Tony asks:

We currently have mortgage life insurance, but what I’ve been reading lately leads me to believe that it may not be the smartest decision. Are we better adding the value of our mortgage onto each spouse’s life insurance policy and canceling the mortgage life insurance?

The drawbacks of Mortgage Life Insurance were pointed out in an earlier post (See Mortgage Insurance versus Life Insurance). I think it makes sense to first obtain or increase an adequate amount of term-life insurance and after the policies come through, cancel the mortgage life insurance. A chat with a licensed insurance broker should clarify matters.

Bryce asks:

When buying a dividend stock or even a corporate bond, is it best to wait till a little before the dividend is paid out to buy the stock?

The short answer is no. This article on Investopedia explains terms such as declaration date, ex-dividend date, record date and payment date. Unfortunately, you cannot make more money by purchasing a stock before the ex-dividend date. The stock price will usually drop by roughly the amount of dividend payment on the ex-dividend date.

Related Reading:

• Personal Finance Clinic: Unbundling ETFs & XIN versus VEA
• How Much Life Insurance Do I Need?
• RBC Corporate Bond ETFs
• Mortgage Insurance versus Life Insurance
• Pre-pay your Mortgage

Questions on Canceling Mortgage Life Insurance and Stock Ex-Dividend Date is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Maxime writes:

I have opened a TFSA with BMO InvestorLine and purchased shares of Microsoft. When I received my first dividend I was surprised to see that they took the usual 15% of taxes as in a regular [taxable] account.

I called BMO to ask about it because I was sure that there would be no income taxes and they told me that this rule in TFSA applies only on Canadian investments.

Is it the same for you guys?

The TFSA is a true tax-free account. There are no taxes on interest, dividends or capital gains on investments held in the account. However, if Canadian residents purchase US-based securities (such as Microsoft) in a TFSA, a 15% withholding tax applies. The withholding tax has nothing to do with the Canada Revenue Agency. It is charged by US tax authorities on US investments held by foreigners, including Canadian residents. Withholding tax also applies to other tax-deferred vehicles such as RESPs.

RRSPs, on the other hand, receive special treatment under the Canada-US Tax Treaty because they are “operated exclusively to provide pension, retirement or employee benefits”. However, if you hold non-US foreign investments inside a RRSP, you may pay a withholding tax. For instance, I used to own Nokia (NOK), which is based in Finland, within my RRSP and was subject to a withholding tax.

As US investments held in a TFSA are subject to a withholding tax, it is best to hold these securities within a RRSP. The TFSA is an ideal location for Canadian bonds, Canadian stocks and Canadian income trusts, including REITs.

Related Reading:

• Tax Implications of Foreign Dividend Investing
• How Withholding Taxes Affect the Choice of International Investments?
• Check Your Withholding Tax
• The Advantages of RRSPs over TFSAs
• Location, Location, Location: Where to put portfolio components?

Withholding tax & TFSA Investments is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Gaby of Toronto asks:

While ETF’s can provide some stability and peace of mind, would it be possible to do better by buying individually enough of an ETF’s main components that cover a big chunk of the holdings? For example, if the iShares Canadian Tech Sector ETF (XIT), is moving up, would it theoretically be possible to buy its top two or three components (Research in Motion, CGI Group Inc. – Class A, and Open Text Corp) and therefore weed out the smaller stocks holding the performance back?

You are talking about unbundling ETFs and buying the component stocks directly, which could work out cheaper due to $10 stock commissions and the concentrated nature of many sector ETFs. The StingyInvestor.com website has a nifty tool for comparing the cost of the ETF with buying the shares directly. If you are willing to live with the tracking error introduced when dropping some of the smaller names, unbundling the ETF could work out even cheaper.

Dennis from Toronto asks:

Are there any tax advantages/disadvantages in choosing iShares CDN MSCI EAFE ETF (XIN) over Vanguard Europe-Pacific (VEA)? I understand that the MERs are different and iShares hedges foreign currency exposure. However, are there different tax implications for choosing Vanguard versus Canadian iShares?

Yesterday’s post showed how holding Canadian ETFs that in turn hold US ETFs results in a withholding tax that cannot be recovered for registered holdings. In taxable accounts, ETFs such as XIN that hedge foreign currency exposure have a different problem: the gains due to currency hedging are taxed as capital gains on an ongoing basis. In other words, ETFs such as XIN that hold foreign ETFs have a tax leakage due to withholding taxes in RRSPs and a tax leakage due to ongoing capital gains in taxable accounts.

Related Reading:

• Unbundling the iShares CDN REIT Index Fund (XRE)
• The Costs of Currency Hedging: Taxes
• How Withholding Taxes Affect the Choice of International Investments?
• Vanguard announces ETF pricing and ticker symbols
• Index ETFs: iUnits or iShares

Personal Finance Clinic: Unbundling ETFs & XIN versus VEA is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

My plan is to invest approx $100 to each of the 2 plans every two weeks in order to qualify for the maximum government match. I want to take advantage of dollar cost averaging but the problem is that there seems to be a minimum of $100 investment for each of the funds. I was hoping to diversify between 4 e-funds but it would seem I have to invest more money or invest less often in order to do that.

As I tend to invest a lump-sum amount into our kids’ RESP, I don’t have experience with investing regularly in a RESP. But I think Tim can invest regularly by setting up a Pre-authorized Purchase Plan for the TD Money Market Account. A Pre-authorized Purchase Plan (PPP) allows investors to invest as little as $25 on a regular basis — from as often as every week to as infrequent as once a year. The PPP can be set up for purchasing $100 of the TD Canadian Money Market fund for each of the two accounts. Every other month (or so), the account should have enough contributions plus CESG payments in the money market fund to switch into other e-Series mutual funds. Use this automatic rebalancing spreadsheet to figure out how to divvy up the holdings in the money market fund.

Another option is to set up a PPP for each of the e-Series mutual fund in your portfolio. If you are planning on purchasing four e-Series funds, you’ll set up a contribution of $25 (the minimum required for a PPP) for each fund for a total of $100. The CESG is deposited into the account in a money market fund and can be used to rebalance the portfolio, say once every year. Note that all the PPP purchases made on the same day in one account show up as one transaction in the chequing account. I’d like to hear your opinion if you have set up a RESP account and invest in it regularly.

[Note: The original post incorrectly mentioned that each mutual fund purchase via a PPP is treated as a separate chequing transaction. Thanks to readers who pointed out the error in the comments.]

Related Reading:

• Investing in TD e-Series Funds for Your RESP
• Sleepy Mini Portfolio Q2-2011 Update
• Sleepy Mini Portfolio Q1-2011 Update
• A Sample RESP Portfolio
• RESP Basics

How to invest periodically in a TD e-Series Funds RESP Account is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

How can I move a self-directed RRSP account from my broker to a self-directed RRSP account with TD Waterhouse?

It’s quite simple to transfer a RRSP account between different institutions — look for a transfer authorization form from the institution you want the account transferred to (the TD Waterhouse form for transferring a registered account can be found here). The form is fairly self-explanatory but the key decision you have to make is whether to transfer each security in-cash or in-kind. When an in-cash transfer is made, your investment will be sold and the proceeds transferred to the receiving institution in the form of cash. In-kind means the account is transferred as is, without any changes to the extent possible (it may not be possible to transfer some securities such as TD e-Series funds to another institution). Note that if you request an in-cash transfer of taxable accounts, you may be on hook for capital gains taxes.

As you could probably guess, a transfer out fee is charged by the institution you are transferring out of. TD Waterhouse, for instance, the transfer out fee is $125 plus applicable taxes. If your account is large enough, the receiving institution could agree to refund the fee. So, be sure to call and ask for a refund before you initiate a transfer. If an agent agrees to a refund, write down the name of the agent and don’t forget to follow up and call in the refund request once the transfer is complete.

Also, dividend payments received in the old account after a successful transfer will be moved later automatically.

Related Reading:

• The TFSA December Transfer Strategy
• Your Turn: Opening an US Dollar Self-Directed RRSP Account with QTrade
• RBC Direct Investing’s Irresistible Offer
• Reader Question on In-Kind RRSP Contribution
• E*Trade Quietly Offers Limited Wash Trades

Reader question on transferring a RRSP account is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Have a great weekend everyone!

Related Reading:

• This and That: Don’t Buy Stuff You Can’t Afford and more…
• Tax Cuts in the Fiscal Update?
• This and That: Pensions, Dollar Parity and more…
• This and That: Falling BRICs Edition
• This and That

This and That is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

It remains at heart largely a leap of faith. Mr. Dion says he can make it work, and you have to be willing to take him at his word on that. Though low-income Canadians would clearly benefit, the cost of that to the rest of the population is not clear. Also unclear is how the party would continue to fund the tax cuts once emissions went down and the related tax revenue disappeared.

The green shift book claims that the only direct costs for an “average” family will be an increase of $250 for heating their homes and BBQing. The document says that “the primary impact will depend on local energy sources, local weather and energy efficiency of the household”, without providing a cost estimate.

Let’s indulge in some speculation of how much the “green shift” will cost us indirectly. The $40 per tonne tax on carbon emissions will be levied on the wholesale level and will raise an estimated $15 billion in new revenue. Businesses forced to spend more on energy will find a way to pass on the entire cost to consumers. The 1% cut in the GST enacted by the Conservatives cost the Treasury $6 billion. That suggests that the indirect carbon tax component of the green shift will be equivalent to a slightly more than 2% increase in our spending. What do you call a tax that is applied on our spending? Don’t we already have one called the GST?

If our assumption that the carbon levy will amount to a 2% tax on spending is correct, Statistics Canada’s Survey of Household Spending provides us with an estimate that the “green shift” will cost an average Canadian household, which spends roughly $50,000 on current consumption every year, $1,000. Add the $250 in estimated direct costs and the green shift is likely to cost $1,250 per year. Note that the tax benefits for a couple with one child living in Ontario and earning $80,000 is estimated at $1,012 according to the “green shift” calculator. This rough analysis gives credence to the Liberal claim that the policy will be tax neutral.

As the “green shift” proposes to refund the carbon tax in the form of income tax cuts, the policy amounts to increasing the tax on consumption while offering an equivalent cut on income. Canadians who save a significant portion of their income are likely to benefit from this policy as money sitting in a bank or brokerage account isn’t emitting any greenhouse gases. Most Canadian families in the middle income brackets that spend most of their income are likely to be more or less in the same financial situation as before. Big spenders are likely to be hit the hardest.

Here’s my question though: assuming that greenhouse gases are a problem that must be addressed (for the record, I think it is), does anyone seriously believe a 2% tax on spending is going to achieve it? Informed comments are welcome.

Note: This or That will return next week. Have a nice weekend!

Related Reading:

• Dion’s Green Shift Plan
• The Conservative Tax Trick
• Survey of Household Spending
• The Spending Habits of Canadians
• The Income Tax Cut is Better

The Green Shift: A GST by Another Name is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Many years ago I set up my RRSP using TD’s low MER e-Series index mutual funds. I learned quite awhile ago that most actively managed funds cannot beat the indexes over the long haul. I’m now thinking of moving from index funds to ETFs. Is there a website(s) somewhere with a good list of available ETF’s? I currently have a TD trading account so flipping over from TD index funds to ETF’s should easily be done not forgetting penalties for redeeming within 90 days.

While index mutual funds are a great option for small portfolios, ETFs could be an even cheaper option for larger portfolios. Though hundreds of ETFs are available, most investors need to be aware of only a handful. You can obtain the list of ETFs that track broad indices under the ETF category on this website or the websites of the major purveyors – Vanguard and iShares (Canada and US). I use the ETF Connect website for looking up more obscure ETFs.

The following table lists the TD e-Series Index Fund and the equivalent ETF:

Note that a better substitution for the TD US Index (TDB902) could be the Vanguard Total Stock Market ETF (VTI). Also, an initial currency conversion charge will be incurred when buying ETFs that are listed on US exchanges. Throw in an emerging market ETF and REITs into the mix and you’ll end up with a well-diversified portfolio.

Related Reading:

• Altamira Precision Series Index Funds
• Vanguard to Introduce Six New ETFs
• Vanguard announces ETF pricing and ticker symbols
• A Tour of ETFs: iShares MSCI EAFE Index Fund
• The Costs of Currency Hedging

Switching from Index Mutual Funds to ETFs is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

I presently have all my investments in mutual funds (locked-in and regular RRSP) and would like to switch to ETFs. I don’t believe there are any DSCs or fees payable if I sell these funds. My question is this: What is your strategy for ETFs as far as what to do with interest or dividends that are generated by the portfolio? For the time being, I won’t be putting any “fresh money” in to my RRSP but would like to re-invest the money that is generated by the ETF.

There are two ways of reinvesting dividends and income generated by a portfolio:

1. Sign up for a synthetic dividend reinvestment plan offered by many discount brokers that allows you to reinvest dividends into full shares without incurring commission costs. For example, say you hold 1000 shares of XSB which made a distribution of $0.31465 shares in March 2008. If your broker offers a synthetic DRIP for XSB, you would receive 11 shares of XSB (at $28.45) and $1.70 in cash will be deposited into your account. You may find Canadian Financial DIY’s post on DRIPing ETFs to be useful.
2. You can let the dividends accumulate and reinvest it once every year when rebalancing the portfolio.

I personally opt for (2) because I usually invest regularly and just combine distributions with savings. I suppose you can’t go wrong with either choice because how you do it matters little compared to the importance of reinvesting dividends. So, when it comes to reinvesting dividends, investors should adopt a simple motto: just do it.

Related Reading:

• How to avoid currency conversions on US Dividends
• DRIP discounts from BMO and RY
• Reader Question on US Dollar Dividends in a RRSP
• Financial Stability Board Warning on ETFs
• Dividends not only way to return cash to shareholders

Reader Question on How to Reinvest Dividends is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

I am wondering about an online article titled ETF Sector: Slop du jour published in the summer 2007 issue of Canadian Business magazine. The relevant section says: ‘The other building block advisers typically recommend is an emerging markets ETF. John De Goey, a senior adviser at Toronto-based Burgeonvest Securities, cautions against the most popular of these, the iShares MSCI Emerging Markets Index Fund (NYSE: EEM). Even though it has a 20% return over the past year and is well diversified, Canadians will expose themselves to currency risk since it trades in U.S. dollars. “You would have made money, but a good chunk of it would have been lost in the currency conversion,” De Goey says. Instead, he likes the Claymore BRIC (TSX: CBQ), which trades in Canadian dollars and boasted a 28% return in 2006. The drawback: it’s less diversified, offering securities from Brazil, Russia, India and China. Yet for De Goey, the currency risk of EEM is still greater than having less diversified holdings in a BRIC fund’.

Why would trading the same stocks in U.S. vs. Canadian dollars expose you to currency risk if the companies assets are all overseas? Even if the U.S. dollars falls you should be protected if the foreign currency moves upward with the Canadian dollar as you mention in this post: “You can essentially ignore the CAD-USD fluctuation for broad international ETFs like Vanguard Europe Pacific ETF (VEA), iShares MSCI EAFE ETF (EFA), Vanguard Emerging Markets ETF (VWO), iShares MSCI Emerging Markets ETF (EEM) etc., country-specific ETFs like iShares MSCI Japan ETF (EWJ), iShares MSCI Australia ETF (EWA) etc. and even ADRs that trade in US exchanges but are denominated in local currencies like Nokia (NOK)”.

I don’t understand why Mr. De Goey would come to a different conclusion. Am I missing something?

1. The Claymore BRIC ETF (TSX: CBQ) uses ADRs listed in the US exchanges and hedges the CAD-USD fluctuations. So, you can think of CBQ as providing you with a narrow emerging market exposure and currency fluctuations of local currencies with the USD.
2. A broad emerging market ETF like Vanguard Emerging Markets ETF (VWO) or iShares MSCI Emerging Markets Index Fund (EEM) will provide you with a broad emerging markets exposure along with currency fluctuations of local currencies with the CAD.

It is not clear to me why currency exposure in (1) is less risky than (2), unless you buy into the notion that the U.S. dollar will depreciate forever against emerging market currencies. Personally, I would pick VWO because of it (a) provides broad exposure to emerging markets and (b) cheaper than CBQ. Do you have any comments on AJ’s question?

Related Reading:

• Reader Query on Currency Risk in International Equities
• Claymore responds to questions on CWO
• Performance of the Currency-Neutral MSCI EAFE Index Fund
• Investing in Emerging Markets
• A Tour of ETFs: iShares MSCI EAFE Index Fund

Reader Question on EEM versus CBQ is brought to you by Canadian Capitalist -- Helping you to invest & prosper.