RBC Direct Investing RRSP Update

As promised, RBC Direct Investing began offering the option to hold U.S. cash and securities within an RRSP as of May 14th. I called early the next week to have my U.S. securities transferred back into U.S. dollars.

The process was smooth once I got to speak with a trader. I just told him what I wanted to do, he repeated, I confirmed, and it was done. Two days later the securities were sitting in the U.S. side of my account.

While the securities were moved over smoothly, and they correctly tracked the market value in U.S. dollars, there was no book value attached to them. I left it for a while, but since there was still nothing in the book value column this week, I sent an email and, subsequently, made a phone call.

If you have the same situation (no book value or percent change), there are two possible remedies:

1. If you originally moved your securities from a non-registered RBC Direct Investing account to your RRSP, you simple have to call (1-800-769-2560), explain the situation, and ask to have the book value calculated. They will put you on hold while they search your account and crunch the numbers.
2. If you originally moved your securities from another institution to the Direct Investing RRSP, you will have to submit documents from the delivering institution (ie. an old monthly statement that shows the book value) as well as a “Book Value” form, which is available here.

I originally moved my securities from my non-registered account to my RRSP within Direct Investing, so it was a very simple phone call that took all of about 15 minutes, half of which was on hold while the rep searched my account history and calculated the book values of my securities. She came back and said the book values would appear on my account page in 2 or 3 business days.

All-in-all I’m quite happy with the situation, though am at a loss as to why they couldn’t have dealt with the book values automatically, given that it was all with the same brokerage. Perhaps it’s only growing pains. A 15 minute phone call is well worth the savings on future dividends.

If you’d like to see the back story to this, please see the following posts:

1. Dividend Conversions within an RRSP
2. Withholding Tax/GICs and an RRSP
3. The First Update

A Simple Plan

I use RBC’s Direct Investing as my brokerage and have my portfolio set up to reinvest dividends. I’ve used and enjoyed this system for years, but TFSAs have me thinking about new strategies for the future.

What popped into my mind today is the possibility of using dividends as contributions to (and in turn investments within) a TFSA. This would also work as an RRSP strategy, but I’ll get into why I think TFSAs are perfect for this in a moment.

The idea goes as follows:  First you would turn off the automatic dividend reinvestment option (if it is enabled) so any dividends received would be deposited into your cash account. You would then transfer the cash into your TFSA. Just to keep things simple, and easy to track total deposits to the TFSA, you may consider using multiples of $5 (ie. a dividend of $26.25 would mean $25 into the TFSA, with the remainder sitting in cash until the next dividend).

As to why I think a TFSA is the better choice, it is because they are funded with your after-tax dollars. If you want to make a $1000 deposit, and you are in the 30% tax bracket, you would have had to earn about $1400 first. Since eligible dividends from Canadian companies are taxed at a lower rate, it seems to me that by using dividends to partially fund a TFSA, you would lower your effective tax rate at which TFSA investments would be made/calculated.

This is actually an adaptation of a plan I had some time ago, which in itself was based on Buffet: I had thought about using dividends in order to buy index funds in the same way Buffet takes the earnings and dividends from one company in order to invest in or buy other companies. Once the cash is in your TFSA, you could do like above and buy index fund units, or another strategy would be to save up for an equity purchase.

By using dividends from Canadian companies you get a tax advantage. Once you had a decent amount of cash stocked up, you could then buy a quality U.S. stock. You would have achieved a lower effective tax at which you bought the U.S. share, and then the only tax payable would be the 15% withholding tax on U.S. dividends.  Any capital gains would be tax-free (of course, any capital losses would be ineligible for use as a tax write-off).

Some more number crunching would be necessary to really come up with the pros and cons, but for now this seed of a strategy seems like it could blossom.