The mailbox is filling up again so let’s see what questions readers have on their minds.
Selling RRIF stocks
Q - I will turn 71 this year. As a result, I will have to close my RRSP and convert it to an RRIF by Dec. 31.
I have many stocks in my RRSP which I have no intention of selling. So, my strategy when converting to an RRIF is that next year, when I will be required to transfer a minimum amount from my RRIF into income (minimum of 5.28 per cent), I will merely transfer enough shares of an individual stock from my RRIF account to a non-registered trading account. This will meet the minimum requirement and permit me to hold onto these shares in their entirety as well. Of course, I will have to pay tax on this transfer out of my RRIF into the trading account.
My question is this. At some point, I will sell these shares that I have just paid tax on, hopefully at a profit. Will I have to pay tax on the capital gains? Wouldn’t that amount to double taxation as I’ve already paid tax on these shares? – Phillip P.
A – Yes, you will have to pay capital gains tax on profits, but no, it is not double taxation. Once the shares are out of the RRIF, you’re starting clean from a tax perspective. The book value of the shares is the price at the time you moved them into the non-registered account. If you were to sell them the next day at the withdrawal price, there would be no tax. You’ll only pay tax on any profits you make going forward – in other words, on any future gains. – G.P.
Low-risk bond ETFs
Q - What are your thoughts on BMO Ultra Short-Term Bond ETF (ZST-T) for income generation in a non-register account? Is it lower risk than iShares Core Canadian Universe Bond Index ETF (XBB-T)? – M.M.
A – These are two very different ETFs. XBB invests in the broad Canadian bond universe – short-, medium-, and long-term bonds, both government and corporate. ZST focuses on very short-term corporate bonds (maturity less than one year), but also holds some government issues.
In safety terms, that makes ZST the winner. It hasn’t lost money in a calendar year going back a decade. However, the returns are low, as you would expect from this type of fund. The average annual compound rate of return since inception (January 2011) is 2.18 per cent.
XBB offers a better long-term result but can lose money in a bad bond year. It was launched in late 2000 and shows an average annual compound rate of return since inception of 4.16 per cent. Its low point came in 2022 when it fell 11.78 per cent as the Bank of Canada raised interest rates after the pandemic.
In terms of cash flow, XBB is currently paying 7.9 cents a month, for a yield of 3.3 per cent as of the time of writing. ZST pays 12 cents monthly ($1.44 a year) to yield 2.9 per cent. In both cases, distributions are not guaranteed and may change at any time.
To sum up, if you’re looking for a higher return, choose XBB. If your goal is maximum safety, go with ZST. – G.P.
Is BCE a buy?
Q - What is your advice regarding BCE (BCE-T) common shares? As you know, the price has decreased substantially in the last year, and the company recently cut the dividend by more than half.
My question: Is the new dividend sustainable? If it is, I would think that this stock would be a buy at this time. What is your opinion? – Tom C.
A – The dividend was cut from $3.99 a year to $1.75 to yield 5.8 per cent. This will enable the company to grow its 2025 free cash flow, on which the payout ratio is based, by between 11 per cent and 19 per cent, according to management’s latest guidance. On that basis, the new payout level should be sustainable.
However, BCE is investing billions of dollars in expanding the Pacific Northwest fibre network of U.S.-based Ziply Fiber, which it acquired last year. This will be done through a strategic partnership to be known as Network FiberCo. Pension manager PSP Investments will own 51 per cent of the partnership and potentially commit in excess of US$1.5-billion to the expansion. BCE will control 49 per cent.
This is new territory for BCE and some analysts are concerned that it represents added risk at a time when the company needs stability. This unease may weigh on the stock for some time.
Bottom line, the dividend yield at the new rate is still attractive but the company has taken on more risk and the p/e ratio of the shares is very high. I suggest you approach BCE with caution. – G.P.
Currency protection in RESP
Q - I have a large RESP and my son is now entering university in the U.S. I want to lock in some of the currency gains between the Canadian and U.S. dollars. I need to be able to hold the position I purchase in the RESP and would like to minimize currency conversion.
I know some of the funds offer .U versions but I have also recently found some that have Canadian dollar versions that are “unhedged”. The one that comes to mind is HBF.B
If I buy a U.S. equity fund (unhedged) don’t I get the benefit if the CAD weakens as the position will be in U.S. companies? If not, can I own the .U versions of various funds in an RESP (even though I suppose I incur the currency conversion when I purchase)?
Do you have suggestions for me to lock in the recent strength of the CAD? – Lyle B.
A - All assets in registered plans including RESPs are single currency accounts. RBC Direct Investing notes that while all trades will settle in Canadian dollars, you will still see the U.S. dollar value of your investments. Any foreign income received (dividends or interest) will automatically convert to Canadian dollars.
So, reporting will always be in Canadian dollars although most brokers will show the U.S. dollar value of any assets held in that currency.
With that in mind and being that your son will be attending a U.S. university, you should own U.S. dollar denominated securities in your plan. I suggest you talk to the financial advisor who handles the plan about the best securities to achieve this. Keep in mind they should be low risk as your son is now of university age. Stock market risk is a greater concern than currency risk at this point. - G.P.
Losing stocks
Q - I have a small amount of iShares MSCI Europe Financials ETF (EUFN-T) and AltaGas (ALA-T) in my trading account. I’m moving these funds into a TFSA. Is it worth keeping these securities? At the moment, I have a loss of 20 per cent on EUFN and 30 per cent on AltaGas. – Maurice B.
A – Never transfer a losing security to an RRSP, RRIF, or TFSA. You’ll lose the right to claim a capital loss if you do. Instead, just sell the securities at the market. That will generate an acceptable capital loss. Transfer the cash into the TFSA and use it to buy back the securities you sold, or something completely different.
As for your two current holdings, EUFN had a dip in April but has been rising since and is ahead 35 per cent year to date. AltaGas has slumped recently but is still up 11 per cent so far this year. Both have moderate upside although you may want something with greater growth potential for a TFSA. – G.P.
If you have a money question, send it to me at gordonpape@hotmail.com and write Globe Question on the subject line. I can’t promise a personal answer, but I’ll reply to as many questions as possible in this space.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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