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It’s time to check the in-box again. Here are some of the questions I’ve received in the past couple of weeks.

Tax on banks

Q - Along with his other mismanagement of the economy, Prime Minister Trudeau now proposes a new tax on our banks. How will this impact share prices of our leading banks? – Robert A.

A – Not much. In the grand scheme of things, the tax is small in relation to bank profits. Plus, the move had already been signalled in the Liberal campaign platform, giving the markets plenty of time to respond. Stocks of most banks actually edged higher in trading on the day after the budget was presented.

The greater concern is the potential slippery slope this initiative creates. Why stop at banks? The government doesn’t like conventional energy companies, so why not impose a special tax on their profits? Or the telecom oligarchy?

Businesses hate uncertainty, especially when it comes to making investment decisions. Imposing targeted taxes on individual industries is a highly questionable policy for a country that wants to encourage investment and growth. – G.P.

Drawing down RRIFs

Q - In the last two years, my spouse and I have converted our RRSPs to RRIFs with minimum allowable payments. While we are both in reasonably good health, we wonder if we should accelerate our RRIF payments to take advantage of income splitting while we are both still living. One of our incomes from a company pension is almost 50 per cent of our total combined income. That pension will continue for the spouse after the pensioner passes away.

We both have room in our TFSAs to contribute about half of our total RRIF values. Most of our RRIF investments are in U.S. ETFs and Canadian mutual funds.

We seem to recall from reading your previous articles that in-kind transfers are not allowed to a TFSA. If so, our RRIF investments could be sold and reinvested in our TFSAs in something more appropriate for the current inflationary situation. We appreciate your helpful advice. – G.M. and R.M.

A – You are correct about the transfer rules. You can’t move assets directly from a RRIF to a TFSA. You would have to withdraw them from the RRIFs in-kind or in cash. Those withdrawals would be taxable. The balance could then be contributed to your TFSAs.

Based on your comments, any such withdrawals would likely generate a high rate of tax for the person with the pension plan, as that money would be on top of the pension income and the mandatory withdrawals.

A better option might be to have the spouse without the pension income make the extra withdrawals, as he/she would be in a lower tax bracket. You would have to calculate the tax implications under each scenario or consult a financial planner. – G.P.

TFSA management

Q - I have stocks in my TFSA and in my cash account. There’s one investment in my TFSA that I think will pay off but will take longer to do so than some in my cash account.

I’m thinking of transferring the one in my TFSA out in kind, creating plenty of room so that I can transfer in some of the investments that are closer to the finish line. What do you think of this strategy? – Chantal M.

A – Your logic puzzles me. The main objective of a TFSA is to maximize the tax-sheltered profits on your invested money. But your suggested approach would do the opposite. Let’s look at the two sides of your equation.

You say the stock in the TFSA looks promising but will take longer to pay off. But as its value grows in the TFSA, those gains will be tax-free. Moving the stock to your cash account will mean all the gains from the time of the switch will become taxable when you sell.

Meantime, you want to move stocks that are “closer to the finish line” into the TFSA. To what end? If they are that close to your sell objective, most of your gain is already taxable. Remember, when you make a contribution in kind, the Canada Revenue Agency considers that as a sale at the market price on the day the shares go into the TFSA. You are taxed accordingly. If you really plan to sell soon, moving those shares into the TFSA will not be of much benefit.

You need to consider the potential profit of each stock, not from the time you bought it but from the day it goes into (or comes out of) the TFSA. Those with the highest long-term growth potential should be in the plan. – G.P.

Charitable donations

Q - I am 77 years old, single, and I have pancreatic cancer which may result in my death in 2022 or early 2023.

I declared $83,000 gross income on my 2021 tax return. My income is from government pensions and RRIFs. My investment accounts consist of $180,000 in mutual funds (not registered), $130,000 in a RRIF, and $80,000 in a TFSA. I also own my own home (mortgage free) and it is valued at approximately $1.6-million.

I would like to make numerous donations to friends and charities. If I leave the funds untouched until after my death and let my executor collapse them, would that be better from a tax point of view?

I would really appreciate your opinion. I am very “old school” and never mention money to my friends and family. – Peter O.

A – I’m very sorry to hear of your diagnosis. Hopefully, your treatment will result in remission.

There are ways to significantly reduce the tax consequences of your objectives, but you need to consult an accountant and a lawyer to ensure all the paperwork is in order.

Based on your information, your estate will be valued at about $2-million, including the house. The sale of the house will not be taxed as it is your principal residence. So, if you wish, you could make bequests in your will to friends based on the value of your house. The bequests would be received tax-free as there is no gift or inheritance tax in Canada. Just be sure to leave enough to cover all final expenses.

As for your registered investments, you can avoid taxes on that money by bequeathing it to one or more charities. You are allowing to designate charitable organizations as the beneficiary of your RRIF and TFSA. The money must be transferred within 36 months of death. Legally, this will be considered as a donation made immediately before death.

As for your non-registered mutual funds, according to taxtips.ca, up to 100 per cent of your net income can be claimed as charitable donations in the year of death and the year preceding death. This should cover off any capital gains from the sale of the funds.

So yes, there are ways to achieve your wishes. But you need professional help to pull it all together. – G.P.

Brookfield partnerships

Q - I own BIP.UN (Brookfield Infrastructure LP), BEP.UN (Brookfield Renewable Partners), and was awarded BIPC and BEPC (corporate spin-offs) a few years ago.

In the meantime, the values have increased. BEP.UN, currently at $45.10, is somewhat in line with BEPC ($46.46) but BIP.UN ($78.89) is out of whack with BIPC ($90.53). The dividends are not that different.

I have been debating whether it would be to my advantage to sell the original stock and buy the corporations or vice versa. Would you have an off-the-shelf answer?

Thank you very much for this and past information. – Wayne N.

A – The off-the-shelf answer is: It depends. It comes down to priorities. Are you investing for yield or capital gains?

If yield is the goal, there is not much to choose between BEP.UN and BEPC since the price is reasonably close and the dividend is the same. But there is a significant gap between BIP.UN and BIPC. Both pay 54 US cents per quarter (US$2.16 a year). So, the yield on BIP.UN is 3.53 per cent while BIPC yields 3.08 per cent.

So, take your pick. If it’s capital gains you’re looking for, the trading history says the corporate shares are the way to go. If it’s cash flow, the edge goes to the original limited partnerships. – G.P.

If you have a money question you’d like answered, send it to me at gpape@rogers.com. I can’t guarantee a personal response but I’ll answer as many queries as possible in this space.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe

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