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Hubert Financial has lost its Luster
May 15, 2019
11:05 am
canadian.100
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GICinvestor said

Good numbers for sure.
Dean:
Does Blue Chip mean the price of stock will never dip?
Also if someone is maxing out RRIF withdrawals while keeping in the lowest income tax rate doesn’t the reporting of a dividend increase your income from the dividend by 150%? Thus less RRIF to be able to withdraw?  

Blue Chip does not mean that the stock will never dip. Stocks are not meant for investors who get caught up in daily gyrations of the market. While one day earlier this week did see a drop of I think 3% (due to Trump/China and his tariffs), that was not a "major" correction. Actually stocks have rebounded since that day. In fact, if you look at the indices for the DOW, S&P 500, S&P/TSX, they are all up for 2019. You have to hold for the longer term and not get emotional each day there is a dip. Blue chips eg Cdn banks, TransCanada, Enbridge, BCE etc. etc. have performed very well and pay regular great dividends, which are tax advantaged compared to interest.
Actually those into GICs are not doing very well these days - interest rates have dropped significantly - yes these investors have maintained their capital, but their income/returns and buying power have decreased.

May 15, 2019
2:15 pm
Loonie
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It's true that these stocks are a long term proposition and many people have done very well with them. It's also true that the future is unknown.

It's not necessarily true that people who invest in GICs are seeing lower returns. I just did the math yesterday, and mine have gone up steadily over the last five years because I keep getting smarter about where I put my money, and the improved returns get compounded. There was only one year in the last five where I saw a dip, which was more than compensated by the increase the following year. I expect to do even better this year and next, as I see more room for improvement even in the current situation.
Hubert has been part of my improved profitability.

If you're 65+, you have to be careful of the dividend tax credit. The gross-up on it can create an OAS clawback and other problems related to being deemed to have a higher income.
It's useless if your money is in TFSAs, RSPs or RIFs. For many people, that's the only savings they have in retirement
Great deal though for low income people, should they be able to afford the stocks..

May 15, 2019
4:38 pm
GICinvestor
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If you're 65+, you have to be careful of the dividend tax credit. The gross-up on it can create an OAS clawback and other problems related to being deemed to have a higher income.

if dividends were in a Non Registered account would it not also gross up my income and reduce the amount of money I withdraw from my RRIF to stay in the lowest income bracket?

It's useless if your money is in TFSAs, RSPs or RIFs. For many people, that's the only savings they have in retirement.

Wouldn't make sense to put into dividend stocks in a RRIF or TFSA and avoid the gross up on income???

May 15, 2019
5:20 pm
Doug
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GICinvestor said

If you're 65+, you have to be careful of the dividend tax credit. The gross-up on it can create an OAS clawback and other problems related to being deemed to have a higher income.

if dividends were in a Non Registered account would it not also gross up my income and reduce the amount of money I withdraw from my RRIF to stay in the lowest income bracket?

It sounds like the OAS clawback threshold goes by one's taxable income, not net income, so, unfortunately, indeed I can see why one would need to be mindful of their dividend income in non-registered accounts if receiving OAS. It's a peculiar anomaly, but on the whole, the tax savings from the generous dividend tax credit do make it a compelling form of income.

That being said, this is really only an issue if you are near the $75,000 per person point at which the OAS clawback begins. I imagine the clawback increments are modest and, if you're earning $75,000 post-pension income split each, arguably, you needn't worry about a bit of OAS clawback. You're well taken care of, I think. 😉

It's useless if your money is in TFSAs, RSPs or RIFs. For many people, that's the only savings they have in retirement.

Wouldn't make sense to put into dividend stocks in a RRIF or TFSA and avoid the gross up on income??? 

I think the issue Loonie identified with dividend stocks in a RRIF not being compelling is the mandatory minimum RRIF withdrawal. I think it's probably fine to hold equities in a RRIF, so as long as you maintain a prudent allocation to cash (at least 10% and ideally more than that, so you can take advantage of down markets), so you can satisfy your minimum RRIF withdrawal from cash and cash-equivalents.

As far as a TFSA, yes, I would actually hold stocks in a TFSA, but bear in mind due to Canada-U.S. tax treaties, foreign withholding tax is non-recoverable so avoid foreign dividend paying stocks in your TFSA. Also, you don't get the dividend tax credit in a TFSA, but arguably, the benefits of the TFSA outweigh that.

I look at at this way:

TFSA = most tax advantageous as far as capital growth, so try and hold your growth-oriented Canadian stocks and dividend payors here. Can also hold any bond ETFs and GICs you may hold for your fixed income allocation
RRIF/RRSP = second most tax advantageous, but that's debateable. I come down somewhere in between Loonie, who would avoid them if doing over, and Norman, who is quite fond of them. I don't know where Bill stands on them. Hold your U.S. equities, dividend payors, and Canadian stocks and dividend payors here. If a RRIF, ensure you hold a significant portion in cash and GICs
Non-Registered = Canadian dividend paying stocks, non-dividend paying stocks, and GICs and high interest savings accounts

Cheers,
Doug

May 15, 2019
8:18 pm
Loonie
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GICinvestor said

If you're 65+, you have to be careful of the dividend tax credit. The gross-up on it can create an OAS clawback and other problems related to being deemed to have a higher income.

if dividends were in a Non Registered account would it not also gross up my income and reduce the amount of money I withdraw from my RRIF to stay in the lowest income bracket?

It's useless if your money is in TFSAs, RSPs or RIFs. For many people, that's the only savings they have in retirement.

Wouldn't make sense to put into dividend stocks in a RRIF or TFSA and avoid the gross up on income???  

Yes, you might decide to limit your RIF withdrawals in compensation IF you have that option, but you would simply be "out" that income then. The gross-up is an accounting feature; it doesn't improve your income. The dividends improve your income, but the more dividends you get, the more gross-up you have. You would still have to deal with the RIF income sooner or later. You would then have to look at when you would ultimately take out that RIF money and what sort of tax you would have to pay on it at that time. As long as you keep the dividend stocks, you would continue to have the problem and the RIF would increase. You would also need to have other investments in the same RIF from which the mandatory amounts could be drawn. If you leave it to your estate, it could be very expensive. And of course, the older you get, the larger the mandatory minimums get. I doubt you can "outrun" the gross-up, as it's about 36% or so. It's there to make it difficult, but maybe you can. Would ahve to do detailed math.

Yes, you could put it in registered accounts, but you would lose the dividend tax credit completely. In an RSP/RIF, the dividends would ultimately be taxed at the same rate as interest.
Best registered option would be in TFSA, where there is no tax, but if your diversification plan indicated you should buy dividend stocks, then the question remains about where is best to put them versus other options for your TFSA. TFSA limits are not that high, considering all the things people would like to put in them.

OAS clawback is based on net income, which includes gross-up, as I understand it. Threshold is currently $77,580.

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