars and invested it all in Canada? I’ll wager the answer is ‘probably not.’
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.