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investor clinic

I bought shares of Royal Bank of Canada at $96 last fall and they’re up more than 30 per cent since then. Is now a good time to sell and lock in my profit?

Let me ask you a question: If you owned a highly successful small business whose sales and earnings were growing year after year, and you knew the value of the business was also rising, would you sell it to “lock in your profit”?

I doubt it. Knowing what a great business it is, you would probably want to maintain ownership because the company will likely continue to appreciate in value and – thanks to its rising sales and profits – allow you to draw a growing salary.

Well, guess what: You own a highly successful business in Royal Bank. The difference is that it is a very large business, and you own only a small piece of it. But the principle is the same. You’re even getting paid a “salary” in the form of a quarterly dividend.

What’s more, you’ll probably be getting a “raise” soon. With Canadian banks carrying record amounts of capital and posting strong results, they are expected to raise their dividends – perhaps substantially – once the banking regulator lifts a ban on increases that’s been in place since the start of the pandemic.

As for the share price, nobody knows if it will rise, fall or go sideways in the short run. Many investors think the way to make money on stocks is to time the short-term ups and downs, but the true secret to building wealth is just the opposite: You must learn to ride the waves and accept them as a perfectly normal part of investing.

So, instead of trying to avoid a potential pullback by selling – which will cost you a commission and may trigger capital gains tax – just roll with it. I would wager that, a few years from now, Royal Bank’s stock price and dividend will both be substantially higher than they are today. If you “lock in” your profit now, you’ll “lock out” any future gains from owning this highly profitable and growing business.

In a recent column, you wrote about the non-resident withholding tax on U.S. master limited partnerships. Last year, I added Seagate Technology PLC (STX) to my registered retirement savings plan, and I’m losing 25 per cent of my dividends to withholding tax. As far as I can tell, Seagate is not an MLP, so what’s the deal?

Seagate is a data storage company with operations headquartered in Fremont, Calif. However, its legal domicile is Dublin, Ireland, which means its dividends are generally subject to Irish Dividend Withholding Tax (DWT) of 25 per cent.

The good news is that investors who reside in a “relevant territory” that has a tax agreement with Ireland – as Canada does – may be able to avoid the tax. Assuming your shares are held with a broker, “you should complete and forward the appropriate Irish Revenue V2 Form to your broker before the record date for the dividend payment,” Seagate advises on its investor relations website. You can find the specific DWT exemption form – called a “Non-Resident Form V2A” – with a Google search.

In some circumstances, you may also be able to recoup tax previously withheld. “Shareholders who are or believe they should be exempt from Irish DWT but receive a dividend subject to Irish DWT should contact their broker for more information on reclaiming the incurred tax,” Seagate says.

Your column about the 37-per-cent non-resident withholding tax on U.S. master limited partnerships reinforced my own experience with individual MLPs. Do you know if U.S. exchange-traded funds that hold MLPs attract the same problems?

Funny you should ask. After the column appeared, I heard from a reader who owns the Alerian MLP ETF (AMLP) in his registered retirement income fund. The reader had checked his latest distribution and “zero tax was withheld,” he said.

The reason? Although the U.S.-listed ETF holds a basket of 16 energy MLPs, the fund itself is not an MLP but a regular corporation. This gets around one of the drawbacks of owning individual MLPs directly, which is that Canadian investors are deemed to be “partners” who are engaged in a business in the United States. As such, distributions from individual MLPs are subject to withholding tax at the highest U.S. marginal rate of 37 per cent.

In the case of AMLP, however, because the ETF is structured as a taxable corporation, under the Canada-U.S. tax treaty its distributions are exempt from withholding tax when the units are held in a registered retirement account, said Dorothy Kelt of However, the exemption does not apply to non-registered accounts, tax-free savings accounts or registered education savings plans, she said.

I am not endorsing AMLP or any other MLP ETF. Consider consulting a tax adviser before taking the plunge into MLPs, whether directly or indirectly through an ETF.

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

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