Taxes and Investing: Orientation

April 4th, 2019 by Potato

This is not a detailed how-to post, instead this is a quick orientation to taxes and filing involved with investing.

First off, there are tax shelters: if you’re doing all of your investing inside an RRSP or TFSA, you don’t have any worries: other than any RRSP contributions (which you get receipts for) or withdrawals, you don’t have anything to report on your taxes. Not only are your investments growing tax free inside those accounts, you don’t have to do any detailed tracking or reporting.

If you’re out of RRSP and TFSA room and are investing in a taxable or “non-registered” account, you’ve got some things to know.

On timing: you’re likely not going to be able to file your taxes until April: some tax slips (i.e., T3s) aren’t due until the end of March.

You’re going to have the responsibility to learn about and report your situation for your taxes (and hey, self-promotion time, I’ve got a course that includes a great module on that). Things to watch out for:

First (and easiest) is income that gets reported on a T-slip. Dividends and interest payments. In this case you need to get a T3 or T5 from your financial institution or brokerage — if it didn’t come in the mail, be sure to log in to your account in April and look for an electronic version to download. It might also be auto-populated in the handy new myCRA feature that connects to your tax software of choice. Reporting this is a snap: you copy the amounts from each box on the tax slip into the corresponding box in your tax software for your return.

Second is interest or other income that did not get reported on a T-slip. The biggest culprit is savings accounts: your bank only has to send you a T-slip when the interest for the year is over $50, but every dollar of interest is taxable even if you don’t get a slip. You’ll have to go through your statements, add up those pennies of interest yourself, and then report it (look for line 121).

Third, and the one that seems to cause the most grief, is capital gains. You only report realized capital gains — you don’t have to pay tax or report when the value of your investments goes up, only when you sell it (or transfer it into a TFSA/RRSP, which is called a deemed disposition). You will get a tax slip in many cases (a T5008), but this will more often than not be wrong or be missing information. So this one you might choose to set aside in favour of your own calculation that you report on schedule 3 (and you’ll have to do this anyway to verify that your T5008 is correct unless you have a lot of faith in your brokerage). You’ll need to know your adjusted cost base (ACB) to report your gains, which requires tracking over all the years you’ve held the investment — this post and spreadsheet will help with that.

There are some other rare things to be aware of, for example if you have more than $100,000 CAD (cost basis) in foreign investments, you’ll have to fill out a T1135, which is separate from your overall tax return.

Tax software: While you can pay more for “premium” tax software that includes a “wizard” to guide you through reporting your investment income, it’s not necessary. The forms are included in all tax packages, including SimpleTax [affiliate link*], Turbotax standard/online, etc.

* – it’s pay-what-you-like, which includes free, so it’s weird to have an affiliate link, but if you do choose to pay and you use my link, I’ll get a portion.

And disclaimer: filing your taxes correctly is your responsibility, including verifying anything you read on a Potato-powered blog. Hire an accountant if you’re not sure — and note that I am not an accountant.

Never Weight – Q1-19 Update

April 1st, 2019 by Potato

The quarter was pretty good. I followed up last year’s success by continuing to lose approx. 2.5 lbs/mo (or about half a pound a week), and made the major milestone of no longer being obese! I am now medically merely “overweight” and ahead of schedule! :)

Mission Accomplished, banner on USS Abraham Lincoln, original public domain via Wikimedia

I use the “Mission Accomplished” image with full awareness of the irony: the job is far from done. Even to just maintain here I have to continue to keep up the processes that have been working (i.e., diligent tracking until my body learns a natural setpoint). Now that I’ve reached a major goal, I don’t actually know how much more weight I should aim to lose. Getting all the way down to “healthy” seems audacious, even after losing so much over the last year. I can definitely stand to lose another 10 lbs at least, so I figure let’s keep going at this new modest pace of ~0.5 lbs/week and see where things stand in another quarter or two.

The curling season has come to an end, which is sad, and also means I need to find another route to get myself exercising through the summer. While I didn’t do very well in any competitions, I had a tonne of fun curling this year, and hope to get Blueberry into the sport next year in little rocks. And speaking of curling, of all the TV stations out there I never thought I’d be on TSN, not even for a few seconds in the background:

A picture of TV showing Curling Day in Canada with me kind of fuzzy but totally there on the ice.

Last year I lowered the price of the course as a punishment for missing my target, and to help motivate me to get back on track. This year I feel like celebrating, and somehow lowering the price again feels like the right move despite the opposite motivation. I’ve lost 17% of my bodyweight, so you can use coupon code missacc to save 17% off the course, good through Q2.

Swap-Based ETFs and Budget 2019

March 20th, 2019 by Potato

I’ve perhaps been one of the more paranoid bunch on the topic of swap-based ETFs. They offer some attractive tax benefits, particularly for high income earners, so some people are naturally excited by them, but I’ve been kind of ‘meh’ on them and haven’t included them in my various tables of model portfolio options (and not without a disclaimer). The benefit isn’t quite as large for people in middle tax brackets (which I believe is the core of my readership) vs high-income earners who love them, and there’s that ever-present legislative risk. Perhaps it’s because I owned units in some income trusts in 2006, but this seemed like one of those too-good-to-be-true bits of alchemy (international dividends into deferred capital gains! poof!) that was begging to be closed.

I don’t see details yet, but it looks like Budget 2019 is going to address it:

To make Canada’s tax system more fair, Budget 2019 proposes to:
• Prevent the use by mutual fund trusts of a method of allocating capital gains or income to their redeeming unitholders where the use of that method inappropriately defers tax or converts fully taxable ordinary income into capital gains taxed at a lower rate.
• Improve existing rules meant to prevent taxpayers from using derivative transactions to convert fully taxable ordinary income into capital gains taxed at a lower rate. [page 209 of the English Budget 2019 PDF]

Horizons has a short note up on their site here.

If you don’t yet own any, perhaps wait a bit longer before making the switch from vanilla ETFs. If you do own them, for now, I suppose just wait and see specifically what happens with them. In the meantime, Ben Felix put up a good video on how the swap-based ETFs work.

Update: Thanks to Reddit user DavidsonWrath for pointing me to additional details, which are very dense legalese.

Meltdown RRSPs for Future GIS Recipients

February 22nd, 2019 by Potato

Retiring on a low income, particularly where you expect to get GIS, changes a lot of conventional wisdom about saving for retirement. An RRSP can work against you, as you face a high effective tax rate for withdrawals due to GIS clawbacks. For more on retiring on a low income, listen to the Because Money podcast with John Stapleton.

A while ago I showed you how to defer taking your RRSP deduction, but in most cases it’s not worth doing. Could the case of someone expecting GIS be an exception?

The scenario: someone in the lowest tax bracket (let’s use 20% as a nice round number) put money in their RRSP before hearing that it might not be a good move for them. They haven’t claimed the deduction yet, so should they defer taking it until GIS starts and they withdraw from their RRSP?

Option 1: Take the deduction right away. Let’s assume this person will be grossing up their RRSP contributions when taking the deduction to make things a little more comparable. So $1000 in the RRSP thanks to that (but only $800 if they had not taken the deduction or were using a non-registered account).

Over time with investment growth, they have $2,000 to withdraw. But now their effective tax rate is 70% (20% base rate plus 50% GIS clawback). So a $2,000 RRSP withdrawal turns into just $600 in spending power — less than the $800 in after-tax money they put there in the first place, despite doubling in nominal value!

Option 2: Defer taking the deduction. That means the “government’s portion” won’t be growing along with their funds, and isn’t there to gross-up the contribution, so to be comparable there’s only $800 in the RRSP to start. With investment growth doubling the value as before, that turns into $1,600 to withdraw in the future. They can then withdraw that, but have $800 in carried-forward deductions to use against it, so only $800 is left as taxable income. Again at a 70% effective tax rate on the taxable part, that leaves $1,040 to spend. In this case deferring the deduction did help compared to taking it right away.

Option 3: Bail out. If you haven’t yet claimed the deduction, another option is to just bail on the RRSP. Withdraw the following year, use the deduction to cancel that out (no time yet for growth to have happened, so the deduction is approximately equal to the contribution), and invest in a non-registered account (we’re assuming the TFSA is full). So you invest $800 in a non-registered account and again have it double over time to $1,600 (assuming all deferred capital gains for simplicity). Then in retirement you sell the investment. Half of the gain gets added to your income: so of the $1,600 total value, $800 is principal and tax free to spend; of the $800 gain $400 is taxed. At the 70% tax rate, that’s $280 in tax, leaving $1,320 to spend.

Conclusion: While this is a scenario where deferring the deduction works out better than taking it immediately, it really just underscores that RRSPs are terrible vehicles for people who expect to get GIS. You’re likely going to be better off just melting down the RRSP while you’re still working and investing in a non-registered account before retirement.

This was a quick back-of-the-envelope post, but my intuition at the beginning of the question was that bailing on the RRSP and using a non-registered account would be the better choice for someone expecting GIS in retirement. Please let me know if you have corrections to the math or assumptions.

Post-script: RRSP Meltdown. So this all suggests that if you had made RRSP contributions as a low-income earner expecting GIS in retirement, you could be better off melting down your RRSP while you’re still working. If you can withdraw those funds and pay tax at a 20% rate, then invest in a non-registered account, it may work out better paying a high tax rate on the growth than waiting and paying a high tax rate on the entire withdrawal (even if you get some further tax-free compounding). Proof left as an exercise for the reader.

Never Weight – Q4-18 Update

January 1st, 2019 by Potato

I had a fairly arbitrary goal for losing weight in 2018: about 2 pounds per month, or 24 for the year. It sounded do-able without being drastic. The first half of the year didn’t go so well, and I ended up cutting the price of the course in response. Then I got serious, and lost a lot of weight in the third quarter, mostly by doing what I should have been doing all along: tracking what I ate.

This quarter featured many food-centric holidays: Thanksgiving, Halloween, and Potatomas, as well as my birthday. So I eased up on the diet and the pressure to lose weight. However, it also marked the beginning of the curling season, so overall things weren’t too bad. In the end I lost 8 lbs this quarter, which is a marked decrease in the rate from last quarter, but still better than the 2-lbs-per-month pace I was targeting for the year. It means that even though all the progress was crammed into the last half, I did manage to meet (exceed!) my 2018 goal, losing just over 30 lbs in total.

It’s cliché to say, but this has been a good thing. I have more physical energy, and I’m more flexible for curling. My heartrate hasn’t improved meaningfully since the update last quarter (~2 bpm, which is less than the week-to-week variance in FitBit’s graph), but that improvement was still a big one and puts me in a much healthier range. My snoring is mostly gone, though I’m still not getting enough sleep (but that’s not a function of poor sleep — I think the sleep I am getting is good, I just need to get better about turning off the world and just going to bed in the first place).

One downside is why I emphasized physical energy above: a big mindset change was not letting myself eat because I wanted to use food as substitutes for emotions or because I was bored, etc. But that means that sometimes when I’m stressed, I’m adding to my mental burden as I fight the old habit of eating through the stress. I’ve noticed it’s made hitting peak productivity a little harder when writing.

I’m not sure yet what the ultimate goal for 2019 should be. In my last update I said the next goal would be to get to the “overweight” BMI range (from “obese”) by June, but even at my slower “I can have a few Halloween-sized chocolate bars” pace of Q4, I’m already halfway there and on track to hit that point by April.

Getting to a weight that starts with a 1 would have been unfathomable a few years ago, but I know I probably shouldn’t stop there. I just don’t know what to target for the year: 2 lbs/mo again? Maybe take it a month at a time and not set a goal for the year?

I know one thing to make explicit is to not backslide: many people who lose weight do go back and put it on again, so I’m going to be conscious of that even as I don’t feel as much pressure to lose so much so quickly anymore.

2019 Goals:

  • Lose just over 7 lbs in the first quarter (same pace as Q4-18).
  • No backsliding through the year!
  • Keep ~2 lbs/mo pace through to end of Q2 and re-evaluate?