Author Topic: Investment Tax efficiency for Canadian Investor  (Read 4340 times)

scorpioncapital

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Re: Investment Tax efficiency for Canadian Investor
« Reply #10 on: January 31, 2018, 04:38:26 PM »
I didn't think about the call option strategy, it sounds quite interesting. I guess you would buy a call at 1/2 the strike of the stock with 100% of the RRSP funds to simulate 50% margin leverage. You'd pay an implied interest rate a bit higher but you could move a leveraged taxable portfolio into an RRSP/TFSA.

Yes, I mean to change physical residency to a country that doesn't tax capital gains...however this may not be practical for all. This would be the ultimate tax efficiency.

However, I calculate that generally if you string out a decent amount of gains each year - and have minimal other types of income, your marginal tax on capital gains is generally no more than 15% so it may not be worth the bother unless there are other considerations.

« Last Edit: January 31, 2018, 04:41:10 PM by scorpioncapital »


Studesy

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Re: Investment Tax efficiency for Canadian Investor
« Reply #11 on: January 31, 2018, 04:54:53 PM »
I didn't think about the call option strategy, it sounds quite interesting. I guess you would buy a call at 1/2 the strike of the stock with 100% of the RRSP funds to simulate 50% margin leverage.

Yes....you can also hold call options in TFSA. Not sure if this would be a better place than the RRSP for options or not though. I suppose if the options provided outsized returns over time...the TFSa may be best as there is no tax when the cash is taken out. I would never fill one of these accounts to accumulate excessive leverage....but I do like to lever up a bit (say 25%) if things get cheap enough.
Cheers

EliG

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Re: Investment Tax efficiency for Canadian Investor
« Reply #12 on: January 31, 2018, 05:05:34 PM »
Generally what bizaro said is correct. He's wrong about that the worst place for US dividend stocks in the TFSA. In the TFSA you pay 15% on divvys and no tax on cap gain. If you held the stock in a cash/margin account you'd pay tax on divvys at your marginal rate (higher than 15%) and pay marginal rate tax on half the cap gain. TFSA is clearly a superior location.

Just to clarify on what rb is saying:

<snip>

So the general advice to avoid US stocks in TFSA isn't always applicable.

Makes sense KC. So marginal tax rate really matters with this stuff. Lots of moving parts.
Cheers

Moving parts:
- marginal tax rates on ordinary income and eligible Canadian dividends (these vary by province)
- actual dividend yields of your various holdings

This article shows how to attack the problem:

Asset Location Across Canada: Some Rules Are Made To Be Broken


bizaro86

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Re: Investment Tax efficiency for Canadian Investor
« Reply #13 on: January 31, 2018, 05:12:51 PM »


Generally what bizaro said is correct. He's wrong about that the worst place for US dividend stocks in the TFSA. In the TFSA you pay 15% on divvys and no tax on cap gain. If you held the stock in a cash/margin account you'd pay tax on divvys at your marginal rate (higher than 15%) and pay marginal rate tax on half the cap gain. TFSA is clearly a superior location.

I put that poorly, sorry. While US stocks are better in a TFSA than outside, for most investors it would be wise to leave them out, since TFSA room is limited.

US dividends go from your marginal rate to 15%, while Canadian REITs or interest income goes from your marginal rate to 0%. Thus, if your TFSA is a small portion of investible assets (which I assume from the tone of the OP), there are probably better choices for the TFSA.

Studesy

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Re: Investment Tax efficiency for Canadian Investor
« Reply #14 on: January 31, 2018, 05:27:32 PM »
Generally what bizaro said is correct. He's wrong about that the worst place for US dividend stocks in the TFSA. In the TFSA you pay 15% on divvys and no tax on cap gain. If you held the stock in a cash/margin account you'd pay tax on divvys at your marginal rate (higher than 15%) and pay marginal rate tax on half the cap gain. TFSA is clearly a superior location.

Just to clarify on what rb is saying:

<snip>

So the general advice to avoid US stocks in TFSA isn't always applicable.

Makes sense KC. So marginal tax rate really matters with this stuff. Lots of moving parts.
Cheers

Moving parts:
- marginal tax rates on ordinary income and eligible Canadian dividends (these vary by province)
- actual dividend yields of your various holdings

This article shows how to attack the problem:

Asset Location Across Canada: Some Rules Are Made To Be Broken

Great article. I was not aware of such differences between various province!

rb

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Re: Investment Tax efficiency for Canadian Investor
« Reply #15 on: January 31, 2018, 06:02:02 PM »
I didn't think about the call option strategy, it sounds quite interesting. I guess you would buy a call at 1/2 the strike of the stock with 100% of the RRSP funds to simulate 50% margin leverage.

Yes....you can also hold call options in TFSA. Not sure if this would be a better place than the RRSP for options or not though. I suppose if the options provided outsized returns over time...the TFSa may be best as there is no tax when the cash is taken out. I would never fill one of these accounts to accumulate excessive leverage....but I do like to lever up a bit (say 25%) if things get cheap enough.
Cheers
Here's a nifty little trick. It makes a lot of sense to have a super levered TFSA with call options IF (big IF) you are sure those stocks are going to go up. So if BRK is at 1.2 BV the right move would be to have your TFSA chock full of BRK LEAPS. What this does is greatly stretch your TFSA room as the stock moves from undervalued to fair value. After this is done you'll have tons of TFSA room to accommodate your life's needs. This makes sense even if you have to hold lots of cash elsewhere in order to delver overall. TFSA room is very precious.

Caveats. Be careful at the big IF above. If the stocks go down you'll destroy your TFSA room. Also you need to be careful to avoid designation of a professional investor at which point you can't use TFSA.

Studesy

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Re: Investment Tax efficiency for Canadian Investor
« Reply #16 on: January 31, 2018, 06:20:34 PM »
I didn't think about the call option strategy, it sounds quite interesting. I guess you would buy a call at 1/2 the strike of the stock with 100% of the RRSP funds to simulate 50% margin leverage.

Yes....you can also hold call options in TFSA. Not sure if this would be a better place than the RRSP for options or not though. I suppose if the options provided outsized returns over time...the TFSa may be best as there is no tax when the cash is taken out. I would never fill one of these accounts to accumulate excessive leverage....but I do like to lever up a bit (say 25%) if things get cheap enough.
Cheers
Here's a nifty little trick. It makes a lot of sense to have a super levered TFSA with call options IF (big IF) you are sure those stocks are going to go up. So if BRK is at 1.2 BV the right move would be to have your TFSA chock full of BRK LEAPS. What this does is greatly stretch your TFSA room as the stock moves from undervalued to fair value. After this is done you'll have tons of TFSA room to accommodate your life's needs. This makes sense even if you have to hold lots of cash elsewhere in order to delver overall. TFSA room is very precious.

Caveats. Be careful at the big IF above. If the stocks go down you'll destroy your TFSA room. Also you need to be careful to avoid designation of a professional investor at which point you can't use TFSA.

Yes...so true....and I agree leverage must be measured across all accounts....even if it only exists in one of those accounts.

gokou3

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Re: Investment Tax efficiency for Canadian Investor
« Reply #17 on: January 31, 2018, 11:35:40 PM »
Also you need to be careful to avoid designation of a professional investor at which point you can't use TFSA.

How to avoid it? Tia.

rb

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Re: Investment Tax efficiency for Canadian Investor
« Reply #18 on: January 31, 2018, 11:42:14 PM »
Also you need to be careful to avoid designation of a professional investor at which point you can't use TFSA.

How to avoid it? Tia.
Well ... as usual the rules are complicated. A good way to go about it is to structure your trades as those of a long term investor as opposed to those of a short term speculator. Your background, education and work experience factor in as well. It helps if you're not a financial type.
« Last Edit: January 31, 2018, 11:53:46 PM by rb »

scorpioncapital

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Re: Investment Tax efficiency for Canadian Investor
« Reply #19 on: February 01, 2018, 01:24:34 AM »
LEAPs in these plans sounds really good. I just regret I didn't use them when I had the chance during this last few years of the bull market, on the other hand, they are limited to a subset of capital and in the case of RRSP you really are locking in the funds unless you convert to RRIF and stream it out slowly.

I notice BRK has leaps but until 2020 - technically 2 years from now. I would imagine there are 2.5 year leaps that will come out soon later this year. The ony downside I can imagine with these is you must constantly monitor the situation to renew or cash them in...but this is not a big deal.

I also am wondering what leap pricing will do if rates rise. Right now for example a $140 strike BRK.B 2 year leap is about $86 (simulating let's say a 1.5x leverage rate)...it seems to be about 6% interest over 2 years. IB charges me around 2.7% (and rising). Let's say it's 3%/yr next 2 years, seems almost identical to the LEAP rate - and this would work best with a no dividend stock.

However I agree that if the stock is already overpriced when you do this strategy you're risking a capital loss without the ability to offset future capital gains against it. I also think in a rising environment, margin expense deduction becomes more valuable.

Overall, a good strategy. I think max TFSA today is like $60,000, so you could in theory migrate say $100,000 worth of Berkshire into the plan via options.

« Last Edit: February 01, 2018, 01:52:31 AM by scorpioncapital »