Author Topic: Finally reaching the non-tax sheltered account stage  (Read 3531 times)

lizi

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Finally reaching the non-tax sheltered account stage
« on: July 28, 2018, 11:30:12 AM »
With a quick click of a mouse on Monday I will have maxed out all registered accounts that DH and I have. So now we are venturing into unregistered territory and I want some advice. Reading the Rich Moose blog has made me realize my strategy to date probably hasn't been that efficient, so I'm also going to re-jig my allocation within our RRSP & TFSA buckets as well.

Current allocation (across the board) is:
VAB 20%
VCN 27%
VEE 6%
VI 20%
VSP 27%

Based on the previously recommended ETF portfolio on Canadian Portfolio Manager, which I now see has changed to have XAW instead of all the non-Canadian ETFs.

DH (higher income earner, will stay that way for the next 4 years)
I'm looking at swap-based ETFs for DH's non-registered account, and based on a combination of tax efficiency by account type and information on swap-based ETFs, I'm thinking I should change the registered allocations to lower the Canadian and bond ETFs and focus on international, and use HBB and HXT for the non-registered account. Of course this would have to happen gradually over time, as the amount in the registered accounts dwarfs the non-registered. But it would look something like this:

VAB/HBB 20% (HBB in margin)
VCN/HXT 27% (HXT in margin)
VEE 6%
VI 20%
VSP 27%

Me (lower income earner, possibility of earning more over next 4 years, will never hit the heights of DH's income)
Based on the first article above, it doesn't really make a difference if I use swap-based ETFs. So I will probably stick to current allocation, but have only VCN & VAB in my margin account.

Questions:
1. Does the above make sense, in terms of using swap-based ETFs, and the allocation between registered and non-registered accounts?
2. Is my allocation overly complex, and should I be shifting away from different international ETFs and moving to XAW?
3. Are swap-based ETFs worth it for a short period of high income (4 years), followed by *hopefully* a period of lower income when DH downsizes his career?

Thanks for your help!
« Last Edit: July 29, 2018, 08:48:40 AM by BrakeForTurtles »

RichMoose

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Re: Finally reaching the non-tax sheltered account stage
« Reply #1 on: July 28, 2018, 11:05:20 PM »
Have you thought about using your non registered account just for bonds using HBB.TO?
It keeps the growth in the tax advantaged accounts for as long as possible, increasing your tax efficiency.
And yes, particularly with the bonds it is definitely worthwhile using swap ETFs. It cuts your tax rate by more than half and offers better flexibility in when you realize income.

Prairie Stash

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Re: Finally reaching the non-tax sheltered account stage
« Reply #2 on: July 30, 2018, 09:28:27 AM »
Questions:
1. Does the above make sense, in terms of using swap-based ETFs, and the allocation between registered and non-registered accounts?
NO, it lacks income levels
2. Is my allocation overly complex, and should I be shifting away from different international ETFs and moving to XAW?
Different discussion
3. Are swap-based ETFs worth it for a short period of high income (4 years), followed by *hopefully* a period of lower income when DH downsizes his career?
NO, you haven't made your case

You haven't answered the fundamental questions; what are your respective incomes?

If your income is under $46,000, you have an advantage that Rich Moose hasn't addressed in his articles you linked. In a dual income couple, with one high and one low income, residing in Ontario, there is a unique opportunity; low income earners don't pay tax on Dividends in Ontario! A non-registered account in the hands of a low income can very much resemble a TFSA! Under $46k in earnings all dividends are negative tax in Ontario, that's a hell of a lot better then bonds.

You shouldn't have simultaneously started margin accounts, yours should have been started a year or two earlier. With 2 different incomes (high/low), the high income should fully fund RRSP and TFSA contributions for both people and the low income should move their money into a taxable account (this makes it difficult for the high income to start a margin account, thats a good thing). This puts all the gains in the taxable account into the hands of the low income earner and shifts the tax burden. The high income earner should pay all the bills, leaving all the earnings for the low income earner to go into the margin account. This is the single biggest argument for seperate accounts (vs. joint), it only applies to the select few families where they max out investments, its fairly uncommon so you don't find much onlie about it (online articles are tailored to the 99%, you are in the 1% of savers).

I employ this strategy. I fully fund my RRSP, TFSA, my spouses RRSP, spouse TFSA, RESP (2 kids) and pay 100% of all bills. She then can save all her money into a margin account (and pays no tax on the dividends, none on the gains either since we do buy/hold), ths even includes CCB money (pro tip for families with kids, that can be a source of income for margin accounts). We encourage Canadian (eligible) dividends on her account, its all tax free and constantly resets the ACB on the account higher; in the future we will pay no tax as there won't be much for capital gains. Basically, her margin account will never pay taxes, much like a TFSA! The single biggest factor is seperate accounts, joint accounts make the paper trail a mess. Joint margin acounts are a rookie mistake, its unnecessary and just makes a mess of everything. I'm giving you a tax reason for seperate accounts, do not open a joint margin account (its not any more difficult, do it right to begin with).

I wouldn't hold bonds in your account. Dividends may be tax free depending on your income. You and your Husband SHOULD NOT be holding the same items in your accounts, thats guaranteed to be a mistake.

Until you post the income levels, all advice is incomplete. All advice is tailored to the posters situation, not yours. This advice works amazing in my situation, we achieve TFSA returns on a larger pot of money.

lizi

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Re: Finally reaching the non-tax sheltered account stage
« Reply #3 on: July 30, 2018, 08:16:53 PM »
DH is currently ~$100K, and I'm all over the place but definitely less than $46K this year, and future years probably unlikely to pass $60K. We're about to move overseas for 3-4 years but I will remain a factual resident of Ontario and DH will be a deemed resident (i.e. Paying federal tax plus federal surcharge).

I guess our mistake is that we have both been maxing out my TFSA instead of me starting a margin account earlier, but we have shifted all the bills to DH and I invest that money instead. We would have different approaches for our (separate) margin accounts, because like you say I can benefit from the tax situation in my income bracket. The swap-based ETFs would be for DH only.

Given that we are opening our margin accounts at the same time, would you recommend what RichMoose said about having DH's be swap-based bond ETFs (HBB), and mine be Canadian dividend paying ETFs? Does VCN fall under that category?

Also @RichMoose, I sent DH a few articles from your blog and now he is fully hooked. He keeps quoting you and I have to balance rolling my eyes and being delighted at the same time, because it's all stuff I've been saying for YEARS but somehow he has absorbed it through your writing. So thank you very much for getting through much more quickly than me!

Prairie Stash

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Re: Finally reaching the non-tax sheltered account stage
« Reply #4 on: July 31, 2018, 10:10:39 AM »
TFSA and RRSP can be considered bills, have your husband pay them (contribute). Its the only form of income splitting allowed, might as well use it. It really slows down his margin account (which is good) and boosts yours (low tax bracket). On a $100k income, 18% goes to his RRSP ($18k, less pension by employer), $3k to your RRSP, $11K goes to the TFSA (both) and then bills($40k?) and taxes ($20k?). That leaves under $20k unaccounted for, please adjust to fit your situation of course. Its meant to illustrate that he can transfer a lot of money into tax shelters (including the ones in your name).

Meanwhile, lets pretend you earn $30k. You pay taxes of $3000, making up numbers here. After that you can put $27k into the margin account, on your smaller salary its likely you have more in the margin account. If you DON'T make it a joint account, its taxed 100% in your hand. The other catch, he can't put money from his accounts into it, you can't have your paycheque go into a joint chequing account (once its there its considered co-mingled, theres no disinction between his and hers in a joint acount).

His paying of your TFSA and RRSP are the only ways to transfer money between spouses without consequence. Any other shared account is based upon earnings; so if you earn $30k and he earns $100k, a shared account is 30/130 or 23% yours and he owns 77% of the capital gains (the 50/50 is a tax myth)! That's why I consider joint accounts stupid, they transfer taxes to higher earners when its simple to keep the taxes towards low earners (at lower rates). It only applies to mustachians of course, for everyone else, joint accounts are fine (since non-mustachians don't have margin accounts). As a whole, you'll be paying (no tax) on 60% of your households margin accounts (or more), thats even better then the 50/50 some people espouse.

Rich Moose has excellent investment strategies, I like them. Just remember to do asset allocation across all your accounts (its a bit of a pain, make a spreadsheet), don't do the classic mistake of having each account with multiple assets (your margin account should really have a single ETF, no need to make it complicated). I think you should do dividends, you won't owe taxes if you are under $46k and not very much if you hit $60k. Reinvest them and it adjusts the ACB upwards, its better then a swap based products for low income Ontario residents. When its time to sell, you won't owe capital gains (because of all the dividends adjusting the ACB) and be able to draw them down, alongside your RRSP, and continue to fund TFSA (potentially, my wife is going to do this starting in a few years). When you hit 65 you will have a massive TFSA and be considered low income and get OAS! Its important to consider your entire lifetime when planning (and you're doing a fine job).

PS - Low income is a factual description of your tax circumstance. As a household you are high income, but we don't pay taxes as a household in Canada.

RichMoose

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Re: Finally reaching the non-tax sheltered account stage
« Reply #5 on: July 31, 2018, 11:06:26 AM »
DH is currently ~$100K, and I'm all over the place but definitely less than $46K this year, and future years probably unlikely to pass $60K. We're about to move overseas for 3-4 years but I will remain a factual resident of Ontario and DH will be a deemed resident (i.e. Paying federal tax plus federal surcharge).

I guess our mistake is that we have both been maxing out my TFSA instead of me starting a margin account earlier, but we have shifted all the bills to DH and I invest that money instead. We would have different approaches for our (separate) margin accounts, because like you say I can benefit from the tax situation in my income bracket. The swap-based ETFs would be for DH only.

Given that we are opening our margin accounts at the same time, would you recommend what RichMoose said about having DH's be swap-based bond ETFs (HBB), and mine be Canadian dividend paying ETFs? Does VCN fall under that category?
I think Prairie Stash did a great job of addressing the set up for high income spouse pays all bills and contributes to registered accounts, low income spouse contributes everything to their non-registered account.

My additional pointers would be to always make sure your non-registered accounts are joint accounts. If your incomes are very different, set up two joint non-registered accounts. However, make sure that only you contribute to your joint investment account and only DH contributes to his joint investment account (hopefully that makes sense). What matters is who contributes to the account, not the names pasted on the account. The main benefit of having your accounts set up as joint accounts is that if something happens to one of you, the assets seamlessly transfer to you without the hassle of estate lawyers and fighting with the banks because your name isn't on the account. Same goes for your house, your vehicles, etc. Joint always.

As far as when to use swap-based ETFs in non-registered accounts, my position is that you should always use swap-based bonds (HBB.TO) because the tax advantages are simply to huge to ignore regardless of the income level. So, as you contribute to your non-registered accounts, slowly move all of your bond allocation into the NR accounts and use HBB.TO.
Then, the next assets you should move over are Canadian stocks. If you income is over $92,000, go with swap-based ETF (HXT.TO), if it's between $45,000-$92,000 you can go with either one. Swap-based can offer some income realization flexibility and make you eligible for more government benefits (no gross-up on dividends and only 50% inclusion on realized gains), traditional ETFs (like VCN.TO, ZCN.TO, or XIC.TO) can be more tax efficient at the headline level. If your income is under $45,000, it is likely best to go with traditional ETFs.
The last assets to move to NR accounts should be international stocks. If you do this, most people are likely better off with swap-based ETFs unless their income is low and they intentionally choose low-yielding ETFs.
Of course it always gets more complicated then this because you can play little tricks like strategically harvesting capital gains at low tax rate opportunities to increase your ACB.

Finally, if you haven't considered it yet, you may want to look at switching your RRSP to U.S. dollars and buying VT, VTI/VEU, or ITOT/IXUS. It will somewhat reduce fees and withholding taxes and if your RRSP is now full, the cost of changing the money should be super low. Look at Norbert's Gambit as well for this.

Also RichMoose, I sent DH a few articles from your blog and now he is fully hooked. He keeps quoting you and I have to balance rolling my eyes and being delighted at the same time, because it's all stuff I've been saying for YEARS but somehow he has absorbed it through your writing. So thank you very much for getting through much more quickly than me!
Thanks and always happy to get feedback from readers!

lizi

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Re: Finally reaching the non-tax sheltered account stage
« Reply #6 on: July 31, 2018, 06:55:30 PM »
Thank you so much Prairie Stash and RichMoose! That makes it A LOT clearer in my mind and gives me some good strategies going forward. As always I appreciate the expertise and patience it takes to explain these things on the forum.

Prairie Stash - I understand that joint margin accounts can be tricky, but if I can show the only deposits are coming from my (non-joint) chequing account, and that invest less than I earn, can I not prove that only I made contributions and therefore all capital gains are mine alone? I.e. What RichMoose was saying in his last post. Then DH can make transfers directly into my TFSA and RRSP (we also have a spousal RRSP set up) to avoid muddying the waters with his money going through my account.

I'm really going to have to do some reading on the ACB calculations. I thought I understood it but after reading the last posts from both of you I'm not so sure. It will be a while until that becomes an issue so I will start my research now. From what I had gathered so far, I should be tracking what the purchase price is each time I buy ETFs, right? And then when I sell that price is factored in to calculate the capital gains.

Prairie Stash

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Re: Finally reaching the non-tax sheltered account stage
« Reply #7 on: August 01, 2018, 12:39:50 PM »
Prairie Stash - I understand that joint margin accounts can be tricky, but if I can show the only deposits are coming from my (non-joint) chequing account, and that invest less than I earn, can I not prove that only I made contributions and therefore all capital gains are mine alone? I.e. What RichMoose was saying in his last post. Then DH can make transfers directly into my TFSA and RRSP (we also have a spousal RRSP set up) to avoid muddying the waters with his money going through my account.

I'm really going to have to do some reading on the ACB calculations. I thought I understood it but after reading the last posts from both of you I'm not so sure. It will be a while until that becomes an issue so I will start my research now. From what I had gathered so far, I should be tracking what the purchase price is each time I buy ETFs, right? And then when I sell that price is factored in to calculate the capital gains.
Perfect strategy. You have a paper trail with clear intent.

ACB is your friend. You have it correct, you track your purchase costs and subtract that from your sale cost. I thing of ACB as "average cost" as opposed to adjusted, it makes more sense to me. Its really just the average cost of all the purchases.

Hypothetical scenario: A stock is valued at $10 in year 0 and goes to $20 in year 10 at a linear increase of $1/year. Every year you reinvest your dividends, so in the second year its at $11 when you buy, then $12 etc. Each year you pay no tax on the dividends, low income. When its time to sell your average purchase cost may be $13, so you pay gains on the $7 instead of $10 per share (30% less tax).

Capital Gains tax is calculated in a weird way, most people get it wrong. You pay your full tax rate on 50% of the gains, its not taxed at 50% of your tax rate. So if you sell $40,000 of shares at $20, with an ACB of $13 you owe tax on $7000 (do the math, make sure you see how its done), below your basic exemption for the year if you have no other income. Its tax free if done correctly. The WRONG way is to say you owe 50% tax on $14,000, that would show a tax bill :( 
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-127-capital-gains/you-calculate-your-capital-gain-loss/example-calculate-your-capital-gain.html

You would also pull $4000 from RRSP that year,still below basic exemption, to give you $44,000 to live off (tax free). If you don't spend it all, you put the leftover money into the TFSA. If your husband is retired, he also pulls $11,000 from his RRSP (tax free) and you can live off it or save it in the TFSA. Pretty crazy

Thats why margin accounts are awesome! You can have $55,000 to live off, tax free. But, also its good to have some RRSP for the initial tax break (notice that $4000, it takes $100,000/year with the 4% rule to generate it, how much of that was tax refunds?), its the combo of all 3 account types that makes this work. The TFSA is the safety precaution, its for years with exceptional funding requirements only (i.e. you need $20k extra every 10 years).

Proportionally, you could have $100,00 in RRSP and $3-500,000 (or more) in a margin account and pay no tax depending on ACB and the dividend/gains allocations, that was a simple scenario for educational purposes. You could also have another $100,000 in TFSA, thats a lot of cash. Its hard to "max" out margin accounts as a low income earner. To me, that's why lower incomes should start them sooner, its hard to reach the threshold amounts.

Heres a good source for dividends that applies to you. In certain rare cases, your margin account may save you taxes next year. That's right, dividend in Ontario can REDUCE taxes. I'm jealous of that part.
https://www.taxtips.ca/dtc/enhanceddtc/negtaxrate.htm

K-ice

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Re: Finally reaching the non-tax sheltered account stage
« Reply #8 on: August 05, 2018, 10:54:14 PM »
Here are some quick rules I remember.

First allocation is more important than location. But if your RRSP & TFSA are getting close to full it’s good to start planning what goes where.

RRSP should have most of your bonds like VAB
TFSA should have most of your foreign like VXC
Unregistered should have most of your Canadian dividend like VCN or VDY.

If you hold US stocks in USD there are some tax advantages to keeping them in your RRSP, but I don’t personally bother with USD investing.

Mighty Eyebrows

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Re: Finally reaching the non-tax sheltered account stage
« Reply #9 on: August 16, 2018, 10:04:26 PM »
That's right, dividend in Ontario can REDUCE taxes. I'm jealous of that part.

Prairie Stash, thanks for your comments. It made me go back and look at our plans in more detail. I note that BC also has an attractive dividend rate for the first tax bracket:
https://www.taxtips.ca/taxrates/bc.htm

(Edit for poor grammar)
« Last Edit: August 27, 2018, 10:35:00 PM by Mighty Eyebrows Boy »