Portfolio Strategy and Taxation Concerns

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frankrom
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Portfolio Strategy and Taxation Concerns

Post by frankrom »

Hello Guys and Gals,

I'll explain what i am currently doing and then express my concerns surrounding taxation.

So I have TFSA, RRSP and a Non-Registered Account.

I have decided that I don't want to take too many unnecessary risks inside the RRSP and TFSA accounts because if I make a few bad decisions or stock picks I could end up depleting valuable tax free or tax deferred principle/contributions and that could have a severe long term effect on the overall growth after 20-30 years

So in my RRSPs I invested in S&P 500 ETF VTI and i figured i'd just let that ride for the long term. In the TFSAs i opted for two good quality dividend paying stocks and I am thinking i can also just let that ride for the long term.

Here is where the question comes in...

I also have a non-registered portfolio/account...

I opted for two ETFs VTI and VEA (EAFE)... But instead of simply holding ETFs I opted for supplementing the ETFs/Non-registered account with a small portfolio of stocks that I picked (about 10 stocks). But it is easy to suggest to someone an index is a buy and hold for 30 years but it is a lot harder to suggest a specific company is a buy and hold for that long as things can change with a stock relatively quickly, IE it gets over bought, long term prospects change etc. So perhaps I want to change a stock here and a stock there.... I will incur capital gains tax on my earnings thus if i do too much trading I won't be able to have the tax dollars deferred and working for me over the long term.

Obviously depending on my tax bracket, tax loss harvesting this may or may not be a concern. Due to my employment structure (which isn't salary based... self employed, contract etc) I have the ability to put myself in a much lower bracket which may make this less of a concern.... I may even have enough expenses to show very little income or may even be able to offset most of the gains...

I guess my question ends up being...

If i am going to long the S&P 500 index anyways... in my RRSP accounts should i hold the individual stocks instead of the VTI etf? and then load up the ETFs in the non-registered account?

This way if i sell stocks inside the RRSP i won't be incurring any capital gains thus i get the entire benefit of tax deferred investing? and in the non-registered account I wasn't likely going to sell the VTI anyways so I get to tax defer there as well...

I hope i articulated my thoughts well enough!

Thanks,

Frank :beer: :thumbsup:
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Re: Portfolio Strategy and Taxation Concerns

Post by deaddog »

The only reason to actively trade is that you feel you can outperform the index or as a measure of risk control.

The best vehicle to use to actively trade is the TFSA.

RRSP you pay tax on withdrawals eventually so the capital gain advantage is not utilized.

Non registered you pay taxes as you recieve your capital gains.
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Re: Portfolio Strategy and Taxation Concerns

Post by longinvest »

deaddog wrote: 20 Jan 2018 11:01 The best vehicle to use to actively trade is the TFSA.
Unless one is too successful and the CRA considers the gains as taxable business income.
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Re: Portfolio Strategy and Taxation Concerns

Post by deaddog »

longinvest wrote: 20 Jan 2018 12:14
deaddog wrote: 20 Jan 2018 11:01 The best vehicle to use to actively trade is the TFSA.
Unless one is too successful and the CRA considers the gains as taxable business income.
I read it as OP talking about trading in and out of 10 stocks a year. That shouldn't be a problem.

I believe the only ones having problems are professionals and industry insiders.
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Re: Portfolio Strategy and Taxation Concerns

Post by frankrom »

Maybe I didn't articulate my question properly.

I understand the difference between a TFSA and an RRSP.... I also understand why one would trade stocks vs indexing...

One of my concerns is if someone is active in trading inside a TFSA or an RRSP there is risk they screw up and ultimately end up taking a loss on some of their trades. The loss inside a TFSA and RRSP is non-deductible. Thus there is risk that someone could theoretically ruin all their TFSA RRSP room.

The long term cost of throwing away TFSA room and RRSP room could be very large.

So my point is...

Scenario 1.
Do you think it is better to take a conservative approach in side the tax efficient vehicles (TFSA and RRSP) and go long the Index via AN ETF and just ride it out? and do some of the stock trading in my non-registered account? Despite the possibility of me liquidating some here and some there... and incurring capital gains throughout the numerous years of investing I have left which could result in less money working for me on a compounded basis...

Scenario 2.
Or do I go long the ETFs in my non-registered account on the assumption that I don't plan to really ever sell it thus I get to take advantage of 20-30 years of never incurring capital gains thus I get the benefits of those potential capital gains in scenario #1 being reinvested for the long term. Then I do some of my stock trading inside the TFSA and RRSP. Thus I take the risk of potentially losing some contribution room with failed stock picks...


Now, even in scenario #1 I am and would continue to hold some ETFs in my non-registered account due to the amount of money... and even in scenario #2 I would have some stocks in the non-registered account due to lack of contribution room but not as many as I would be putting as many as I can in the TFSA and RRSP and would have more ETFs in the non-registered account than in scenario #1


I am basically trying to establish the long term effect of dabbling in and out of some stocks in the non-registered account and the long term effect of the capital gains on a compounding basis.

Again as mentioned in my OP - I currently can put myself in a relatively low tax bracket so maybe this is a good thing as the capital gains wouldn't be all that high and thus spread my capital gains over a longer period of time.

Perhaps that is articulated better..
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Re: Portfolio Strategy and Taxation Concerns

Post by deaddog »

frankrom wrote: 21 Jan 2018 15:09
I am basically trying to establish the long term effect of dabbling in and out of some stocks in the non-registered account and the long term effect of the capital gains on a compounding basis.
Every time you dabble in an unregistered account you have to deal with the tax man.

Compound capital gains can bite you in the where-ever if you are forced to sell. (Like an all cash takeover)

Best not to let the tax tail wag the investment dog.
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Re: Portfolio Strategy and Taxation Concerns

Post by AltaRed »

I agree not to let the tax tail wag the investment dog. I suggest that it ultimately does not matter much in practical terms. It is likely more psychological, I.e. what would irritate you more? Paying capital gains taxes as you churn investments in your taxable account, or not able to use cap losses in your registered accounts?

I would choose to pay cap gains taxes in my taxable account simply because I get to keep the choice of NOT incurring them for many years whereas a capital loss in a registered account could be lost forever.
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Re: Portfolio Strategy and Taxation Concerns

Post by frankrom »

AltaRed wrote: 21 Jan 2018 19:51 I would choose to pay cap gains taxes in my taxable account simply because I get to keep the choice of NOT incurring them for many years whereas a capital loss in a registered account could be lost forever.
Alta I always seems to agree with your perspective.

But one thing that I kept asking that people don’t seem to be addressing (I guess Alta sort of addressed it) which I feel could be more paramount than the tax tail wag the investment dog is the potential loss of tax free (TFSA) contribution or tax deferred (rrsp) contribution room. That loss could be more damaging than the tax tail especially if I have 20-30 years of investing left. I am in my early 30s...

That is why I was kind of leaning towards the ETF the RRSPs and TFSA for the long term. Don’t risk losing the contribution room as it is valuable. And if I want to dabble in stocks do it in the non registered account and if I incur cap gains so be it let’s hope my picks are beating the index.

Have other people on here chased aggressive growth in their rrsp and TFSA accounts at early years in hopes of building a critical mass that would then build tax free or tax deferred? That doesn’t seem to wise to me.

I mean hell if we all got a 4x return on our max TFSA we would have 200k working tax free for the long hall oppose to organic growth. Chasing those returns just seems like gambling with not just money but your TFSA or RRSP room

Given I have 30 plus years of investing I feel as if I should give high priority to preserving my TFSA and RRSP room by going long an index ETF and if I am picking a few stocks do it in the non registered.
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Re: Portfolio Strategy and Taxation Concerns

Post by ig17 »

The account that you pick for your stock speculations will likely affect how you trade.

RRSP/TFSA:

- You will probably sell your winners too soon instead of letting them run. No tax is due, so easy to pull the trigger.
- You will probably hang onto your losers too long, hoping to recover a non-deductible loss.

Taxable:

- You will likely round-trip some of your winners, because you will be reluctant to realize the gains and pay the taxman.
- You will likely sell too soon to capture a deductible loss, before a stock recovers or is bought out at a higher price.

Been there, done that, all of the above.
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Re: Portfolio Strategy and Taxation Concerns

Post by ig17 »

frankrom wrote: 21 Jan 2018 20:15 Given I have 30 plus years of investing I feel as if I should give high priority to preserving my TFSA and RRSP room by going long an index ETF and if I am picking a few stocks do it in the non registered.
This is a reasonable approach.
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Re: Portfolio Strategy and Taxation Concerns

Post by frankrom »

ig17 wrote: 21 Jan 2018 20:31
frankrom wrote: 21 Jan 2018 20:15 Given I have 30 plus years of investing I feel as if I should give high priority to preserving my TFSA and RRSP room by going long an index ETF and if I am picking a few stocks do it in the non registered.
This is a reasonable approach.
Thanks. I appreciate your perspective in both of your posts.
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Re: Portfolio Strategy and Taxation Concerns

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frankrom wrote: 21 Jan 2018 20:15 But one thing that I kept asking that people don’t seem to be addressing (I guess Alta sort of addressed it) which I feel could be more paramount than the tax tail wag the investment dog is the potential loss of tax free (TFSA) contribution or tax deferred (rrsp) contribution room. That loss could be more damaging than the tax tail especially if I have 20-30 years of investing left.
This does sound like a classic example of loss aversion. The first thing you're articulating is reasons why losses would be keenly felt.
Admittedly, you do mention the possibility of building a solid nest egg in a registered account that can work for your for decades, but this possibility is described as less likely than a painful loss.
This is odd, rationally, given that markets have a long-term upward bias.
I have been selectively putting some small caps with big potential in our TFSAs because of the value of creating long-term untaxed wealth. The compounding of untaxed cap gains in a TFSA can be profound. There will certainly be some losers -- and therefore foregone capital loss deductions -- but over time they should be outweighed by capital gains that go untaxed.
This is an argument for putting your best investment ideas into your TFSA, perhaps in modest amounts.
Using ETFs is a hard-to-argue-with strategy, especially if you accept that you are unlikely to beat the market over the long term. Of course, if that's the case you shouldn't be stock picking in any of your accounts.
So, I'd say if you see value in stock picking then you should pick stocks in your TFSA.
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Re: Portfolio Strategy and Taxation Concerns

Post by frankrom »

fireseeker wrote: 21 Jan 2018 21:56
frankrom wrote: 21 Jan 2018 20:15 But one thing that I kept asking that people don’t seem to be addressing (I guess Alta sort of addressed it) which I feel could be more paramount than the tax tail wag the investment dog is the potential loss of tax free (TFSA) contribution or tax deferred (rrsp) contribution room. That loss could be more damaging than the tax tail especially if I have 20-30 years of investing left.
This does sound like a classic example of loss aversion. The first thing you're articulating is reasons why losses would be keenly felt.
Admittedly, you do mention the possibility of building a solid nest egg in a registered account that can work for your for decades, but this possibility is described as less likely than a painful loss.
This is odd, rationally, given that markets have a long-term upward bias.
I have been selectively putting some small caps with big potential in our TFSAs because of the value of creating long-term untaxed wealth. The compounding of untaxed cap gains in a TFSA can be profound. There will certainly be some losers -- and therefore foregone capital loss deductions -- but over time they should be outweighed by capital gains that go untaxed.
This is an argument for putting your best investment ideas into your TFSA, perhaps in modest amounts.
Using ETFs is a hard-to-argue-with strategy, especially if you accept that you are unlikely to beat the market over the long term. Of course, if that's the case you shouldn't be stock picking in any of your accounts.
So, I'd say if you see value in stock picking then you should pick stocks in your TFSA.
Ahhhh Also a good point well i am at cross roads
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Re: Portfolio Strategy and Taxation Concerns

Post by ig17 »

fireseeker wrote: 21 Jan 2018 21:56
frankrom wrote: 21 Jan 2018 20:15 But one thing that I kept asking that people don’t seem to be addressing (I guess Alta sort of addressed it) which I feel could be more paramount than the tax tail wag the investment dog is the potential loss of tax free (TFSA) contribution or tax deferred (rrsp) contribution room. That loss could be more damaging than the tax tail especially if I have 20-30 years of investing left.
This does sound like a classic example of loss aversion. The first thing you're articulating is reasons why losses would be keenly felt.
Admittedly, you do mention the possibility of building a solid nest egg in a registered account that can work for your for decades, but this possibility is described as less likely than a painful loss.
This is odd, rationally, given that markets have a long-term upward bias.
I don't think your interpretation is correct. The OP is worried that his stock picking strategy will underperform passive indexing. In other words, he is worried about relative performance. Relative performance has nothing to do with the long-term upward bias of the broad markets. OP's worry is perfectly rational. A poorly performing stock portfolio wastes tax-sheltered room -- compared to passive indexing.

fireseeker wrote: 21 Jan 2018 21:56 This is an argument for putting your best investment ideas into your TFSA, perhaps in modest amounts.

...

So, I'd say if you see value in stock picking then you should pick stocks in your TFSA.
You have to be careful making this suggestion to a total stranger on an Internet forum. For all we know about OP, he might be a mediocre stock picker. Or, worse, a terrible stock picker. I'm not sure if OP himself knows at this point.

(OP, no offense intended)
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Re: Portfolio Strategy and Taxation Concerns

Post by frankrom »

You are absolutely right ig... matter of fact I have only actively been managing my own investments since August... granted I have/or had a mix of ETFs and a few stocks I have overall outperformed the index relatively well.

But with such a short period of time I would agree with you... I cannot say I know myself yet.

Granted I am not risk adverse when it comes to equities. I am not looking for 3x returns on phara companies type bs... the 10 stocks I did pick are quality companies to say the least... but even that doesn't mean much.
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Re: Portfolio Strategy and Taxation Concerns

Post by fireseeker »

ig17 wrote: 21 Jan 2018 23:03 The OP is worried that his stock picking strategy will underperform passive indexing. In other words, he is worried about relative performance. )
The issue is: Why have two investing strategies? (This was the point I was trying to make above.)
With a single strategy, there is no reason to worry about relative underperformance.
Now, this strategy can be passive, index-based or it can be based on stock picking. It can be 100% equities or it can be 60/40. I wasn't trying to make the case for stock-picking, I was simply saying if you decide on stock-picking then that strategy should also apply to your TFSA.
As for loss aversion, in the OP's first post he clearly says he's concerned about losing room in an RRSP or TFSA. I'm suggesting that's irrational, and what the OP really needs to refine is his investment strategy and asset allocation.
(Note: This is not to suggest there aren't some reasons for adjustments to investments based on accounts -- i.e. keeping fixed income in RRSPs and keeping dividend-paying US equities out of TFSAs -- but these seem subordinate to the big-picture investment questions raised by the OP.)
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Re: Portfolio Strategy and Taxation Concerns

Post by kukucanuck »

i believe in "one" overall strategy for the entire investment portfolio- registered or unregistered. To me, the overall return from the entire portfolio is the prime issue. Some times registered component may perform better and the reverse may be so during other years.

The overall strategy (asset allocation) is also dependent on percentage distribution between registered and unregistered portfolios. At younger age, the registered portion may be higher percentage of overall portfolio whereas it may be other way around for older folks. The registered/unregistered distribution will vary depending on individual situations

I will not hold US dividend paying stocks in TFSA as the 15 percent dividend tax cannot be recouped.
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Re: Portfolio Strategy and Taxation Concerns

Post by deaddog »

kukucanuck wrote: 22 Jan 2018 10:09 I will not hold US dividend paying stocks in TFSA as the 15 percent dividend tax cannot be recouped.
That only makes sense if your tax rate is less than 15% and you don't have capital gains.

Non registered account you pay tax on the dividends and with a RRSP your cap gains are taxed as income.
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Re: Portfolio Strategy and Taxation Concerns

Post by adrian2 »

deaddog wrote: 22 Jan 2018 10:35
kukucanuck wrote: 22 Jan 2018 10:09 I will not hold US dividend paying stocks in TFSA as the 15 percent dividend tax cannot be recouped.
That only makes sense if your tax rate is less than 15% and you don't have capital gains.

Non registered account you pay tax on the dividends and with a RRSP your cap gains are taxed as income.
"With a RRSP your cap gains are taxed as income" is a big red herring: the available capital to invest in the RRSP is higher than non-reg due to the tax deductibility; the taxation down the road just counterbalances that. We've had this discussion several times; the easiest way to think about it is that in an RRSP you have two pools of money, one that is yours, absolutely tax free, and one that is government's money with you as their manager. Your portion enters the RRSP tax free, stays in the RRSP tax free, and gets out of the plan tax free. The government's money is theirs forever as well.

Back to dividend paying US stocks, it makes plenty of sense to keep them in an RRSP, vs. TFSA / non-reg / etc.
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