Investment income in a CCPC

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ClosetIndexer
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Re: Investment income in a CCPC

Post by ClosetIndexer »

Doug wrote:http://www.milliondollarjourney.com/

"Private Corporation Dividends – For you business owners out there, if you expect to have a personal tax refund this year, you may want to pay yourself a dividend for a tax free way to pull money out of the company. Alternatively, if a dividend would result in personal tax payable, consider holding off until January as you would have another full year before paying the taxes due."
I'd put an extra set of quotes around "tax free" there. :) Just because you have an offsetting deduction, it doesn't mean the withdrawal is tax free, right?

One other thing to note is that the effective tax rate on non-eligible dividends is going up by about 2% next year, so if you have extra cash in a corp and are planning to pull it out soon, it may make more sense to do so this year (in some cases, even at the next higher marginal tax bracket).
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Re: Investment income in a CCPC

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Two articles from Mr Golombek:

1st from october 2010: Rethinking RRSPs for Business Owners: Why Taking a Salary May Not Make Sense
https://www.cibc.com/ca/pdf/jg-rethinking-rrsps-en.pdf
At pre-salary corporate income of $150,000, with an assumed after-tax spending amount required of about $72,000, our model showed that Scenario B (invest surplus funds in the corporation) outperformed Scenario A (maximize RRSP) strategy in all three investment portfolios. That is, under each investment portfolio, after 20 years, the business owner would have more after-tax cash available if he received dividends and left surplus funds inside the corporation instead of paying enough salary to maximize an RRSP contribution.

2nd from december 2013: The Compensation Conundrum: Will it be salary or dividends?
https://www.cibc.com/ca/pdf/small-busin ... -13-en.pdf
While the tax deferral advantage and potential changes in the tax rate advantage strongly influence the decision to defer dividend payments, the ability to contribute to an RRSP complicates the analysis by making it more likely that salary would be a better option than deferred dividends. The owner-manager may wish to consider paying sufficient salary to maximize RRSP contributions, particularly if the RRSP invests in high-rate of return, highly-taxed investments over a long time horizon. Other factors, such as social security and provincial health program contributions and benefits, should also be considered.
It seems that Mr Golombek as partly changed his mind concerning the 100% dividend approach? (vs salary to maximise RRSP)
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Re: Investment income in a CCPC

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Penquin007 wrote:
2nd from december 2013: The Compensation Conundrum: Will it be salary or dividends?
https://www.cibc.com/ca/pdf/small-busin ... -13-en.pdf
While the tax deferral advantage and potential changes in the tax rate advantage strongly influence the decision to defer dividend payments, the ability to contribute to an RRSP complicates the analysis by making it more likely that salary would be a better option than deferred dividends. The owner-manager may wish to consider paying sufficient salary to maximize RRSP contributions, particularly if the RRSP invests in high-rate of return, highly-taxed investments over a long time horizon. Other factors, such as social security and provincial health program contributions and benefits, should also be considered.
It seems that Mr Golombek as partly changed his mind concerning the 100% dividend approach? (vs salary to maximise RRSP)
Beginning in 2014, the tax rate on non-eligible dividends is increasing to achieve better integration. So there will no longer be any advantage from a tax basis to paying dividends vs salary. IMO opinion the main tradeoff is now that with salary you must pay (both sides) into CPP, but you gain RRSP contribution room. With dividends, you don't need to pay into CPP (but of course don't get the corresponding benefits), but you also don't get the contribution room.

CPP payments (in real dollars) appear to be worth the same regardless of which year they are made in, so they are a 'better deal' later in one's career. This might lead one to favour dividends early. However, RRSP contributions are more valuable the earlier they are made, which would lead to the opposite conclusion. Personally, now that the tax advantage of dividends is gone, I'll be taking a salary. (I'm in my early 30s.)

That said, if you're still figuring out 2013 compensation, it may well make sense to draw a bit extra while you still have access to the cheaper dividends. Taxtips.ca is a handy site to compare tax brackets.
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Re: Investment income in a CCPC

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ClosetIndexer wrote: IMO opinion the main tradeoff is now that with salary you must pay (both sides) into CPP, but you gain RRSP contribution room. With dividends, you don't need to pay into CPP (but of course don't get the corresponding benefits), but you also don't get the contribution room.
Also EI and possibly worker's compensation. I suppose EI could be gamed (laying myself off from time to time) but I don't do that kind of thing.

Keeping retained earnings in a CCPC and paying out dividends is working well for me. Before age 65, it allowed income splitting with my wife. It also allowed me to fund my children's university education somewhat more cheaply than if I had drawn a salary (you have to be careful with the tuition and education allowance). Now that I'm retired, more or less, we're living off dividends, which should be sustainable until RRIFs cut in. This approach has given me maximum flexibility and minimum administrative costs.

In my case, the extra 1.5% tax on dividends would still have left dividends a vastly superior strategy to salary.

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Re: Investment income in a CCPC

Post by ClosetIndexer »

ghariton wrote:
ClosetIndexer wrote: IMO opinion the main tradeoff is now that with salary you must pay (both sides) into CPP, but you gain RRSP contribution room. With dividends, you don't need to pay into CPP (but of course don't get the corresponding benefits), but you also don't get the contribution room.
Also EI and possibly worker's compensation. I suppose EI could be gamed (laying myself off from time to time) but I don't do that kind of thing.

George
Might be different elsewhere, but here in BC you aren't eligible for EI as an owner, and you're supposed to pay into WorksafeBC (insurance) even if you are compensated with dividends. So neither of those factors in.
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Re: Investment income in a CCPC

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ClosetIndexer wrote:Might be different elsewhere, but here in BC you aren't eligible for EI as an owner
EI is a federal program, so conditions should be the same throughout Canada. I couldn't find anything on owners of businesses. but according to this a relative is eligible for EI, as long as the job is a legitimate job, i.e. it would have been filled by another worker if you hadn't been available. FWIW I was involved in a case where a husband and wife team ran a very small corporation. The wife went off to have a baby and claimed maternity benefits from EI. They were initially refused but eventually granted, even though she was not replaced while on maternity leave.

In the case I just mentioned the wife was a shareholder and a Director of the corporation (her husband and I were the other two Directors). So ownership seems not to be an absolute barrier.

In my case, the work was seasonal, with virtually no workload in January and February, work starting around March and hitting a peak in October - November, before tailing off in December. So EI would technically have been a legitimate claim.
and you're supposed to pay into WorksafeBC (insurance) even if you are compensated with dividends.
Interesting. In Ontario neither my accountant nor my lawyer (who serves as Secretary of my Corporation) ever mentioned it.

Anyway, if I show up only as Director and shareholder of a corporation, how would any level of government ever know that I did any work for it?

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Re: Investment income in a CCPC

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ghariton wrote:
ClosetIndexer wrote:Might be different elsewhere, but here in BC you aren't eligible for EI as an owner
EI is a federal program, so conditions should be the same throughout Canada. I couldn't find anything on owners of businesses. but according to this a relative is eligible for EI, as long as the job is a legitimate job, i.e. it would have been filled by another worker if you hadn't been available.
OTOH, according to this:
The following types of employment are specifically excluded for calculating insurable earnings as well as EI premiums, even when an employee / employer relationship appears to exist:
* The employee owns more than 40% of the voting shares of the Corporation
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Re: Investment income in a CCPC

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When in doubt, go to the legislation. Employment Insurance Act, section 5(2)(b):
Insurable employment does not include
.........

(b) the employment of a person by a corporation if the person controls more than 40% of the voting shares of the corporation
Doesn't seem much of an obstacle. My corporation has five shareholders, each with 20% of the voting shares. I'm the sole Director and they vote each year to reappoint me, approve the financials (which they never look at), and waive an audit.

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Re: Investment income in a CCPC

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ghariton wrote:
ClosetIndexer wrote:Might be different elsewhere, but here in BC you aren't eligible for EI as an owner
EI is a federal program, so conditions should be the same throughout Canada. I couldn't find anything on owners of businesses. but according to this a relative is eligible for EI, as long as the job is a legitimate job, i.e. it would have been filled by another worker if you hadn't been available. FWIW I was involved in a case where a husband and wife team ran a very small corporation. The wife went off to have a baby and claimed maternity benefits from EI. They were initially refused but eventually granted, even though she was not replaced while on maternity leave.

In the case I just mentioned the wife was a shareholder and a Director of the corporation (her husband and I were the other two Directors). So ownership seems not to be an absolute barrier.

Took me a bit to find the reference, but this document covers who's eligible: http://www.servicecanada.gc.ca/eng/ei/i ... oyed.shtml
In my case, this was the relevant bit:
In a corporation or limited company, a person who controls more than 40% of the voting shares is not necessarily self-employed, but is still considered uninsurable under the EI Act.
ghariton wrote:
and you're supposed to pay into WorksafeBC (insurance) even if you are compensated with dividends.
Interesting. In Ontario neither my accountant nor my lawyer (who serves as Secretary of my Corporation) ever mentioned it.

Anyway, if I show up only as Director and shareholder of a corporation, how would any level of government ever know that I did any work for it?

George
WorksafeBC specifies that any dividends paid to directors or controlling shareholders are considered salary, regardless of their actual participation. Not sure if they actually check, but I know that's the rule. If you have a holdco you could funnel the dividends through there though I suppose.
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Re: Investment income in a CCPC

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ClosetIndexer wrote:WorksafeBC specifies that any dividends paid to directors or controlling shareholders are considered salary, regardless of their actual participation. Not sure if they actually check, but I know that's the rule. If you have a holdco you could funnel the dividends through there though I suppose.
Much the same for WSIB in Ontario. My wife and I are both shareholder/directors with 50% ownership and pay ourselves through a combination of salaries and dividends and we must pay WSIB its pound of flesh (you know, in case we are mortally wounded by papercuts at the office).

FWIW, we do not pay EI premiums for the reasons as noted above. Mind you, I'm still considering laying myself off. My commitment to the corporation has been wavering lately and it's affecting management morale .... :rofl:
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Re: Investment income in a CCPC

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Very informative thread, I have read most of it and it is a veritable treasure trove.

I had a question regarding the reporting of eligible dividends received from Canadian corporations in a CCPC and flowing them through to get the dividend refund equal to Part IV tax and to clear RDTOH. Is the value of the eligible dividend received by the CCPC or paid by the CCPC reported on line 450a on Schedule 3? If active business income is less than $500,000 then I'm assuming that the CCPC is only able to declare and pay non-eligible dividends, so how can one flow through eligible dividends to shareholders? Is this as an eligible dividend or as a noneligible dividend? How is this reported?

Thanks.

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Re: Investment income in a CCPC

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sbakar wrote:... If active business income is less than $500,000 then I'm assuming that the CCPC is only able to declare and pay non-eligible dividends, so how can one flow through eligible dividends to shareholders?
You'll need to take a look at Schedule 53 "General Rate Income Pool".
Although your CCPC (to the extent it has claimed a small business deduction) will not have paid income tax at the general rate, the Public Company that paid an eligible dividend to the CCPC did pay tax at the General rate.
Eligible dividends received are reported on Sched 53, and can be paid back out to the CCPC shareholders.
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Re: Investment income in a CCPC

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I see, Schedule 53 adds the eligible dividends received to the GRIP which then allows the CCPC to pay eligible dividends forward to shareholders and deplete the GRIP to zero. This 'flow-through' means that there is no tax at the general corporate tax rate (since the GRIP is 0) and the eligible dividends have been flowed through with Part IV tax canceled by the dividend refund, and RDTOH ending up at 0. Clever!

Since 2006, Ontario medicine professional corporations (MPCs) have allowed a spouse, children, and parents to own non-voting shares within the MPC. What prevents one from flowing eligible dividends received from an investment portfolio within the MPC through to family members above the age of 18, and the family members gifting the value of the eligible dividends back to the physician? If the family members only received eligible dividends as taxable income, doesn't that allow approximately $50,000 of eligible dividends to be flowed through tax-free at the CCPC level, tax-free at the family members' personal level, and then tax-free, as a gift of cash, to the physician? Am I missing something here? Is there a hidden tax liability that is being generated or an attribution rule that I am missing?

Thanks.

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Re: Investment income in a CCPC

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sbakar wrote:If the family members only received eligible dividends as taxable income, doesn't that allow approximately $50,000 of eligible dividends to be flowed through tax-free at the CCPC level, tax-free at the family members' personal level, and then tax-free, as a gift of cash, to the physician?
You're not missing anything, it's called income splitting.

Although it will take a while to generate $50k annual eligible dividends per adult family member -- at least a million in investable assets, i.e., retained earnings, generated from money which you could afford to leave in the CCPC, pay corp taxes, and be comfortable with equity risks.
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Re: Investment income in a CCPC

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Excellent, thank you both for the help!

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Re: Investment income in a CCPC

Post by Doug »

The Blunt Bean Counter has a post on holding your investments in a corporation. He points out that using a corporation to hold your investments can result in double taxation on your death:

"upon death, you are deemed to dispose of your Holdco shares on your final terminal tax return for their fair market value (unless they are left to your spouse). So you pay tax upon your death on the value of these shares. However, when your estate starts selling the individual securities in Holdco, the Holdco has to pay tax on the same securities you paid tax upon on your final return, a double tax. In order to avoid this result, fancy tax planning is typically undertaken"

http://www.thebluntbeancounter.com/2014 ... -your.html
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Re: Investment income in a CCPC

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A shot across the bow?

Private corporations widen income gap, study shows
The gap in Canada is wider than first thought because top earners are more likely to funnel income through private corporations.
The [color=red]Star[/color] wrote:“The objective of this study is to pierce the corporate veil by bringing together anonymous data from individuals’ income tax returns with data on the incomes received in the CCPCs which they own. This is not an easy task,” the report said.

It takes a closer look at CCPCs, a tax-planning vehicle widely used by business owners, doctors, lawyers, and other professionals.

Most research about income inequality comes from data gleaned from income tax returns. But that data does not capture income from CCPCs, Wolfson said.

“We are for the first time ever shining a light on one of the more arcane mechanisms that high income people can use to arrange their affairs to pay less tax. I think it affects our sense of fairness,” Wolfson said in an interview.

“You’ve got people who would ordinarily be receiving a big salary and they’re able to flow their income through a company and they get to pay tax at 25 per cent or less rather than 50 per cent in the top marginal tax bracket.”

[...]

Income that is received by a CCPC may be taxed at 15.5 per cent if it is eligible for a small business deduction. If not, in Ontario it would be taxed at the general corporate income tax rate of 26.5 per cent.

Both rates are still well below the province’s top individual income tax rate of 49.5 per cent.

The share of income of the top 1 per cent increases by about 25 per cent when CCPC income is included, the study found.
Exacerbated class envy + lying by omission (overall taxation rates are about the same, not 15.5% vs. 49.5%) etc, etc...

Shame on the study's authors, professors Michael Wolfson of the University of Ottawa, Mike Veall of McMaster, and York University’s Neil Brooks.
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Re: Investment income in a CCPC

Post by parvus »

I dunno. I think it's a useful, if not entirely accurate, benchmark. I'd go with the class envy theme for a bit. How many loudmouth anti-1%ers actually have a CCPC? I suspect not a few.

So I enjoy the class-envy follies between the richest and the next-to-richest -- neither of whom has any intention of redistributing their money. Tax the next guy. Not me.

Borsht.

By contemporary standards, Neil Brooks is rich.

But there is a fundamental mistake in the study. Top marginal rate does not equal average rate.

Which raises an interesting question. How do we have income tax rates that prevent individuals from incorporating? And should we? A doctor is, after all, an employee of the government, but with the right to declare independent contractor status. Curious.

Lawyers, on the other hand, generally work for limited partnerships, where profits must be flowed through.

Anyway, thanks for the post. More grist for the mill in my campaign to tax the top 10% -- everybody making over $64K. :mrgreen:
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Re: Investment income in a CCPC

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We all know that a CCPC is a tax advantage. But since the recent increase in tax on non-eligible dividends, the advantage from over-integration has become tiny. So that point, which is one of the authors' two main points, has become insignificant. Anyway, they do not mention that a cost of compensation via dividend is not creating RRSP room.

Their other main point in this article is that, by not integrating CCPC income with other forms of personal income, statistics on income inequality are distorted. But that is just one distortion. A much bigger one is owning versus renting a home. And an other one that is almost as big -- taking part of your compensation in the form of a pension in the future, instead of salary or dividends. The latter, in particular, would accrue to people not in the top 1%. If you were to throw in all deferred income from all sources, I'm not sure which way the needle would swing.

The authors promise two more articles, one looking at the tax deferral benefits of CCPCs and one looking at their use for income splitting. We will see if they are any less dishonest than this one.

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Re: Investment income in a CCPC

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Looking at Jamie Golombek's article here:

http://www.jamiegolombek.com/media/Comp ... c_2013.pdf

He stated that with a the new tax increase on non-eligible dividends, there is actually now a slight disadvantage to some CCPC's. I'm in BC so there is a disadvantage of 0.56%, whereas the same CCPC in ON has a slight advantage of 0.12%. Both seem to be miniscule, which is completely neglected by the article in The Star. CCPC is not a tax heaven, merely as a personal RRSP for high earners. We also don't get to claim CPP or EI.

What is the better way to increase readership in a slowly dying newspaper than to declare class war on people who make >$50k a year.
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Re: Investment income in a CCPC

Post by ghariton »

Thank you for the link to Golombek. I was looking for that kind of analysis. Obviously, I didn't look hard enough.

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Re: Investment income in a CCPC

Post by Koogie »

DmDave wrote:. We also don't get to claim CPP or EI.
Not 100% accurate on the CPP, depending on how remuneration is handled. But I agree with you 100% on the rest.. :)
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Re: Investment income in a CCPC

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I'm just looking at my holdings in my CCPC and trying to see what are the most tax efficient way to invest. According to the popular wisdom here, we lost about 3/4 of foreign withholding tax credit if it's within a CCPC, which would increase the cost of some of my ETF's. There are products out there that has higher MER, but has tax deferral benefits

My question is, has anyone done an in depth analysis of comparing which product is better in a CCPC. Specifically, I'm looking for a comparison of S&P 500 ETF's, which are HXS vs VFV (HXS.U vs VOO in USD). Another would be with S&P/TSX 60, HXT vs VCE.

On one hand, HXS from Horizons has higher MER because of the 0.3% swap fee (total MER approximately 0.47%), but it there is no dividends and no loss of foreign dividend tax credit, and no quarterly taxable event. On the other hand, VFV has MER of 0.16%, and including the loss of foreign dividend tax credit, my estimate of its total MER will be about 0.3%

Neglecting the counterparty risk of National Bank going belly up or CRA cracking down on these derivatives, which will be better in a CCPC? HXS with its higher MER but tax deferral, and tax on only half of the capital gain, or VFV with lower MER but quarterly taxable event? Assuming I'll hold them for 20-25 years.

I currently hold VTI/VUN, but since it's a total market index, it wouldn't be an appropriate comparison. If HXS turns out better in the long run, I might be tempted to use HXS with VXF to form my own VTI/VUN.
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Re: Investment income in a CCPC

Post by DmDave »

I'm not well versed in Excel, but I thought what the hell, I'll give it a try, to compare VFV vs HXS, and see which would come out ahead. Mind you, I have based it on a few assumptions.

I'm using 1.5% as the annual dividend, 5.5% stock growth, to arrive at a 7% total return. HXS's MER is 0.47% (0.15% MER plus swap fee of 0.3%). For VFV I based on the Canadian Couch Potato's calculation, and assumed that 3/4 of foreign dividend tax credit is lost when it's held within CCPC. The link so the white paper from PWL Capital is here:

https://www.pwlcapital.com/pwl/media/pw ... f?ext=.pdf

Along with the lost of FDTC, I'm using a MER of 0.33% for VFV.

For tax, based on what my accountant told me (I could be wrong, please correct me if I made any mistake), once I draw foreign dividend/interest/capital gain from my CCPC to myself through non-eligible dividends, after the refund from RDTOH, the net tax will be 18%/18%/9% respectively (only 50% of capital gain is taxed, thus 18%/2 = 9%). These are BC numbers.

So I'm assuming that with VFV, the foreign dividend is withdrawn from the CCPC annually, taxed at 18%. VFV will therefore grow at a rate of 5.5%, plus 1.5% dividend with 18% tax (1.5% * 0.82% = 1.23%), total growth will be 6.73%.

With HXS, it'll grow tax free at 7%, because it's a total return swap ETF.

At year 20, I'll liquidate everything, pay capital gain tax. So the total at the end of 20 years minus $200,000 of principle will be the capital gain, taxed at 9%.
Picture 2.png
From my spreadsheet, there is a 3% advantage of using HXS over VFV. It doesn't sound like a lot, but the nominal value is over $11,000. I adjusted VFV's MER to see if it plays a significant role, even when I set it to 0%, it still lags HXS by about 2.3%. Seems to me the annual taxable event plays a bigger role than I thought.

What do you guys think? I'm thinking instead of VTI/VUN, I'm now tempted to slowly switch to a HXS(HXS.U)/VXF formation. Is there any reason why you don't think it's a good idea besides counterparty risk and CRA risk?
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Re: Investment income in a CCPC

Post by DmDave »

Silly me, it looks like Newguy has already made a spreadsheet to help compare ETF's in different accounts.

http://newguys.freeoda.com/Returns.html
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