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Tag: income investments

  • How to report foreign income in Canada – MoneySense

    How to report foreign income in Canada – MoneySense

    This form is typically used for foreign bank accounts, foreign investment accounts or foreign rental properties, but it can include other foreign assets. Foreign investments, including U.S. stocks, must be reported even if they are held in Canadian investment accounts. Foreign personal-use properties, like a snowbird’s condo that is not earning rental income, may be exempt.

    Foreign asset disclosure applies to taxable investments, so assets held in tax-sheltered accounts like registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), pensions and other non-taxable accounts are generally exempt.

    U.S. persons in Canada

    U.S. citizens or green card holders must generally file U.S. tax returns despite living in Canada. The United States is one of the few countries in the world that has this requirement for non-residents. As a result, you may have to report both Canadian and U.S. income, deductions, credits and foreign tax payable.

    Adding to the complexity is that certain types of income are taxable in one country but not the other, and some deductions or credits may only apply on one tax return.

    Voluntary disclosure for previous years

    If you have not reported foreign income or declared foreign assets in the past and you should have done so, you may be able to file a voluntary disclosure with the CRA. This program may allow relief on a case-by-case basis for taxpayers who contact the CRA to fix errors or omissions for past tax returns.

    There are five conditions to apply:

    1. You must submit your application voluntarily and before the CRA takes any enforcement action against you or a third party related to you.
    2. You must include all relevant information and documentation (including all returns, forms and schedules needed to correct the error or omission).
    3. Your information involves an application or potential application of a penalty.
    4. Your information is at least one year or one reporting period past due.
    5. You must include payment of the estimated tax owing, or request a payment arrangement (subject to CRA approval).

    Before pursuing a voluntary disclosure, you should seek professional advice. The CRA also offers a pre-disclosure discussion service that is informal and non-binding, and it does not require the disclosure of your identity.

    Bottom line

    When you are a Canadian tax resident, whether you are a citizen or not, you have worldwide income and asset disclosure requirements on your tax return. Some Canadian residents, despite living abroad, may still be considered factual residents or deemed residents of Canada with ongoing tax-filing requirements.

    Jason Heath, CFP

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  • What is Sun Life’s new decumulation product? – MoneySense

    What is Sun Life’s new decumulation product? – MoneySense

    A Canadian retiree’s main decision with this Sun Life product is the age they want the funds to last until (the maturity age). They can choose from 85, 90, 95 or 100 (or select a few with a combination of ages); but they can also start drawing down as early as age 50. Sun Life recalculates the client payments annually, at the start of each year, based on the account’s balance. That has the firm looking at the total amount invested, payment frequency, number of years remaining before the selected maturity age, estimated annual rate of return (expected return is 5.5% but a conservative 4.5% rate is used in the calculations) and any annual applicable regulatory minimums and maximums.

    Birenbaum says holders of MyRetirementIncome can arrange transfers to their bank accounts anywhere from biweekly to annually. While the payment amount isn’t guaranteed, they can expect what Sun Life calls a “steady income” to maturity age, so the payment isn’t expected to change much from year to year. If the client’s circumstances change, they can alter the maturity date or payment frequency at any time. While not available inside registered retirement savings plans (RRSPs), most other account types are accommodated, including registered retirement income funds (RRIFs), life income funds (LIFs), tax-free savings accounts (TFSAs) and open (taxable) accounts.

    Compare the best RRSP rates in Canada

    Emphasis on simplicity and flexibility

    In a telephone interview, Eric Monteiro, Sun Life’s senior vice president of group retirement services, said, in MyRetirementIncome’s initial implementation, most investments will be in RRIFs. He expects that many will use it as one portion of a retirement portfolio, although some may use it 100%. Initial feedback from Canadian advisors, consultants and plan sponsors has been positive, he says, especially about its flexibility and consistency. 

    As said above, unlike life annuities, the return is not guaranteed, but Monteiro says “that’s the only question mark.” Sun Life looked at the competitive landscape and decided to focus on simplicity and flexibility, “precisely because these others did not take off as expected.” The all-in fee management expense ratio (MER) is 2.09% for up to $300,000 in assets, but then it falls to 1.58% beyond that. Monteiro says the fee is “in line with other actively managed products.”

    Birenbaum lists the pros to be simplicity and accessibility, with limited input needed from clients, who “simply decide the age to which” they want funds to last. The residual balance isn’t lost at death but passes onto a named beneficiary or estate. Every year, the target withdrawal amount is calculated based on current market value and time to life expectancy, so drawdowns can be as sustainable as possible. This is helpful if the investor becomes unable to competently manage investments in old age and doesn’t have a trusted power of attorney to assist them. 

    As for cons, Birenbaum says that it’s currently available only to existing Sun Life Group Retirement Plan members. “A single fund may not be optimal for such a huge range of client needs, risk tolerance and time horizons.” In her experience, “clients tend to underestimate life expectancy” leaving them exposed to longevity risk. To her, Sun Life’s approach seems overly simplistic: you “can’t replace a comprehensive financial plan in terms of estimating sustainable level of annual draws with this product.” 

    In short, there is “a high cost for Sun Life doing a bit of math on behalf of clients… This is a way for Sun Life to retain group RRSP savings when their customers retire … to put small accounts on automatic pilot supported by a call centre, and ultimately, a chatbot. For a retiree with no other investments, it’s a simple way to initiate a retirement income.”

    However, “anyone with a great wealth advisor who provides planning as well as investment management can do better than this product,” Birenbaum says. “For those without advisors, a simple low-cost balanced fund or ETF in a discount brokerage will save the client more than 1% a year in fees in exchange for doing a little annual math.”

    Jonathan Chevreau

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  • What are covered call ETFs, and are they good investments? – MoneySense

    What are covered call ETFs, and are they good investments? – MoneySense

    First, what is a covered call, anyway?

    A call option is an agreement that gives a buyer the right to buy a stock at a predetermined price in the future. The seller is compensated for giving the call option buyer the right (or the option) to buy the investment they own. The option is “covered” if the seller owns the underlying stock. Canadian investors can “write” (sell) a covered call option when they want to reduce the risk of owning an investment.

    In 1999, Mark Cuban (the minority owner of the Dallas Mavericks but better known as a panellist on Shark Tank) sold Broadcast.com to Yahoo!, and in return received 14.6 million shares of the company. Cuban was forced to hold Yahoo’s shares (likely due to a lock-in period) and implemented a version of covered calls to protect his position, explains Koivula. 

    In the example above, Mark Cuban can give another investor the right to purchase one share of Yahoo—let’s say at $100 per share—at a future date. For simplicity’s sake, we’ll assume Cuban’s Yahoo shares are worth $95 each, so he was able to sell the option for, say, $4. Here are two hypothetical outcomes: 

    • Scenario 1: Yahoo’s shares move up to $110 per share. The counterparty exercises their option to buy at $100, and Cuban has to sell it to them at that price. He misses out on the $15 gain, but still has the $4 from selling the option. Cuban ends with $99 instead of the $110 he would have if he hadn’t sold the option.
    • Scenario 2: Yahoo’s shares fall to $90 per share. The counterparty doesn’t exercise the option because they wouldn’t buy shares for $100 that they could buy for $90. Cuban has lost $5 on the value of his Yahoo share. However, the loss has been offset by the $4 premium from selling the option. Cuban ends with $94 instead of the $90 he would have if he hadn’t sold the option.

    You can see that the covered call acts as a kind of dampener on the investor’s overall return, while giving them immediate income ($4 in the example above).

    What are covered call ETFs? 

    Most Canadian investors don’t implement options trades. But they can own covered call ETFs. Covered call ETF providers step in to implement this trade on investors’ behalf, with a larger pool of funds. Global X’s S&P 500 Covered Call ETF (XYLD) is a well-known example of a covered call ETF. In Canada, examples include RBC’s Canadian Dividend Covered Call ETF (RCDC) and CI’s Gold+ Giants Covered Call ETF (CGXF). Use a Canadian ETF screener to find more.

    Why are covered call ETFs gaining traction? 

    Many Canadian retail investors are seeking the highest dividend or yield that they can find in an ETF. In many cases, covered call ETFs come up near the top of that search, says Koivula.

    Some of his own clients see covered call ETFs offering eye-popping yields, and they decide to further investigate the opportunity. Indeed, as of Feb 14, 2024, XYLD paid a 10.6% 12-month trailing yield, which, on face value, is a very strong income yield. 

    ETFs like this can work well in the short-run. Koivula points out that clients like that they’re “getting paid to wait” if they think markets will be flat or down.

    Jun Ho

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  • When are TFSAs and RRSPs actually taxable? – MoneySense

    When are TFSAs and RRSPs actually taxable? – MoneySense

    TFSA day trading: Do you pay tax?

    Tax-free savings accounts (TFSAs) are mostly tax-free. When you buy and sell an investment for a profit, that is generally tax-free inside a TFSA, regardless of the type of investment. 

    One exception could be if you are day trading in your TFSA. If you are engaging in frequent trading activity, there is a risk your profits could become taxable as business income. For most long-term, buy-and-hold investors, this is not an issue. There’s no specific guideline about what constitutes day trading in your TFSA, but factors like the frequency of trades or the holding periods, for example, could indicate you are using the account this way.

    Taxes on U.S. stocks in a TFSA

    U.S. stocks held in a TFSA are subject to 15% withholding tax on U.S. dividend income. Withholding tax would apply to other foreign stocks held in a TFSA, with rates starting at 15%, depending on the country. Only Canadian stocks are not subject to withholding tax on their dividends inside a TFSA. 

    Does this mean you should only hold Canadian stocks in your TFSA? Not necessarily. If your TFSA is your primary investment account, or a big part of your overall investments, you may need to hold non-Canadian stocks to have proper diversification. If it is a small part of your overall portfolio, you may be able to have a bias towards Canadian stocks in your TFSA, but that may or may not be the best investment strategy depending on the value and type of your other investment accounts. Canada is a small part of the global stock market and has little exposure to sectors like technology and health care, so foreign stocks help diversify and can increase risk-adjusted returns. 

    Can you avoid foreign withholding tax by holding Canadian mutual funds or exchange traded funds (ETFs) in your TFSA, Tawheeda? Unfortunately, no. They, too, are subject to withholding tax on foreign dividend income, so even though you will not see withholding tax on your TFSA statement, the mutual fund or ETF itself would have withholding tax before receiving dividends from foreign stocks. 

    TFSA withdrawals are always tax-free. However, if you overcontribute to your TFSA, in excess of your TFSA limit, you may be subject to a monthly penalty tax, plus interest. A similar penalty applies if you overcontribute to your registered retirement savings plan (RRSP).

    When do you pay tax on an RRSP?

    When you buy and sell for a profit in your RRSP, the proceeds are not generally subject to tax. RRSPs are generally only taxable when you make withdrawals. Unlike your TFSA, business income treatment does not generally apply to day trading in your RRSP. One exception could be if you are trading non-qualified investments in your RRSP, which would be uncommon. Qualified RRSP investments include things like cash, guaranteed investment certifications (GICs), bonds, qualifying mortgages, stocks, mutual funds, ETFs, warrants and options, annuity contracts, gold and silver, and certain small business investments.

    How are dividends taxed in an RRSP?

    U.S. dividends may or may not have withholding tax in your RRSP, Tawheeda. If you own U.S. stocks directly in your RRSP, there will be no withholding tax. If you own U.S. stocks through a U.S. ETF, you will not have withholding tax, either. However, if you own U.S. stocks indirectly through a mutual fund or an ETF listed on a Canadian stock exchange, that mutual fund or ETF will be subject to U.S. withholding tax on any dividends before it receives them, even though you will not notice any withholding tax on the dividends or distributions you personally receive from the fund. You see, a Canadian mutual fund or ETF is itself considered a non-resident of the U.S., subject to 15% withholding tax. The account the fund is held in does not matter. The withholding tax will still apply.  

    Jason Heath, CFP

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