This article was originally published in 2001. There are no longer foreign content rules for RRSPs.
The media, the industry and investment professionals have discussed the merits of global investing in depth. The merits include higher potential returns, diversification, less risk, and increased investment opportunities, which are all good reasons why every investor should consider global diversification outside and inside your RRSP.
The one issue investors must deal with is the 20% maximum foreign content limit. This rule simply limits the foreign content to 20% of your book value. It is important to note some very important details to managing the foreign content:
- Foreign content is monitored on a per plan basis. The best way to explain this is by example. If you have $50,000 in RRSPs at the Royal Bank, you cannot go to Templeton Mutual Funds and invest $10,000 (20%) in their Global Equity Fund. Both Templeton and the Royal Bank must report the foreign content to Revenue Canada individually.
- Self Directed RRSPs are considered one plan. One advantage of the self -directed RRSP is the ability to manage foreign content more efficiently. No longer do you have to worry about maximizing the foreign content within different plans. You can also “cherry-pick” your favorite global fund. For example, let’s say you really like the Templeton Growth Fund. However, if you went to Templeton with your RRSP dollars, only 20% could go into the Templeton Growth Fund and 80% would have to go into their Canadian Funds. In a Self directed RRSP, you can use your favorite Canadian fund and your favorite global fund.
- Foreign content is calculated on book value. Book value is the actual amount that you paid for the investment. If the foreign content grows faster than the Canadian part, you will have a plan that has more than 20% foreign content. However, if you do not buy or sell (no transactions) then you will be fine because only the book value is used to calculate the foreign content. It is important to note that any distributions issued by a mutual fund can change the book value.
- Foreign Content Penalties are assessed at the end of the month. If your account goes “offside” on the 28th of the month, you will be liable for a 1% penalty of the amount that is offside. Many companies will automatically re-adjust the foreign content prior to the end of the month but it is important to understand that the penalty is assessed at a certain point in time.