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I have invested with an online brokerage for the past 20 years and have been averaging an annual return of about 8 per cent. I also have about $270,000 with PH&N in its Dividend Income Fund, which has been losing money lately. I want to sell the fund and transfer the proceeds to my self-directed account to invest as my returns have been better than PH&N’s. However, that will trigger capital gains of about $120,000. I’m a retired senior with about $28,000 of income. Any suggestions?

There are a lot of moving parts here, so I’ll offer a few general comments and then have a tax expert weigh in.

First, you might want to cut the PH&N Dividend Income Fund a little slack. The Series A units – with a management expense ratio (MER) of 1.87 per cent – have posted a five-year annualized total return, including dividends, of 6 per cent through March 31 (despite dropping 5.4 per cent year to date). The less expensive D units – with an MER of 0.99 per cent – have a five-year return of 6.94 per cent, which is virtually identical to the total return of the S&P/TSX Composite Index. So the fund – which invests primarily in blue-chip dividend stocks – has been a decent performer.

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Second, you should carefully weigh the pros and cons of selling. The main advantage of selling is that you’ll eliminate the MER, so if you hold the A units the case for selling is stronger because you’ll save more in costs. However, as much as I believe in keeping investing costs low, there is no guarantee the stocks you buy with the proceeds will outperform the PH&N Dividend Income Fund. What is guaranteed, however, is that you will take a haircut from the capital-gains tax.

Assuming you live in Ontario and have income of up to $42,960, the effective marginal tax rate on capital gains (only half of which are included in your income) is about 10 per cent. The rate rises gradually for higher income levels, topping out at 26.8 per cent for people who make more than $220,000. Is it worth sacrificing 10 per cent or more of your gains now for the possibility – but not the certainty – of earning higher returns later? You’ll only know in hindsight.

If you do decide to sell, you should do so in stages to spread the gains over several years and mitigate the tax hit, says Dorothy Kelt of Selling all at once is a bad idea, because your income for the year would spike to about $88,000 ($28,000 plus half of the $120,000 capital gain), a level at which the marginal tax rate on capital gains is nearly 17 per cent. What’s more, if you’re receiving Old Age Security, you would face a partial clawback of your benefits (for 2018, the clawback kicks in at income of $75,910).

Ms. Kelt adds that other income-tested credits and benefits for seniors – including the age amount tax credit, guaranteed-income supplement and various provincial programs – could also be affected depending on the size of the capital gain realized. The age credit, for instance, is reduced starting at income of just $36,976 for 2018. If you were to sell, say, $50,000 of units, that would trigger a capital gain of about $22,000 and a tax hit of $2,200, and your income would rise to $39,000 – above the threshold for the age credit reduction. These are just round numbers and I present them merely to illustrate the kinds of things you need to look out for.

“It would probably be beneficial to sit down with a qualified tax professional [CPA] and provide all the financial details so that a plan could be devised that would minimize any taxes payable,” Ms. Kelt says.

One way to offset the capital gains, Ms. Kelt says, would be to make a registered retirement-savings plan contribution, assuming room is available. (RRSP contributions must be made by Dec. 31 of the year you turn 71). Or, if you want to keep things really simple, you could hang on to the fund and not trigger any capital gains at all.

Do you have any advice for coping with rocky markets? The violent ups and downs lately are causing me a lot of anxiety and I think other investors would also benefit from some soothing words.

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I have a few pieces of advice:

  1. Look at a long-term stock chart. Notice that, while there are lots of peaks and valleys, the general direction is up. 
  2. Review the companies (or funds) you own. If you are confident that your companies will thrive for years to come  –  that their revenue, earnings and dividends will continue to rise  –  you should do nothing. The stock market will ultimately recognize their value.
  3. Instead of obsessing about stock prices, track your portfolio’s dividend income. This number should be rising steadily, through good markets and bad, and it won’t bounce around violently from one day to the next. Focusing on your portfolio’s growing income can be a source of comfort when the market is giving you fits.
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