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  • richardmkiernicki

The Unconventional Conventional, Part VII

Updated: Aug 6, 2019

Half way through RSP “season” and the momentum is still building. At least for the financial industry. Even the deep cold we find ourselves in this past week has not cooled the enthusiasm for RSP sales. One of the things I do like, and there are only a couple of them, about RSP’s is tax free compounding. This is what makes RSP’s the best vehicle to hold any interest bearing investments such as term deposits, GIC’s, bonds, mortgages and any other fixed income investments that you may own or consider. However, this is also not really such a big deal these days as returns on these investments are rather dismal. I mean how much growth can you actually get on your capital when the return is close to one percent? Still, even a one percent return is better if it is not taxed annually versus that same return taxed at your marginal rate each year.

The use of an RSP then is a way to achieve a balanced portfolio. If half of your investments are held in an RSP, the RSP can keep all the fixed income component thereby eliminating the need to hold any interest bearing assets outside your RSP. This is a simple way of developing an asset allocation strategy without having to dissect each individual holding.

The non-registered component of your investment portfolio can then be managed with a focus on investments that keep taxable distributions to a minimum. This may take a little more effort on your part and you will have to examine your T3 and T5 reporting slips, sent by the issuer, for the different types of income that will need to be reported on your tax form. This can be a very revealing exercise as you will become much more familiar with your portfolio managers activities when you see what types of income you need to report from your equity mutual fund or Canadian Corporation. A T3 for instance can report interest, Canadian dividend , Capital Gain and Foreign income all on one slip depending on the activity of the portfolio manager, whereas T5’s are generally issued from Canadian Corporations and only dividend income income is to be reported. You and your financial advisor should be up on the equity funds that trade excessively, and or globally, and or are doing nothing but hoarding tons of cash creating taxable distributions you were not expecting. There is something to say about a buy and hold strategy when it comes to taxable distributions. In fact, most mutual funds today are trusts and are obligated to pay out and report any and all of their earnings whereas there used to be some equity mutual funds that were Canadian corporations and regardless of what they earned, paid out Canadian Dividends. Ask your advisor why there are no corporation funds out there anymore, I doubt they’ll know.

Copyright 2013 Richard M. Kiernicki. All Rights Reserved.

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