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On July 11th I published an article entitled “Navigating the Wild, Wonderful World of Canadian Corporations (formerly trusts).” Judging by the number of comments (161 so far) it is apparent that Canadian instruments are of high interest to investors, yet is an area that is underserved by Seeking Alpha community.

I made several promises in the comments section for follow up. First, I promised to periodically update the “FPI Rated CanCorps” spreadsheet with updates and new information. This is in process and will be communicated in a third installment.

Second, there were so many informative and helpful comments made that I promised to condense the best into a follow up article. This is your article.

Summary of Your Comments

I had asked for input to flesh out some of the issues raised in the article. All I can say is – “Wow”, you guys delivered! Many commentors have been invested in Canadian trusts and corporations for years and provided valuable insights. Your most helpful comments were condensed down as follows:

  • Tax Treatment in IRAs and Taxable Accounts

  • Can you Deduct the 15% IRA Withholding on your Taxes

  • Brokerage Houses and Canadian Corporations

  • Issues with Pink Sheets

  • Investor Advantages of the Canadian System

  • Is UBTI an Issue?

  • Decoding the Ticker Symbol

  • Helpful Resources and Information

Tax Treatment: CanCorps held in IRAs

In the previous article I detailed my disappointment in what appeared to be lack of distribution increase for 2011, as per a provision in the Tax Fairness Plan which eliminated the 15% withholding of Canadian Corporations held in U.S. IRA accounts. In short, the distributions in my brokerage account appeared to remain flat instead of including an distribution increase of 15%.

However, ricksteph and Igadawah pointed out that I may have had my expectations (and frankly, my math) set incorrectly. Previously, my distribution with OTC:EIFZF was $262 minus $39, which would have made my distribution a total of $223, not $262 total. So there really was a distribution increase with a $262 positive entry that wasn’t reduced by a negative entry.

Archman Investor also pointed out that “those dividends you received in "January" were from your December ex-div dates and were still subject to the 15% withholding”.

I had also indicated a difficulty in locating the exact provision which made this possible. tndrroot found it for me, providing a link from the Canada Department of Finance and this copy/pasted quote:

A unitholder who is non-resident will be taxed on the distribution at the non-resident "withholding tax" rate for dividends, taking into account any rate reduction provided, under an applicable tax treaty, for cross-border dividends. For instance, a United States pension or other retirement arrangement (such as an IRA) will, under the Canada-US Income Tax Convention, be exempt from the Canadian tax that would otherwise apply to the distribution, just as it would be if it received a dividend.

As a reminder, the tax treatment for CanCorps and CanTrusts held in a taxable account does not do away with the 15% withholding. You can, however, file for a tax credit on the withheld amount. Depending on your tax bracket, this can amount tax-free dividends, as pointed out by antiquary: “(the withholding credit) effectively turns the tax I have to pay to the Canadian government into tax-free money for me, because a tax credit isn't considered income by the IRS.”

Can you Deduct the 15% IRA Withholding on your Taxes

After much debate, the safest answer is, “no”. Retired Aviator says this is his practice. However cpa28761 and casey00001 make the following points:

cpa28761: The receipt of income into a qualified tax advantaged account (IRA, 401K, etc.) is NOT a taxable event. Therefore, any reduction of that income is not a taxable event. The taxable event occurs only when income is withdrawn….”

casey00001: “When I calculate my foreign tax credit I use my composite 1099 form from my brokerage account as backup. IRA accounts don't show up as a credit on there for foreign taxes paid so you have no business trying to deduct them. It’s an immediate red flag to the IRS because the dollar amounts don't match up.”

Brokerage Houses and Canadian Corporations

The issue I thought I had with my brokerage house brings up an important point - are all brokerage houses equal in their ability to trade and hold Canadian issues? My own experience, after years of experimentation, is "no". There is often a trade-off between a cheap trading commission and the depth of capabilities of a brokerage, especially when it comes to international markets.

If you wish to hold the base TSX (Toronto Stock Exchange) issue, which is highly recommended by many commentors, it will be even more important to screen carefully the brokerage you wish to use.

There was a lively discussion of which brokerage houses might provide the most capabilities in this arena. I would refer back to the article commentary for more specific information. If you are shopping around for a brokerage house for your Canadian issues, it's good to ask the following questions:

  • Do they allow for trading on pink sheets? Some brokerage houses will not hold pink sheets entities for you. As a reminder, many Canadian issues trade in the U.S. as pink sheets stocks.

  • Will they hold foreign ordinaries? Some brokerage houses do trade in pink sheets, but not in pink sheets foreign ordinaries.

  • Do they allow trading (broker assisted or online) on the TSX exchange?

  • How much do I want to pay in commissions?

Advantages / Disadvantages of Pink Sheets

In my article I maintained that the stable price point of the pink sheets entities may provide a cushion in wild market swings, pointing out:

…the lack of reaction to the day-to-day of market machinations makes it advantageous during standard, run-of-the-mill market slumps. During those days I generally find my CanCorps staying on the $0.00 dollar change mark. This provides stability to my overall portfolio, and a comforting dose of “white” when the rest of my portfolio is going “red.”

ResearchNorstar points out a fact that I understood, but did not elaborate upon, in the article. The actual value of your pink sheets holding corresponds directly to the price the underlying TMX issue, regardless of pink sheets market price:

The underlying securities are one in the same whether they trade on the pink sheets or the TSX/TSX.V, you would hold shares of the company you purchase regardless of the venue through which you purchase. The pink sheets are simply a broker made market…The price of the security traded on the pink sheets would absolutely correspond with that of the same security trading on a Canadian exchange; a simple dual-listed arbitrage trading strategy would ensure it.

Investor Advantages of the Canadian System

americanincanada helps explains the higher dividend payments of CanCorps:

The author points out that US stocks on average pay lower dividends than Canadian. One reason for this is that the Canadian income tax system makes an effort to account for the fact that corporate dividends are paid from after Canadian corporate income tax. In the US no such effort is made and as a result dividends are double taxed…

Albert Meyer appreciates Canadian corporate governance:

Corporate governance at Canadian companies [is] much better than in the US. Stock option compensation (the root of all evil) is either absent or used very sparingly…Chartered Accountants in management and on the board are also a big plus…My investment experience with Canadian companies [has] been outstanding…

Is UBTI an Issue?

Igwadah brought up the issue of potential UBTI when holding CanCorp in IRAs, but Ralph Bowlin countered that this should not be an issue:

…regarding UBTI in IRA accounts. I do not believe that applies to Canadian Corporations as they issue 1099s to your brokerage firm. I have never received a K1 even from the former CanRoys when they were Royalty Trusts…UBTI relates to active participation in the management of pass through entities.

Decoding the Ticker Symbol

No Free Cake helped us decode the relationship of the ticker symbol to the foreign ordinary designation:

…a ticker in the US that is 5 letters long and ends in F is a foreign ordinary share. You'll note nearly all of your tickers are like this...If the 5 letter ticker ends in Y, it is an ADR which is then traded on the US exchange and that's what you own - the ADR. If the ticker is less than 5 letters, it is a US listed stock. It may be a foreign company that has decided on a US listing (like ERF or AT). These trade on a US exchange.

d_teller recommends tracing the origins of the pink sheets listing through the SEDOL number, which is like CUSIP number (bond order number). The SEDOL master file can be accessed (after registration) at this link.

Helpful Resources and Information

Mercy Jiminez, soupy and ralph bowlin recommend Roger Conrad’s Canadian Edge, with Mercy commenting:

Their monthly detailed updates on key financial variables for the companies they track [are] second to none. And their share valuation guidance is also extremely helpful. Total returns on investments I have made through Canadian Edge recommendations and analysis [has] "paid" for the subscription price for many years to come.

joesmith323 and others recommended obtaining quotes on these issues from the Toronto exchange at tmx.com. Uncle Pie points out that tmx.com also provides valuable company metrics. Many commentors recommend having the quotes from the Toronto Exchange available when making a pink sheets purchase.

joesmith323 also recommended globeinvestor.com for stock screening.

bob adamson recommends Canada’s equivalent of CNBC: www.bnn.ca/.

446513, a Canadian living in the U.S.,recommends theglobeandmail.com for information on Canadian companies that are not inter-listed, and stockchase.com for Canadian analysts ratings.

Low Sweat Investing points out that information on Canadian companies is readily available simply by going directly to company websites. Just input company name and the phrase “investor relations” in your web browser.

No Free Cake and joesmith323 assisted Tom Wright with his question about a Canada-only ETF, (NYSEARCA:EWC) which invests in Canadian financials, industrials and energy. Other Canadian ETFs were recommended by Delojozafado: (NYSEARCA:ABCS), (NYSEARCA:ENY) and CFPF.

Uncle Pie recommends Bloomberg.com for the CAD/USD exchange rate. He also recommends reading the business sections of the Financial Post (and the Globe and Mail, previously mentioned) online (it is free). Also, a synopsis of Canadian analysts opinions can be found at stockchase.com.

Archman Investor replies to Mozman’s concerns about the illiquidity of the pink sheets entities by recommending to “ALWAYS…use limits orders. No ifs, and or buts about it. You never use a market order on the pink sheets”.

Philipsohn recommends looking at trading volume before buying:

If the company has a high trading volume, then you can use the stock for trading or investing….If the company has low trading volume, like zero to a few 100 shares traded on many days, then you would be best served to only make the purchase if you intend to hold the shares as a long term investment.

Source: Navigating The Wild, Wonderful World of Canadian Corporations, Part 2: Reader Comments