Author Topic: Canadian Investor - What to buy in my Margin (taxable) account?  (Read 907 times)

max9505672

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Hi all,

I've hit a situation where I need advice on what to buy in my Margin account.

Both my TFSA and RRSP are maxed out, so I am currently investing in a taxable Margin account only only until more room is available in 2021.

I know it's best to hold canadian stocks in my taxable account only, which is what I do (I only own VCN in my margin only).

I know it's also best to hold non-canadian stocks in RRSP and to hold canadian bonds in TFSA and RRSP, which is what I do.

My AA% is where I want it right now and I just want to invest more while still following my AA% strategy.

How should I do that considering my situation of having room in my margin account only and aiming for canadian stocks only? I guess it's now the end of the world to have non-canadian stock in a taxable account, but are there some stocks I should avoid? Any other advices regarding my situation?

Thanks

EDIT:

TL;DR

My accounts:

RRSP = VTI (US$), VUN (US - waiting to do a Norbert Gambit for VTI), XAW (RoR), VAB (bonds)
TFSA = VUN (US), XAW (RoR), VAB (bonds), ZEA
taxable = VCN (CAN)

Basically, my AA% (50% US, 20% CAN, 20% RoR, 10% bonds) is right where I want it now. RRSP is maxed. TFSA is maxed. I have cash to insvest in my taxable so I am looking for stock ETFs/bonds I should buy in my taxable.
« Last Edit: June 16, 2020, 11:16:29 AM by max9505672 »

Spudd

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #1 on: June 15, 2020, 12:40:11 PM »
I don't see any big issue with holding non-Canadian stocks in the taxable account. You get a foreign tax credit to offset any withholding tax that's withheld by the source country. Dividends are taxed like interest (i.e. regular income), but so would interest be.

The only real watchout is if you use ETFs or REITs, you can get some mildly exotic things happening with your distributions, such as return of capital, or phantom distributions, that you have to account for in order to be accurate when filing your taxes. It's easy to account for using a tool like adjustedcostbase.ca but you need to remember to do it.

Posthumane

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #2 on: June 15, 2020, 12:40:46 PM »
I've been a bit confused by this situation as well, and from what I've gathered it depends a bit on where you live. Different provinces have different tax rates for things like dividends capital gains.

Canadian dividend stocks are taxed quite favorably where I live (Alberta) so that's what I started out with, although after a while my taxable accounts started to resemble my TFSA since contributions to the taxable account are not limited and it was the only way for my to maintain my asset allocation.

One thing I think is worth avoiding in taxable accounts is anything that pays returns based on interest income or the like. They are taxed much worse than dividends, but it can be hard to tell at first glance what the payouts consist of.

I guess in hindsight that is not very helpful, so I'll wait until someone more knowledgeable on the subject chimes in...

max9505672

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #3 on: June 15, 2020, 02:26:31 PM »
I don't see any big issue with holding non-Canadian stocks in the taxable account. You get a foreign tax credit to offset any withholding tax that's withheld by the source country. Dividends are taxed like interest (i.e. regular income), but so would interest be.

The only real watchout is if you use ETFs or REITs, you can get some mildly exotic things happening with your distributions, such as return of capital, or phantom distributions, that you have to account for in order to be accurate when filing your taxes. It's easy to account for using a tool like adjustedcostbase.ca but you need to remember to do it.
Should have been more specific. When I talk about stocks and bonds, I mean ETF of stocks and bonds.

I guess at this point, I am looking for some stock ETF options for US and Rest of World (excluding US and CAN) + bond ETF to invest in in my taxable account. Or ETFs to avoid.

K-ice

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #4 on: June 16, 2020, 12:32:39 AM »
If I understand correctly do you just want to invest for the short term ~ 6 months until you can fill your TFSA & RRSP in January again?

If that is the case I would probably just try to find a high interest savings account or maybe a 6 month GIC. That kind of return is probably not worth it in a margin account.

If your TFSA and RRSP are full, and you have next years investment cash earmarked and you still have more to invest you may want to re balance your overall asset allocation so it is in a better location. What I mean is get your Canadian ETFs out of your RRSP and keep the majority of your VCN in your taxable account and don't touch it for years.

My accounts are not perfect but I primarily have the following:

RRSP = VAB & VTI (US$)
TFSA = VXC & VIU
taxable = VDY or VCN

I found this couch potato asset location article helpful:

https://canadiancouchpotato.com/2010/03/05/put-your-assets-in-their-place/#:~:text=Couch%20Potato%20investors%20hear%20a,real%20estate%20in%20your%20portfolio.



max9505672

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #5 on: June 16, 2020, 11:14:07 AM »
If I understand correctly do you just want to invest for the short term ~ 6 months until you can fill your TFSA & RRSP in January again?

If that is the case I would probably just try to find a high interest savings account or maybe a 6 month GIC. That kind of return is probably not worth it in a margin account.

If your TFSA and RRSP are full, and you have next years investment cash earmarked and you still have more to invest you may want to re balance your overall asset allocation so it is in a better location. What I mean is get your Canadian ETFs out of your RRSP and keep the majority of your VCN in your taxable account and don't touch it for years.

My accounts are not perfect but I primarily have the following:

RRSP = VAB & VTI (US$)
TFSA = VXC & VIU
taxable = VDY or VCN

I found this couch potato asset location article helpful:

https://canadiancouchpotato.com/2010/03/05/put-your-assets-in-their-place/#:~:text=Couch%20Potato%20investors%20hear%20a,real%20estate%20in%20your%20portfolio.
No, I want to keep investing for the long term in my taxable. When I have more available room in my TFSA and RRSP, I will invest there in priority.

My accounts:

RRSP = VTI (US$), VUN (US - waiting to do a Norbert Gambit for VTI), XAW (RoR), VAB (bonds)
TFSA = VUN (US), XAW (RoR), VAB (bonds), ZEA
taxable = VCN (CAN)

Basically, my AA% (50% US, 20% CAN, 20% RoR, 10% bonds) is right where I want it now. RRSP is full. TFSA is full. I have cash to insvest in my taxable so I am looking for stock ETFs/bonds I should by in my taxable.

Lews Therin

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #6 on: June 16, 2020, 03:06:05 PM »
Whats your income and province Max? It's pretty much ETFs, Dividends, or Swap-based ETFs depending on your province and income. Check the blog post below and it'll explain the options.

https://therichmoose.com/post20170419/


sixwings

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #7 on: June 16, 2020, 04:56:46 PM »
I generally hold all my stocks in my TFSA and taxable accounts and then my bonds in my RRSPs. That way the growth stocks are in areas that aren't taxed (TFSA) or only taxed at 50% (taxable accounts), and my bonds that grow less will become income later. This way, in retirement, the majority of my income will come from my TFSA which will be tax free. I would not have bonds in my TFSA as that's a waste of your tax advantages of stock growth.

(Obviously I top off my RRSP with stocks if I dont need more bonds)

Lews Therin

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #8 on: June 16, 2020, 07:56:24 PM »
Six wings has a good point, you should have all your Bonds in RRSP, (no need to have your AA repeated in each account, you can have it throughout the whole portfolio.)

Your continuous investments have the effect of rebalancing, if you always invest in whichever stock has gone down compared to your AA.

max9505672

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #9 on: June 17, 2020, 06:41:37 AM »
Whats your income and province Max? It's pretty much ETFs, Dividends, or Swap-based ETFs depending on your province and income. Check the blog post below and it'll explain the options.

https://therichmoose.com/post20170419/
My income is over 92K$ currently and I am in QC. According to your blog post, HXT.TO would be a good option.

max9505672

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #10 on: June 17, 2020, 06:42:48 AM »
I generally hold all my stocks in my TFSA and taxable accounts and then my bonds in my RRSPs. That way the growth stocks are in areas that aren't taxed (TFSA) or only taxed at 50% (taxable accounts), and my bonds that grow less will become income later. This way, in retirement, the majority of my income will come from my TFSA which will be tax free. I would not have bonds in my TFSA as that's a waste of your tax advantages of stock growth.

(Obviously I top off my RRSP with stocks if I dont need more bonds)
Good advice!

max9505672

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #11 on: June 17, 2020, 06:46:16 AM »
Six wings has a good point, you should have all your Bonds in RRSP, (no need to have your AA repeated in each account, you can have it throughout the whole portfolio.)

Your continuous investments have the effect of rebalancing, if you always invest in whichever stock has gone down compared to your AA.
I agree! I'll try to have all my bonds in my RRSP relatively soon.

However, it's not always easy when you have maxed out account. Currently, my only account where I can do continuous investments to rebalance is my taxable. I can't just invest in whichever stock has done down compare to my AA since I don't hold cash in my maxed out RRSP and TFSA and only have canadian stocks (VNC.TO) in my taxable.

Lews Therin

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #12 on: June 17, 2020, 09:44:15 AM »
Whats your income and province Max? It's pretty much ETFs, Dividends, or Swap-based ETFs depending on your province and income. Check the blog post below and it'll explain the options.

https://therichmoose.com/post20170419/
My income is over 92K$ currently and I am in QC. According to your blog post, HXT.TO would be a good option.

Yup. at that level of income, Swap based is your best bet to avoid losing a bunch to taxes.

max9505672

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #13 on: June 19, 2020, 09:04:53 AM »
Whats your income and province Max? It's pretty much ETFs, Dividends, or Swap-based ETFs depending on your province and income. Check the blog post below and it'll explain the options.

https://therichmoose.com/post20170419/
My income is over 92K$ currently and I am in QC. According to your blog post, HXT.TO would be a good option.

Yup. at that level of income, Swap based is your best bet to avoid losing a bunch to taxes.
Thank you!

However, this is still CAN stocks ETF. I need to find what to invest in, other than CAN stocks, in my taxable account in order to maintain my AA%.

Lews Therin

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #14 on: June 20, 2020, 08:03:32 PM »
S&p horizon exists too

max9505672

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #15 on: June 22, 2020, 07:04:34 AM »
S&p horizon exists too
Ok so all of HXS.TO, HXX.TO, HXT.TO and HBB.TO are swap based ETFs that do not pay dividends and all gains are converted to capital gains, so would there be any negative side of owning those in a taxable account?

What's the reason it's usually preferable to own Canadian stock ETF is a taxable account? Tax reason?


Lews Therin

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #16 on: June 22, 2020, 07:25:56 AM »
S&p horizon exists too
Ok so all of HXS.TO, HXX.TO, HXT.TO and HBB.TO are swap based ETFs that do not pay dividends and all gains are converted to capital gains, so would there be any negative side of owning those in a taxable account?

What's the reason it's usually preferable to own Canadian stock ETF is a taxable account? Tax reason?

Canadian stock etfs make sense at lower income ranges, because in some provinces, Canadian dividends are taxed negatively. (I.e. you get even more back from taxes )

The possible negative is if the government closes the loophole that allows swap based ETFs to exist. But so far it's still alive.

max9505672

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #17 on: June 22, 2020, 09:41:32 AM »
S&p horizon exists too
Ok so all of HXS.TO, HXX.TO, HXT.TO and HBB.TO are swap based ETFs that do not pay dividends and all gains are converted to capital gains, so would there be any negative side of owning those in a taxable account?

What's the reason it's usually preferable to own Canadian stock ETF is a taxable account? Tax reason?

Canadian stock etfs make sense at lower income ranges, because in some provinces, Canadian dividends are taxed negatively. (I.e. you get even more back from taxes )

The possible negative is if the government closes the loophole that allows swap based ETFs to exist. But so far it's still alive.
Wow, didn't know Canadian dividends are taxed negatively (for example, according to Taxtips.ca, in BC, they are taxed at -9.60% for first $41,725).
In QC though, they are always taxed (at a minimum of 4.42%). Should I consider selling all of my VCN.TO in my taxable account for HXT.TO?

Also, what's the worst that could happen if the government closes the loophole that allows swap based ETFs to exist you think? What would happen to people holding those ETFs?

Lews Therin

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #18 on: June 22, 2020, 10:57:44 AM »
It would depend on the amount of capital gains you have accumulated already.

I'm not well versed enough to answer for the swap and law portion.

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #19 on: June 22, 2020, 11:11:23 AM »
Ok so all of HXS.TO, HXX.TO, HXT.TO and HBB.TO are swap based ETFs that do not pay dividends and all gains are converted to capital gains, so would there be any negative side of owning those in a taxable account?

For swap based ETFs there have been some changes at how CRA is looking at them. Doesn't sound like deal breaker, but ensure you figure out how this would affect you. 

https://canadiancouchpotato.com/2019/09/06/horizons-swap-etfs-the-next-generation/

I had a small position of HBB and I got rid of it because I didn't want to deal with any extra hassles. I'm a lazy investor so that isn't a general opinion that swap ETFs like HBB are a bad idea.

What's the reason it's usually preferable to own Canadian stock ETF is a taxable account? Tax reason?

Qualified CDN dividends can result in very favourable tax treatment, but it varies by Province and how the rest of your income lines up with the tax code/Gov't benefits so there isn't a simple one size fits all answer.


max9505672

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #20 on: June 23, 2020, 06:55:52 AM »
Qualified CDN dividends can result in very favourable tax treatment, but it varies by Province and how the rest of your income lines up with the tax code/Gov't benefits so there isn't a simple one size fits all answer.
Right!

So at this point, I guess I don't really have a choice to invest in something not very favourable regarding tax treatment in my taxable account in order to maintain my AA%. Would VUN.TO and XAW.TO be bad decisions? I need US and Rest of World options.

Lews Therin

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #21 on: June 23, 2020, 07:39:29 AM »
I`m betting on governmental inertial. :D

I`ve got swap-based.

Horizons will keep changing the structure to reflect loop-holes.

Retire-Canada

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #22 on: June 23, 2020, 12:06:58 PM »
So at this point, I guess I don't really have a choice to invest in something not very favourable regarding tax treatment in my taxable account in order to maintain my AA%. Would VUN.TO and XAW.TO be bad decisions? I need US and Rest of World options.

When it comes to choosing between your AA and optimizing taxes I would always worry about my AA first and taxes second. I have VCN [Canada], VUN [US] and VEE [Emerging Markets] in my taxable account at the moment.

Garrett B.

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #23 on: June 23, 2020, 01:12:03 PM »
I'm also in your situation where my TFSA and RRSP are maxed out.  What I invest in my taxable account are Canadian Index funds to take advantage of the preferential dividend tax rate, and I also invest in Nasdaq Index funds because, while an American equity, it never pays out a dividend/yield so I'll only pay capital gains if/when I sell.   

max9505672

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #24 on: June 23, 2020, 01:41:17 PM »
So at this point, I guess I don't really have a choice to invest in something not very favourable regarding tax treatment in my taxable account in order to maintain my AA%. Would VUN.TO and XAW.TO be bad decisions? I need US and Rest of World options.

When it comes to choosing between your AA and optimizing taxes I would always worry about my AA first and taxes second. I have VCN [Canada], VUN [US] and VEE [Emerging Markets] in my taxable account at the moment.
Thanks for your input. Any special tax implications in holding bond ETF in a taxable account?

max9505672

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #25 on: June 23, 2020, 01:48:35 PM »
I'm also in your situation where my TFSA and RRSP are maxed out.  What I invest in my taxable account are Canadian Index funds to take advantage of the preferential dividend tax rate, and I also invest in Nasdaq Index funds because, while an American equity, it never pays out a dividend/yield so I'll only pay capital gains if/when I sell.   
That looks similar to swap based ETFs.

Which Nasdaq Index fund are you investing in? Any other similar funds that don't pay out dividend for RoW and bonds to suggest?

Garrett B.

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #26 on: June 23, 2020, 01:55:34 PM »
I'm also in your situation where my TFSA and RRSP are maxed out.  What I invest in my taxable account are Canadian Index funds to take advantage of the preferential dividend tax rate, and I also invest in Nasdaq Index funds because, while an American equity, it never pays out a dividend/yield so I'll only pay capital gains if/when I sell.   
That looks similar to swap based ETFs.

Which Nasdaq Index fund are you investing in? Any other similar funds that don't pay out dividend for RoW and bonds to suggest?
Exactly my strategy.  My TD e-series Nasdaq fund doesn't pay out dividends because tech stocks are more growth funds, so most don't pay out a dividend. 

Lews Therin

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #27 on: June 23, 2020, 03:15:38 PM »
So at this point, I guess I don't really have a choice to invest in something not very favourable regarding tax treatment in my taxable account in order to maintain my AA%. Would VUN.TO and XAW.TO be bad decisions? I need US and Rest of World options.

When it comes to choosing between your AA and optimizing taxes I would always worry about my AA first and taxes second. I have VCN [Canada], VUN [US] and VEE [Emerging Markets] in my taxable account at the moment.
Thanks for your input. Any special tax implications in holding bond ETF in a taxable account?

Fully taxed, the same way as income is. (interest income) So not excellent. That's why it's better in RRSP. Slows the growth, and you don't get taxed.

max9505672

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #28 on: June 24, 2020, 11:33:44 AM »
After ready this article in depth : https://canadiancouchpotato.com/2019/09/06/horizons-swap-etfs-the-next-generation/

Here's the part that convinced me to go with Horizons Swap ETFs:

Should investors be concerned about additional risks in the new corporate class structure? And what is the likelihood that the new ETFs will continue to deliver the returns of their underlying indexes with no taxable distributions?

Impossible to know, of course, but its possible the mutual fund corporation will earn income that cannot be fully offset by expenses, which would require it to pay income taxes, something mutual fund trusts normally dont do. If thats the case, holders of the corporate class ETFs might see higher tracking error.

If the new corporate class ETFs are forced to pay distributions in the future, the good news is they would be in the form of tax-efficient eligible Canadian dividends or capital gains, even if the share class is tied to an index tracking foreign equities or bonds, since corporations cant distribute other types of income. (At tax season, you would get a T5 slip rather than a T3.)

...

That said, if youre a unitholder in these ETFs, it would appear you have nothing to lose from voting in favour of this new structure and continuing to hold on to your investment. If, ultimately, the funds are forced to distribute taxable income, or even if theyre closed altogether and youre forced to liquidate your holding, its still in your best interest to make the Section 85 election now and defer the gains as long as you can.



K-ice

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #29 on: June 25, 2020, 05:56:42 PM »
Quote


RRSP = VTI (US$), VUN (US - waiting to do a Norbert Gambit for VTI), XAW (RoR), VAB (bonds)
TFSA = VUN (US), XAW (RoR), VAB (bonds), ZEA
taxable = VCN (CAN)

...
 I need to find what to invest in, other than CAN stocks, in my taxable account in order to maintain my AA%.

Id sell the VAB from the TFSA & buy XAW
Id offset that by selling XAW in your RRSP to buy VAB.

Im not sure how your AA is looking now. But once  all the tax advantages accounts are full everything spills over into taxable.
You could keep it simple with a VGRO in your taxable or start by buying the lowest each month of VCN, VAB, XAW or VUN. (Lowest according to allocation % not $)

Id lean towards the individual stocks & you can probably transfer a portion of then in-kind into your respective tax advantages accounts without actually selling them. There will be a deemed disposition & tax consequences, but this may be preferable to saving cash to deposit in January.
« Last Edit: June 25, 2020, 06:01:38 PM by K-ice »

max9505672

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Re: Canadian Investor - What to buy in my Margin (taxable) account?
« Reply #30 on: June 29, 2020, 06:30:36 AM »
Id sell the VAB from the TFSA & buy XAW
Id offset that by selling XAW in your RRSP to buy VAB.
I did that (but offsetted with VUN), thanks!

Im not sure how your AA is looking now. But once  all the tax advantages accounts are full everything spills over into taxable.
You could keep it simple with a VGRO in your taxable or start by buying the lowest each month of VCN, VAB, XAW or VUN. (Lowest according to allocation % not $)
Yes, I considered buying VAB, XAW and VUN in my taxable, but maybe not the best options tax-wise. I decided to go with swap based ETF for now (such as HXS.TO, HXX.TO, HXT.TO and HBB.TO).

Id lean towards the individual stocks & you can probably transfer a portion of then in-kind into your respective tax advantages accounts without actually selling them. There will be a deemed disposition & tax consequences, but this may be preferable to saving cash to deposit in January.
That will not be necessary with swap based ETF, at least until this strategy keeps working with CRA.