Get better returns in USD

Michael Zienchuk, MBA, CIM
Manager, Wealth Strategies Group

The weakness of the Canadian dollar (CAD) relative to the U.S. dollar (USD) continues. Over the past 12 months, CAD depreciated from 98 U.S. cents to 90 U.S. cents. A few factors can be linked to this CAD weakness, including a weaker Canadian economy relative to the U.S. economy, but also weakening commodity prices, including oil prices, gold and some other metals. CAD weakness may continue, as leading domestic economists expect that the Canadian dollar may depreciate to as low as 87 U.S. cents in 2015.

This situation is interesting for those Canadians holding USD funds, be it for travel or investment purposes. Recently, I have been receiving calls from our members and clients with questions concerning different options for investing in USD denominated assets, while still holding them in Canada.

The main concern of investors is that USD-denominated accounts provide a paltry return of just 0.25% annually. Despite the fact that over the past year, one would have already made 10% from the USD appreciation relative to CAD, it is a fair question to ask, can one make more on USD holdings? This question is especially fair now when further upside for the USD:CAD exchange rate may be more limited. 

To get a higher return on USD assets in Canada, an investor is faced with more limited options than with CAD assets. First off, one must consider the type of account one should hold USD assets in – it is not advisable to hold USD-denominated assets in a TFSA or RESP account, as this type of account is not covered in the Canada-U.S. Income Tax Treaty. Best to hold such assets in an RRSP (no tax issues) or a non-registered account, where half the applicable U.S. withholding tax of 30% can be claimed on Canadian income tax returns, lowering the effective withholding tax to 15%.

Dividends on U.S. stocks held in an RRSP will not be taxed because RRSPs are viewed by the American IRS as a pension savings account. This is not the case for TFSA and RESP accounts, which are subject to withholding tax. Given that TFSAs aren’t taxable in Canada, you cannot claim withholding tax as a credit, thus you would simply lose that part of your investment.

If you hold U.S. stocks in non-registered accounts, you get a credit for the amount of the withholding tax which you can use against Canadian income taxes. So if your Canadian tax rate is 15%+, you will not pay the withholding tax. You should also be aware that if you hold U.S. stocks in a non-registered account with a cost of more than $100,000, you need to disclose this on your tax return.

Therefore, it is advisable to hold your U.S. stocks in your RRSP or non-registered accounts. However, the best way to avoid any issues with holding U.S. equities is to own Canadian mutual funds focused on U.S. stocks and denominated in USD. This way, you will effectively own Canadian listed USD assets which are treated similar to other Canadian listed securities.

Some Canadian mutual funds, which focus on American stocks, performed quite well in 2013. Their owners benefited twice (in Canadian dollar terms) – first from capital appreciation of the securities themselves, and; second from the appreciation of the USD relative to the CAD. That said, performance in 2014 is more muted. In the table, we provide the returns (in CAD) for five mutual funds which had the best results in this category in 2013.

U.S.-focused Equity Mutual Fund Returns, as at August 31, 2014

	2014 (YTD)	2013	2012	1 Yr	3 Yrs	5 Yrs	10 Yrs
Fidelity Small Cap America Sr B	5.4%	54.2%	19.9%	25.1%	29.3%	21.5%	9.0%
Dynamic Power American Growth	6.0%	48.6%	0.7%	22.9%	18.3%	22.5%	10.6%
RBC O'Shaughnessy US Value Sr A	10.7%	47.5%	12.4%	21.4%	25.2%	19.1%	6.7%
AGF American Growth Class	5.9%	45.4%	12.3%	28.7%	20.3%	15.1%	5.6%
CI Cambridge American Equity Class A	8.4%	44.6%	9.4%	26.7%	18.5%	12.3%	3.4%

Michael Zienchuk, MBA, CIM
Investment Advisor, Credential Securities Inc.
Manager, Wealth Strategies Group
Ukrainian Credit Union
416-763-5575 x204
mzienchuk@ukrainiancu.com

Mutual funds and other securities are offered through Credential Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit values and reinvestment of all distributions for the period ended, August 31st, and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Unless otherwise stated, mutual funds and other securities are not insured nor guaranteed, their values change frequently, and past performance may not be repeated. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any mutual funds and other securities. The views expressed are those of the author and not necessarily those of Credential Securities Inc.®. Credential is a registered mark owned by Credential Financial Inc. and is used under licence. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.