Move US Stocks to US Broker?

Trading (acquisition and divestiture) and MER costs are lower. A net benefit.

If you have more than $100K in the account(s), you'll have to file a "special" form with Cdn taxing authorities next April (and every year therafter).

Taxes are taxes. Canadian residents for tax purposes are taxed on their world wide income (including U.S. stock dividends in kind). No benefit on that side of the account until death in which case multiple Wills can be structured to avoid certain "local" costs or you can structure a holding company or create an offshore trust for portfolio holdings or...

BTW, BRK is a very tax inefficient investment. If Buffett could reconfigure his success, the first thing he would do on behalf of his shareholders is to recreate his original partnership regime.

I'm thinking there may be an overall advantage to moving US stocks currently held in a Greenline Account in Canada to a Waterhouse account in the US [which, ironically enough is owned by TD].

You probably know this, but be sure that the move is handled as a transfer or you may trigger a taxable capital gain.

Also, most US brokers (including Waterhouse) can automatically reinvest dividends for you at no cost. This means you get a single consolidated statement from them each month rather than a separate one from each company. Likewise you get just one 1099 tax slip (like a T3/T5) each year. This is similar to what CSA does for Canadian stocks except there are no membership fees or transaction charges.

The trading costs are lower at Waterhouse. It may also be easier to trade small lots.

Yes, US$12 a pop with no odd-lot charges. This is particularly useful if you want to buy some BRK.A. :-)

BTW that US$12 fee also includes free certificate delivery should you prefer to buy single shares and deposit them in individual companies' DRIPs.

Strangely enough the tax situation may also be simpler for stock-spin offs and mergers. But I'm not sure.

I agree with mikale that RevCan cares about your country of residence -- not your portfolio's -- in determining the appropriate tax treatment.

BRK is a very tax inefficient investment. If Buffett could reconfigure his success, the first thing he would do on behalf of his shareholders is to recreate his original partnership regime.

I don't understand. BRK has never paid a dividend (that's why the As trade today at US$66K.) That would make BRK an optimally-tax-efficient investment. (because there's no tax to pay until you sell.)

don't you have to be a US resident to open an account in the US? a US resident cannot open an account in Canada and I think there is a reciprocal thing!

don't you have to be a US resident to open an account in the US?

Nope. Both RevCan and the IRS know about my account. As long as I pay their respective taxes they're happier than pigs in shit poop to be my partners.

"...there's no tax to pay until you sell." Sounds like the greater fool theory to me.

Glad to see that the revenue collectors live in chicken coops;-)

BRK has a humongous pregnant tax liability which is not (maybe not) reflected in the price of stock. Certain managers wish to emulate the success of Buffett, but at least they have appropriate tax structures in place.

This is not a "dividend" issue. It is a question of double taxation because BRK's stock price is portfolio driven not operational (insurance) driven.

If my recollection is correct, BRK dumped some Big Macs in the last 12 months at an effective tax hit of 44%. If I'm a long term capital gain U.S. (Cdn) investor I'm only paying 20% (37% inclusive of provincial) tax. No tax until you sell; methinks to the the contrary. Great gain until you sell in the short run, methinks likewise.

Mikade: Not sure I follow your BRK analysis.

Am I correct in the following?

BRK, unlike a mutual fund company, cannot pass on its realized capital gains. Thus it has to eat the tax hit - at a high rate - when it sells Big Mac or Coke. Meanwhile the shares of BRK are valued very high (reflecting BRK's holdings of Big Mac and Coke) - and the holder of BRK again pays cap gains again when he/she sells BRK.

Sounds pretty screwy, - if correct.

George,

Your explanation is not only correct, but much more eloquent than mine. Thanks for stepping in.

Further, not only does Berkshire Hathaway the company pay lots of tax, but Buffett is very proud to have the privilege. From his 1996 Letter to Shareholders:

Charlie [Munger] and I believe that large tax payments [US$860M that year] by Berkshire are entirely fitting. The contribution we thus make to society's well-being is at most only proportional to its contribution to ours. Berkshire prospers in America as it would nowhere else.

(Correction: My comment "that's why the As trade today at US$66K" was wrong. This has little or nothing to do with the stock price. BRK.A is at US$66K a share because there has never been a stock split.)

So mikale makes a good point since the effective corporate tax rate in the state of Nebraska is something like 42% while most Americans have a tax rate of about 28%. Not being able to flow through the taxable income is an inefficiency of the corporate structure. Buffet's pride of this fact seems a bit screwy, but I get his point.

Mikale also mentions the large eventual tax bill on many of BRK's historic 30-year holdings. I heard from AIC that BRK carries their holdings at their after-tax market value. This surprised me and I still don't know if I believe them, but I just don't know US accounting standards. Anybody confirm this. Hey Bylo, you've got an annual report - check the notes to the financial statements.

OntFA,

I'll have to backpedal a little on my earlier post. BRK recognizes deferred income taxes ($10B) on its balance sheet for unrealized appreciation of investments($18B) and records investments at FMV. So AIC is correct.

Shareholders equity of $31.45B divided by 1.206M shares outstanding gives a book value (which is predominately market value) of approx $26K per share. FMV of investments (fixed income + equity securities) is approx $46.5B or 82% of assets.

How can the operating entities be worth $40K per share?

"How can the operating entities be worth $40K per share?"

Assuming Buffett is the "operating entity" is it then merely a coincidence that his shares are worth ~$40B? ;-)

Bylo,you can find E&Y's latest update on foreign property reporting to RevCan in their Sept.22/98 E&Y Tax Mailbag.

You may want to post the link on your website.

Bylo,you may find this article on U.S. estate tax rules informative.

done & hanks again

Bylo,sorry to bother you again,but if you're considering incorporating to avoid U.S. estate taxes (and you should),you should read this KPMG article on the subject.It does a very good job of explaining the tax ramifications for the different types of income that can be earned by the corporation.

benkel,

Thanks once more. Where on the KPMG site did you find the article? The link above is to their home page.

(The KPMG site uses frames, which makes it difficult to get URLs of items that are in subframes. To get the URL for the article go to the article, right-click your mouse, and select Open Frame in New Window. This will create a new window with the article. The complete URL will be in the Location field at the top of the browser window.)

The moral of incorporating investment income: Newfoundlanders should "just do it."

Bylo,thanks for the lesson on getting URL's from framed websites...I didn't know that.

I'm glad you managed to track down the article,sorry for the inconvenience.

benkel,

Fantastic job of online research!

The issue begs itself, why bother with all the machinations (US index funds through a US discount broker or incorporation to avoid US estate tax, etc.) when a Cdn investor can buy DIAs, SPYs or WEBs in "street form". Some may argue that you need the DFA 9-10 decile fund for small value "portfolio tilting" but in the long run it goes against the Bogle theory of investing - KISS.

Now Bylo, if you really want to load up your site server and you're a glutton to ape over more than the superficial loss rules with more techie tax stuff, then better include [just kidding -:)] the

'why bother with all the machinations (US index funds through a US discount broker or incorporation to avoid US estate tax, etc.) when a Cdn investor can buy DIAs, SPYs or WEBs in "street form"'

Excellent question. Eric Kirzner and Richard Croft established three indexes for the FP (NP) that are based on these securities along with HIPs, Gov't Canada bonds and cash. In each weekend edition of the paper they publish the current status and contents of these indexes along with a discussion of related topics. I fully agree with you that the FPXs -- or an individually-customised variant -- are probably all most indexers need. Indeed if FPX had existed before I embarked on the US broker path, I would have seriously considered them.

That said, there are still some reasons for considering the US route:

1. In keeping with the KISS concept, Vanguard's Total Stock Market index fund, which tracks the entire US stock market (Wilshire 5000) is probably the best single US MF one can buy. Bogle certainly thinks so, and so do I (not to suggest that our opinions should carry equal weight! :-)) Most available-in-Canada index funds and index participation units track either the S&P500 or DJIA, so they have no exposure to mid and small caps. I think CIBC now has a W5000 index fund, but it's relatively new and the MER is 0.90%.
2. While the MER for DIAs and SPYs is comparable to Vanguard, the MERs for WEBs are rather high at 1.25% to 1.75%. Vanguard doesn't have country funds, but you can get Europe, Asia/Pacific and Emerging Market funds for around 0.3% or 0.35%. (OTOH Royal's brand new EAFE index fund has an MER of 0.55% and is even fully RRSP-eligible, but I have a fundamental mistrust of Canadian-run index funds. Compare the performance of TD's or CIBC's US index funds with the S&P500. The delta's are a helluva lot more than can be accounted for by the MERs. But I digress...)
3. For those who want the flexibility to create more diverse portfolios, Vanguard offers by far the widest selection of index funds. In addition US brokers give you access to a much broader selection of actively-managed MFs than are available in Canada at MERs that are substantially lower than in Canada. You just can't create the kind of portfolios advocated by Armstrong, Bernstein et al with only Canadian-run MFs.
4. You can trade DIAs, SPYs and WEBs in the US for less than in Canada. Ditto for shares of US stocks. Waterhouse charges US$12 (CA$18) a transaction. Others are as low as US$8 (CA$12) and dropping. On the downside is the US$25 fee that Waterhouse charges for Vanguard transactions (at least one discount broker charges as little as US$10.) That's not a major issue though if you buy at least $2,500 at a time.
5. US brokers offer free DRIPs for DIAs, SPYs, WEBs as well as ordinary stocks. They also provide a consolidated statement of all holdings, reinvestments, etc. And it's even possible (though rather awkward) to download Waterhouse's statements from their website into Quicken.
6. In general US estate tax becomes an issue only when your portfolio exceeds US$1.2M or if you own a Florida condo. I don't qualify for the IRS using either criterion.

(standing ovation for Bylo)

Bylo, I think you nailed it, especially with point numbers 4 and 5. The cheapest you can find in Canada (I think) is BoM Investorline at $25 flat fee per trade (since all Canadian brokers charge US$ for securities bought/sold on US exchanges the currency conversion is not a factor). That's over 50% more than Waterhouse if you are trying to buy SPYs, DIAs, Midcap SPYs, or WEBS. This becomes very relevant if you are attempting to DCA into these vehicles.

One other benefit you failed to mention is that by using an online US broker you can effectively do an end run around your local provincial securities regulator. This may not have a direct financial benefit, but it sure brings a warm glow to my heart.

I have not opened a Waterhouse account yet, but I plan to early in the new year. One might say you've given me a severe case of "fee-ness" envy.

Ditto checkmate.

No need to suggest that Bylo preserve the post for posterity to paste to the next FAQ.

A couple of nits Bylo (particularly item 6), but I'll comb them in future threads.

BTW, the Croft/Kirzner partnership of ideas is quite impressive. Croft seems to be on an option roll these days...

Thanks for the applause.

Bylo provides 6 good reasons for considering the US route. May I humbly add another to his list of Oct 22 - 4:33pm post.

#7 - I have a Waterhouse account and this past weekend I was rooting around after loging onto my account. What impressed me was the "Research service" they offer account holders. It was excellent and easy to use. For example I could get 4-page Standard & Poors summary of any company [US?] I want, news lists, etc. There was no "count limit" that I noticed like there seems to be with some Canadian brokers. I doubt that one can get equivalent US-equity coverage via a Canadian broker account. [But I could be wrong.]