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How long do I need to keep my tax records?

The Canada Revenue Agency recommends that you keep records for six years. The six-year period starts at the end of the tax year to which the records relate. For example, records for the 2017 tax year should be kept for six years starting from Dec. 31, 2017 - that is, until Dec. 31, 2023. In addition to expense receipts, keep your T4s and other T slips, receipts for charitable donations, cancelled cheques, bank records and any other documentation to back up deductions or credits you claimed. You’ll need this information should the CRA review your return. In the case of securities, real estate or other property that could generate a capital gain or loss, you’ll need to keep records of the original purchase and any subsequent investments that affect the adjusted cost base of the property during the time that you own it. These records will be required to calculate your capital gain or loss when you eventually sell the property. You should keep the records for six years after the year of the sale should the CRA ever question you about the gain or loss.

What is your opinion of XEI?

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If you’re in the market for a dividend exchange-traded fund, the iShares S&P/TSX Composite High Dividend Index ETF (XEI) is a worthy choice. It has a low management expense ratio of 0.22 per cent, yields an attractive 4.3 per cent (based on distributions paid over the past 12 months) and provides reasonable diversification. Its largest weightings are in energy (about 31 per cent of assets), financials (29 per cent), utilities (14 per cent), telecoms (10 per cent), real estate (9 per cent) and consumer discretionary stocks (3 per cent). The energy weighting may seem high, but it consists mostly of pipelines, which have limited exposure to commodity prices. Despite its many strengths, XEI’s performance has been hurt by the recent soft patch for dividend stocks amid rising interest rates. For the five years ended June 30, XEI posted a total return – assuming all dividends had been reinvested – of 6 per cent on an annualized basis. That compares with an annualized five-year total return of 9.2 per cent for the plain-vanilla iShares Core S&P/TSX Capped Composite Index ETF (XIC). These numbers are backward-looking, of course, and the next five years could look very different. I discussed XEI and several other dividend ETFs in my column here.

In a recent column, you wrote about A&W Revenue Royalties Income Fund (AW.UN). Do its distributions qualify for the enhanced dividend tax credit?

No. A&W’s distributions are treated as “non-eligible dividends” for tax purposes. Non-eligible dividends are subject to a gross-up and tax-credit system - similar to eligible dividends - but the calculation is not as favourable for the taxpayer. The result is that non-eligible dividends are taxed at a higher rate than eligible dividends but at a lower rate than interest or other income. As an example, an individual in Ontario with 2018 taxable income of $100,000 would have a marginal tax rate of 25.38 per cent on eligible dividends, 35.1 per cent on non-eligible dividends and 43.41 per cent on other income. (To find your own marginal tax rate on various forms of income, consult the tax tables for your province at taxtips.ca.) Given that A&W’s distributions are taxed at a higher rate than eligible dividends, you may wish to hold the units in a registered retirement savings plan, tax-free savings account or other registered account to avoid the tax.

Can you recommend a website where I can compare payout ratios for various companies?

I recommend that you not rely on a third-party website to research payout ratios. That’s because payout ratios are measured in many different ways, and it can be difficult to interpret what the numbers mean or even know if they are accurate – particularly when they are compiled using an automated process. If you are interested in a particular company’s payout ratio, your best bet is to read the company’s earnings releases, conference call transcripts and investor presentations. That way you’ll be getting the information directly from the company, along with commentary that will help you understand how the ratio is measured and what it means for the sustainability and potential growth of the dividend.

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