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How can I maximize foreign exposure in my RRSP using mutual funds?

There are several ways you can have more of your RRSP invested in foreign securities without breaking Revenue Canada's rules.

A mutual fund can have up to 30% of its investments in foreign investments without being deemed "foreign property." If you invest $10,000 in an RRSP-eligible fund that has 30% of its portfolio in foreign securities, this fund would still qualify as 100% Canadian content for you. As far as the rules go, you would have nothing invested in foreign property. What this means is that you can easily exceed the 30% limit.

Example:   You have $50,000 in your RRSP, and put 30% of that, or $15,000, into foreign property by investing in an international equity fund that holds stocks. You could invest the remaining $35,000 into a fund that maximizes its foreign content (30%) and is RRSP-eligible. That would mean you would have another $10,500 in international securities. Added to the $15,000 in your international fund, you could potentially have $25,500 or 51% of your RRSP money in foreign investments.

Certain bonds and mutual funds that invest in them can also offer you a way around the foreign content limit. Federal and provincial governments, along with many corporations, raise money by issuing bonds. Often, these are denominated in foreign currencies.

These bonds, called foreign currency bonds, can be held inside your RRSP and qualify as Canadian content. It doesn't matter whether the bonds are issued in yen, marks, or francs. What matters is the nationality of the issuer. As long as a Canadian government or corporation issues the bond, it won't affect your foreign content. You can hold the bonds directly, or buy mutual funds that hold these types of bonds. Many international organizations issue bonds, debentures, and notes. These include the World Bank. These debt securities can all be held inside your RRSP without affecting your foreign content level. Some bond funds invest solely in RRSP-eligible bonds, including foreign-currency bonds, and those issued by qualifying international organizations. Here's another way to boost foreign content in your RRSP--use mutual funds that use futures contracts on foreign stock or bond markets to participate in those markets. These funds count as Canadian content because they typically hold most of their money in Canadian government treasury bills. A similar product that avoids the foreign content rule is an index RRSP mutual fund. They are linked to one specific stock or other index. These funds, particularly those offered by banks, may offer low management expenses compared to other fund types. If you hold funds that count as foreign content, keep in mind that the 30% foreign content limit is calculated on the original cost or book value, as opposed to the current market value. Mutual fund distributions could bump up your book value, so it makes sense to aim for slightly less than 30% foreign content. Consider seeking professional investment advice. An investment that makes sense for one person may not meet your needs.