RBC Broker Adds International Trading: Investor Guide

RBC Direct Investing has recently become the only bank-owned discount brokerage in Canada to offer online trading of securities on several non-North American exchanges. This brings international stock trading into the mainstream for many Canadian self-directed investors. Other brokers, such as Interactive Brokers Canada, have long provided broad global market access, but Royal Bank’s move is likely to encourage additional banks to expand their offerings. What exactly does RBC Direct Investing provide, and what should investors consider before trading internationally?

International trading with RBC Direct Investing

RBC Direct Investing now allows online trading in major markets including Hong Kong, London, Paris and Frankfurt. Investors who prefer phone-assisted trading can also access markets such as Japan, Singapore, Australia and several smaller European exchanges.

In non-registered accounts, you can hold a range of foreign currencies, including the British pound, euro, Swiss franc and Japanese yen, as well as the Singapore, Australian, New Zealand and Hong Kong dollars. Registered accounts—like registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs)—are limited to holding Canadian and U.S. dollars, so currencies other than the U.S. dollar can’t be held directly in those registered plans. You can, however, hold foreign securities inside both registered and non-registered accounts. When you buy a foreign security, RBC Direct Investing converts Canadian or U.S. dollars into the required foreign currency and, likewise, converts foreign dividends back into Canadian dollars when they are paid into your account.

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What about foreign investment limits or restrictions?

Some older investors recall a federal limit on foreign assets held in registered plans. From 1971 until 2005, RRSPs, registered retirement income funds (RRIFs) and many pension plans faced restrictions on foreign investments, with caps ranging from 10% to 30%. That limit was removed in 2005. Today there are no legal restrictions preventing Canadians from owning foreign stocks in registered or non-registered accounts. That said, owning foreign securities brings tax and reporting implications that investors should understand before expanding internationally.

Tax implications of holding foreign stocks

Dividends paid on foreign stocks are commonly subject to withholding tax in the country where the company is domiciled. Withholding rates typically fall between 15% and 25%, depending on the foreign country and any tax treaty it maintains with Canada.

As an example, U.S. dividends are exempt from withholding tax inside an RRSP due to the Canada–U.S. tax treaty; however, U.S. dividends paid into a TFSA are subject to a 15% withholding tax. Withholding tax applied in a registered account is not recoverable on your Canadian tax return, which effectively raises the cost of foreign dividend income in those accounts.

Foreign stocks in non-registered accounts

If you hold foreign stocks in a taxable, non-registered account, all income—dividends, interest and capital gains—must be reported on your Canadian tax return because Canadian residents are taxed on worldwide income. Foreign tax withheld at source can typically be claimed as a foreign tax credit to avoid double taxation on the same income.

Most countries do not impose capital gains tax on non-resident investors who sell stocks listed in their markets, though there are exceptions and special rules—real estate is frequently taxed in the jurisdiction where it is located, for instance. U.S. tax rules are unique in that U.S. citizens and green card holders must report worldwide income regardless of residency.

Canadian residents holding foreign investments with a total cost amount exceeding CAD$100,000 must file form T1135 (Foreign Income Verification Statement) with their annual tax return. This is a disclosure requirement intended to prevent tax avoidance; failure to file can result in penalties. Note that foreign investments held inside an RRSP or a TFSA are exempt from T1135 reporting.

Calculating foreign exchange

When preparing your tax return, all foreign income and transactions must be reported in Canadian dollars. This includes dividends, interest and capital gains. Generally you should use the exchange rate in effect on the date the income was received or the transaction occurred. The Canada Revenue Agency also accepts established exchange-rate sources, such as Bank of Canada rates, and in some cases the annual average rate may be acceptable for stable currencies.

For capital gains and losses, convert your purchase and sale prices into Canadian dollars at the relevant exchange rates when those transactions took place. Currency movements between purchase and sale can produce a foreign exchange gain or loss in Canadian-dollar terms, which will affect the overall capital gain or loss on the investment.

Should you invest directly in international stocks?

Technology and greater market access are shrinking barriers to cross-border investing. RBC Direct Investing’s new functionality makes it easier for Canadians to trade directly on global exchanges, and other banks are likely to follow. Direct international investing can be a valuable diversification tool: the S&P 500 accounts for roughly 51% of global stock market capitalization, while Canada represents around 3%. Relying on a handful of U.S. technology stocks does not constitute broad diversification—non-S&P 500 U.S. stocks make up about 8% of global market cap, and the rest of the world represents approximately 38%.

That broader opportunity set comes with trade-offs. Direct international investing can involve higher commissions, foreign exchange costs, tax withholding and added reporting requirements, all of which can reduce net returns. Investors should carefully weigh those expenses and logistical issues before buying individual foreign securities.

For many investors, simpler routes to global diversification may be preferable. Exchange-traded funds (ETFs) and mutual funds offer diversified, cost-efficient exposure to international markets without the need to manage currencies, multiple tax jurisdictions and individual stock selection. If you gain new access to international markets through an online broker, consider whether buying individual foreign stocks is the best choice for your goals—or whether ETFs or global mutual funds might meet your needs more efficiently.

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