Time to check the inbox again. Here are answers to some of the questions I’ve received in recent weeks.
Winding down company
Q – I am collecting RRIF income every year, enough to live on. I still have $1-million in my corporation portfolio, and I am trying to close the company. I have maxed out my TFSA. Should I gradually invest the withdrawn funds from the corporate portfolio into a personal investment portfolio or other more tax efficient vehicle? – Mario C.
A – There are two key points to consider. The first is your goals. What do you want to do with the million dollars? If you don’t need it to live on, you’re accumulating it for something. A trip around the world? A family legacy? A charitable donation? Your objective will be critical in how it’s invested.
The second issue is taxation. The money will be taxed as it comes out of the company, either as salary, dividends, or capital gains. There’s a lot of money involved so I suggest you engage the services of a tax expert to decide on the best withdrawal formula.
Once the money is in your hands, you will face taxes again on any profits earned. If you’re planning to give some to charity, you can minimize the tax by making a gift now. Your tax advisor or the charity of your choice can explain the process.
If you plan to use the money for other purposes, your reinvestment goal should be to minimize tax liability. Since you have topped up your TFSA, you will probably want to build a non-registered portfolio that focuses on capital gains. Ideally, dividends should be from Canadian companies to qualify for the dividend tax credit. – G.P.
Withdraw RRIF money?
Q – I’m 76 and have a good defined benefit pension plan. My annual required RRIF withdrawals are based on my wife’s age which is 71. The withdrawal usually covers the amounts required to make maximum contributions to each of our TFSAs in January.
With the RRIF’s annual value usually between $325-$350,000, I’m wondering at my age if I should begin withdrawing more each year to reduce its value. I don’t need the money but would probably put it in my non-registered account at CIBC’s Investor’s Edge and continue to put aside enough in a savings account to cover the taxes. What do you think and what would you recommend in terms of the amount annually withdrawn in addition to that which is required? Many thanks. – Jim S.
A – I don’t think it’s a good idea. Let’s break it down. Your plan would mean withdrawing tax-sheltered money and paying tax on it before it would otherwise be necessary. The withdrawals would then go into a taxable account, so any income earned on those amounts in future would in turn be taxable. You’re 76 so if you’re in reasonable health you could live another 10-20 years. That means potentially paying a lot of unnecessary tax years before it would otherwise be required. Melting down the RRIF in the way you describe would reduce tax at death, but at a hefty cost. – G.P.
CPP dilemma
Q – I’m a pensioner, age 66. I started receiving CPP at 60, have savings and retirement income, deferred my OAS. I’m working part-time and paying into CPP. This generates a bump up in my monthly payments of about $20 after I file my tax return. I’m trying to figure out my break-even point. How long do I need to stay alive before I start recouping? Or should I simply opt out of paying into CPP, particularly the post-retirement CPP, and invest the monthly savings? - Raymond P.
A – If you’re 65 or older and already receiving CPP, you have the option whether to contribute to the post-retirement benefit program. If you are age 60-64, it’s mandatory.
At your age, you can opt out. I can’t say whether you should do so. There are several factors to consider including your income, tax bracket, and anticipated life expectancy. I suggest you consult a financial planner to see if contributing makes sense in your case. – G.P.
Wants U.S. cash flow
Q – I am looking to hopefully generate some U.S. dollars in dividends and down the road some stock appreciation. Proceeds might be used for purchasing a U.S. property or renting. – Dennis F.
A – For starters, you need a U.S. dollar account, if you don’t already have one. Then it’s a case of selecting which dividend securities you want to own. There are two ways to go about this.
The first is to invest in one or more U.S. dividend ETFs. This provides diversification and relieves you of the responsibility for selecting individual stocks.
One interesting fund to look at is the Invesco S&P High Dividend Low Volatility ETF (SPHD-N). It’s coming off a bad year, but that’s because a large percentage of the portfolio is invested in interest-sensitive securities. Rising interest rates hit those stocks hard but it now appears that rates have stabilized and will likely turn down in 2024. That would be a great boost for real estate securities, which make up almost 18 per cent of this fund’s portfolio, and utilities, which account for 17 per cent. If the market reacts as expected to rate cuts, that will set the stage for some nice capital gains on top of healthy monthly distributions. These are currently about 15 US cents for a projected twelve-month yield of 4.3 per cent based on a recent price of US$42.34.
For a more conventional ETF, consider the iShares Core Dividend Growth ETF (DGRO-N). It invests in a well-balanced portfolio of dividend stocks with financials as the top sector at 18.4 per cent, followed by information technology (17.4 per cent) and healthcare (16.9 per cent). As you can see, this is a very different approach than that of the Invesco fund. This ETF has a better short-term record (up 10.4 per cent in 2023) and has performed well long-term (11 per cent average annual return since its inception in 2014).
Alternatively, you can pick your own stocks. Some of the highest yielders on my Internet Wealth Builder recommended list are Atlantica Sustainable Infrastructure PLC (AY-Q, yield 9.3 per cent), Western Union Co. (WU-N, yield 7.5 per cent), AT&T Inc. (T-N, yield 6.4 per cent), Verizon Communications Inc. (VZ-N, yield 6.3 per cent), and Duke Energy Corp. (DUK-N, yield 4.3 per cent). – G.P.
Correction: In a previous Q&A column, I stated that Hamilton Enhanced Canadian Bank ETF (HCAL-T) was underperforming its peers. That was incorrect. In 2023, HCAL posted a gain of 11.7 per cent, compared to 10.9 per cent for the BMO Equal Weight Banks Index ETF (ZEB-T). HCAL also has a strong long-term record.
If you have a financial question, send it to me at gordonpape@hotmail.com and write Globe Question on the subject line. I can’t promise a personal response, but I’ll answer 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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Gordon Pape