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1. Foreign investment tax; 2. Bonds

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asked Dec 20, 2014 06:58 PM by
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Hi Jin, 1. I bought a bunch of U.S. ETF's and now I'm getting hit with foreign investment tax. Could you explain the tax rules for a Canadian? And how it might be different with an individual account, corporate account, RRSP or (obviously) TFSA? 2. I don't completely understand why bonds are considered a good, "safe" investment. I bought a bunch of bonds in the past ten years, admittedly through a mutual fund company, with low MER's and poor/negative returns. I do want to keep some of my money safer, but at least I understand GIC's. Bonds just seemed to be the worst of all worlds: some risk and no (in my limited experience) reward.

Thanks, Melissa

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answered Dec 22, 2014 12:43 PM by
Jin Won Choi gravatar image Administrator

Hi Melissa,

With regards to taxation on U.S. ETFs, Canadians have to pay withholding taxes on dividends paid by those ETFs held outside of RRSPs. Since the dividend yield on ETFs are low and since withholding tax rates are low (15%), this is usually not a big deal. You can read more about it in the article below.

http://www.advisor.ca/tax/tax-news/th...

With regards to bonds, it depends on the kind of bonds you're talking about. High yield bonds are generally unsafe because there's a high chance that the bond issuer will default. These kinds of bonds have suffered in recent months because many such issuers are oil and gas companies. As oil prices crashed, investors in these bonds got nervous about the prospect of defaults and sold their bonds, lowering prices. However, if you stick to government bonds such as what's in XSB.TO, the default risk is very low so you're virtually guaranteed to earn the interest rate on those bonds. In other words, they're safe.

Jin

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