Wednesday, April 25, 2007

Canadian Content in an RRSP

During the 100th post contest I got a great series of ideas for topics from the readers, one I've been thinking about from Cardero was how much Canadian equities exposure should we have in an RRSP?

Prior to 2005 this was a simple question. We had to have 70% Canadian content in our RRSP account to not exceed the foreign content limit. Now with the flood gates wide open you have have up to 100% in foreign content, which provides Canadians a significant opportunity to invest outside of Canada. This is a good thing after all Canada only has 0.5% of the world population and something like 3% of the world's market (I can't seem to find that statistic this morning).

The issue to investing in foreign content is your not only investing in bigger markets, but also in foreign currencies. You end exposed to more than you plan on which is fine during a long time frame, but somewhat problematic if you need the money any time soon. So with all this in mind here is what I suggest people do at different time frames.

Over 20 years to retirement: Keep you Canadian equity content to no more than 33% of your portfolio. You have time you don't keep too much money in Canadian equities.

Five years or less to retirement: Now should start to reduce your equities in your portfolio and covert them to more stable fixed income. Also at this time you will want to pull back a bit from foreign markets. Depending on what you want for a fixed income/equities balance, for example 60% fixed and 40% equity, you want about half your equity in Canada. So in this case 20%, but if you want a 70/30 split you would reduce your Canadian content to 15%.

Less than 20 years and more than 5 years: Now your into a bit more of personal risk territory of what you can handle. In my case I'm holding around 25 to 30% in Canadian equities, but I plan on scaling that back as time goes on.

The exception to all of the above is if you planning on a Derek Foster style retirement where you live off of just dividends. In this case you want a lot of Canadian content to reduce your tax load to near zero, since low income Canadians don't pay tax on Canadian dividend income.

That's my take on the question. What do you think? I would love to see what other people have been doing and their opinions.


Financially Motivated said...

One way to achieve this foreign exposure is to invest in Canadian companies that have international exposure. One example is the Bank of Nova Scotia. While it is a large Canadian Bank they have growth opportunities with exposure in the Caribbean and Asia. (Full disclosure I own shares in BNS)

Canadian Dream said...


If your familiar enough with their business activities that would also be another option.


Outroupistache said...

MY RRSP is only part of the larger portfolio (including also a non-registered account and tow LIRAs) in which Canadian content gets a certain percentage, currently above 40% but about to go down to about 30% upon a major restructuring. Within the overall portfolio allocation, I think it is better to keep US equities inside the RRSP where they can be sheltered from the US witholding tax and to have the Canadian equities in the non-registered account to take advantage of the lower tax rate on Canadian dividends. I'll be posting about my portfolio restructuring in the next few weeks.