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investor clinic

I am aware that investments held by a brokerage firm are covered up to $1-million by the Canadian Investor Protection Fund in the event of a bankruptcy. Recently, our account has gone considerably over this amount and I am concerned that if the brokerage does go bankrupt we could lose everything over the $1-million threshold. Should we transfer some of our securities to a different brokerage company? If so, what would the tax consequences be? Would we be considered to have sold the shares on transfer and have to claim the capital gains at that time?

I don’t think it’s necessary to transfer any assets. Before I explain why, some background is in order.

The Canadian Investor Protection Fund (CIPF) is funded by investment dealers that belong to the Investment Industry Regulatory Organization of Canada, ranging from the big, bank-owned brokers to small, independent firms. (View a list of CIPF’s members here. by going to CIPF.ca and clicking on “member directory.”) In the event that a firm becomes insolvent, CIPF will cover up to $1-million in cash, stocks, bonds or other assets that are missing from a client’s account.

The dollar limit applies to each of several different account categories at the same financial institution – namely, $1-million for all non-registered accounts and tax-free savings accounts combined, $1-million for all registered retirement accounts and $1-million for all registered education savings plans. If you have accounts at other financial institutions, they receive their own coverage up to the same $1-million limits.

Now, before you move any assets around, it’s important to understand a couple of things. First, insolvencies of investment dealers are rare. Second, even if your firm were to go bankrupt, it’s likely that only a small portion – if any – of the firm’s assets would be lost. Once the bankruptcy trustee has distributed all of the available assets to clients, the odds of a single customer being out by more than the covered $1-million are vanishingly small.

In the past 25 years, there have been just eight CIPF member insolvencies. The total payout, net of recoveries, in those eight cases averaged just $2.27-million, Jane Yoo, a senior adviser with CIPF, said in an e-mail. To be clear, that’s the average combined payout to all customers of the insolvent firm; the payout to each individual client would have been a small fraction of that number – far under the $1-million limit.

What’s more, it sounds like you have a joint account with a spouse, in which case you would each qualify for $1-million of CIPF protection, or $2-million in total. So there’s even less reason to worry.

The bottom line is that you have a great deal of protection for an extremely unlikely event that, even if it were to happen, would almost certainly not leave you out of pocket. So I see no reason to move a portion of your assets to a different broker. Moreover, doing so would entail a lot of paperwork – brokers love paperwork – and add another layer of complexity to managing your assets.

Now, in some cases it may make sense to move assets. Perhaps you don’t like the service at your current broker; or you already have two brokers and you want to consolidate your accounts under one roof for simplicity; or you want to take advantage of a cash incentive a broker is offering to move your assets. As for the tax consequences, transferring non-registered securities from one broker to another is not considered a deemed disposition, so no capital gains taxes would apply in such cases.

Capital gains taxes do come into play, however, if you do an in-kind transfer of assets with unrealized gains from a non-registered account to a registered account such as an RRSP or TFSA.

As a retiree, I depend on monthly distributions for retirement income. I own the iShares Canadian Select Dividend Index ETF (XDV), which has more than half of its assets in financials. But even as banks and insurers have been raising their dividends, XDV recently cut its distribution by about 10 per cent. Is iShares not passing along all the bank dividend increases received XDV?

Nothing nefarious is going on here.

It’s normal for an exchange-traded fund’s distribution to fluctuate from month to month, or quarter to quarter. This reflects factors such as the timing of dividends from the ETF’s underlying securities, changes in the ETF’s constituents, increases or decreases in their dividend rates and the flow of investor funds into or out of the ETF.

Unless stocks in the ETF have cut their dividends, or the ETF’s composition has changed dramatically, any decline in its distribution is likely to be temporary.

In the case of XDV, it must have been disconcerting to see the distribution fall to 9.3 cents a unit in April, down from 10.3 cents in each of the three previous months. But here’s good news: This week, BlackRock Canada announced that XDV’s distribution will rise to 10 cents a unit for the cash payment on July 29.

It’s important not to lose sight of the big picture. Even as XDV’s distribution has bounced around from month to month, the long-term trend is still up. In 2017, XDV’s monthly cash distribution averaged about 7.95 cents a unit. So far in 2022, it’s averaged 9.19 cents. So the distribution is moving in the right direction.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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