In these recent times of market volatility, it's the little things that separate the good advisers from the rest of the pack.
One of the most important areas of distinction is how you take advantage of tax knowledge to enhance your wealth. It is here that it becomes very important to either have some personal tax expertise or to work with an investment advise who knows tax strategy.
Case in point: A Series O preferred share from Great West Life. If you own it at the end of this month, it will be redeemed for $25, and there will be a final dividend paid of about 35 cents. It has traded this week at about $25.30.
Here is why it is unique: If you hold the share to redemption in a taxable account (and assume you bought it at $25), you will have a tax issue. The issue is that you will get a capital loss of $7.74, plus a dividend of $7.74.
The explanation for this is complicated but relates to some of the accounting around original London Life preferred shareholders, who had their shares converted to Great West Life preferred shares. The technical issue is that there is paid-up capital of the Series O Preferred Shares of only $17.26 per share.
The tax risk
If you hold these shares and are in a high tax bracket, this likely won't significantly affect you, unless you already have more capital losses than you can handle. In that case, you definitely want to sell the shares before Oct. 31.
Another risk is that if you are 65 or older, and are in the income range of $60,000 to $108,000, the extra dividends and the dividend gross up will potentially cost you some Old Age Security payments.
The tax opportunity
Do you have meaningful unrealized capital gains? Have you owned shares of bank stock for years in a non-registered account? If you also have a low annual income - maybe you are retired - this could be an opportunity.
If your income is $25,000 and you have $25,000 of unrealized capital gains, you could sell your stock to crystallize the gains, use the proceeds from that and other holdings to buy $83,000 of the Series O Great West Life preferred shares. The net effect is that you eliminate your $25,000 unrealized capital gain, and because the dividend tax rate is lower than the capital gains tax rate (a 6-per-cent to 10-per-cent spread depending on the province), you come out ahead.
The risk and opportunity from this unique preferred share is not huge. However, if you hold it or might consider buying it, a number of things must be thought through. Depending on your personal situation, dividend tax rates, income level and unrealized capital gains or losses, a different strategy might be recommended.
In the bigger picture, this has an effect on more common issues:
• Should I hold a GIC, bond or preferred share in my taxable, non-registered account?
• With a particular income trust or REIT, an 8-per-cent yield might be treated as interest, dividend or return of capital. This tax treatment could have a big effect on whether it is a good investment for you.
• As a newly retired individual, should you be drawing $0, $5,000 or $15,000 from your RSP?
At the end of the day, if you have a taxable investment account, your strategy can't simply be about what investment to buy, sell or hold. It must also look at your bigger tax situation to figure out what will end up in your pocket after the government gets its share. Without the tax picture, "pure" investment management is no longer good enough.