Playing the Stock Market

[socafighter]

Bakes

If you noticed I stated when we started the DRIP , our Financial expert sent us forms to sign ,
we had the option of paying the taxes or deferring them . We have chosen the latter as
no taxes have been paid to date . This individual is one of Canada's best authority on such
matters , he gets opinions from revenue Canada and follows them .

But there is some good news. Unlike many other countries, dividends from Canadian based companies are eligible for a somewhat convoluted set of calculations that can fondly be described as the dividend gross up and tax credit system.  The basic rationale behind this system is that dividends are paid by corporations after the taxman has already taken his cut.  Therefore, if dividend payments were fully taxed in the hands of the investor as well, it would equate to a double taxation.

To illustrate this double tax situation, assume that Canadian based company Gnarley Tuques earned $100 in its fiscal year and was taxed at a rate of 30%.  Gnarley’s after tax profits would be $70.  If you’re keeping score at home, this means $30 went to the taxman.

Now assume the company decides to pay all of this $70 out to shareholders as a dividend.  Also assume all of the company’s shareholders are taxed at a rate of 40%.  In theory, this means, collectively, Gnarley’s shareholders would pay an additional $28 in tax on that dividend.  Therefore, of Gnarley’s $100 in profits, $58 would find its way into the coffers of the Canadian government.  Not a very incentivizing system for the company, or the investors.

Thanks to the dividend gross up and tax credit system, this is not the way it works.  The gross up is meant to convert the value of the dividend, $70 in the case of Gnarley Tuques, into an amount that approximates the company’s pre-tax earnings.  The current (2012) gross up rate is 38%.  Applying this to the $70 dividend brings us to $96.60.  As an aside, this gross up rate has been in decline in recent years.  As corporate tax rates have come down, the gross up has fallen from 45% in 2008/2009 to 44% in 2010 to 41% in 2011 and now sits at 38%.

Ok, so we’ve grossed the dividend up to $96.60, now what?  First we need to calculate how much tax the investor theoretically needs to pay on this grossed up amount.  Assuming a 40% tax rate, this would amount to $38.64.  Here comes the slightly tricky part.  Each province has their own dividend tax credit rate which goes on top of the Federal dividend tax credit rate of 16.44%.  To make our lives a little easier here, we’re going to assume that the combination of the Federal and Provincial dividend tax credits amount to 25%.  We apply this 25% to our grossed up dividend and arrive at a dividend tax credit of $24.15.  This tax credit is then subtracted from the $38.64 that we calculated earlier.  We are left with taxes being owed by Knarley’s shareholders on that $70 dividend of $14.49 – basically half of the tax that would have been owed had this system not been in place.

This gross up and tax credit system adds another feather in the cap of equities as we continue to build a case for this asset class being the best vehicle to grow long term savings.  Asset allocation comes up in the next section, but for now it is important to realize that fixed income instruments (bonds, GICs) pay interest, which is classified as income for tax purposes.  Income is taxed at the individual’s tax rate.  End of story.  No gross up, no credit.  If your personal tax rate is 40% and you receive interest from a Government of Canada bond of $70, you’re going to be sending $28 of that interest receipt right back to the GoC at tax time.

Dividends have a minimum tax any way .

As I stated its not my field that I am involved in . I hire and listen to experts .

I will send you a pm , with his credentials .

[socafighter]

Bakes

You gave up already ..I was about to explain a few more points 

Just teasing ya..lol

[Bakes]

Bakes

You gave up already ..I was about to explain a few more points 

Just teasing ya..lol

The argument has run its course... unless VB is looking to buy equity then the entire discussion about DRIPs is moot.  The information I've been able to source indicates that taxes must still be paid on dividends that are reivested, this is also the case here in the US.  You said your advisor has found a way where you haven't had to for over 30 years... I say good for you.  I don't know enough about Canadian tax laws to argue.

[socafighter]

Bakes ..

I wasn't arguing with you , I was stating facts . You see one of the biggest mistakes investors
make is not getting good legal and accounting advice, before they venture into the uncertain
world of investing hard earned money . A simple question ..look at how much we have earned
over the years , then look at how much we have saved during that same period . Its an eye
opener for many . Preservation of wealth is not easy , it takes tremendous skills.

How often have we heard of some one who earned a small fortune over a period of years and
today he is broke. I sent you a brief summation of advisor , I truly meant it was brief . The
numerous books he has written on Taxation in the Euro Zone , USA and Canada are so complex
that a Chartered Account , said that individual is in another level that few reach in such a field.

I in 2010 sought his advice , again on the preservation of wealth , it cost me over $50,000 ,
he doesn't come cheap . In the end , the results has shown it was worth it for many years to come.
I would still remain tax free with minor tweaks to my portfolios .

The most fascinating part was not my financial advisor , but his wife, a woman who found Eckhart Tolle
in Vancouver , and went to his small apartment , the rest is history . You should
read a visionary mustard seed ..its has now grown.

Be well

soca

[Bakes]

Bakes ..

I wasn't arguing with you , I was stating facts . You see one of the biggest mistakes investors
make is not getting good legal and accounting advice, before they venture into the uncertain
world of investing hard earned money . A simple question ..look at how much we have earned
over the years , then look at how much we have saved during that same period . Its an eye
opener for many . Preservation of wealth is not easy , it takes tremendous skills.

How often have we heard of some one who earned a small fortune over a period of years and
today he is broke. I sent you a brief summation of advisor , I truly meant it was brief . The
numerous books he has written on Taxation in the Euro Zone , USA and Canada are so complex
that a Chartered Account , said that individual is in another level that few reach in such a field.

I in 2010 sought his advice , again on the preservation of wealth , it cost me over $50,000 ,
he doesn't come cheap . In the end , the results has shown it was worth it for many years to come.
I would still remain tax free with minor tweaks to my portfolios .

The most fascinating part was not my financial advisor , but his wife, a woman who found Eckhart Tolle
in Vancouver , and went to his small apartment , the rest is history . You should
read a visionary mustard seed ..its has now grown.

Be well

soca

We were both stating facts, facts that were in opposition to each other... hence "argument".  It's not necessarily a negative thing.  Your expert obviously knows what he's doing so who am I to argue otherwise.  It very well could be that his knowledge and expertise have bought you a way around the information floating about the public domain.  It could also be that the information I posted is incorrect.  Either way I don't doubt what you are saying 

[vb]

Bakes, SF,

I've read with some interest what you've had to say.

Will prob. start investing for real this week. Have been practicing with a fantasy acct. and doing ok.
What's good about the waiting is that it has forced me to keep doing research and I've found some very successful co.s that are rising and their shares are quite cheap.  gogo and zynga are two examples.

My bank kept contacting me to give me "financial advice." When I explained my interest in a DRIP.

The response was "How much are you looking to invest, 100 thousand, 200 hundred thousand or more."

I tell de man around 6-10 thousand - still waiting to hear from him.

I am using Virtual Brokers, considered the no. 1 online brokerage firm by the Toronto's Globe & Mail.

VB

[Bakes]

Bakes, SF,

I've read with some interest what you've had to say.

Will prob. start investing for real this week. Have been practicing with a fantasy acct. and doing ok.
What's good about the waiting is that it has forced me to keep doing research and I've found some very successful co.s that are rising and their shares are quite cheap.  gogo and zynga are two examples.

My bank kept contacting me to give me "financial advice." When I explained my interest in a DRIP.

The response was "How much are you looking to invest, 100 thousand, 200 hundred thousand or more."

I tell de man around 6-10 thousand - still waiting to hear from him.

I am using Virtual Brokers, considered the no. 1 online brokerage firm by the Toronto's Globe & Mail.

VB

Best to find out which companies are offering DRIPs and purchase shares directly from the company on the stock market, rather than going thru a broker/bank.

[socafighter]

vb

This is just a suggestion not advice....

I am hoping you have a RRSP , see how much you have in it and invest in yourself in blue chips stock.
When you purchase the stock , leave it in trust at the broker . He/she must look after such accounts,
should a mistake occur they are responsible.

In Canada the Banks own the big brokerage houses any way .

One of the reason your Banker didn't call you back was , he sensed you had no long term plan .
Pontificate and lets say look at the next ten years and what the sum you will have to invest .
You will now have a brief business plan . He will inquire about your RRSP and any other such
accounts you may have . Make sure all of the numbers in this plan are accurate for the first
3 years.
The next 7 are pie in the sky numbers , he would now see you have done your home work
and its on paper .

Your first question , what will my tax liability be yearly and how can I defer such liabilities.
Remember you want to pay taxes when you retire , you can then control your own destiny.
When I did ours we didn't have any kids but we were both in high income brackets .

A provision will be made here to accommodate such . Now remember the majority of our assets
are in Trust at the Brokerage House . Since you live in Canada  you must take into account
any company pension, CPP and Canada old age pension and supplements .

We regress a bit here and look at our income wages , investment income , chance of being a
beneficiary in a will , family assets transferable at a later date etc etc...

Now you have your financial portfolio all on paper.

You now send this to three largest Banks in Canada  to the appropriate Group that deals in
preservation of wealth  or your financial advisor .

They will have a total picture of what you can achieve , and to take advantage of Tax Loopholes,
remember such exist . Its part of your objective .

We went from paying in the top tax bracket to a 60% reduction immediately , by some minor
modifications in our portfolio. Having 4 kids helped later on , other avenues opened up resulting
in lower taxes . Our Advisor spent time trying to balance out our total portfolio , he did a great
job .

In a decade or so we will retire , now we need to look at other options that are available .

One such aspect is being a non-resident Canadian , spending half a year plus one day outside the
country . Our tax rate will now be lower .

vb, I hope I have given you some brief insights of what we did , I have no clue if you are married ,
how many kids you have , approx income , RRSP etc etc ...

Would love to hear Bakes suggestions...

[vb]

SF,

much appreciated. I'll send yo a PM later.

Btw, started playing the market. Doing well.

Did  about a 4.5 % return in my first five days.

Small time stuff but it does help to pay the bills. ;-)

The thing is even if I average 3 percent a week, it looks good at the end of the month.

VB

[socafighter]

vb

Thats great news ..keep it going.

Remember its easy to make money , its very difficult to preserve it .

Now your first question to any adviser , what are my tax consequences and how do I avoid

it ?.

[Pointman]

VB
A few years ago(pre 9/11) I opened a commodities investment account( hella volitile not sure if you're interested in that) and I made a few grand in of all things, yep you guessed it...pork bellies. I took my profit and kept a lil bit in the account and reinvested in grains( didn't do so well).

What I didn't know then was that I could have made a hell of a lot more money if i had exercised a bit of patience and waited for the right events to happen. Anyway, reopening an account is always somewhere in my mind.

A word of caution: day trading is quite dangerous if you don't know what you're doing. Losses can be steep. be careful.