Author Topic: Investment Tax efficiency for Canadian Investor  (Read 4825 times)

Studesy

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Investment Tax efficiency for Canadian Investor
« on: January 31, 2018, 11:04:05 AM »
I am in the process of selling my business and am interested in any advice / perspective other Canadians have to offer in regards to the allocation of various types of investments among various accounts.  Given that all tax advantaged accounts will be maxed (TFSA & RRSP), what is the most tax efficient way to hold the remainder of the capital? Inside a corporation, a trust, or held personally?

Now lets assume a variety of equity holdings to be allocated between these accounts;

1. Long term holds/compounders (companies I plan to hold for a long time)
2. Undervalued situations with a shorter expected timline
3. Special Situations (usually the shortest timeline)
4. Cash
5. Borrowed funds
5. US / Foreign equities

Which investment types should be held in which accounts?

I do plan on meeting with a tax planner but was hoping for any advice/ideas from others.
If anyone can chime in on this topic it would be appreciated. TIA



bizaro86

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Re: Investment Tax efficiency for Canadian Investor
« Reply #1 on: January 31, 2018, 02:39:51 PM »
Special situations are great for TFSA, probably the fastest way to compound capital, and it makes a big difference not to pay tax on every transation.

Compounders are great for non registered funds, since if you don't sell you defer the tax indefinitely.

US stocks that pay dividends are a good choice for your RRSP, because then there is no dividend tax in US or Canada. TFSA is the worst place for US dividend stocks, because they take withholding so you're paying tax on your TFSA.


rb

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Re: Investment Tax efficiency for Canadian Investor
« Reply #2 on: January 31, 2018, 03:04:32 PM »
Studesy, just like anything else the answer depends on the circumstances.

What is your income going to be after you sell the business? How much money do you need to spend? At what stage are you in life? Do you have kids? Is divorce a possibility for you? If you have kids do you have an inheritance plan? Do you want to protect the assets in case one of your kids gets divorced? Are you going to be living in different tax jurisdictions in the future?

The right answers in regards to allocation between different structures depend on the answers to the questions above and more. Holding companies and trusts are great tools that enable you to do lots of stuff. But they make sense in some situations and not in others.

Depending on the situation it can be a very bad idea to max out RRSP so you want to keep a good eye on that. Also don't keep long term compounders in the RRSP.

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.

scorpioncapital

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Re: Investment Tax efficiency for Canadian Investor
« Reply #3 on: January 31, 2018, 03:06:40 PM »
The most tax efficient plan in Canada for both investment and income taxation is called 'non-residence'  ;D

Also while it's true that these registered plans have some benefits one negative is the inability to use leverage. The value of leverage is a question mark but it often is more than the benefits of the plans, especially as you can deduct the interest expense against all sources of income, thus potentially really lowering your tax bill. It isn't necessary for the cost of leverage to exceed dividend income so this is probably the one last decent tax break on investments.


« Last Edit: January 31, 2018, 03:10:11 PM by scorpioncapital »

Studesy

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Re: Investment Tax efficiency for Canadian Investor
« Reply #4 on: January 31, 2018, 04:01:06 PM »
Special situations are great for TFSA, probably the fastest way to compound capital, and it makes a big difference not to pay tax on every transation.

Compounders are great for non registered funds, since if you don't sell you defer the tax indefinitely.

US stocks that pay dividends are a good choice for your RRSP, because then there is no dividend tax in US or Canada. TFSA is the worst place for US dividend stocks, because they take withholding so you're paying tax on your TFSA.

Thanks for the input. Mostly in line with what I was thinking.

Studesy

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Re: Investment Tax efficiency for Canadian Investor
« Reply #5 on: January 31, 2018, 04:07:43 PM »
Studesy, just like anything else the answer depends on the circumstances.

What is your income going to be after you sell the business? How much money do you need to spend? At what stage are you in life? Do you have kids? Is divorce a possibility for you? If you have kids do you have an inheritance plan? Do you want to protect the assets in case one of your kids gets divorced? Are you going to be living in different tax jurisdictions in the future?

The right answers in regards to allocation between different structures depend on the answers to the questions above and more. Holding companies and trusts are great tools that enable you to do lots of stuff. But they make sense in some situations and not in others.

Depending on the situation it can be a very bad idea to max out RRSP so you want to keep a good eye on that. Also don't keep long term compounders in the RRSP.

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.

Thanks Rb. I know what you are saying about "each person's situation is different". Just looking for whatever big picture input I can. Have never spent much time looking at tax efficiency as the majority of my assets have been held withing my business and a separate holdings Co. That was created years back.
Definitely something I want to educate my self on more going forward. Cheers

rb

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Re: Investment Tax efficiency for Canadian Investor
« Reply #6 on: January 31, 2018, 04:10:46 PM »
You're welcome. Feel free to ask whatever else you need to know. If you don't want to make it a public post you can PM me. I work a lot with these types of situations.

Studesy

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Re: Investment Tax efficiency for Canadian Investor
« Reply #7 on: January 31, 2018, 04:12:57 PM »

Also while it's true that these registered plans have some benefits one negative is the inability to use leverage.

Leverage via long call options is possible though.

Also, when you speak of non residence, are you referring to setting up accounts in a offshore/tax free jurisdiction.... Or physically moving to one of these places?

Thanks again for the input.

KCLarkin

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Re: Investment Tax efficiency for Canadian Investor
« Reply #8 on: January 31, 2018, 04:26:30 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:

Let's assume you have income of $100k. Let's say you have dividends of $10k from US stocks and $10K from CAD stocks. And you can either put all of your US stocks in TFSA or Taxable.

Scenario A: CAD in TFSA, US in Taxable

CAD Div tax: $0
US-sourced tax (at 43.41% marginal rate): $4341
Total Tax: $4341

Note: I have ignored withholding tax and the corresponding foreign tax credit b/c I believe they will cancel each other out.

Scenario B: CAD in Taxable, US in TFSA
Cad Div tax (at 25% eligible dividend rate): $2500
US-tax (15% withholding tax): $1500

Total Tax: $4000

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

Studesy

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Re: Investment Tax efficiency for Canadian Investor
« Reply #9 on: January 31, 2018, 04:36:46 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:

Let's assume you have income of $100k. Let's say you have dividends of $10k from US stocks and $10K from CAD stocks. And you can either put all of your US stocks in TFSA or Taxable.

Scenario A: CAD in TFSA, US in Taxable

CAD Div tax: $0
US-sourced tax (at 43.41% marginal rate): $4341
Total Tax: $4341

Note: I have ignored withholding tax and the corresponding foreign tax credit b/c I believe they will cancel each other out.

Scenario B: CAD in Taxable, US in TFSA
Cad Div tax (at 25% eligible dividend rate): $2500
US-tax (15% withholding tax): $1500

Total Tax: $4000

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