I purchased the TD Nasdaq Index Fund (Investor Series) for my tax-free savings account through an adviser at a TD Canada Trust branch. My understanding is that the fund is subject to U.S. withholding tax, but the bank denies this. Can you settle this?
Any Canadian mutual fund or Canadian exchange-traded fund that invests in U.S. equities is generally subject to a 15-per-cent U.S. withholding tax on the underlying dividends, regardless of the account type in which the fund is held. The only way to avoid withholding tax on U.S. dividends is to: a) invest in a U.S.-listed ETF or U.S. stocks directly, and b), hold that investment in a registered retirement account. A TFSA does not qualify for the exemption.
But here’s the thing: Nobody buys the Nasdaq-100 Index (which your mutual fund tracks) for the dividends; they buy it for growth. The tech-heavy index yields just 0.7 per cent which, at a 15-per-cent withholding rate, works out to an annual tax hit of just 0.105 per cent.
Now, compare that with your mutual fund’s management expense ratio, which is 1 per cent – or nearly 10 times higher. The MER alone is more than enough to wipe out the 0.7-per-cent dividend yield from the stocks in the index, which explains why the TD Nasdaq Index Fund has paid zero distributions over the past five years (which is as far back as the data go in the most recent Annual Management Report of Fund Performance.)
So withholding tax is not your biggest enemy here.
There are cheaper ways to invest in the Nasdaq, including TD’s own e-series Nasdaq Index Fund, which has an MER of 0.5 per cent. You could cut your costs even further by opening a self-directed discount brokerage account and investing in ETFs.
If you’re more comfortable working with an adviser, you could certainly do worse than paying an MER of 1 per cent. So I’m not suggesting you urgently need to shake things up. But I wouldn’t spend another minute worrying about a tiny amount of withholding tax on a growth-focused mutual fund.
I’m 59, and a longtime employee with one of the big telecoms. I have about $200,000 of my employer’s stock – all in my RRSP and TFSA – and an additional $50,000 from an insurance settlement that I am starting to invest. I have opened two TFSA accounts with Wealthsimple – one self-directed and one robo-adviser – and a third TFSA with Questrade’s Questwealth robo portfolios. In addition to my employer’s stock, my individual holdings include TD, Granite REIT, Vanguard’s S&P 500 Index ETF (VFV) and asset-allocation ETFs from Vanguard, iShares and Horizons. Can you provide any feedback?
First, having 80 per cent of your portfolio invested in one company violates one of the cardinal rules of investing, which is that you should diversify to control your risk. Fortunately, because all of your company shares are held in your registered retirement savings plan and tax-free savings account, you won’t incur any capital gains tax if you sell a portion of them.
My second concern is that, by opening multiple accounts at different financial institutions and buying everything from banks to real estate investment trusts to asset-allocation ETFs (from three different providers, no less) you seem to be proceeding without any sort of plan. The danger is that you will make your investments far more complicated and difficult to manage than they need to be.
Unless you have some experience managing a portfolio of stocks, you might be better off investing primarily in ETFs – either directly or through a robo-adviser – at least for now. You could, for example, get all the diversification you need with one or two asset-allocation ETFs that provide global exposure to stocks and bonds.
To save even more on costs, you could purchase individual index ETFs instead. You already own VFV, which tracks the S&P 500. For Canadian exposure, consider an ETF based on the S&P/TSX Composite Index (I discussed two examples in my column last week).
Finally, think about how many separate accounts and financial institutions you really need. Especially as you get older, you may find that the complexity becomes a burden.
With investing, less is often more. If you keep your costs down, stay diversified and keep things simple, time will do the heavy lifting for you.
E-mail your questions to firstname.lastname@example.org. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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