No, investing in a non-registered account doesn’t beat an RRSP
Before tax-free savings accounts came along, I invested in stock index funds in my registered retirement savings plan. Now, I realize that these investments do not benefit from favourable tax treatment available for dividends and capital gains in a non-registered account. This makes me think that on an after-tax basis it’s better to hold equities in a non-registered account than in an RRSP. Is my thinking correct?
No. It’s a myth that you’re better off holding stocks in a non-registered account to benefit from the favourable tax treatment of dividends and capital gains. The opposite is true, as I’ll demonstrate in a moment.
The key thing to understand is that the dividend tax credit and 50-per-cent inclusion rate for capital gains don’t eliminate tax. They just reduce it relative to the tax rate on interest and other income.
In an RRSP, on the other hand, there are no taxes on investment gains or income.
I can hear people objecting: “But you pay tax when you withdraw money from your RRSP!” That’s true. But what critics of RRSPs forget is that RRSP contributions are made with pre-tax dollars. When the government taxes your RRSP withdrawals, it’s basically collecting the tax it let you defer originally, plus the implied growth of that tax over time.
Let’s look at an example that compares the returns of two investors, Harry and Sally. Harry chooses to invest in a non-registered account to get the supposed tax savings on dividends and capital gains. Sally follows the conventional wisdom to invest in her RRSP. We’ll assume both investors start with $10,000 before tax and have a constant marginal tax rate of 40 per cent on regular income and 20 per cent for both dividends and capital gains. (These rates are for illustration purposes only.)
Let’s start with Harry. Because he is investing in a non-registered account, he’ll be using after-tax dollars. So, the first thing he needs to do is pay $4,000 of income tax on his $10,000. That leaves him with a net $6,000. Let’s assume he invests the money in a stock that triples in value to $18,000 and pays him $1,000 in dividends over 10 years, for a total of $19,000.
When Harry sells his shares, he’ll owe capital gains tax of $2,400 (20 per cent of $12,000). He will have also paid $200 of tax on his dividends (20 per cent of $1,000). That adds up $2,600 of tax on his investment earnings, leaving Harry with a net $16,400 after tax ($19,000 minus $2,600).
Now, let’s look at how Sally would fare if she bought the same stock in her RRSP. Because she’s investing pre-tax dollars, she gets to put the entire $10,000 into her RRSP. After 10 years, her shares will have tripled to $30,000, and she will have collected about $1,667 in dividends – about 67 per cent more than Harry. Before any taxes are deducted, Sally will have $31,667 in her RRSP.
When it’s time to cash in her shares and withdraw the money, Sally will pay income tax of about $12,667 (40 per cent of $31,667), leaving her with $19,000 after tax ($31,667 minus $12,667). That’s $2,600 more than Harry.
If that number sounds familiar, it’s because Harry paid exactly $2,600 of tax on his capital gains and dividends in his non-registered account, whereas Sally paid no taxes on her investment earnings. As this example illustrates, far from saving tax, non-registered accounts increase your taxes relative to investing in an RRSP.
To repeat, this example assumes a constant tax retirement. But if we assume a lower tax rate when money is withdrawn from an RRSP – as is the case for many retirees – Sally’s advantage would be even greater.
I sold a U.S. stock in a non-registered account for the tax loss and waited 30 days. Now, I want to repurchase the stock in my tax-free savings account. Do I have to exchange the U.S. dollars to Canadian dollars before I put the money in my TFSA, and then exchange the funds back to U.S. dollars to repurchase the U.S. stock?
Currency conversions are your enemy as an investor. Banks typically take a profit of 1 to 2 per cent each time they buy or sell, so converting U.S. dollars into Canadian dollars, and then back again, would be a double whammy. The good news is that, depending on your broker, you may be able to avoid the hassle and expense of currency switching.
There is certainly no legal reason you can’t deposit U.S. dollars directly to your tax-free savings account.
“You can contribute foreign funds to a TFSA,” the Canada Revenue Agency says on its website. “However, your issuer will convert the funds to Canadian dollars (using the exchange rate on the date of the transaction), when reporting this information to us.”
Note that the value of your U.S. dollar contribution, expressed in Canadian dollars, cannot exceed your TFSA contribution room. Overcontributions to TFSAs are subject to a penalty tax of 1 per cent per month on the excess amount.
Now, back to your question. Some brokers make it painless to contribute U.S. dollars to a registered account. For example, my broker, BMO InvestorLine, has a straightforward “move money” feature. I simply choose the account I’m moving money from, specify the currency and choose the destination account.
With some brokers, however, the process is more convoluted. TD WebBroker, for instance, says on its website that contributions cannot be made directly to the U.S. dollar component of a TFSA or registered retirement savings plan. Clients must contribute to the Canadian dollar side of their registered account, then convert the money to U.S. dollars.
Some TD clients use a workaround to avoid currency conversion costs. They purchase a U.S. money-market fund in their non-registered account using U.S. dollars, transfer the fund in-kind to the U.S. side of their registered account, then sell the fund and realize the cash proceeds in U.S. dollars.
Speak to your broker about what options are available. If your broker doesn’t allow direct TFSA contributions in U.S. dollars, ask how it can facilitate a transfer that minimizes or eliminates currency-conversion costs.
IN FOCUS: 'No room for complacency' as fight for global investments heats up. What can Singapore do? – CNA
Apart from the US Chips and Science Act, the US Inflation Reduction Act is another incentive programme “that will compete for the same sorts of investments that Singapore would be interested in”, EDB chairman Beh Swan Gin told reporters at a press conference in February.
The US Inflation Reduction Act comprises billions of dollars of subsidies for the purchase of electric cars and other eco-friendly products that are made in America. This has rattled many European nations who fear that companies may choose to relocate or at least prioritise investment in the US.
In response, the European Commission has presented a Green Deal Industrial Plan with higher levels of state aid to help Europe compete as a manufacturing hub for clean tech products.
Then, there is BEPS 2.0 which is advocating a minimum effective tax rate of 15 per cent for multinational groups with annual group revenues of at least 750 million euros (US$818 million).
Currently, Singapore’s headline corporate tax rate is at 17 per cent but the effective tax rate of many businesses may be lower than that, or even the proposed global minimum, due to tax incentives given to those seen as beneficial to the country’s economic development.
Singapore has said it will implement a domestic top-up tax for these large multinational enterprises – about 1,800 of them currently meet the revenue threshold – from 2025.
Already, these firms are having concerns about how the new global tax rules will erode their tax savings in Singapore and mulling whether they should be looking at relocating or making new investments in other countries, said Mr Baik.
“Certainly, tax is just one of the factors in this evaluation process but recent global tax developments have undoubtedly elevated the tax benefits consideration among the factors.”
Meanwhile, the cost of doing business in Singapore has crept up the list of concerns for businesses.
Beyond the inflationary push in operating expenses such as electricity, firms are increasingly mindful of the cost of living here, said Dr Lei Hsien-Hsien, chief executive officer of The American Chamber of Commerce (AmCham) in Singapore.
The Singapore International Chamber of Commerce (SICC) said global companies are most concerned about the elevated rental costs for residential and commercial premises.
The former, in particular, is “making living here much less viable for many expat executives and prohibitive for others”, and this impacts a company’s ability to relocate talent to Singapore.
While Singapore continues to stand out for having low risks of doing business, SICC said “there is no room for complacency” as its regional peers can now better manage risks than before.
“When combined with lower business costs, regional markets will remain attractive to investors based on their risk appetite and their specific business requirements,” the chamber said.
A separate survey, released this week by the European Chamber of Commerce Singapore, also showed that 69 per cent of companies are ready to relocate their staff out of Singapore if there is no relief from rising rental costs of residential and office spaces.
Mr Wong, who is also Finance Minister, has warned that multinational firms are “mobile and … have options” for their next investment projects. Already, firms are “making this clear” in consultation sessions with policymakers.
“Because of BEPS, they will no longer enjoy the same tax advantages in Singapore. Meanwhile, other countries in the region are cheaper, while their home countries are offering very generous incentive packages,” Mr Wong said in his Budget round-up speech on Feb 24.
“So they ask us: what else can Singapore offer to stay competitive?”
Months after its launch, Canada's new investment industry regulator finally has a proposed name – The Globe and Mail
Three months after the launch of Canada’s new investment industry self-regulatory body, the organization has proposed a moniker for itself: Canadian Investment Regulatory Organization.
The organization has been nameless since it was formed out of the amalgamation of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) on Jan. 1. It has been temporarily using the name New Self-Regulatory Organization of Canada.
Now, in a proxy circular distributed to the industry on Friday, the New SRO board is requesting that the organization’s members, who include investment and mutual fund dealers, vote for the name change on April 24. If approved, the name will become official on June 1.
“We recognize the importance of establishing a new name and brand that reflects the values, purpose, and goals of New SRO,” New SRO chair Timothy Hodgson writes in the proxy. “Therefore, we have committed to an accelerated timeline to complete this important task and are confident that the chosen name will resonate with all stakeholders and foster a strong sense of confidence in the New SRO’s mission.”
The shift to a single self-regulatory organization happened after more than two years of industry consultation that began in 2019, when the Canadian Securities Administrators – an umbrella group for provincial and territorial securities regulators – announced it was considering an overhaul of the regulatory framework that governed IIROC and MFDA.
The two self-regulatory organizations had long been criticized by investor advocates and the investment industry for having overlapping areas of oversight, as wealth managers were increasingly serving customers buying both mutual funds, overseen by MFDA, and individual securities, which were IIROC’s responsibility.
In the fall of 2022, the merger was approved by the CSA, which also approved the combination of two investor protection funds – the Canadian Investor Protection Fund and the MFDA Investor Protection Corporation. The new single fund is independent from the new regulatory organization.
Lefebvre announces new committee to help spur investment
A new committee of Greater Sudbury city council is being set up to find the “best way of streamlining and of encouraging investment in Sudbury.”
So described Mayor Paul Lefebvre, who used Thursday’s Fireside Chat event with the Northeastern Ontario Construction Association to announce the new five-member committee.
“It’s a big exercise, but I think it’s a positive way of affecting change,” he told Sudbury.com after delivering his address at Verdicchio Ristorante, adding that his goal is for the committee to present recommended changes to municipal bylaws by the end of the year.
The committee would host five to seven meetings this year to learn from local industry leaders, with priority given to those with experience working for other municipalities.
“What is going on elsewhere?” Lefebvre asked. “How are they doing things different from what’s going on here, and why is that the case, so we have a better understanding.”
Lefebvre said that with many regulations provincially mandated, he wants the committee to narrow in on what the municipality can actually accomplish.
In concert with the committee’s work, Lefebvre said an internal team at city hall will work with their counterparts in other municipalities to dig out best practices for Greater Sudbury to adopt.
Reflecting on Lefebvre’s address, Northeastern Ontario Construction Association executive director Mark Kivinen told Sudbury.com he is “very optimistic,” and that Lefebvre has “hit the ground running” since he was elected to head city council on Oct. 24, 2022.
“He is so engaged with the community and understands what the community wants and needs, and also has the ability to not stay stagnant, to open up and don’t be just locked in your little bubble,” Kivinen said, adding that the upcoming committee should aid in this effort.
“There are other municipalities that are doing things better than us, and we are doing some things better than them,” he said. “I think we understand now that if we’re going to promote growth, we’ve got to open up the city a little more.”
Thursday night’s speech and subsequent question and answer period highlighted an ongoing concern within the local construction industry of so-called “red tape” at city hall, which Lefebvre said city council’s upcoming committee will strive to suss out.
Ward 5 Coun. Mike Parent has also addressed “red tape” in a motion greenlit by city council in February, which will see the city partner with the Greater Sudbury Chamber of Commerce to investigate ways of streamlining processes for businesses.
During his speech, Lefebvre cited recent progress on the Employment Land Strategy and a $1.25-million interim fix approved for Fielding Road, which services one of the city’s industrial hubs, as recent signs of city council support for tackling economic growth.
“We’re serious about this,” Lefebvre said, adding that the work on Fielding Road is a solid investment that will help ensure clients and those working in the area won’t have to wear a mouthguard while navigating the pothole-filled road.
Earlier this week, city council approved a public consultation plan for a new tax incentive called the Employment Land Community Improvement Plan, which Lefebvre cited as another recent move toward spurring economic activity. Sudbury.com will be publishing an in-depth report on the proposal soon.
Tapping into the value-added market when it comes to battery-electric vehicles, the city’s infrastructure deficit, its collection of aging facilities, a need for housing across the continuum, and a need for employees in a local economy in which there are approximately 3,500 unfilled jobs right now, were also hot topics during tonight’s speaking engagement.
Lefebvre said all of these issues and more will need to be dealt with to help meet his ultimate goal of increasing Greater Sudbury’s population to 200,000 within 20 years.
Tyler Clarke covers city hall and political affairs for Sudbury.com.
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