Your questions are coming in faster than ever so let's go right to the Q&A inbox and see what's on your minds.
Investing in resources
Q - I try to spread my individual security choices across the main sectors. One challenge I have always faced is choosing companies within the resources and commodities sector.
I'm a relatively new investor. I currently only hold one security in that sector and that's Suncor. I chose it because of the high volatility of the sector and the strong market capitalization of the company.
However, this sector includes more than just oil. I have chosen no companies in the precious metal sector or any other commodity. This is simply because I don't know how to select them and I worry about their volatility.
My question is this: should I invest in an ETF or a small basket of ETFs that helps allocate my funds appropriately within the sector or should I choose individual companies? If I am choosing individual companies, which groups within the sector do I choose? One oil and gas, one gold, one copper, one lithium, for example? I wouldn't know where to begin.
If the former is the way to go for me, do you recommend any ETFs or mutual funds that satisfy my goals? – Lance R.
A – We have several stocks on my newsletter recommended list that would provide exposure to a range of resource sectors. For precious metals, I like Franco-Nevada Corp. (FNV-T), which has performed very well. For copper, look at Lundin Mining Corp. (LUN-T). Teck Resources Ltd. (TECK.B-T) is Canada's largest diversified resource company, with mining operations focused on copper, steelmaking coal, and zinc. As well, it has energy interests in the Foot Hills Oil Sands project, which is scheduled to come into production next year.
If you prefer an ETF, the iShares S&P/TSX Capped Materials Index ETF (XMA-T) provides exposure to all types of resource stocks except oil. Top holdings include Barrick Gold, Potash Corp., Agrium, and Franco-Nevada. However, over half the portfolio is in the gold sector and returns have not been great, averaging less than 1 per cent annually over the three years to April 30.
There are many natural resource mutual funds that include energy stocks in their portfolios along with mining and other resource companies. However, most have unimpressive track records – some have lost more than 20 per cent annually over the past three years.
One that's worth a look is Scotia Resource, which has a three-year average annual return of 2.8 per cent and a one-year gain of 8.1 per cent. It is a no-load fund that invests internationally. Some of the top positions are in NexGen Energy, Lundin Mining, Agnico-Eagle Mines, and TransCanada Corp.
My own preference would be to focus on the individual stocks I have mentioned. – G.P.
IBM shares
Q - I'm an IBM retiree and bought shares through IBM's payroll deduction plan, re-invested the dividends, and inherited some. The dividends are quite nice but they are taxed as ordinary income in Canada and there is U.S. withholding tax of 15 per cent. I have a large capital gain that makes selling the shares not particularly attractive. But I wonder if that wouldn't be the wisest thing to do?
IBM pays a reasonable dividend and I think it is fairly secure. If I sold, after paying the capital gains I'd have a lot less to invest. To get the same total income I'd have to probably to take more risk but if I invested in Canadian equities because of the better tax treatment I would probably be further ahead after taxes.
Some very rough numbers. If I had $100,000 in IBM shares and got $3,500 (U.S.) in dividends after the withholding tax I might end up with $3,000 (U.S.) or $4,000 (Canadian). If I sold, after paying the capital gains tax I might have $75,000 (U.S.) to invest or $100,000 (Canadian). Because of the lower tax rate on Canadian dividends maybe I'd only need $3,500 in dividends to net $3,000 after tax. So if IBM was paying a dividend of 3.5 per cent, to net the same after taxes from Canadian dividends I might only need a Canadian equity paying 3.4 per cent. Not quite as risky as I first thought, in fact less. As I said, all very rough numbers but you get the idea. How do I easily determine the actual numbers? – Robert F.
Response: Well, let's break this down. Let's assume you own 590 shares of IBM, which is worth about $100,000 (U.S.) at the price at the time of writing. The stock pays an annual dividend of $5.60 so your shares are generating $3,304 annually. That's a yield of 3.3 per cent.
Withholding tax takes 15 per cent, leaving you with $2,808.40, or $3,741.55 (Canadian). Now let's assume your annual income is $75,000. The EY online personal tax calculator shows that if you are a resident of Ontario you'll pay tax at a rate of 31.48 per cent on those dividends, leaving you with $2,563.71 (Canadian).
Suppose you sell the IBM shares as you suggest. We don't know what your cost base is but let's assume the stock has doubled in value. You have a capital gain of $50,000 (U.S.) or $66,613.50 (Canadian). Only half is taxable, so your actual tax rate on that amount is 15.74 per cent. You are left with $56,128.54 (Canadian). Add to take your untaxed profit of $66,613.50 and you have a total of $122,724,03 to invest.
That would buy you a little over 2,000 shares of BCE at the current price. Those shares pay a dividend of $2.87 per year so you would receive income of $5,739.20 annually. Your tax rate would be 8.92 per cent on eligible dividends, leaving you with $5,227.26 in your pocket.
As you can see, using those numbers and a $75,000 income, you are much better off with BCE from an income perspective. However, the figure will change, depending on your income level and province of residence. A Quebec resident with $150,000 in income will pay tax on eligible Canadian dividends of 35.22 per cent and a capital gains rate of 24.99 per cent.
Ask a financial planner to work on your personal numbers. – G.P.
Duel citizens and TFSAs
Q – I have dual citizenship with the U.S. and Canada. Can I have a TFSA in Canada that will not be taxed in the U.S. since I have to file tax returns for both countries? Or will the IRS see funds and dividends from that account as income to be taxed (even though it is taxed income in Canada before entering the TFSA). I believe the U.S. has a similar type of account as the TFSA. – Robert P.
A – Any income earned in the TFSA is considered to be taxable in the U.S. The Canada-U.S. tax treaty recognizes retirement savings plans and exempts them, but the TFSA does not qualify. So while your earnings inside the plan will escape tax here, you'll be assessed in the States. – G.P.
Oaken Financial
Q - I tried to convince my wife to switch from CIBC to Oaken Financial because CIBC is giving me 1.30 per cent on a GIC for one year non-redeemable and are insured by CDIC. Oaken Financial gives me 2.6 per cent for one year. The inflation rate is 1.60 per cent. Since you are an expert what is your opinion? - George V.
A – Of course 2.6 per cent is better than 1.6 per cent. You don't need an expert to tell you that. And both CIBC and Oaken Financial are covered by deposit insurance up to $100,000.
But you may not be aware that Oaken is part of the Home Capital Group. If you've been paying any attention to the business news recently, you'll be aware that Home Capital is in deep financial trouble and experienced a classic "run on the bank" with investors withdrawing millions of dollars. It appears the crisis has now passed, but many people are still reluctant to put money into Home or any of its subsidiaries, despite CDIC coverage. It appears your wife is in that group. – G.P.
GICs
Q – I have a GIC that purchased five years ago which is coming near its date of maturity. I didn't purchase this GIC in a TFSA account but is it somehow possible to add it to a registered account before maturity? – Gurbaz S.
A – If you have a self-directed TFSA you could move the GIC into it if you have contribution room but it won't do you much good. The tax people will view that as a deemed disposition and all interest earned up to the date of the transfer will be taxable. You would be better off taking the money at maturity, contribute it to a TFSA, and then buy a new GIC within the plan, if that is how you want to invest. Frankly, with interest rates so low, I would look at some more aggressive options for reinvesting. – G.P.
If you have a money related question send it to me at gpape@rogers.com. Write Globe Question in the subject line. I can't guarantee a personal response but I'll include the most interesting ones in this column.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca. Follow Gordon Pape on Twitter at twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney
Gordon Pape