Personal Finance

How am I taxed on my non-reg. investments? (MAW105)

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  • Feb 10th, 2021 9:30 pm
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[OP]
Member
Apr 26, 2010
276 posts
35 upvotes

How am I taxed on my non-reg. investments? (MAW105)

Hi!

I know this might sound as a very newbie question but I'm struggling to find out how much my non-reg. investment will be taxed.

I have ~200k in a non-reg. account (all in the ETF MAW105) since my RRSP and TFSA accounts are full.

Let's say I make 7% gain on this account in 2021, how much will I get taxed on this ~14k$ gain?
My marginal tax rate is 53.3%.

Is it taxed at 50% of my tax rate (capital gain)?
Is it taxed at 100% of my tax rate like any other revenue?
Is it 0% and will only be taxed when I take my money out of it say at my retirement at a lower tax rate?

Thanks!
31 replies
Deal Addict
Mar 3, 2018
1858 posts
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GTA
A non registered account will be taxed when your receive dividends, interest or capital gains. In order to have capital gains you need to dispose of an investment like selling shares. You do not pay tax on unrealized gains while holding an investment.
[OP]
Member
Apr 26, 2010
276 posts
35 upvotes
Wow!

Are you sure? This almost sounds too good to be true! :O

So for example, let's say my 200k in my unreg. account grows on average 7% per year for 30 years.

I will be able to accumulate 200k x 1.07^30 = 1.522M without having to pay any taxes (except on dividends)?

And then, only when I gradually use that money at my retirement will I be taxed at a rate hopefully lower than 53%?
... and would it only be taxable on 50% of my tax rate (capital gain)? If so, that's truly amazing!!

Also, if I wanted to change ETF and sell all my MAW105 and buy MAW104 (just an exemple), would that trigger a capital gain?
If so, it seems like I need to stick with whatever ETF I picked for 30 years...
Deal Addict
Mar 3, 2018
1858 posts
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GTA
As long as you are holding or adding to investments gains are not taxed until sold. If you sell one ETF to buy another that is a sale subject to capital gains tax. Also if the ETF sells investments for a gain within the fund that would be attributed back to you to report as capital gains income.
[OP]
Member
Apr 26, 2010
276 posts
35 upvotes
Thanks!

So it seems I really need to stick with MAW104 for those 200k$ for 30 years then...

And how likely do you think am I going to be hit by capital gains caused by Mawer deciding to sell investments over the next 30 years?
If it likely going to be a very signficative amount? It's kind of anoying as I have no control over this...

Oh and those capital gains at my retirement, they would be taxed at 50% of my tax rate right?
Jr. Member
Oct 24, 2010
190 posts
65 upvotes
Toronto
You can buy any mutual fund / ETF / stock in a non-registered account and you would only pay capital gains when you sell it or the fund sells/realizes a gain.
The current capital gains tax is 50% in Canada, but this can change in the future.

You will get a yearly T3 slip (in February) which details the breakdown of gain/loss and of distributions (eg. return of capital, interest) throughout that tax year.
Turnover within a fund depends on its purpose and how the holdings perform, sometimes they need to rebalance the portfolio to meet the weightings/% in any sector/industry/etc.
Deal Addict
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May 11, 2014
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There is a lot of assumptions here which makes your premises false

Not 100% true that you won't realize capital gains until selling. If you look at Mawer's distribution list, there was about 20 cents in capital gains for 2020.
https://www.mawer.com/funds/distributions/

@DaveTheDude is correct in that you realize the capital gains upon selling, but unlike stock or property, funds sometimes realize these gains while you hold onto them, making control of this a bit more difficult. If you want fully only capital gains when you sell a fund, you need to build a portfolio with swap-based ETFs like HXT where the return on capital gains and distributions is replaced with swap contracts so the return is set as capital gains upon sale.
eg. HXT is a TSX60 index fund. The dividends and realized capital gains are only realized in the price appreciation as Horizons uses Swap Contracts to ensure this.
https://www.horizonsetfs.com/ETF/HXT Look under distributions, zero given, but the return is the same as the index.
https://www.horizonsetfs.com/library/Ge ... tal-Return

Or individual stocks


Mutual Funds and ETFs are trickier when held non-registered. People need to be careful when investing in them for tax purposes. Hence why @Malkavian , when we were discussing this, I cautioned you not to just jump from one investment to another. It is more than just about holding a diversified portfolio. Additionally, the choice of a balanced fund with fixed income is also not tax efficient considering your situation.

So no, in your example 30 years 7% annually, you will have to pay taxes and capital gains in many of the years. Remember, that 7% is including interest, dividends, capital gains realized and then reinvested. You have to pay taxes on those distributions.
https://www.mawer.com/assets/Prospectus ... 0-2020.pdf
As can be seen by this prospectus, there is monthly distributions, with both net interest and net capital gains. Also not having to pay capital gains until 30 years from now isn't necessarily a great situation. Remember, realizing it all at once immediately gets you into a high tax bracket. You could save significantly in many cases by realizing small amounts each year especially in low income years.
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[OP]
Member
Apr 26, 2010
276 posts
35 upvotes
Thanks xgbsSS!

A few question if you don't mind.

Does MAW105 have a lot of fixed income assets? If so, why do you think it's not very tax efficient in my situation?

MAW105, if I remember correctly, was supposed to limit distributions, turnover and re-balancing... Which is why it was recommanded for non-reg. accounts.
Discussed here: https://www.canadianmoneyforum.com/thre ... nt.136990/

Maybe there's something in my situation that make it less than optimal?
Deal Addict
Jan 19, 2017
4101 posts
2329 upvotes
Just to summarize what everyone has said above, there are 2 ways to earn capital gains. One is the fund company selling holdings inside the fund and capital gains ate realized. This kind of capital gain are distributed to you the unit holder and shows up in T3 or T5 slips. The other way is you sell your own units and capital gains are realized.
The other important point is you have to keep track of the auto reinvestment of all distributions to you cost base when calculating your capital gains or losses. If you don’t include these distributions to your cost base, then you will pay double tax when you sell.
Deal Addict
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May 11, 2014
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Malkavian wrote: Thanks xgbsSS!

A few question if you don't mind.

Does MAW105 have a lot of fixed income assets? If so, why do you think it's not very tax efficient in my situation?

MAW105, if I remember correctly, was supposed to limit distributions, turnover and re-balancing... Which is why it was recommanded for non-reg. accounts.
Discussed here: https://www.canadianmoneyforum.com/thre ... nt.136990/

Maybe there's something in my situation that make it less than optimal?
I'm a bit disappointed. We had spent hours talking about this and you did not do your homework as I recommended.

https://www.taxtips.ca/taxrates/qc.htm

Look at your top tax bracket and interest income. Look at how much fixed income Mawer Balanced has. You also have a mortgage where you are paying significantly higher than today's interest rates. Rather than investing ~60% equity and 40% fixed income, take 60% and invest it in equity and 40% towards mortgage prepayment before the penalty. In order for bonds to outperform, we need to assume
1) interest rates drop (how much lower can they get before zero?)
2) the interest rate you are being paid is well worth the risk - Mawer's yield to maturity is around 1.2%
3) there is slim chance interest rates go higher (we don't know if this will happen, but consider it a risk) bonds drop in price if they do.

So considering your tax situation (high tax bracket), you have a mortgage paying higher interest rates than the market, why would you invest in a fixed income investment where you are paying full income tax on at the highest bracket, when paying down your mortgage is the equivalent of a tax-free fixed income investment? Yes bonds could outperform your mortgage interest rate, but considering your tax situation, it might be a high risk for not so great returns.

It doesn't matter if a product is called "tax effective." It does what it can to reduce your tax situation, but ultimately you have to pay taxes at some point on fixed income.
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[OP]
Member
Apr 26, 2010
276 posts
35 upvotes
ml88888888 wrote: Just to summarize what everyone has said above, there are 2 ways to earn capital gains. One is the fund company selling holdings inside the fund and capital gains ate realized. This kind of capital gain are distributed to you the unit holder and shows up in T3 or T5 slips. The other way is you sell your own units and capital gains are realized.
The other important point is you have to keep track of the auto reinvestment of all distributions to you cost base when calculating your capital gains or losses. If you don’t include these distributions to your cost base, then you will pay double tax when you sell.

Oh! I had never thought about that... all my investments (RRSP, TFSA and non-reg.) have auto re-investment enabled and, so far, I never paid attention to it.

Won't I get a document from Mawer, my trading platform or a slip from the the gouvernement with all the numbers?
Or do I need to find a way to get an extraction of all past re-investment?

I also myself put money into my non-reg. a couple of times and didn't bother to keep a detailed log of everything.
Last edited by Malkavian on Feb 7th, 2021 4:40 pm, edited 1 time in total.
[OP]
Member
Apr 26, 2010
276 posts
35 upvotes
Ah yes xgbsSS, I remember we spoke about this!

I think ultimately I went with MAW105 because I realized I use a significant part of my house (32%) for my business so part of the mortgage I'm paying is considered an expense for my business (I hadn't told you that, sorry).
So considering this and the fact the my mortgage was relatively low I decided not to repay any mortgage.

But I do agree that I should possibly go for 100% equity for my next investments in my non-reg. I suppose I should keep the MAW105 that I have since I don't want to trigger a capital gain however.

Do Mawer have an ETFs that is (or close to) 100% equity and also tax effective?
Deal Addict
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May 11, 2014
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Malkavian wrote: Ah yes xgbsSS, I remember we spoke about this!

I think ultimately I went with MAW105 because I realized I use a significant part of my house (32%) for my business so part of the mortgage I'm paying is considered an expense for my business (I hadn't told you that, sorry).
So considering this and the fact the my mortgage was relatively low I decided not to repay any mortgage.

But I do agree that I should possibly go for 100% equity for my next investments in my non-reg. I suppose I should keep the MAW105 that I have since I don't want to trigger a capital gain however.

Do Mawer have an ETFs that is (or close to) 100% equity and also tax effective?
That still doesn't make sense. Just because it's part of a busIness expense, it still is interest. Besides if you don't want to take the risk of a full equIty portfolio, which is prudent, deleveraging is something you should do overtIme especially if as you say you expect income to drop over time.

You really need to sit with an accountant before you proceed. You keep jumping to the investment part which should be your last decision. You need to figure out how to structure your business and corp so that the investments you take make sense. Stop getting strung by the name Mawer. Yes, they are good at what they do, but so are many other investment funds. And similarly, just because they have a good reputation doesn't mean their products are appropriate for your investments
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Deal Addict
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Malkavian wrote: Oh! I had never thought about that... all my investments (RRSP, TFSA and non-reg.) have auto re-investment enabled and, so far, I never paid attention to it.

Won't I get a document from Mawer, my trading platform or a slip from the the gouvernement with all the numbers?
Or do I need to find a way to get an extraction of all past re-investment?

I also myself put money into my non-reg. a couple of times and didn't bother to keep a detailed log of everything.
Some mutual funds do provide the cost base. But I find them to be not correct most of the times. It is best to keep track yourself.
CRA won't have all the numbers.
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May 11, 2014
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Malkavian wrote:
Oh! I had never thought about that... all my investments (RRSP, TFSA and non-reg.) have auto re-investment enabled and, so far, I never paid attention to it.

Won't I get a document from Mawer, my trading platform or a slip from the the gouvernement with all the numbers?
Or do I need to find a way to get an extraction of all past re-investment?

I also myself put money into my non-reg. a couple of times and didn't bother to keep a detailed log of everything.
It doesn't matter if you reinvest the distribution received or not. Alot Of funds reinvest money regardless of whether it is actually paid out. Sometimes distributions are also return of capital, which simplistically is returning money you had invested.

You need to keep track of some Of this. For instance if MAW105 returned $20 of return of capital, your cost of $1000 Of investment becomes $980 for example.
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Member
Dec 26, 2013
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Ottawa
xgbsSS wrote: There is a lot of assumptions here which makes your premises false

Not 100% true that you won't realize capital gains until selling. If you look at Mawer's distribution list, there was about 20 cents in capital gains for 2020.
https://www.mawer.com/funds/distributions/

@DaveTheDude If you want fully only capital gains when you sell a fund, you need to build a portfolio with swap-based ETFs like HXT where the return on capital gains and distributions is replaced with swap contracts so the return is set as capital gains upon sale.
eg. HXT is a TSX60 index fund. The dividends and realized capital gains are only realized in the price appreciation as Horizons uses Swap Contracts to ensure this.
https://www.horizonsetfs.com/ETF/HXT Look under distributions, zero given, but the return is the same as the index.
https://www.horizonsetfs.com/library/Ge ... tal-Return
Wasnt the government threatening to remove the tax advantages of swap based ETFs in their last budget? What ever came of this decision? I remember a lot of members on here losing sleep over this.
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xgbsSS wrote: It doesn't matter if you reinvest the distribution received or not. Alot Of funds reinvest money regardless of whether it is actually paid out. Sometimes distributions are also return of capital, which simplistically is returning money you had invested.

You need to keep track of some Of this. For instance if MAW105 returned $20 of return of capital, your cost of $1000 Of investment becomes $980 for example.
this is interesting to have $20 ROC and auto reinvestment. If this is true, the cost base at the end didn't change because cost base changed to $980 after distribution. But the auto reinvestment added $20 to the cost. So the cost base became $1000 again.
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ml88888888 wrote: this is interesting to have $20 ROC and auto reinvestment. If this is true, the cost base at the end didn't change because cost base changed to $980 after distribution. But the auto reinvestment added $20 to the cost. So the cost base became $1000 again.
We were talking about reinvested distributions, but what I'm saying here is that distributions are tricky (my comment didn't say reinvest in this case). if you receive the cash as a return of capital, then the conversation is much more convoluted.

Sorry the conversation is all over the place :P
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wilyam wrote: Wasnt the government threatening to remove the tax advantages of swap based ETFs in their last budget? What ever came of this decision? I remember a lot of members on here losing sleep over this.
Very possible. My thoughts on this however is that until it is on paper, it means nothing.

Besides, if the government were to take this away, all that happens is the investments you make just now have the tax implication you would have had to begin with anyway.
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