Expat Canadians Investing While Abroad

What happens to investment accounts at Canadian brokerages when a Canadian goes out of the country to work or live? Would you want to be forced to transfer your investment accounts to another country for a few years in order to manage them or be obliged to leave them inactive?

For self-directed, self-managed investors, such a prospect can be particularly frustrating since technology enables Internet or telephone access to accounts from virtually anywhere. Unfortunately, the WWB (World Wide Bureaucracy) has complex rules that may bring a full stop to such activities. If you are not leaving permanently with your money/investments and you wish to keep your accounts open and available for trading, you need to be careful.

The issue arises from this fact taken from the Ontario Securities Commission note on Cross Border Trading:

"As a fundamental principle in securities regulation, for a securities broker to deal with a client, the broker needs to be registered with the securities authority in the jurisdiction where the client is resident. This applies in the individual states in the U.S. and in the provinces and territories of Canada."

So where are you considered to be "resident"? It all hinges on the meaning of that word resident, which is defined in different ways by different authorities, or even not at all explicitly, leaving the matter to the varying interpretation of court cases, to the utter frustration and dismay of us poor schmucks who have to figure it out.

Here is part of the OSC's response to my enquiry on the issue:
"The term "residency" is not defined in Ontario securities law. Where questions of jurisdiction are to be determined, it must be done on the basis of specific facts and not hypothetically. The basis of jurisdiction may be differently interpreted and applied in different jurisdictions. We cannot give you an opinion or interpretation of Ontario securities law, nor of any other jurisdiction."

The oft-quoted principle that being 183 days or more (i.e. more than half the year) in a place makes you a resident may not apply. A few years ago, Canadian snowbirds with RRSPS and RRIFs found that Canadian brokers refused to allow them to trade in those accounts. As a result of many protests, the US federal regulator, the Securities and Exchange Commission, made a special ruling outlined in the note Canadian Tax-Deferred Retirement Savings Accounts that exempts those type of accounts and allows Canadians to continue trading in them while in the US. It also contains this ominous statement,
"... federal securities laws generally require that securities transactions made for U.S. residents-even those in the U.S. for only a brief period of time-and brokers who sell those securities be registered with the SEC". What the "brief period of time" might be I do not know.

The SEC exemption that removed the restriction on trading in RRSPs and RRIFs did so only for those type of accounts. Regular taxable trading accounts are being blocked. I'm not 100% sure but I believe the reason Canadian brokerages have not fixed the problem simply by registering in both Canada and the USA is that the securities being traded must also be registered in the proper jurisdictions. In the case of the USA, the individual States also have registration requirements as the afore-mentioned SEC note says. Our cherished OSC sums it up nicely: "Due to the complexity of regulations and the confusion as to which states have accepted or partially accepted the SEC process, many compliance departments of Ontario registered brokers have decided that their firms will NOT transact any business from those customers while they are on US soil." Welcome to the WWB!

All this is supposedly motivated by a desire to protect the investor from fraud as paragraph 1.1(a) of the Ontario Securities Act says and this document Investing and the Internet by the OSC suggests. In the case of the USA, there are evidently other motives too, namely to protect the business of US investment firms - see III - Cost Benefit Analysis in the explanation of the ruling where it says the ruling will not significantly harm US brokers by taking away the potential business of Canadians forced to move their accounts to the US.

The brokers are the ones we must deal with and it is their interpretation and application of the law and regulation that counts in the end. Part of the OSC's response to me included this: "Dealers and advisers in Ontario have developed compliance policies to ensure they do not risk breaching the laws of foreign jurisdictions. These policies are not specifically prescribed by Ontario securities law and may vary from firm to firm."

One should therefore not expect that they will all do it the same but I was puzzled and amused by the discussion by several Canadians living in Japan on a Financial Webring thread describing their investing activities despite living outside Canada for many years. One broker evidently is deducting taxes at the rate for non-residents while continuing to allow trading. I am not familiar with securities regulation in Japan but perhaps trading is allowed to continue because there are no restrictions in Japan that Canadian brokers would violate and the broker knows that the Canadian regulator will in fact do nothing about it (the OSC's response to my enquiry left me the strong impression that the OSC would not care - they only mention the foreign jurisdiction problems). Or maybe different parts of the brokerage business don't communicate well enough to catch it. Or maybe the brokerage applies what the OSC also said in their response to my enquiry: "The citizenship and tax status of the investor is generally not relevant in applying Ontario securities law."

In the UK, so far as I could determine from two separate calls to the regulator, the Financial Services Authority, there is no legal restriction for UK brokers to deal with non-residents ... though phone calls to a couple of UK brokers also revealed that they will not open an account unless you are a UK resident. Maybe it's only the US that is an issue because only the US will punish the brokers.

Out of curiosity, I called BMO Investorline to ask how they deal with this stuff. According to the telephone rep I spoke to (who knows if it could be different in practise or with a different person), they rely on the investor to inform them through an address change notice, though they also suspend an account if signs show a person is gone or mail is returned. When pressed about when a person becomes a non-resident, they said they use the 183 days+ absence rule but they have no way of knowing the length of absences.

What to Do to Keep A Canadian Brokerage Account Happily Active.
Let us call this the benign neglect or the "See No Evil, Hear No Evil" approach. Ultimately it doesn't economic make sense for brokers to stop their clients trading - that's how they make their profits. So don't provoke them or force the issue.

1) Decide for yourself whether you are a Canadian resident for brokerage purposes (which is not the same as for tax purposes). If your answer is yes, Keep a Canadian Street Address to receive mailed statements and have an official location within Canada, not just a post office box, and if you need to inform the broker about a new address prior to leaving, make sure it is a province where the broker is registered
2) Do your trading online; it's cheaper and faster anyway