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Lexicon
Jul 29, 2003
2 + 2 != 5

Welcome to the Canadian investing thread! This is not intended to replace the Investing and Retirement thread for Canadians; but rather, serve as a supplement with Canada-specific information. In other words, it'll be much of the same advice as the Investing megathread(s), coupled with additional Canada-specific tips on how to navigate the treacherous waters of our especially-rapacious banks and investment houses. Canada has some of the highest banking fees and mutual fund fees in the world, so there's not a great deal of point in investing well, only to have all the returns picked off by a terrible, high-MER fund. Also, RRSPs, TFSAs, and all that jazz.

What's an MER? Glad you asked!
Management-expense ratio. It's the portion of your holdings subtracted as a fee every year by the mutual fund or ETF issuer. If you're paying more than 1%, you're being absolutely ripped off. It should be a lot closer to 0.3-0.5%. The Investor's Group chucklefucks charge more like 2-3%.

What the hell should I invest in?
If you have debt, especially consumer debt, your main priority is to get rid of that. There's very little point investing for a best-case scenario 7% return when you're getting done for 20% on a credit card. You won't find many better uses of spare cash than paying off carried balances on a credit card.

But that aside, investing newbies are often overwhelmed by the sheer volume of misinformation and clever marketing out there. The dirty secret of the industry, however, is that the vast majority of normal folks would be better served with a couch-potato strategy backed by very low-MER funds or ETFs. In very basic terms, rather than picking stocks or paying a silver-tongued Investor's Group salesman to pick them for you, you invest in funds that represent the entirety of the market, and then balance occasionally (to take profits where things have gone well, and to buy stuff that's gotten cheap). The exact country split, proportion of bonds, and frequency of rebalancing is all a matter of debate and personal choice, but this strategy has a lot of academic and historical basis. It's frequently said that active management (stock pickers) on average do not beat the index (and this is especially true once their considerable fees are subtracted). This is a really tiny overview of index investing - anyone new to this will want to do some proper research and not just take my word for it.

How do I do it?
For 5-figure and above amounts of money, you should buy ETFs. I like the ones from Vanguard Canada - they have super low MERs. If you're just starting out - weekly contributions to index mutual funds are hard to beat. The best are the TD eSeries mutual funds with MERs of 0.3% to 0.5%. TD makes this notoriously hard to sign up for... you can convert an existing mutual fund account to eSeries by signing up online. But don't mention it in the branch - they don't know what you're talking about and will try to steer you aside most likely. A youngish person who wants to save/invest and has some money to contribute weekly and no debt in my opinion has no better option than to throw $50-$100 a week into a couple of eSeries funds, rebalancing yearly, and otherwise forgetting about it until the fairly distant future.

What bank / credit card should I use?
I don't have too much to add here - others will. Personally, I use ING Thrive for all my chequing needs, TD eSeries for weekly index contributions, Questrade for ETF purchases, and the MBNA smart cash world credit card for basically all purchases.

RRSPs and TFSAs
Tread carefully. It is not axiomatically true that everyone should use RRSPs as a savings vehicle. I, for instance, don't... for reasons that are very case specific but we can get into if I'm compelled to justify my financial reasoning. TFSAs, on the other hand, are great - everyone should have one, but be careful on the contribution room. Everything I've said about indexing applies within the context of a TFSA.

Housing Bubble?
Not everyone agrees, but it should be fairly uncontroversial at this point to those who are both not-innumerate and not-selling real-estate-connected-products that Canada's housing market is looking awfully bubbly. Therefore, from an investing point of view, my advice at least is to stay the gently caress away. Opposing positions are welcome, but in either case, the discussion should generally be pertinent to investment, and not, say, the foibles of the CMHC. We have the housing bubble thread for that.

Disclaimer:
This is an internet comedy forum, not a chartered-accountancy. Configure your expectations and skepticism accordingly. No one here is provably a financial professional, and I'm explicitly not one. Use any information here as a starting point for your own research. Actual CAs / tax attorneys are necessary for serious personal financial decisions. Blah blah blah.

Justified corrections and additional material will be added to the OP as provided. I'm just a dude that's read a bunch of books and blogs on this stuff.

Lexicon fucked around with this message at Sep 13, 2013 around 12:37

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Lexicon
Jul 29, 2003
2 + 2 != 5

Saving this first post for important follow-up or whatever.

Baronjutter
Dec 31, 2007

...the engine tracks thousands of details for each unit meaning it will be a far deeper game than your grandpa's chess.
Pre-order CHESS now and receive the DLC "queen" unit.

Me and my wife just maxed out our tax free savings thingies and have "a guy" handling our investments. We've got about 40k each in a mix of conservative and moderate mutual funds. I don't know poo poo about the world of finance, but is it generally safe to trust these investment dudes to throw my money into the best places?

He thinks the housing market is bubbly and interest rates are going to be going up soon and that the canadian economy and banks aren't as solid as people think, so he moved our money around based on those assumptions.

Are we mostly doing the right things here?

Cultural Imperial
Sep 17, 2004

FUCK CHINA

its ok im ethnic han


What the gently caress is up with all the loving heloc ads on cbc newsworld? It's absolutely disguising that a national broadcaster is in cahoots with such terrible financial products.

Cultural Imperial
Sep 17, 2004

FUCK CHINA

its ok im ethnic han


By the way, manulife just cut their imfs BT half or more.

JawKnee
Mar 24, 2007



What's the best TFSA to go with? Ally's used to have a pretty decent percentage a couple years back, but it's now 1.2% (which is still higher than TD's, where my chequing is).

rhazes
Dec 17, 2006
Midas!

JawKnee posted:

What's the best TFSA to go with? Ally's used to have a pretty decent percentage a couple years back, but it's now 1.2% (which is still higher than TD's, where my chequing is).

I think ING Direct is generally the "best" for a high interest savings account. That said, realistically, I hope that as you get more savings you decide to actually use your TFSA room for investing, as it's a fantastic way to get tax free gains, whereas a TFSA just prevents you from losing too much value in regards to inflation.

Baronjutter posted:

Me and my wife just maxed out our tax free savings thingies and have "a guy" handling our investments. We've got about 40k each in a mix of conservative and moderate mutual funds. I don't know poo poo about the world of finance, but is it generally safe to trust these investment dudes to throw my money into the best places?

He thinks the housing market is bubbly and interest rates are going to be going up soon and that the canadian economy and banks aren't as solid as people think, so he moved our money around based on those assumptions.

Are we mostly doing the right things here?

Honestly, not really. Most financial advisers who are not fee-only, are basically taking 1% per year just to advise you (in every class A type mutual fund share, 1% of the fees goes to the adviser). You would likely be best served by a low cost index approach but most mutual funds are a bit bizarre and by their nature are somewhat inefficient: they usually have to have 5-10% of your 'invested' money sitting in cash... Not to mention having different mutual funds is a bit foolish unless they are narrow in nature, ie, 20% of a US-only equities mutual fund, 20% into an international emerging markets mutual fund, 40% in canadian bond fund, etc. I highly doubt this is the case, and the adviser just bought a few similar ones for no good reason. I don't think you should really take your money 'out' of the banks in Canada, because they make up a huge proportion of our total stock market capitalization and also are the largest, most liquid things on our stock markets.

I have a lot of disdain for financial advisers personally and feel like many of them don't add much value but cost a fair chunk of money. You should look and see what kind of fees/MER these mutual funds entail. Near the bottom of my post you can see how much of your total returns they are taking in fees and expenses, and decide whether the probably few hours they have looked at or cared about your personal investments every year justify that much in fees.

If you aren't prepared to do ~25-30 hours of reading yourself to become a DIY-er, or aren't 100% certain you have the discipline to remain strong when your investments plummet 20-30% in a single year, then your best bet is to have nearly $100k in investments and get a DFA (Dimensional Funds adviser) or try to see if "Canadian Couch Potato"'s blog links to an adviser in your proximity. I'm a fan of the owner of that blog and from what I know, he only links to advisers who are reputable and actually care about building their clients a proper portfolio. The fees are more up front than you are probably paying in your mutual funds now, but that's because your fees are currently hidden in the mutual funds themselves.

(Note: to anyone reading this, sector-specific ETFs/mutual funds/anything are usually very, very dumb. Don't invest in a "healthcare ETF" or "energy ETF" unless you have a very good reason to do so. I have 5% in a mining ETF just to increase my portfolio home-bias to Canadian investments (Many of the largest mining corporations in the world are Canadian-based) and perhaps work as an inflation hedge while still providing capital gains/dividends, unlike gold futures or something.) Also, those double and triple leveraged and inverse ETFs are really stupid too, because of how you are virtually guaranteed to lose money with them as long term holdings.

Also, Lexicon, an important distinction in the OP is that active managers do not beat the market, after fees. They often DO beat the market, but their fees eat up those extra gains and then some. Also for those who are not very familiar with DIY investing, a lovely advisor can be good for someone even with their horrible fees, if they prevent that person from going antsy and doing something completely bizarre like selling investments during the downturn in 2008 and missing the subsequent recovery.

If you want to look at how much those advisers/mutual fund fees are ACTUALLY skimming, in the long run, off your returns, check this handy (American) tool by Vanguard. Fees can be very huge in Canada: my father actually has Mackenzie Financial Mutual Funds that have a MER of 2.70% (Class A-type).

https://personal.vanguard.com/us/in...ruth-about-cost

After 25 years, with 6.0% annual returns, 2.7% MER takes 53% of your actual returns, just because those few percentage points cripple your compounding gains.

rhazes fucked around with this message at Sep 13, 2013 around 08:41

Lexicon
Jul 29, 2003
2 + 2 != 5


Baronjutter - I agree entirely with rhazes here - having an advisor dude is almost certainly a sub-optimal approach, especially when we're only talking 40k each. You'd probably be better served investing 20-30 hours of research, and pretty quickly realizing you can cut out the middleman. But if you're happy, of course, there's no reason to change - just be aware that you *are* paying for this service, and likely quite substantially so.

Rhazes - on the beat the market point - I don't have any good research to hand, but I've heard it expressed multiple times that the average advisor does not beat the index without even considering fees. It's just that hard to pick stocks due to the inherent stochastic nature of the markets. Still, I'm happy to err on the side of caution - will edit the OP.

Lexicon
Jul 29, 2003
2 + 2 != 5

Cultural Imperial posted:

What the gently caress is up with all the loving heloc ads on cbc newsworld? It's absolutely disguising that a national broadcaster is in cahoots with such terrible financial products.

I hear you. Problem is, these financial product companies have deep pockets because they are absurdly profitable. And the CBC really likes and needs money. In a sane world, the CBC wouldn't even have advertising (e.g. the BBC model of license fees), but at the very least, any advertising they do have should be agreed to be online socially useful stuff (so no cigarettes, no helocs, etc). Sadly, this is not a sane world.

Lexicon
Jul 29, 2003
2 + 2 != 5

JawKnee posted:

What's the best TFSA to go with? Ally's used to have a pretty decent percentage a couple years back, but it's now 1.2% (which is still higher than TD's, where my chequing is).

A tax-free-savings-account should primarily be used as a tax-free-investing-account (unless you have very exceptional circumstances like low cash flow due to a child on the way or a sick parent you're caring for or something).

Inflation is around 2% a year. Sit and collect 1.2%, and you're not even keeping up with inflation. The money gets less valuable every year - and you're squandering a pretty nice tax saving opportunity on more serious investments.

It's up to you - all this stuff is very overwhelming at the beginning - but you're almost certainly leaving money on the table here.

leaves of logic
Sep 11, 2006


Lexicon, I'm curious about why/how you're contributing weekly into your index funds, but rebalancing yearly. Isn't your cash just sitting idly in your account until you rebalance? Or do TFSAs that are setup for something like TD eSeries also get interest? I've already invested in some index funds, but I'm wondering what to do between rebalancing, like putting it into a good HISA such as People's Trust or maybe into GICs.

For those who want some more information on couch potato investing and a general intro to investing, I'd recommend The MoneySense Guide to the Perfect Portfolio. It's written by Dan Bortolotti, the same guy who runs canadiancouchpotato.com.

Lexicon
Jul 29, 2003
2 + 2 != 5

leaves of logic posted:

Lexicon, I'm curious about why/how you're contributing weekly into your index funds, but rebalancing yearly. Isn't your cash just sitting idly in your account until you rebalance? Or do TFSAs that are setup for something like TD eSeries also get interest? I've already invested in some index funds, but I'm wondering what to do between rebalancing, like putting it into a good HISA such as People's Trust or maybe into GICs.

For those who want some more information on couch potato investing and a general intro to investing, I'd recommend The MoneySense Guide to the Perfect Portfolio. It's written by Dan Bortolotti, the same guy who runs canadiancouchpotato.com.

I contribute weekly as a "savings" mechanism - the source of that money is basically out of my monthly earnings. I quite like dollar-cost averaging, which is why I contribute weekly as opposed to monthly or quarterly - and with eSeries, there's no transaction costs. My actual longer-term savings is held in ETFs.

Come rebalancing time, I'll look at the mutual fund / ETF combination, and get stuff moved over to [lower-cost] but equivalent ETFs as appropriate. But that has transaction costs, so I do it infrequently.

Does that make sense?

leaves of logic
Sep 11, 2006


Lexicon posted:

I contribute weekly as a "savings" mechanism - the source of that money is basically out of my monthly earnings. I quite like dollar-cost averaging, which is why I contribute weekly as opposed to monthly or quarterly - and with eSeries, there's no transaction costs. My actual longer-term savings is held in ETFs.

Come rebalancing time, I'll look at the mutual fund / ETF combination, and get stuff moved over to [lower-cost] but equivalent ETFs as appropriate. But that has transaction costs, so I do it infrequently.

Does that make sense?

So you're purchasing eSeries weekly, and come rebalancing time, selling some of those off and buying more into your ETFs?

Lexicon
Jul 29, 2003
2 + 2 != 5

leaves of logic posted:

So you're purchasing eSeries weekly, and come rebalancing time, selling some of those off and buying more into your ETFs?

Precisely.

rhazes
Dec 17, 2006
Midas!

Questrade has free ETF purchases (and I think every ETF is available) so a person could just go with that. However, that free ETF promotion could end at some point, not sure.

Lexicon
Jul 29, 2003
2 + 2 != 5

rhazes posted:

Questrade has free ETF purchases (and I think every ETF is available) so a person could just go with that. However, that free ETF promotion could end at some point, not sure.

True. Questrade's pricing is agressive and awesome... but I'm not too keen on the platform itself. I'm probably going to end up migrating off it at some point.

Lexicon
Jul 29, 2003
2 + 2 != 5

Here's your occasional reminder that we, as a nation, are loving poo poo at not being hopelessly indebted:

http://www.vancouversun.com/busines...9016/story.html

quote:

OTTAWA Canadian household debt climbed to a new high in the second quarter, turning around after creeping lower for two quarters, according to Statistics Canada.

Statistics Canada said Friday the ratio of household credit market debt to disposable income increased to a new high of 163.4 per cent in the second quarter compared with 162.1 per cent in the first three months of the year.

That means Canadians owe just over $1.63 for every $1 in disposable income they earn in a year.



Read more: http://www.vancouversun.com/busines...l#ixzz2endngYIC

Midtown
Jun 16, 2013


Can somebody explain to me in very basic language like you were talking to a child or barnyard animal what is the purpose of a TFSA, in actuality. I am very new at money management having spent many years as a student bumping around various homeless shelters so I'm not savvy on these things now that I'm bringing in Tim Hortons level cash after graduating with a prestigious 4 year BA.

I know it is called a "saving" account (the S is in there after all) but this does not seem to be the purpose. I think the intended purpose is to be an investing account, correct? Because otherwise you are best case making only $30/month from opening one and stuffing your money in it. If you use it as an investment vehicle and say you earn money from your investment over and above the account limit would that not get you in trouble for going over the contribution room? I know it's a stupid question but I sincerely know nothing about this stuff. So you put money in your TFSA and "buy stocks" with it and what you make is tax free but where does the money go? Please don't hurt me.

Edit: this post is the first time I've really related to my avatar picture, just saying

acetcx
Jul 21, 2011


In a "normal" (non-RRSP, non-TFSA) account, which is called a non-registered account, when you make money on an investment you have to pay tax on it. The amount you have to pay depends on a lot of things, most importantly your tax bracket and whether the money you made is classified as interest, dividends, or capital gains.

Note that this means that any interest you're earning in your non-registered savings account is taxable. However, it's likely that you've never paid any tax on it because your bank will only send you a tax slip at the end of the year if you earned more than $50. You're still expected to self report any interest you earned when you file your taxes but I don't think very many people do, so amounts under $50 are effectively tax free.

In a TFSA, when you make money on an investment you don't have to pay any tax on it, period.

This is a pretty sweet deal, especially when compared to non-registered accounts (it's a bit more complicated when compared to RRSP's). However, there are a few restrictions. The first one is that you can only deposit a limited amount of money into a TFSA, which increases each year. This is your "contribution room". The second one is that you can't ever deposit more than your available contribution room in a single calendar year, even if you withdraw money during that same calendar year.

So, if your contribution room is $5000 then you can make one deposit of $5000, or two deposits of $2500, or five deposits of $1000, or however you want up to $5000 total over the course of the year. But you can't deposit $5000, withdraw $1000, then deposit $1000 in the same year. That would be $6000 of deposits in one year, even if you just redeposited the same $1000 you withdrew earlier. This doesn't mean you can't ever withdraw and redeposit though because you could deposit $4000, withdraw $1000, then deposit $1000 and still be at the $5000 limit (although the account would only hold $4000 of deposits at that point). I hope that makes sense.

Now, your contribution room is calculated as your unused contribution room from the previous year plus the sum of your withdrawals from the previous year plus the yearly increase which is currently $5500/year. Whether your TFSA grows or shrinks in value is irrelevant as far as these rules are concerned. This means that depending how your investments did your contribution room could be bigger or smaller than other people's contribution room.

For example, imagine your contribution room was $5000, you deposited $5000, and it grew to $6000. If you withdrew all your money then your next year's contribution room would be the $6000 you withdrew plus the $5500 yearly increase so it would be $11500. However, if instead your TFSA shrank to $4000 and you withdrew it then your next year's contribution room would only be $4000 + $5500 = $9500.

As long as you were 18 or older in 2009 and you've never contributed to a TFSA then your contribution room is currently $25500. That's because the yearly increase was $5000 in 2009-2012 and $5500 in 2013.

As for what you should do with a TFSA, well, that depends entirely on your situation. I put investments in mine and I'm planning to use those investments for retirement but that's me and your situation is probably different (for example, it may make more sense for you to put some or all of your retirement savings in an RRSP).

Oh, and one important thing to note that people often get wrong is that non-registered accounts, RRSP's, and TFSA's are all just types of accounts. You can put cash in them or bonds or stocks or mutual funds or ETF's or whatever. If you open a TFSA at your bank they will probably only let you put cash in, but if you open a TFSA at a brokerage of some sort you can put whatever you want in.

Rockzilla
Feb 19, 2007

Squish!

Lexicon posted:

Here's your occasional reminder that we, as a nation, are loving poo poo at not being hopelessly indebted:

http://www.vancouversun.com/busines...9016/story.html

Seems like a lot of that is from a spike in new mortgages. Before we bought a condo last year we had no debt and enough cash for a down payment, appliances and an emergency fund. 15 months later we have an emergency fund and $240k left on our mortgage, meaning our debt to income ratio jumped from zero to about 400%. Anyway, now that I'm balls-deep in mortgage debt I'm expecting that the Vancouver real estate bubble will explode any day now.

rhazes
Dec 17, 2006
Midas!

Lexicon posted:

True. Questrade's pricing is agressive and awesome... but I'm not too keen on the platform itself. I'm probably going to end up migrating off it at some point.

Well, I haven't used anything else so I have no issues with it.. ignorance is bliss I guess. what are your qualms?

Midtown posted:

Can somebody explain to me in very basic language like you were talking to a child or barnyard animal what is the purpose of a TFSA, in actuality. I am very new at money management having spent many years as a student bumping around various homeless shelters so I'm not savvy on these things now that I'm bringing in Tim Hortons level cash after graduating with a prestigious 4 year BA.

I know it is called a "saving" account (the S is in there after all) but this does not seem to be the purpose. I think the intended purpose is to be an investing account, correct? Because otherwise you are best case making only $30/month from opening one and stuffing your money in it. If you use it as an investment vehicle and say you earn money from your investment over and above the account limit would that not get you in trouble for going over the contribution room? I know it's a stupid question but I sincerely know nothing about this stuff. So you put money in your TFSA and "buy stocks" with it and what you make is tax free but where does the money go? Please don't hurt me.

Edit: this post is the first time I've really related to my avatar picture, just saying

Yes, TFSA's are amazing for investing, because certain types of investments are taxed very harshly. This is going into a little extra detail about how things should be arranged. Ie. most bonds are bought at a premium (ie buy for $110 not $100), so they actually pay out more interest (say $30 instead of $20) and have a capital gains loss (ie. $10) when they mature/'expire' (return the initial $100). And interest is taxed regularly, unlike capital gains and dividends which are taxed differently and generally at a lower level. TFSA's aren't ideal for some types of investments, but I wouldn't say they are bad, it's just you prioritize being efficient later on, because if you are investing for retirement seriously, that $5k in contribution room every year should be easily maxed early in the year. For example, you lose 15% of your foreign dividends due to a withholding tax when they are in a TFSA, which a RRSP is exempt and you can get a rebate for a regular account.

The best part of a TFSA is the compounding, because if your TFSA doubles in value, all of that is tax free, which is drat awesome, and no, it doesn't take up future contribution room at all. A RRSP is tax-free when you put the money in, but is then taxed when taken out, so all your gains are taxed. And a regular investment savings account would be post-tax money, that is then taxed on any earnings. If you're asking WHERE you can get a TFSA that isn't a plain jane high interest savings account, well, I use Questrade for ETFs, there are many other discount brokerages, but you can get it at TD and use their e-series mutual funds, you can get a ING direct one and pick up the streetwise fund.

For those just starting off who want to buy a home in ~5 years, for those who have room in it and want to save for a house, putting it all in bonds/GICs/etc in a TFSA is not a bad idea at all, because you get the contribution room back at the end of the year after you withdraw, unlike a RRSP where you're penalized for withdrawing. So a TFSA _CAN_ be used for shorter-term investing in this way. And remember: DON'T EVER put money in equities/stocks if you need money at a specific time in the near future <10 years.

rhazes fucked around with this message at Sep 13, 2013 around 22:27

Demon_Corsair
Mar 22, 2004

Goodbye stealing souls, hello stealing booty.

I'm also super new at this, and plan to grab that book linked up thread. What are some other good references for me to look at?

I also have some money in RRSPs, does it makes sense to leave that there, or move it to my TFSA? Also is there a way to tell how much is left in your cap? I have sporadically contributed to it, so I have no idea how much room I have left in it.

Demon_Corsair fucked around with this message at Sep 13, 2013 around 22:53

leaves of logic
Sep 11, 2006


Demon_Corsair posted:

I also have some money in RRSPs, does it makes sense to leave that there, or move it to my TFSA? Also is there a way to tell how much is left in your cap? I have sporadically contributed to it, so I have no idea how much room I have left in it.

It's generally not a good idea to withdraw from your RRSP early:

Investopedia posted:

http://www.investopedia.com/university/rrsp/rrsp7.asp

Taking money out of an RRSP account before retirement can be very expensive because withholding taxes often apply. If you have an RRSP and you want to take money out of it for anything other than retirement, post-secondary education expenses or the purchase of a home, you'd be well advised to think twice before you run to the bank and make a withdrawal.

...

If you're still thinking about taking money out of an RRSP early, consider this: once you've taken money out of an RRSP through an early withdrawal, you'll never be able to recontribute that amount. For example, let's say that your lifetime contributions to your RRSP total $15,000. Because you have not always made the maximum allowable contribution, you have also accumulated $30,000 in additional contribution room. If you withdraw the $15,000 and want to re-contribute that $15,000 at a later date, the re-contribution will reduce your $30,000 unused contribution room down to $15,000.

I think transferring from RRSP to TFSA is considered a withdrawal.

You can check your contribution limits on CRA's system: http://www.cra-arc.gc.ca/esrvc-srvc...s/menu-eng.html.

acetcx
Jul 21, 2011


Alright, let's compare RRSP's and TFSA's then. But first we have to talk about types of income. When you make money on an investment it's classified in one of three ways:

Interest is just simple interest, e.g. interest from a savings account, a GIC, a bond, etc... Interest is taxed at your marginal rate, which is the rate of your tax bracket. That means interest is taxed at the same rate as the money you earn at work.

Dividends are cash payments from companies to their shareholders. You get dividends from owning dividend-paying stocks directly or from owning a mutual fund or ETF that owns dividend-paying stocks. Taxation of dividends is kind of complicated because companies pay dividends using cash that they already paid (corporate) tax on. It would be unfair to tax dividends at your marginal rate since that would be double taxation so dividend taxes are calculated using a formula that tries to approximate "what you would have paid if it was interest" minus "what the company already paid" but the exact formula varies by province. There's also something to do with accounting for foreign dividend taxes when you get dividends from a foreign company but that's beyond my knowledge.

Capital Gains are money you make from the value of something increasing between when you bought it and when you sold it. For example, if you bought a stock at $50 and sold it at $100 you would have $50 of capital gains. Capital gains are taxed at only half your marginal rate, which is pretty awesome. Conversely, if you bought a bond at $110 and sold it at $100 you would have $10 of capital losses. The nice thing about capital losses is you can use them to offset capital gains, and you can even offset capital gains from the past or future. As rhazes mentioned above, this is why people like to put bonds in registered accounts (RRSP's or TFSA's). In a non-registered account, a bond that earns $30 interest with a $10 capital loss is worse than a bond that just earns $20 interest because $10 of capital loss is only "worth" $5 of interest because of the difference in taxation.

Here's a calculator that shows the different tax rates on the different types of income. You should be able to see that the capital gains tax rate is always half the marginal rate and that the dividend tax rate varies significantly by province and tax bracket but is usually quite favourable.

What you should take away from this is that you usually pay a lot of tax on interest and not very much tax on dividends or capital gains.

Now, here's how RRSP's work. When you contribute money to an RRSP, the government doesn't charge you any income tax on the money you contributed to your RRSP. They do this by subtracting the contribution amount from your taxable income for that year. So let's say you made $60k and contributed $10k to your RRSP. The government would subtract your $10k contribution amount from your $60k taxable income and pretend that you only actually made $50k. The amount of tax you have to pay on $50k is less than the amount on $60k so you get a tax refund for the difference.

We say that you've contributed "pre-tax" money to your RRSP. All of the money in your RRSP has never had any tax paid on it - no income tax on the contributions and no tax on the gains, whether interest or dividends or capital gains. The kicker is that all withdrawals from your RRSP are taxed at your marginal rate (as long as you aren't withdrawing early and taking a penalty).

You might be thinking that this sounds like it kind of sucks because that means capital gains in your RRSP which would have been taxed at half your marginal rate are now going to be taxed at your full marginal rate. You're right, but the whole point of RRSP's is that you should contribute to your RRSP when your marginal rate is high (e.g. when you're making lots of money) and you should withdraw from your RRSP when your marginal rate is low (e.g. when you're no longer working). If you do it the other way around and contribute to your RRSP when your marginal rate is low then withdraw when it's high then you're throwing money away.

So how do you decide between an RRSP and a TFSA? Consider how the money is taxed in each case:

RRSP

Money is earned -> money is contributed to account -> money grows in account -> money is withdrawn -> tax is paid

TFSA

Money is earned -> tax is paid -> money is contributed to account -> money grows in account -> money is withdrawn

So in both cases the tax is being paid, it's just a question of when it's paid (aside from the fact that RRSP's tax all gains at the same rate). As long as we're talking about retirement savings, your strategy should be to pay the least amount of tax possible by adjusting when you pay the tax by adjusting whether you contribute to an RRSP or a TFSA. You can probably guess how to do that...

If your marginal rate is high, and you think it will be low when you retire, contribute to an RRSP.

In all other cases, contribute to a TFSA.

Don't forget that this advice is not necessarily meant for everyone. For example, contributing to an RRSP is a bad idea if you might need the money early because of the early withdrawal penalties. I'm sure there are other considerations too, this is not meant to be an in depth guide.

Please feel free to correct any mistakes I've made or add any of your own advice.

acetcx fucked around with this message at Sep 14, 2013 around 00:23

Lexicon
Jul 29, 2003
2 + 2 != 5

^ great post. This part can't be emphasized enough:

quote:

If your marginal rate is high, and you think it will be low when you retire, contribute to an RRSP.

In all other cases, contribute to a TFSA.

One should understand the rules of an RRSP before diving in head first. Anyone making under 50k, especially with no TFSA, really should think twice about the wisdom of having one.

It's also highly probable, in my opinion, that marginal rates will be quite a bit higher in future. As I said: tread carefully.

rhazes
Dec 17, 2006
Midas!

Lexicon posted:

It's also highly probable, in my opinion, that marginal rates will be quite a bit higher in future. As I said: tread carefully.

I fully agree with thinking taxes going up. I don't disagree personally with an expanded welfare state, but reality is that someone's gotta pay for all the people who bought an iPhone every year and went to Vegas/Mexico/Hawaii every year with their excess income, and only at the age of 40 decided to start saving for retirement despite having kids and their expenses. The government will have to increase the social net for the elderly, because old people vote in droves. People don't realize that you will need an absolutely huge amount in an investment account to life off of it for 30 years with am income even two thirds what you are earning as a worker (having a nest egg of 1.2 to 1.8 million to have a real/inflation adjusted income around 60k, off the top of my head). The retirement age will probably have to be increased at some point just because people are living longer (it's not retire at 60 and die before 75, it's retire at 60 and die around 85).. lot more years in retirement and that means more money needs to be saved. Besides, buying a home is the best investment there is! They aren't making any more land, you know.. after all, it can only go up! What's diversification?

rhazes fucked around with this message at Sep 14, 2013 around 05:26

Lexicon
Jul 29, 2003
2 + 2 != 5

rhazes posted:

I fully agree with thinking taxes going up. I don't disagree personally with an expanded welfare state, but reality is that someone's gotta pay

Yeah. I think it's virtually guaranteed that income taxes need to rise fairly substantially in the next few decades. So many promises have been made by the state that simply cannot be kept under current financing: massive 25-odd year pension schemes for government workers and end-of-life healthcare for the boomers who are now hitting retirement in waves. Obviously, rules can and do change, but my TFSA is basically the foundation of my retirement plan.

That said, on the RRSP/TFSA point - if your workplace offers you a matched contribution to your RRSP: TAKE IT. Never turn down free money.

Lexicon
Jul 29, 2003
2 + 2 != 5

rhazes posted:

Well, I haven't used anything else so I have no issues with it.. ignorance is bliss I guess. what are your qualms?

Honestly, I'm just a fussy nerd bastard when it comes to web stuff.

There's also the issue that Questrade is not likely to be around long-term - like every other moderately disruptive banking initiative in Canada, they'll be subsumed into the big-5(6) beast eventually. Given my adherence to the couch-potato thing, I'd almost rather just have my assets parked at a single big bank, where everything's all in one place and will be forever more, and there's no pending hassle once the "purchase and shutdown" inevitably happens.

Questrade is fantastic for day-trading though. Very low transaction costs. But I'm skeptical of the vast majority of day-traders being actually able to make significant money - might as well bet on horses.

rhazes
Dec 17, 2006
Midas!

Lexicon posted:

Yeah. I think it's virtually guaranteed that income taxes need to rise fairly substantially in the next few decades. So many promises have been made by the state that simply cannot be kept under current financing: massive 25-odd year pension schemes for government workers and end-of-life healthcare for the boomers who are now hitting retirement in waves. Obviously, rules can and do change, but my TFSA is basically the foundation of my retirement plan.

That said, on the RRSP/TFSA point - if your workplace offers you a matched contribution to your RRSP: TAKE IT. Never turn down free money.

I'm a young person, so I agree. My opinion is that boomers have essentially presided over governments gradually dismantling the safety nets since the late 80s until now, and bought into that rhetoric because they were bribed by reductions in income taxes (which were paltry compared to the costs of eroding the safety nets and their benefits), so they can have their cake and eat it too. They're just lucky they entered the working force in a very long and prosperous boom. And now we're stuck with a poo poo economy with inflation outpacing interest rates for individuals because otherwise our economy will grind to a halt. And all that fun stuff like entry level jobs paying barely above minimum wage and requiring prior training. I feel like I'm going to have to endure personal austerity in order to retire as comfortably as I want, because of rising taxes to fix the structural deficit/chronic underfunding we have as well as rebuild the social safety nets that were indiscriminately axed.

Lexicon posted:

Honestly, I'm just a fussy nerd bastard when it comes to web stuff.

There's also the issue that Questrade is not likely to be around long-term - like every other moderately disruptive banking initiative in Canada, they'll be subsumed into the big-5(6) beast eventually. Given my adherence to the couch-potato thing, I'd almost rather just have my assets parked at a single big bank, where everything's all in one place and will be forever more, and there's no pending hassle once the "purchase and shutdown" inevitably happens.

Questrade is fantastic for day-trading though. Very low transaction costs. But I'm skeptical of the vast majority of day-traders being actually able to make significant money - might as well bet on horses.

I have no idea about the long term viability of Questrade, but yes, I hope idiots keep on day-trading so I can essentially never pay fees. I don't think I will ever have to pay much of any, because when you're adding money you almost never need to rebalance. Once I have a bunch more money I will at some point do Norbert's Gambit to do a very cheap currency conversion to USD and purchase some aspects of my portfolio as US-listed Vanguard ETFs, though. At least day-trading is trading equities that have a overall positive return, unlike Forex trading where the expected return is 0%. That's even more insane.

I track my Portfolio on Google Finance anyway, so the Questrade interface isn't all that important to me as I don't really care how the stock is doing, except to try to buy ETFs comprised of a basket of foreign stocks when the principal stock markets they represent are also open, to prevent pricing errors.

Lexicon
Jul 29, 2003
2 + 2 != 5

^ Great points all around. I agree with basically everything you've said.

All I have to add is that I've done Norbert's Gambit myself recently, and it worked out swimmingly. I calculated that on the particular day I did it, the savings rate versus the bank transfer was about $300 CAD on a $10k USD transfer. Transaction costs come off of that, of course, but still - it's a hell of an awesome way to convert large amounts of CAD/USD.

Bleu
Jul 19, 2006
Why won't you learn LifeSprinkler?

Since the last time I was employed, the government implemented TFSAs. I finished my current grad studies, and that's pretty great, and I have some GICs () from when I was an intern that are maturing in a month or two. I'd like to move my money into a more favourable investment setup, and indexed mutual funds sound cheap and stable and brainless, which appeals to me. I also have a really low cost of living (no kids, no plan for kids, no intention to own a house, really cheap hobbies), so I plan to make some pretty big contributions when I start working full-time. I get that TFSAs are pretty baller, and they become even more baller when you use them to invest, and I think that hitting the cap is going to be pretty easy for me.

My question is this: when I go to TD and ask them to make me a TFSA mutual fund account, will I then have to ask them to make that TFSA an e-Series mutual fund TFSA to invest with the money I put there? And then, if I wanted to contribute more to my retirement than the TFSA cap, would I need a second e-Series mutual fund non-TFSA account to shovel additional money into, or can I just keep dumping money into the TFSA and just pay tax on it normally?

rhazes
Dec 17, 2006
Midas!

Bleu posted:

Since the last time I was employed, the government implemented TFSAs. I finished my current grad studies, and that's pretty great, and I have some GICs () from when I was an intern that are maturing in a month or two. I'd like to move my money into a more favourable investment setup, and indexed mutual funds sound cheap and stable and brainless, which appeals to me. I also have a really low cost of living (no kids, no plan for kids, no intention to own a house, really cheap hobbies), so I plan to make some pretty big contributions when I start working full-time. I get that TFSAs are pretty baller, and they become even more baller when you use them to invest, and I think that hitting the cap is going to be pretty easy for me.

My question is this: when I go to TD and ask them to make me a TFSA mutual fund account, will I then have to ask them to make that TFSA an e-Series mutual fund TFSA to invest with the money I put there? And then, if I wanted to contribute more to my retirement than the TFSA cap, would I need a second e-Series mutual fund non-TFSA account to shovel additional money into, or can I just keep dumping money into the TFSA and just pay tax on it normally?

There is nothing wrong with GICs. GICs are roughly equivalent to bonds (albeit illiquid), which are not a _GREAT_ return mind you, but risk free. I don't know much about bonds and GICs and optimizing, because I am <30yo and currently have 90% in equities and only 10% in short term corporate investment grade bonds (erm, should move to government ones at some point). I think the main take-away difference when you want to compare the two is that bonds are very very terrible in taxable accounts, whereas GICs are more tax efficient when they aren't in a TFSA or RRSP.

I don't know much about TD's e-series, sorry, but if you skim the Canadian Couch Potato blog, there are multiple posts on it including the best way to set it up, some posts about this might be as old as 2010, so it may take some digging if you need a lot of detail and are nervous.
But, I remember tidbits, briefly, the people in the branches may not even know about the e-series, because it is technically not part of the personal banking part of TD, it's part of the discount brokerage TD-Waterhouse Direct Investing/Discount brokerage. That's why it needs to be converted and the people in-branch probably won't have a clue, so the best way to convert is probably online after creating a regular mutual fund account at a bank branch.

You can't exceed your TFSA (well you can and it probably won't ring alarm bells, but there are very nasty penalties for doing so, so don't!), you would have to have a second regular (taxable) ISA (investment savings account) which I imagine is fairly easy to set up once you already have the e-series TFSA set up. Good luck!

rhazes fucked around with this message at Sep 15, 2013 around 08:09

acetcx
Jul 21, 2011


When I opened my TD e-Series account I walked into a TD branch and asked them to open a mutual fund account for me. Then I downloaded the account conversion form, filled it out, and mailed it in. It was actually pretty painless.

Since you want both a TFSA and a non-registered account you're going to have to open two accounts when you go to the TD branch. They shouldn't have a problem with that. Then you will probably have to fill out the conversion form twice, once for each account, and mail both forms off.

It's possible that TD offers some way to consolidate the accounts so you may want to call and ask in advance. They have a phone number listed here. You're going to want to call the first number, not the second one, because TD Waterhouse is the brokerage arm of TD and it doesn't sound like you want to open a brokerage account.

EDIT: The penalty for exceeding your TFSA contribution room is quite steep: 1% of the excess amount per month. I wouldn't recommend overcontributing, just open a non-registered account too.

acetcx fucked around with this message at Sep 15, 2013 around 16:31

Lexicon
Jul 29, 2003
2 + 2 != 5

rhazes posted:

There is nothing wrong with GICs. GICs are roughly equivalent to bonds (albeit illiquid), which are not a _GREAT_ return mind you, but risk free.

I think GIC's are a pretty poo poo investment, honestly. For the hassle of setting one up, etc, I'd sooner just have a high-interest online savings account. Fun GIC fact: you need to pay the tax on "earnings" from a multi-year GIC each year, despite not actually receiving that money until the end of the term.

rhazes posted:

I think the main take-away difference when you want to compare the two is that bonds are very very terrible in taxable accounts, whereas GICs are more tax efficient when they aren't in a TFSA or RRSP.

Why shouldn't bonds go into a taxable account? I'm not challenging you - I genuinely can't reason this out. I can't see a compelling reason not to.

As for GICs, I disagree they are "more tax efficient" outside of a tax shelter. They produce interest income which is always taxed at your marginal (unlike dividend income, which you rightly point out belongs outside a tax-shelter). If you have a high wage or whatever, that would be a reason to ensure they are actually in a tax shelter - but personally, that's academic for me because I think they suck as an asset class.

Lexicon
Jul 29, 2003
2 + 2 != 5

acetcx posted:

When I opened my TD e-Series account I walked into a TD branch and asked them to open a mutual fund account for me. Then I downloaded the account conversion form, filled it out, and mailed it in. It was actually pretty painless.

Since you want both a TFSA and a non-registered account you're going to have to open two accounts when you go to the TD branch.

Yeah - just go and open both flavours of bank mutual fund account. They'll make you go through the know-your-client song and dance... but just smile and nod. Once they are open, download the conversion forms and "convert" your new accounts to eSeries accounts. All that does is make the low-MER funds available... it's the exact same set of funds the bank dudes will sell you... just at a third the MER!

If you don't use TD otherwise (I don't) you need a way of getting money in and out. I achieved this by opening a regular and TFSA "savings" account. It's pretty much nothing but a vehicle for injecting funds into my eSeries. I also got them to make me a direct deposit form for each account so I could EFT from ING Direct also.

Italy's Chicken
Feb 25, 2001

cs is for cheaters


I need a recommendation for what to do with a LIRA (Locked-In Retirement Account). Keep in mind I am clueless when it comes to investing. I worked 3 years in a union who held almost $10,000 for a pension that was somehow "locked" and I didn't know what to do with it. A family friend, who works for Investor's Group (yes I'm a sucker), said he could transfer it to one of their funds. It's in their "Investors Real Property-A" fund which has a MER of 2.53 (according to this link). If I Google Finance the fund, I see since it's inception in 2008 it hasn't gained anything. My clueless investing mind thinks I'm screwing myself with no gains while taking the MER hit. How hosed am I?

FrozenVent
May 1, 2009
a richer bytestage

Speaking of pensions, I have about 12-15k in a union pension fund from my previous employer. I'm quite happy with the way it's being managed (Probably my best returns in 2012); is there any reason I should pull it out and send it somewhere else or can I just leave it there? I don't currently have a pension at my current job although I might get it in the next few weeks.

rhazes
Dec 17, 2006
Midas!

Lexicon posted:

I think GIC's are a pretty poo poo investment, honestly. For the hassle of setting one up, etc, I'd sooner just have a high-interest online savings account. Fun GIC fact: you need to pay the tax on "earnings" from a multi-year GIC each year, despite not actually receiving that money until the end of the term.


Why shouldn't bonds go into a taxable account? I'm not challenging you - I genuinely can't reason this out. I can't see a compelling reason not to.

As for GICs, I disagree they are "more tax efficient" outside of a tax shelter. They produce interest income which is always taxed at your marginal (unlike dividend income, which you rightly point out belongs outside a tax-shelter). If you have a high wage or whatever, that would be a reason to ensure they are actually in a tax shelter - but personally, that's academic for me because I think they suck as an asset class.

Read this, CCP is more eloquent and smarter than me, at least, financially speaking.

http://canadiancouchpotato.com/2013...xable-accounts/

And see how awful it is in practice..
https://www.pwlcapital.com/en/Advis...x-Return-on-CLF
Granted, that's extremely low yield, but ouch.

dum2007
Jun 13, 2001
I may be the victim of indigestion, but she is the product of it.

I hadn't seen mention of DRIPs yet? I personally think they're a fantastic way to invest in Canadian businesses.

http://www.dripprimer.ca/aboutdrips

You can put dividend bearing stocks in a synthetic drip at a bank as an in-kind TFSA contribution. In this way you can shelter the dividends from taxation and also compound their yield. Only thing is, you won't get partial shares. So what, that might round out to two shares a year?

You can build up those DRIPs to a reasonable amount by buying one share, certificating it or getting a digital transfer to you. This will cost $50 - $75, I think?

You can then take that share and sign it up for the official DRIP at the transfer agent. Every quarter or so you'll have the option to buy more of that stock using the optional cash purchase program for free, no commission. Maybe even get a 1-2% discount.

I am not a financial advisor. I'm just mentioning things you might want to research. This strategy isn't for everyone. Not every stock has a DRIP, not every DRIP has an OCP.

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tuyop
Sep 14, 2006

Every second that we're not growing BASIL is a second wasted


No mention of the Homebuyers' Plan (HBP) or Lifelong Learning Plan (LLP)?

The HBP lets you withdraw up to $25 000 from your RRSP, without penalties*, to buy a house, paid back in even increments over 15 years.

The LLP lets you withdraw up to $10 000 per year of attendance from your RRSP, without penalties*, to pay for tuition and any related expense (read: whatever you want, I'm using mine to pay off my car) provided that you or your spouse are attending some kind of approved post-secondary institution full-time. You have to pay this back within ten years, in equal increments.

* No penalties from CRA, your bank may be another story so check that out first. Questrade charges a $25 transfer fee, for instance, so it behooves you to plan and minimize transactions.

Italy's Chicken posted:

I need a recommendation for what to do with a LIRA (Locked-In Retirement Account). Keep in mind I am clueless when it comes to investing. I worked 3 years in a union who held almost $10,000 for a pension that was somehow "locked" and I didn't know what to do with it. A family friend, who works for Investor's Group (yes I'm a sucker), said he could transfer it to one of their funds. It's in their "Investors Real Property-A" fund which has a MER of 2.53 (according to this link). If I Google Finance the fund, I see since it's inception in 2008 it hasn't gained anything. My clueless investing mind thinks I'm screwing myself with no gains while taking the MER hit. How hosed am I?

I opened a Self-directed LIRA with Questrade. I've got about 25k coming in from my pension into it and I'm just going to set it on the couch potato global diversification plan (or whatever) and look at it every six months or so. I think the average MER on that plan is like .6% off the top of my head.

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