Foreign Content Investing - (Note, the rules have changed and you may now put all the foreign content you want into your rrsp. This page shows how we used to get around the rules and why you might want to.)
If you are like many people, you are looking forward to doing some traveling once you have retired. Retirement will be your chance to see what you have only been able to read about or visit in your dreams. Given that so many Canadians hope to travel once they've retired, it is curious that so few have invested outside of the country when planning for their retirement.
Most people understand that as the value of the Canadian dollar falls, so too does the spending power of Canadians traveling abroad. The same principle applies to your retirement fund. If you invest in the United States, at least part of your portfolio will keep pace with the American dollar, making it easier to finance a trip to Florida or Arizona.
The desire to see the world isn't the only good reason to invest abroad. Every good investment strategy should include an element of international diversification. Portfolios may vary, depending upon the investor's age, risk tolerance, and retirement goals. However, the principle remains the same: every portfolio needs a mix of different types of investments.
Investments need to be diversified geographically, as well as by industry and security type. Canadian stock markets represent only 3% of the world's market capitalization, which means there are many more investment opportunities beyond our borders. Notably, American and Japanese markets have outperformed Canadian markets during the last decade.
The Canadian government currently allows RRSP investors to invest up to30 percent of their portfolios abroad. While the percentage has changed over the years, the foreign content allowance has remained a long-standing feature of the RRSP program. Yet fewer than 30 percent of Canadians who have RRSPs hold any foreign content in their plans.
The foreign property limit is measured by the cost amount or book value of your foreign investments and not their current market value. Therefore, if your foreign investments outperform your Canadian investments, causing your foreign content to rise above 30 percent, you will not be penalized. Should you exceed your foreign property limit, however, your financial advisor can notify you and arrange to have any excess sold, and the cash transferred to the Canadian side of your RRSP.
A sound diversification strategy involves investing in markets around the globe. To do this properly, use the assistance of a financial advisor who can help you identify opportunities by region, industry, and investment vehicle. A good financial advisor is knowledgeable about world economies.
For most investors, mutual funds represent the easiest and most effective means of diversifying internationally. Mutual funds are a highly liquid form of investment that reports unit prices daily, unlike most foreign bonds and equities. Mutual funds also allow you the opportunity to increase your purchasing power, decrease your costs, and hire a professional portfolio manager to oversee the management of your Fund. Mutual fund companies that support a global network of researchers, analysts, and managers have a significant competitive advantage. These companies maintain offices in the regions where they invest, so they have an excellent understanding of their companies, industries and regional economies.
A wide variety of Mutual funds are available to Canadian investors: equity funds, fixed-income funds, balanced funds, and money market funds, to name just a few. Many Canadian funds are structured to make them suitable for RRSP investments: foreign content is kept within the defined limits. An experienced financial advisor can assist you in developing an RRSP program that is tailored to your particular financial profile. Proper planning, good management, and ongoing assessment of your RRSP will ensure that you and your RRSP portfolio are well positioned for a satisfying retirement.
How to get more than 30% foreign content in your RRSP legally!
With the invention of "clone" funds, funds that are considered Canadian but which mimic a non-Canadian fund, much of the concern about not getting enough foreign content has become moot. There are some investors who are not comfortable with the concept of these clone funds, and who are frightened by the use of derivatives. For these people there is the old-fashioned way to get around the foreign content rules.
First we have to ask ourselves why would we want foreign content in an RRSP? There are several reasons:
So how do we go about having more than 30% foreign content legally?
There are several ways:
The first is to invest in a Canadian bond fund that is made up of bonds that are owed to other countries denominated in their currencies. These funds are 100% eligible for RRSPs.
The second way is to invest 70% of your RRSP in a portfolio that has30% built-in foreign content, then invest your regular 30% foreign content. Now you have 30% of 70% = 21% + 25% = 46% foreign content - legally.
A third way is as follows:
Let’s suppose that you have 70% of your RRSP invested in a Canadian fund and 30% in a foreign fund and that they each grow by 10% per year. We follow a strategy of realizing the gains in the Canadian fund each year by moving the fund to a money market fund for one day then back into the same fund on the following day.
This gives us a new book value upon which to calculate the foreign content. We then re-balance the portfolio on the basis of the new book value. We never realize the gain in the foreign fund.
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