Comments on: Couch Potato Basics, Part 5: Tax Efficiency

By: Canadian Couch Potato

Canadian Couch Potato — Mon, 06 Jun 2011 18:45:05 +0000

@JMan: I don’t the scenario you describe can actually happen. Remember, HXT does not actually own the stocks: the counterparty does. HXT keeps all of its inflows in a cash account and can therefore use this cash to handle redemptions. You might want to give Horizons a call to ask about this. Anyway, I’m not trying to promote any specific ETF one way or the other. I just want to make sure that your decision is based on real risks. Cheers.

By: JMan

JMan — Mon, 06 Jun 2011 18:28:33 +0000

Thank you for your reply. I read about this also but decided against it because it apparently lack the in-kind creation/redemption mechanism of other ETFs (such as XIU/XIC) . So while you would have no taxable events during periods of “normal” economic activity, if the market crashes the fund might have to tax investors for redeeming large amounts of units. So your assets are melting away and you get extra taxes : not a fun scenario.

By: Canadian Couch Potato

Canadian Couch Potato — Fri, 03 Jun 2011 23:37:25 +0000

@JMan: The vast majority of distributions from XIC and XIU are eligible dividends. There is some RoC (which is non-taxable anyway) and negligible foreign income (fractions of a cent per share), so this is not really an issue. You can check the breakdown of the distributions here:
http://ca.ishares.com/product_info/fund/distributions/XIU.htm
http://ca.ishares.com/product_info/fund/distributions/XIC.htm

However, if you’re using a taxable account, you may want to have a look at Horizons’ HXT, which tracks the S&P/TSX 60 with no distributions at all:
http://www.horizonsetfs.com/pub/en/etfs/?etf=HXT&r=o

By: JMan

JMan — Fri, 03 Jun 2011 20:33:01 +0000

I read that some iShares mutual funds such as XIC and XIU will not only pay distributions in eligible dividends but also foreign income and RoC because of their income trust components.

In that sense, if held in an unregistered account, would it be better to get the TD Canadian Index – e that only pays eligible canadian dividends even if it has slightly higher MER and that capital gains may occur during the year?

I’m talking about buying a bunch (say 20k worth) and holding so trading costs have no effect here.

By: Canadian Couch Potato

Canadian Couch Potato — Mon, 25 Jan 2010 13:48:31 +0000

Thanks for the question. Having your investments in an RRSP saves you from paying taxes, but not MERs. Moving your RRSP assets to TD e-Series funds will certainly reduce your costs.

You cannot transfer money from your RRSP to your TFSA without paying income tax on it. You can do it the other way around, however: you’ll just lose the TFSA contribution room until next year. If you’re confused, you may want to work with a TD advisor to make sure you set up your accounts properly.

By: L. Hall

L. Hall — Sat, 23 Jan 2010 18:17:56 +0000

I am new to investing so my question may sound simple. If my investments are in a RRSP (down about 40%)then I don’t need to worry about high MERs and therefore don’t need to move my money into index mutual funds like TD e-series funds. Is this correct? I currently also have a TD TFSA where I am investing in the e-series fund so could transfer money over if it would be to my benefit. Any comments on this would be appreciated. I am enjoying reading about the Couch Potato Portfolio so keep up the great work.

By: Preet Banerjee

Preet Banerjee — Fri, 22 Jan 2010 21:47:45 +0000

Thanks for the mention in your post Dan! Great series.