Be sure to read Part 1 before continuing
What to hold in a frozen investment account:
Remember that in your frozen account there is no rebalancing, no buying, no selling, no withdraw. You can take no action until you return to Canada and unfreeze. Good thing you are read this before you leave Canada and it’s not too late! Your ideal frozen funds should have these characteristics:
- No dividends
- No re-balancing required
- Steady, reliable growth
- Low fees
- Allocations: 15% Canadian equity, 40% US equity, 25% International equity, and 20% bonds
If you are under thirty I’d normally suggest 10% in bonds, but since you can’t re-balance it’s best to give your slower growing bonds a head start. In a few years your entire portfolio will be higher(probably), but the bonds will have grown at a slower pace, reducing their share of the total. Ideally that 20% will be closer to 10% or 15% where it belongs. (and yes that will keep shrinking, but there’s really nothing we can do about it if your account is frozen for ten years or longer).
I’ve come up with two options: One single balanced fund, or a set of three or four stable ETFs. Amix of both will also work well:
Option 1: A Single Balanced Fund
If we ignore the specifics of the asset allocation I mentioned in the last section, we can buy a single solid balanced ETF and dump our whole sac of cash into it. Don’t be intimidated, you’re still diversifying because the fund includes different asset classes. Blackrock offers a range of these balanced ETFs. CBN for example invests in the total stock market and includes bonds. Seems like a no-brainer right? Well these balanced funds don’t satisfy some key criteria:
- They all pay dividends
- They have MERs over 0.6%.
Since we can’t purchase new shares, all those cash dividends will sit and collect dust, ruining all that beautiful compound interest. And I do mean ruining. Seriously don’t ignore this.
For example: Lets say you invested $10,000 in two stocks. One gives a 3% dividend and 4% capital gain. And the second gives a straight 7% capital gain. And let’s say you’re holding it in a frozen account where you can’t reinvest the dividends. I did the math and after 5 years, the difference in total value is about $1,500, after ten years it’s nearly $4,500. That’s 45% of your initial investment!!! ALWAYS REINVEST YOUR DIVIDENDS.
Tangerine also offers tasty balanced index funds, but they may not allow you to keep your account when you break residency. (I don’t have an account with Tangerine so you’ll need to check yourself)
Option 2: Mixed ETFs
Difficulty: Slightly less easy
In this option we’ll pick no more than four ETFs in an attempt to satisfy as many criteria as possible. The obvious first choice is my old friend the dividend-free Swap based ETF. Horizon has three solid choices:
But what about international equity? To my knowledge there are no international low-cost swap ETFs available to Canadians (If I’m wrong please please tell me so I can buy some). Unfortunately we are hooped and have to take the cash dividend ETFs. There are three good choices on the market:
They virtually identical. The only loser is ZEA because it holds another BMO ETF within it instead of holding the underlying stocks directly (Thus you’ll lose some money on withholding taxes, don’t worry about the complexities, just remember holding stocks directly is always marginally better).
Pick any of them! But if you really want my opinion, lets say VIU.
Here are my recommended steps for leaving money in Canada:
- Determine if you are giving up residency. If yes:
- Ask your brokerage if you can keep your investment accounts. If yes:
- Set up your investments with either a single balanced fund or ETF mix that will reduce fees and dividends
- Report a “deemed disposition” on your next Canadian tax return based on the day you left the country
- Enjoy your new international life! You made a fantastic life decision.
- Return to Canada
- “Reacquire” your taxable investments at their price the day you re-enter Canada.
Get ready for the world of cross-border taxes! Good luck!Spam your friends: