Readers of Investor Clinic are a curious bunch, judging by all the questions we receive. And that's good, because one of the goals of this column is to encourage reader input.
So this week - and occasionally in future columns - we'll do our best to answer some of your questions. There's a fair bit of ground to cover, so let's dig right in. The first two questions have to do with dividends - one of our favourite topics.
HOW ARE U.S. DIVIDENDS TAXED?
Like most things in life, it depends.
Inside a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF), there's no withholding tax on U.S. dividends. So the entire amount will land in your account - adjusted for currency. That's why many investors prefer to hold U.S. stocks inside an RRSP.
It's not so straightforward if you own U.S. stocks in a non-registered account.
For starters, you'll pay a 15-per-cent U.S. withholding tax off the top. Also, because U.S. dividends don't qualify for the Canadian dividend tax credit, when you file your return you'll pay tax at your marginal rate on the full amount of the dividend. The good news is, you'll be able to claim all or part of the 15-per-cent withholding tax as a foreign tax credit.
Yes, it's confusing, but the net effect for most people is that, in a non-registered account, U.S. dividends are taxed at the same rate as interest income. So sheltering U.S. dividends in an RRSP makes sense.
"A lot of financial planners would give the recommendation to hold the foreign part of your portfolio in your RRSP as well as holding fixed-income, for example, because they're more heavily taxed," says Pina Perruccio, senior financial adviser with Kerr Financial Corp.
There are exceptions, however. If someone is expecting a large capital gain on their U.S. shares, leaving them in a non-registered account may be prudent, she says, because the investor could take advantage of the 50-per-cent inclusion rate for capital gains, rather than having the full amount taxed upon withdrawal from an RRSP.
Tax Free Savings Accounts add yet another layer of complexity. Because TFSAs - unlike RRSPs and RRIFs - are not strictly a retirement vehicle and are therefore not covered by the Canada-U.S. tax treaty, U.S. dividends are subject to the 15-per-cent U.S. withholding tax, says Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth Management.
What's more, the withholding tax can't be claimed as a credit. So on a $100 dividend the investor will end up with $85, which for most people is still better than paying tax on the dividend at their marginal rate.
So from a tax perspective, RRSPs and RRIFs are usually the best place for U.S. dividend stocks, followed by TFSAs and then non-registered accounts.
WHERE CAN I FIND SOLID U.S. DIVIDEND STOCKS?
A great place to start your search is the S&P 500 Dividend Aristocrats index. To join this exclusive club, a company must have raised its dividend for at least 25 consecutive years.
The index includes such household names as Coca-Cola Co., McDonald's Corp., PepsiCo Inc. and Wal-Mart Stores Inc., and some lesser-known companies such as Air Products & Chemicals Inc. and Bemis Co. Inc.
There's more information about the Aristocrats at www.standardandpoors.com (click on "indices" and then "equity indices"). There's also a Canadian Aristocrats index, but the bar is set lower at just five consecutive years of dividend increases. The index is the basis for the Claymore S&P/TSX Canadian Dividend ETF.
Be aware, however, that a few stocks on the index actually cut their dividends this year - Manulife Financial Corp. and Yellow Pages Income Fund, for example. When the index is rebalanced in December, they'll be shown the door.
WHERE CAN I FIND A STOCK'S ONE-YEAR PRICE CHANGE?
Several readers asked this question in response to a recent Number Cruncher column. The column showed that bank stocks with the worst trailing 12-month performance often had the biggest gain going forward.
To find the trailing 12-month performance, go to globeinvestor.com and enter the stock and exchange symbol. Next, click on "price reports." Finally, click on the blue "% change" button, and you'll see a table with the stock's performance for various time periods.
CAN I MOVE AN EXISTING GIC INTO A TFSA?
Yes, with one key limitation: The value of the guaranteed investment certificate (GIC), plus accrued interest, must be less than or equal to the contribution room in your tax-free savings account.
For example, if you have $5,000 in TFSA contribution room, you won't be able to transfer - without penalty - a $5,000 GIC purchased a year ago because the accrued interest will push you over the contribution limit.
One way around this is to withdraw some assets from the TFSA first, which will increase your contribution room. But you can't use this extra room until the next calendar year, notes Dorothy Kelt, co-owner of Taxtips.ca (a website that's well worth visiting if you're curious about taxes).
If you are considering this strategy, it's usually best to withdraw assets - such as Canadian dividend stocks - that will receive favourable tax treatment outside the TFSA, she says.
Got a question for Investor Clinic? Send it in to John Heinzl.