By Gigi Suhanic
National Post
FP Money
Saturday, August 24, 2002

Question: As you know, Canadians are allowed to buy calls or sell covered calls in their RRSP. Yet, they are not allowed to buy protective puts. Why is that?

Answer: The Income Tax Act allows a variety of qualified investments for registered plans such as the RRSP, RRIF and DPSP, says Adrian Mastracci of KCM Wealth Management in Vancouver.

Typically, an investor purchasing a protective put agrees to sell an asset, say a stock, at a specified price on or before a pre-determined date.

An investor who uses protective puts typically owns the underlying asset. So, it is difficult to say for certain why a protective put is not allowed.

The bigger consideration is which investment strategy is appropriate in a registered plan. One caution in using puts and calls in a registered plan when an investor does not own the underlying security is that the put or call becomes worthless at the expiry date. Further, many investors don't have sufficient knowledge of these investment vehicles.

A registered plan either supplements an investor's pension plan or replaces it -- especially for the self-employed. Either way, the registered plan is a "pensionable asset." Thus, the investment strategy followed should be appropriate for each circumstance.

Protective puts can reduce risk in times of uncertainty. Investors can use puts to lock in profits or limit losses in equity positions.

Investment strategies that include puts and calls may be better suited outside a registered plan. The preferential tax treatment of capital gains and losses is better in a personal or corporate account. If a capital loss is incurred in a registered plan, it is a real loss because the tax benefits are lost.

For his clients, the investment strategy is the first consideration.

Question: I am a Canadian resident with dual citizenship (Canadian and American). I have all my investments in Canada and pay Canadian taxes, but also file taxes in the United States. I don't pay U.S. tax because we earn less than the foreign earned income exclusion.

I am guessing that fixed-income products in U.S. currency probably pay more in the U.S. than what I am finding in Canada.

I was wondering what would be the tax implications if I decided to buy a term deposit in a U.S. bank or a bond from a U.S. brokerage.

How would I avoid withholding tax and dual taxation on my investments? Any advice would be appreciated.

Answer: As a U.S. citizen, you are required to file a U.S. income tax return, no matter where you live, says Kevyn Nightingale, a chartered accountant.

The return must include your income, no matter where it is earned. Canada also taxes your worldwide income.

The Foreign Earned Income Exclusion eliminates U.S. tax on up to US$80,000 of wages or gross self-employment income.

Foreign Tax Credits (FTCs) generally work to avoid (or at least minimize) double-taxation of investment income.

Canada and the United States each offer FTCs, in respect of income earned in the other country. However, the rules for FTCs are quite complicated and, if you have income on both sides of the border, you may need a professional to assist you with the calculation each year.

As a U.S. citizen, there should be no withholding tax on interest earned from U.S. sources. You will need to provide the brokerage with form W-9 in order to inform them that you are a U.S. citizen. U.S. forms are available at www.irs.gov.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.