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bank stock question
March 13, 2014
2:40 pm
kilarney
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If you were going to buy a Canadian bank stock which one would you pick?
Since the recent split by TD stock would it make this a good time or should you avoid a recently split stock?
National bank is an option too but is more tied to Quebec and the separatists are making noise again...
Anyone have any thoughts on which Canadian bank would be best as a buy and hold at this time?

March 13, 2014
5:18 pm
kanaka
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Have you considered an ETF heavily laden with Canadian banks.

March 13, 2014
10:48 pm
GS1
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Last time I picked two of the big 5 bank stocks those two were the ones that went down.

I'm with Kanaka for you to buy a bank heavy ETF.

Here are partial results for the category Financial Services Equity from my RBC DI screener. You could search any or all of these using the trading symbol.

CEW iShares Equal Weight Banc & Lifeco Fund Common Class
FXF First Asset Can-Financials Covered Call ETF Common
HEF Horizons Enhanced Income Financials ETF Common Class
HXF Horizons S&P/TSX Capped Financials Index ETF
XFN iShares S&P/TSX Capped Financials Index Fund
ZEB BMO S&P/TSX Equal Weight Banks Index ETF
ZWB BMO Covered Call Canadian Banks ETF

GS

March 14, 2014
7:48 am
kilarney
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here is another dumb question. Would you buy bank stocks or bank ETFs and hold them inside an RSP or TFSA?

March 14, 2014
8:49 am
kanaka
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That is a loaded question.

RRSP - you will have to pay a minimum of 20% income tax on the principal plus growth when you withdraw. But you may get a income tax refund from the RRSP contribution.

TFSA - you won't be taxed at all. But no income tax refund and will be limited to your contribution room.

RRSP/TFSA no hassles with income tax on dividends and reporting a loss or gain at time of sale.

March 14, 2014
10:59 am
Loonie
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I like the idea of this one, from GS' list, as it is a pure play on bank stocks only:
ZEB BMO S&P/TSX Equal Weight Banks Index ETF . If you look at what's in it, it is only bank stocks and not insurance companies etc. like some or all of the others. Even if most of the benefit is through dividends, they sound pretty good in the current climate. There is always some risk with any stock, though, of a downturn, however temporary it may be.
Watch out for the CRA implications if you hold it outside of a registered plan. Dividend tax credit will help you, but the income will be "grossed up", and will affect your tax bracket and also will affect clawbacks if you are a senior. This can be confusing. If you can't be clear on it from CRA, best ask an expert.
I have never held these kinds of stocks. I am curious, though, what sort of form do you receive for income tax purposes if you hold it non-registered? Does it clearly break down dividends versus capital gains so that you can easily understand it and deal with it in your T1?

March 14, 2014
11:03 am
Doug
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Short answer: it depends on your personal and financial circumstances, obviously. And yes, picking an ETF ensures you are "equally weighted" among all the major Canadian publicly-traded banks so you're not "picking a laggard". The downside(s) are: you're paying management fees for arguably the safest and most profitable Canadian industry, with a 100+ year history of growing dividends per share over time and never having cut their dividends. So really, I'd rather buy ETFs for my RRSP/Locked-In RSP and/or possibly by TFSA for the portion(s) of my portfolio where I either seek index return replication or areas of the market I have little knowledge of (i.e., bonds, perhaps commodities and global/emerging/frontier markets).

For something like the Canadian banks, I think you'll do just as well (they will all continue to do well, despite competition from upstarts [though that is waning, with the high-profile exit of Ally Canada from the Canadian landscape, Scotiabank buying ING DIRECT Canada in 2013 and the likely exit/sale of Canadian Tire Bank/Canadian Tire MasterCard portfolio in 2014], they are an oligopoly and enjoy a favourable regulatory environment that makes barriers to entry high). Some will have periods of lagging (Scotiabank & National Bank of Canada seems to be lagging the industry, when you compare it to TD, RBC and BMO in 2014), but that's why I think they're attractive. If Scotiabank were to pull back a few dollars, I'd look at adding to my 25 share position. I continue to like TD (disclosure: I do hold 153 shares post-split) and I like CIBC for the stability, albeit slower growth, of their core retail banking & wealth management earnings and a substantially de-risked balance sheet (they're ranked as #1 or #2 in the world in terms of best capitalized and lowest risk in the global rankings) and the 4.25% dividend yield is attractive. I like National Bank, too, thanks to their less focus on the higher growth/higher risk Capital Markets segment and increased focus on wealth management (they may lack a Western presence in retail banking, but they make up for it in wealth management, with National Bank Wealth Management offices in every major community in each of the western provinces and National Bank Discount Brokerage offers arguable the #2 or #3 most competitive pricing and highest customer service coupled with quality stock reports in the Canadian self-directed brokerage industry). Although I'm hesitant to add a fourth bank to my portfolio, if it were to pull back to sub-$40 per share, their book value (thanks to acquisitions in the last couple of years) is now in the mid-$20s per share and would look very attractive with a P/E Ratio of between 8 and 9.

The key with bank stocks is to maximize your return by not overpaying and I wouldn't pay more than 2x book value (1-1.25x would be ideal, though that doesn't happen as often) and, as far as P/E Ratios go, look for anything under 10 (if you can). Worse case, I might pay 11-12 for a company like TD if a long-term time horizon, but that will diminish your total shareholder return as you're potentially buying at or near their higher price points. :)

As for buying them in a TFSA, for a long-term hold and if buying them at, let's say 1.75x book/10x P/E multiple (or lower), although you would lose the capital loss potential (which isn't really applicable in the Canadian banks, especially if buying more than 5 years) and dividend tax credits, the long-term capital gains appreciation of the stock price and dividend increases coupled with the safety of the dividend make it a good potential use of your TFSA. Although past performance won't be indicative of future returns, for my own, it would not be unreasonable for me to predict the future value of my own TFSA invested in Canadian bank stocks (if I had them in my TFSA) to grow comfortably and slowly over the next 30 years from $30,000 to $90,000 over the next 25-30 year time horizon (including reinvested dividends).

As for stock splits, they don't generally have much of an impact on shareholder return, except, I'd argue in the Canadian banks. Because of the relative safety/strength of their dividends, when you now own twice as many shares, your dividends are reinvested at a lower price point instead of paid in cash because most people own their shares as "beneficial owners" through a broker/intermediary meaning their broker/broker's clearing agency (the Canadian Depository for Securities) registers the shares in their and you've elected them as your "nominee". Because of that, fractional shares normally purchased through a registered DRIP from the Bank's transfer agent aren't possible so you can only purchase shares (generally at a discount to the market price) when your dividend is equal to or higher than the share price. With a lower share price, the likelihood of reinvesting those dividends into a share (or a higher number of shares) is greater. This gives you a greater compounding effect to your dividends.

kanaka - not sure where you get your numbers from, but if you're referring to withholding tax on RRSP withdrawals, that is 10% on the first $5000 of the withdrawal. And, the withholding tax percentage is per-withdrawal based not cumulative of all withdrawals for the tax year. Now, depending on your marginal tax rate and effective average marginal tax rate, you may have to pay more tax come tax filing time or receive a refund for overpayment of tax. I think my average income tax rate was at or under 10% last year and has never been more than 15% (on anywhere from $27,000 to $36,000 of annual income). :)

Cheers,
Doug

March 14, 2014
11:10 am
AltaRed
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For ownership of individual bank stocks, the broker issues a T5 for the aggregated income earned during the tax year. For ownership of bank stocks, it is almost exclusively eligible dividends.

For an ETF, the tax slip will be a T3 rather than a T5 and there might be, in addition to dividend income, some capital gains IF the ETF sponsor has re-shuffled the deck and/or Return of Capital.

I also would suggest the ZEB ETF if someone does not want to do the research to pick individual bank stocks, e.g. valuation metrics, management guidance, etc. Each bank has slightly different strengths in different areas.

I recognize the eligible dividend tax credit can play havoc with OAS clawback provisions, and potentially other social programs like HST/GST credit, etc. but with the start of the clawback provision for OAS starting near $80k, that is a nice problem to have and not one that would deter me from Canadian dividend paying stocks.

March 14, 2014
11:54 am
kanaka
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Kilarney
You have to choose TFSA, RRSP or non registered based on your current income, RRSP and TFSA contribution room and your personal preferences. But for younger folks with two options and "if" income is real good I would max out RRSP and TFSA and make sure the tax refund from the RRSP contribution is invested in the RRSP or TFSA.

Also review what is said here about grossing up when you declare dividends outside of a registered plan.

If you are happy with the room you have in your TFSA and that is satisfactory for how much you would like to invest....I would go TFSA.

Doug
Hi, correct. I should have said "average tax" is 20%. But who knows how much Kilarney is making?
In regards to RRSP withdrawal yes 10%, 20% etc. BUT that is not the true income tax and for Kilarney's sake to cover that the actual tax will show once your actual return is completed and MAY be more or less as you say. But never the less CRA gets the better part of their share upon withdrawal.

March 14, 2014
2:59 pm
GS1
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Wow - lot's of good comments.

Doug's point about not wanting to pay the management fee for an ETF that is just the 5 or 6 banks makes sense -- unless one is investing smaller dollar amounts and so cannot build one's own synthetic ETF.

TFSA versus RSP - having now retired, I would advise younger folk to max out their TFSA first and then their RSP as I find myself with a large RSP that, while nice to have, makes me wonder how much tax is going to have to be paid while collapsing it. I didn't have the opportunity to put the money I put into my RSP into a TFSA as they did not exist then. Today I would be maxing out my TFSA.

And finally, ACB - adjusted cost base. I don't think I have mentioned this site previously (http://www.adjustedcostbase.ca/)-- but it is a godsend for those of us with amounts in the infamous box 42 - Amount Resulting in Cost base Adjustment. You don't have to worry about the amounts in box 42 -- until the day comes when you have to file a tax return for an investment where there was a Return of Capital - then you need to go back and look at all the previous years returns from when you bought the investment till you sold it. It is MUCH easier to do it yearly. I do also export the resulting data to a spreadsheet in case the web site disappears.

GS

March 14, 2014
3:19 pm
Loonie
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Once again, I'm not sure I understood all of these comments. Wish I did.
I did look on the ING site, and could not find a "Fees" page that looked to be comprehensive, so be careful - unless I missed it.

Doug, anyone who knows as much as you do ought to be earning a lot more money. Can we help you find a better job??sf-smile

Greg, I have been reading a couple of books lately which suggest the best strategy for collapsing RRSP/RIFs is not necessarily to wait until you are 71. If you are concerned about the tax bite from a largish RSP, they are saying you might consider starting to withdraw it when you retire, enough to max out your current tax bracket, as it could cost you more later.

March 14, 2014
11:27 pm
GS1
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Loonie:

1) - Questions? Keep asking! There is a lot of knowledge scattered around the assembled throng.

2) - I started to collapse both our RSPs last December and will continue to do so. I just need to get a better handle on the amount of income I have. I have been reviewing the various T-5 and T-3 slips I have received and the amounts are half again more than I would have guessed. The income is in the form of dividends and I have RBC DI set up to reinvest all dividends, so am not really paying attention to it. It is in Quicken and so I need to do an end of November report so I can them draw down the RSPs.

3) - See 1 above!!! sf-smile

GS

March 15, 2014
10:59 am
Loonie
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thanks, Greg. Sounds like you are on the right track.
I am not much good with computer programmes, myself.
I am a bit fuzzy on whether, apart from getting the pension tax credit, there is any need to convert to RIF before 71, or if it's just OK (and more control) to withdraw directly from RSP. I suppose an advantage of conversion might be that you could keep the same investments without having to change anything in that regard? This question probably doesn't belong in this thread, but it occurs to me now.

March 15, 2014
6:08 pm
kanaka
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GS and everyone else.
We too are winding our RRSPs. We are 64 and both have GIC’s and Mutual Funds. I have begun to withdraw $15000 x 2 per year to keep within our current tax bracket. I will try, this year, 6 x $5000 withdrawals to only be hit with 10% withholding tax vs 20%. It may only allow me to gain interest on the 10% saved and the true tax will be calculated at year end. Our Mutual Funds and ETF’s are at an all-time high and will clear over 10% after 20% withholding tax which in my opinion is poor based on the amount of years we have held them. But never the less I have to get the best value from them and move on. My wind down will take us into the RRIF scenario and we “could’ lose the option from where to withdraw as if we keep both the GICs and Mutual Funds/ETFs we may have to withdraw from the Mutual Funds/ETFs below the threshold I have set. Do we dissolve all GICs first and wait for a further climb of our Mutual Funds/ETFs or??
Anyone have a theory or strategy?

March 15, 2014
7:16 pm
Loonie
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I am not sure I understand you, Kanaka, probably because I have not been in this position.
Are you saying that for some reason you must choose whether to withdraw from RSP/RIF your GICs or from your stock market stuff? I obviously haven't given this any thought, but why can't you take some of each? diversification in reverse, you might say.
I'm sure there is something I don't understand, but diversification makes theoretical sense to me.
If that's not possible, as you are still relatively early in the retirement process, perhaps hold onto the Mutual funds/etfs, if you think the market will go up. If you are conservative, and need the reliability of income in the future, perhaps best to keep the GICs.

March 15, 2014
10:17 pm
GS1
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Kanaka:

I have structured my RSPs so I have my strip bonds laddered so cash comes free every year.

Failing that I would sell anything you owned to get it to cash. Then, assuming you still like it, buy it back (or buy something similar - I like ETFs over mutual funds due to fees) in your non-registered investment account. There will be tax to pay but you will get the value out and back in and so shouldn't miss much appreciation (or loss as the case may be) during the days this is happening. If I had the spare cash somewhere I would sell the fund out of the RSP the same day I used the spare cash to buy the equivalent stuff, then replace the cash from the sold RSP funds. This way you will sell and buy at the same price.

Between the ages of 65 and 69 or 70 or 71 there is a $2000 piece you can get out tax free. I don't fully understand it. Two years ago I moved $2000 straight from my RSP to my Investment account and didn't get to take advantage of it at tax time. Last year I moved $2000 from RSP to my "empty" RIF and then moved it from the RIF t my investment account. This tax season I got a T4RIF that I believe will give me the $2000 tax free. Note that all references to $2000 get turned to $1800 after the $200 is withheld by the operator of the RSP for CRA.

Greg

March 16, 2014
8:31 am
Loonie
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What you get, Greg, is a tax credit. $300 federal, and I believe it's $60 provincial in Ontario. In a 20% tax bracket, that would almost wipe out the tax on $2000 and would refund your withholding tax. It only comes via RIF, not via RSP withdrawal.6
It gets advertised as a complete freebie but I don't see where that is quite the case. Someone will correct me if I'm wrong, I'm sure.
If you belong to an employer-based pension plan, then you can get the same tax credit that way, but you only get one or the other.

March 16, 2014
10:02 am
Norman1
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GS said
Between the ages of 65 and 69 or 70 or 71 there is a $2000 piece you can get out tax free. I don't fully understand it. Two years ago I moved $2000 straight from my RSP to my Investment account and didn't get to take advantage of it at tax time.

Greg, I think that's the Line 314 pension income credit for the first $2,000 of eligible pension income. I found the following details in the T1 General return for Line 115, Line 129, and Line 314.

It looks like only certain amounts reported on Line 129 (RRSP Income) qualify. Those would be RRSP annuity payments, from Box 16 of T4RSP slips, which qualify when one is at least 65 years of age at taxation year end or one received the annuity payments because of the death of one's spouse or common-law partner.

I don't think RRSP withdrawals reported on Line 129 qualify. They would be from Box 22 (Withdrawal and communtation payments) of T4RSP slips and not Box 16 (Annuity payments).

Amounts on Line 115 (Other pensions and superannuation) also qualify for the pension income credit. RIF income would be reported on line 115 when one is 65 years of age or older at taxation year end or one received the RIF income because of the death of your spouse or common-law partner. Otherwise, the RIF income would be reported on line 130 (Other income).

March 16, 2014
10:07 am
Loonie
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That's correct. RSP withdrawals as such don't count.

March 16, 2020
12:52 pm
Bud
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they say bank stocks will be affected by zero interest rates margin compression. Once this settles will they still be growthy in a zero interest rate environment?

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