Comments on: Reader Query on Currency Risk in International Equities

By: Sheila B.

Sheila B. — Mon, 27 Oct 2008 23:31:08 +0000

Isn’t it a good time now to purchase Japanese Yen with
CAD? Please someone advise. Thank you.

By: Reader Question on EEM versus CBQ

Reader Question on EEM versus CBQ — Wed, 14 May 2008 03:50:21 +0000

[...] should be protected if the foreign currency moves upward with the Canadian dollar as you mention in this post: “You can essentially ignore the CAD-USD fluctuation for broad international ETFs like [...]

By: Canadian Capitalist

Canadian Capitalist — Sat, 17 Nov 2007 18:58:22 +0000

Hi Sonja:

In general, it is better to hold foreign equities like VTI, VEA etc. in your RRSP because in a taxable account the dividend income will be taxable at your marginal rate, as it is not eligible for the dividend tax credit. Also, money contributed to the RRSP is not taxed, so I suspect that you’ll come out ahead over the long run when you buy foreign stocks within your RRSP. Still, it would be worthwhile to run some numbers to make sure that’s the case. I’ll add this to my list of future post ideas.

By: Sonja

Sonja — Fri, 16 Nov 2007 18:41:02 +0000

Hi there,
I’m just starting out in investing and your blog has been of great help to me
Forgive the newbie question, but would it be better to have index ETFs (like VTI and VEA) in RRSPs, or in a non-RRSP portfolio? I’m look at opening either a RRSP or non-RRSP Questrade account…

I know that stocks with lots of interest (and dividends when you’re in a high enough income bracket) should be in RRSPs because they’re taxed heavily. And stocks that will have capital gains should be outside RRSPs.
I plan to keep the ETFs for many years (I’m in my early 20s now).

My confusion comes from this:
Aren’t capital gains only realised when you sell? Would ETFs like VTI be counted as stock with potential capital gains or as a dividend fund (I noticed on money central that VTI *does* pay out dividends).

I’ve also read that foreign dividend funds should be in RRSPs because they don’t recieve the Canadian dividend break – does that count for ETFs like VTI?

I would prefer to leave it out of an RRSP to avoid the tax hit when I cash it in, and I don’t like the… confines of RRSPs.

thanks for any help!

By: Canadian Capitalist

Canadian Capitalist — Wed, 14 Nov 2007 15:14:01 +0000

CI: I’m totally unhedged and have a 50% allocation to foreign equities (US, EAFE and Emerging Markets) and the portfolio is feeling the pain of this rapid appreciation in the C$. However, I am not even contemplating changing horses now and think it’s best to stick to the original plan instead of performance chasing.

By: CanadianInvestor

CanadianInvestor — Wed, 14 Nov 2007 09:08:03 +0000

Thanks for the praise. These days the wild ups and downs of the Canadian $ and other currencies vs the US$ make it difficult to know where one will end up in net terms. A few days ago markets had a large drop but the C$ lost big too so I ended up a little ahead overall. Other days the market has risen but so has the loonie and I’ve lost ground. I am experiencing the noted “non-correlation” of currency and equity market returns, the diversification effect. I am worried that Peter Bernstein is correct when he says in his book Against the Gods (which I will be reviewing shortly on my blog) that “diversification is not a guarantee against loss, only against losing everything at once.”

By: Phil S

Phil S — Mon, 12 Nov 2007 12:37:33 +0000

I used to invest in a few Vanguard funds in my US brokerage account before I moved to an all-stock portfolio. The thing you need to check is whether the Vanguard fund that you selected is a hedged or un-hedged fund. They usually have two versions of every international fund they offer, one with a currency hedge, the other without. It sounds like you probably want the unhedged one to address your currency concerns.

By: Canadian Capitalist

Canadian Capitalist — Mon, 12 Nov 2007 01:27:27 +0000

tyler: You’re right. You simply convert any buy to Canadian dollars on the day you buy and convert any sell to Canadian dollars on the day you sell when reporting your taxes.

I’ve never done FX trading, so I don’t know if capital gains applies to FX trades. If there is a lot of FX transactions, I would think that they would need to be reported. Technically, if I convert $100 CAD into $100 US and sometime later convert the USD back to $110 CAD, I would think that I’d need to report a $10 gain somewhere in my taxes.

By: tyler

tyler — Mon, 12 Nov 2007 00:54:10 +0000

I’ve always wondered how do capital gains apply to equities bought in a foreign currency? For example, let’s say the exchange rate between CAD and USD. I take $100CAD, exchange it for $100USD, and buy some AMEX traded ETF for $100USD. One year later I sell it for $110USD but the exchange rate, let’s say, has fallen such that $110USD is only worth $100CAD. When you file your taxes can you just stipulate that your net CAD gain was zero?

Do capital gains apply to FX trades the same as they do to equities in general?