Dear Nancy,
You have said in a previous column, "Remember that there are other investment instruments that are considered fixed income without being interest paying bonds and stripped coupons. It is important that investments be owned in the most appropriate account (for instance, registered plans versus investment accounts.)"
Can you expand on this? What are these instruments? Please give us some examples. Are they mutual funds or ETFs?
I am interested in adding some REIT mutual funds or ETFs into my portfolio. Is the monthly distribution/income from REITs considered interest, dividend or capital gain? Should REITs be in a registered or non-registered account for tax efficiency?
Samantha
Dear Samantha,
The investments I am referring to are ones such as preferred shares and convertible debentures. The preferred shares pay an income that is deemed as dividend income and in order for them to benefit from the dividend tax credit must be held in a non-registered account. There are some notes or funds (closed-end and open-end) where the income is considered return of capital. Those also make more sense to be held in a non-registered account.
In regards to your specific inquiry about REITs, the income from them are a combination of taxable income and return of capital. Because of the return of capital component, it's more beneficial to hold in a non-registered account for tax efficiency.
It is always good to keep in mind that any income or growth that occurs within a tax shelter eventually will be 100 per cent taxable as income when it is de-registered. A registered plan, be it an RRSP or a RIF, is really a tax-deferral account. Eventually the tax man gets his cut.
Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. To ask her a question, send an e-mail to asknancy@rbc.com or visit her web site at nancywoods.com
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