As I advance in my senior years, my spouse and I are trying to consolidate our investments. What are the pros and cons of moving our shares of TC Energy from a non-registered DRIP to a TFSA?
The main advantage of such a move is that future dividends and growth will be tax-free, said Shay Steacy, an advice-only planner with Modern Cents in Brockville, Ont.
Putting assets into a TFSA also means they can be transferred to a successor holder, Ms. Steacy said, keeping them tax-sheltered after the death of the original holder. The disadvantages mainly come down to more immediate tax implications.
Ms. Steacy noted that you’re probably looking at capital gains. Even if you don’t sell your shares and just transfer them over to your TFSA in kind, this will trigger a deemed disposition. Half of the capital gain will be included in your income for the year, and you’ll have to pay taxes on that at your marginal rate.
You could also try spacing a transfer out over a few years to spread out the tax hit. Incidentally, you can’t claim a capital loss when you transfer your shares in kind, she said.
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A quirk of the in-kind transfer route is that it introduces uncertainty around the market value of the assets you’re contributing, said Ms. Steacy. If you have $20,000 of TFSA contribution room and want to transfer 1,000 shares of a company at around $20 per share, a share price move between your request and the actual contribution could easily cause you to overcontribute.
Ms. Steacy advises caution: Transfer an amount that keeps you safely below your contribution limit, and then top it up in cash.
You mentioned you’re a senior, so you should consider the impact of any added income on Old Age Security payments. You likely don’t want to have capital gains bump you over the OAS clawback threshold or significantly increase the size of the clawback. On the other hand, if you’re not yet receiving OAS, triggering a capital gain in a year that’s not used to calculate the OAS clawback might be a good move.
There are a lot of things to consider, and Ms. Steacy said that nine times out of 10, the answer a financial planner has to any question is “it depends.” She said thinking about this transfer may also be an opportunity to take a step back and re-evaluate your investment approach.
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If specific shares have become overweight in your portfolio, for instance, you might consider reducing individual company concentrations or rebalancing into other asset classes. Base your decisions on your broader financial situation and goals, and not solely on what it means for your taxes.
“Sometimes we naturally don’t want to take action with rebalancing because of the tax trigger, but we also don’t want to let the tax tail wag the dog,” Ms. Steacy said.
You may want to consider talking over your finances with an advice-only planner. I did so years ago and the advice has paid for itself many times over.
If you buy U.S.-listed ETFs or single stocks, do you have to file a U.S. income tax return or will withholding tax take care of that?
I have good news for you: As long as you’re not a U.S. citizen or tax resident, you don’t need to file a U.S. income tax return for your U.S.-listed investments.
Even better news: As a Canadian investor in U.S. securities, you should have at some point signed a W-8BEN form with your brokerage that allows you to take advantage of a 15-per-cent withholding rate under a U.S.-Canada tax treaty, instead of the usual 30 per cent. If you haven’t submitted a W-8BEN, please stop reading and do so now.
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All set? Great. Keep in mind that this form needs to be renewed every three years, but your brokerage should automatically inform you when it’s time.
You’re actually well ahead of your peers when it comes to understanding the tax implications of U.S. ETFs. A recent study by the Canadian ETF Association found that a full 65 per cent of Canadians are not aware that Canadian and U.S.-listed ETFs are subject to different tax treatments. Even among people who actually hold U.S. ETFs, 45 per cent said they were unaware of the differences.
While I may be preaching to the choir, I encourage you all to spread the word.
E-mail your questions to agalbraith@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.