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.

Passiv Review: A Robo in Your Pocket

November 29th, 2018 by Potato

Passiv is a tool to help you manage your investments more easily. It’s still a DIY idea: you make your own investment choices, pick your own funds, and have to press a button to execute the trades, but Passiv makes it all easier to manage on an ongoing basis. In a nutshell, if other robo-advisors are like chauffeurs for your portfolio, Passiv is like cruise control. Passiv doesn’t pick any funds or your allocation for you, and there are no advisors to call or email to answer questions about your plan or risk tolerance, but it helps make investing easier.

How it Works

Very simply, Passiv connects to your Questrade account to get the information needed to help manage your portfolio in a more intuitive way. You set your own allocation and pick your own products.

But Passiv helps bury some of the complexity of investing in ETFs: it lets you drag a slider to set your allocation in percentages, instead of having to look up the prices and figure out how many units of each fund to buy yourself. It does the rebalancing calculations for you, and will figure out how much of each ETF to buy with new money, and you can choose whether to only rebalance with new purchases, or to include selling funds.

Screenshot of Passiv with sliders for asset allocation.

It will send you an email when new cash arrives in your brokerage account, providing the prompt needed to go in and set up your trades — not quite fully automated, but getting pretty close. Indeed, while I personally feel like I was doing fine unaided, this feature alone is cool enough that I’m going to keep using it (because then I don’t have to keep in the back of my head that I should check Questrade 3-5 days after I send money via a bill payment).

And it can even set up a series of (market) orders to execute it all for you in just one click. That’s a paid feature, but at just $5 $3.33/mo [new pricing as of summer 2019 with their Questrade partnership] it can take a lot of that last lingering complexity out of the picture that might be scaring someone away from using a brokerage account and ETFs. And the cost is low enough that you don’t really need to worry too much about the precise break-even point for this versus Tangerine or e-series or whatever.

The way it simplifies investing in ETFs while giving you full control is kind of like having a robo-advisor in your pocket.

Screenshot of Passiv making a one-click trade setup.

Suggested Pairing: All-in-One Funds

Combine with VGRO/VBAL to make something that’s cheaper than e-series (for portfolios of ~$30k+) and almost as easy (not quite automated, but close). The automatic trade feature buries a fair bit of the complexity associated with buying ETFs, and an email prompt to log in and press one button is approaching (but not quite the same as) the behavioural goodness of automation. While you can also choose a 3- or 4-ETF portfolio and have Passiv smooth over the complexity, it’s even fewer things to track if you want to use an all-in-one fund, and also has the benefit of hiding the relative performance of the constituent parts.

Behind the Scenes

Passiv uses what’s called an API to access certain information about your Questrade account from Questrade, and (with your permission) to send orders. If you’re not familiar with how APIs work, what you need to know is that there’s a special way for Questrade to securely hand off some information, but that you are not providing your password to Passiv nor full access to your account. At the moment, Questrade is the only brokerage Passiv interfaces with.

For the Core-and-Explore Crowd

If you can’t help but dabble in individual stocks (or sector ETFs or whatever), Passiv lets you exclude some items from calculating your rebalancing needs. That is, you can focus on keeping your core in line (and in one click deploy new cash to those ETFs) while still playing around on the side, and not have to worry about an automatic calculation deciding that you need to plow more money into your loser picks (or trim your winners) in the name of re-balancing.

And the Passiv team has created a special offer for BbtP readers: a 10% discount on Passiv Elite.

Disclosure: I did not receive any payment for this post — I know it sounds like an ad, but I genuinely like the tool. At the time it was written there was no conflict-of-interest with Passiv. However, we are talking about working together somehow, so there may be a conflict in the future. I do not receive any compensation if you use the link for the special offer.

Financial Literacy Month 2018

November 21st, 2018 by Potato

It’s a buyer beware world when it comes to your finances in Canada, with lots of high fees and a fractured regulatory system where we’re lucky if they even close the barn door after the horse has left (hi there FSCO).

And it won’t get better any time soon: as Sandi points out in this Twitter thread, the Ontario government is strongly signalling that this is going to be the case for a while. Financial literacy may not be the best answer for how we would arrange our society given the choice, but at this point it is our last, best hope.

So happy financial literacy month!

So how do you get financially literate? As loud as the call is to add this stuff to the curriculum, it’s too late for anyone reading this to be helped by a developing mandatory program for high schools. Besides, just-in-time education seems to work better. Though that means you will have to take it upon yourself (or hope that whoever is already financially literate and reading this post has forwarded it to you) to seek out appropriate resources and learn before it’s too late.

There are lots of ways of doing that. You could subscribe to blogs like this one and follow along for a decade or so. You could hit up the reading guide. You could take a course. You can hire someone (but then you need enough to know that good advice costs money and isn’t free at your local bank branch).

I love blogs — I have one! — and follow many. But if you’re just starting out, I think there’s value to some structure, so books or courses are likely the better way to go.

I have a course on investing. I think it’s fantastic, but it’s not the only option. In a recent episode of the Canadian Couch Potato podcast Dan Bortolotti did a good take-down of the consumer-focused CSI course on investing (the segment starts at about the 37:50 mark), and I thought that the points he mentioned that a course should cover were really good, and also something that I think my course covers.

Need some other options?

In Toronto, Ellen Roseman and Teri Courchene teach courses through UofT’s School of Continuing Studies, with multi-day evening options (winter, fall), and a one-day workshop ($225).

Your local college or university’s continuing education department may have some offerings. Plus there are one-off seminars, like at the Toronto Public Library (and I’ll be presenting in the winter/spring).

And if you have a business (or are part of one), a somewhat common thing is to have lunch-and-learns, or other non-work-related educational seminars, where a someone comes in to speak to the group, which can be a good way to help improve your employee’s financial literacy. Sometimes these take the form of a sales pitch from the big banks and mutual fund companies (which you don’t want), but for a modest fee there are lots of independent people who will do this (I don’t advertise it but have done it once or twice, and know lots of others who do or would be interested if you can’t find someone).

Back to the online courses, Kornel Szrejber (Build Wealth Canada) has How to Invest (for Canadians), an online course focusing on ETFs ($125). Bridget Casey (Money After Graduation) teaches the online Six Figure Stock Portfolio (~$495 CAD) which includes trading as well as passive investing. Aman Raina (Sage Investors) has two How to Invest in ETFs for those looking to take a passive approach ($149), and a more expensive one for would-be active investors. And those are just the ones on investing — I’m not sure I could catalogue the books, challenges, programs, and courses out there for budgeting.

And a final tip for financial literacy month that comes from Sandi Martin: “Start talking to other people about money. Normalize conversations about the choices we make about our investments (beyond “I’ve got a guy” or whatever it is people say) and spending. If we imagine the bad/lazy/corrupted actors as the enemy, our job as the resistance is to conspire with each other by sharing information and overcoming the urge to either feel shame (because we’re not doing the “right” things and want to wait before we share until we are) or shame others.”

New RDSP Options

October 29th, 2018 by Potato

For the longest time, TD Direct Investing was the only game in town if you wanted to invest in a low-cost way in an RDSP. Big Cajun Man detailed the quirks of these accounts (and has provided lots of info on RDSPs in general).

Fortunately, there’s some competition now: National Bank Direct Brokerage is now offering RDSPs.

And NB is Nest Wealth‘s custodian broker, which means that there’s now a robo-advisor option for RDSP! I’ve long thought that the robo-advisor method would be really welcome for RDSPs, but it just hasn’t been an option for the first several years. I’m glad to see that it’s now possible, though there will be some manual processes to make it happen on Nest Wealth’s end (so you won’t yet see a link on their site — you’ll have to contact them and ask).

A few details: RDSPs are only available to those on their top-tier, $80/mo plan. That’s normally for accounts over $150k in assets, though you can opt to pay it if you want to open an RDSP even without the assets. Of course, you’ll have to decide if it’s worth it vs. using TDDI or NBDB (or high-fee mutual funds with other banks) if your accounts are small. There’s a $100/yr admin fee for additional accounts, and since your RDSP isn’t likely the only account you’ll have with Nest Wealth (e.g., if you’re opening one for your kids, then you may have your own RRSP/TFSA as well), you should expect that as well when doing your cost-benefit analysis. Still, that should be welcome news for a few people!

Disclosure: I’m a member of Nest Wealth’s affiliate program and have used the affiliate link above — see the side bar for more.