One of my New Year’s resolutions is to not leave a lot of cash sitting around earning nothing. So today I’ll be reinvesting most of the money that has accumulated in my model Yield Hog Dividend Growth Portfolio.
Before I get into the specifics, I’ll briefly discuss the portfolio’s recent performance.
After a rough 2022, when the portfolio’s value fell 6.8 per cent on a total return basis (including dividends), things have started looking up. Helped by expectations that interest rates may be nearing a peak, the portfolio gained 5.6 per cent in January and finished the month with a value of $152,097, up from its initial value of $100,000 on Oct. 1, 2017.
Most sectors participated in January’s gains, including banks, telecoms, pipelines and real estate investment trusts.
The portfolio has also benefited from several dividend increases. In January, Canadian Utilities Ltd. CU-T raised its payout by 1 per cent. This week, two more companies – BCE Inc. BCE-T and Brookfield Infrastructure Partners LP BIP-UN – hiked their dividends, by 5.2 per cent and 6 per cent, respectively.
Now about the cash sitting in my portfolio. In light of BCE’s and BIP-UN’s continued generosity to dividend investors, I’ve decided to use a chunk of the cash in my portfolio to increase my position in each company. Specifically, I’ve added 20 shares of BCE, for a total of 115, and 22 units of BIP-UN, for a total of 220.
These purchases were completed at Thursday’s closing prices and consumed $2,245.30 of funds, reducing the portfolio’s cash balance to $574.29. The money in the model portfolio isn’t real, but I also own BCE and BIP-UN personally, along with all of the other companies in the model portfolio. (View the portfolio online at tgam.ca/dividendportfolio.)
February is also looking good from a dividend standpoint. Based on historical patterns, I’m expecting dividend increases from TC Energy Corp. TRP-T and Restaurant Brands International Inc. QSR-T when they report fourth-quarter results this month.
Now, on to some reader questions.
In your column last week, you said that interest is not tax deductible when borrowing to invest in a tax-free savings account. But couldn’t one get around the rules by purchasing, say, a money-market fund on margin in a non-registered account and then contributing the fund in-kind to a TFSA? Then one could sell the fund in the TFSA and invest in whatever instruments one desires. Or am I missing something?
For interest to be deductible, the Canada Revenue Agency requires the borrowed funds to be “used for the purpose of earning income from a business or property.” A money-market fund, rental property, dividend-paying stock or interest-bearing bond would qualify, for example. Even a stock that does not pay a dividend could meet the income test as long as the investor has a “reasonable expectation” that the investment will produce income in the future.
However, the CRA also stipulates that the income produced by the security must be taxable for the interest to be deductible. In the example you provided, income from the money-market fund – or whatever it is replaced with in the TFSA – would not meet this test because there are no taxes of any kind in a TFSA.
The same would be true if you purchased a security with borrowed funds, sold it to buy a different security, then transferred the new security to a TFSA or other registered account. “If the investment is transferred to a registered account … the interest would no longer be deductible,” said Dorothy Kelt of TaxTips.ca
To reiterate what I said last week, the recent jump in interest rates has dramatically reduced the appeal of borrowing to invest. Even when rates are low, the strategy is appropriate only for experienced investors. It’s not something I would even consider now.
Will a TFSA withdrawal in December give you additional contribution room the next year? Or would you simply be back to the same overall limit you would have been at without doing a withdrawal?
Any withdrawals from your TFSA are added to your contribution room on Jan. 1 of the following year. For example, say you had maxed out your contributions every year, including 2022. You then decided to withdraw $5,000 in December (or any other month last year). As of Jan. 1, your contribution room would increase by $5,000, plus the $6,500 limit that applies to all TFSA holders for 2023, for a total contribution limit of $11,500. If you also had unused contribution room from previous years, you would add this to your 2023 contribution limit as well.
E-mail your questions to email@example.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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