Investing

Personal finance hacks

  • Last Updated:
  • Aug 15th, 2021 12:51 pm
[OP]
Jr. Member
Aug 6, 2008
188 posts
244 upvotes

Personal finance hacks

Here are some "hacks" that I've thought about in my several years of DIY investing. These are things that doesn't get talked about that often. I am sure some RFDers may find some of these very basic, but maybe there are some who aren't aware and find them useful.

Do you have any personal finance "hacks"? Share them here!

-When thinking about your marginal tax rate, it's helpful to include your Canada Child Benefit (CCB), which is based on your taxable income. So whatever your marginal tax rate is, add on the % your CCB will increase with extra RRSP contributions.

-If you plan to sell a rental property soon and will trigger a large capital gains tax, it may be good to preserve your RRSP contribution room. If your ongoing employment income puts you in a lower tax bracket, it may be advantageous to stop contributing for a year or two and preserve the contribution room for for the year you sell your rental property, which could let you save taxes at the highest tax bracket rate.

-If you need to sell equity in order to buy bonds to rebalance your portfolio, instead of selling the equity and buying bonds right away, consider using a stop-limit sale of the equity. This way, you protect yourself on the downside, but may ride the upside as the equity rises. If the stop limit order is triggered, hey, buy those bonds to rebalance.

-If you are contributing regularly into your TFSA and RRSPs, instead of selling investments to rebalance, rebalance by buying under-weigh investments with your contributions. This will save you on commissions.

-For retirees, increase in equity prices in an RRSP/RRIF account means more taxes on withdraw. It's better to keep all equities in TFSA and all fixed income in RRSP/RRIF.

-If you know you are going to put at least $xxx into your RRSPs this year, ask CRA to grant permission for your employer to reduce your taxes at source. You can use the extra money to put into TFSA, let it grow tax free, then take it out before RRSP deadline and contribute to RRSP. Of course you need to consider the risk that your TFSA investments could drop in value during that time period.
1 reply
Newbie
Aug 14, 2021
1 posts
2 upvotes
Some of my investing habits/hacks that I've picked up as a decade-long passive index investor (have investments in mine and my spouse's RRSPs, TFSAs, non-registered accounts and also in a corporate account):

- I time my portfolio rebalancing (once per year usually, unless there is market turbulence) towards the end of the calendar year. That way, if I have to trigger capital gains in a non-registered account, I can wait and do so in the new year (defers the tax on that for another year). Conversely, if I am selling with a capital loss, I can plan to do so before the end of the current calendar year (and thus locking in the capital loss to use in the current tax year).

- I've made use of the Horizons "Swap" ETF funds to optimize taxation in my personal non-registered and corporate investment accounts. These funds, in a nutshell, mimic existing ETFs (TSX, S&P 500, etc) but their goal is not to create any taxable distributions for their holders. So, by holding a fund like HXS, I am getting the same return as any other S&P500 ETF out there, but with the benefit of all of the fund's ROC and dividend income being converted into more tax-friendly capital gains. I do the same with fixed income in my portfolio (I hold HBB for bonds), where the tax on interest income is especially punishing. The main benefits of this structure:

1) More room in the registered accounts: the traditional wisdom has been to hold bonds in a tax-sheltered account due to the tax-unfriendly nature of interest income, but in recent years, the interest/return from bonds is so low that this wisdom doesn't make that much sense anymore (when an equity ETF pays 2% in dividends and sees 7-11% price appreciation - it makes more sense to hold the equity ETF in the registered account). So, these swap funds allow me to hold my bond portion of the portfolio outside of the registered accounts, while still maintaining complete tax efficiency (as all of the "interest" that would be paid out of the bond fund is instead converted into an increase in share price and an eventual capital gain instead, taxed at 50%).
2) Tax deferral advantage: as hinted at before - with no distributions in a normal year, these funds are completely tax efficient and do not produce any kind of interest, dividend, ROC, etc. There's no nickel-and-diming away of the nest egg to tax, and there's more left over for me to grow and carry forward into future years.
3) Conversion of tax-unfriendly income (interest, foreign dividends, etc) into tax-friendly capital gains.

Downsides of these funds: slightly higher management fees and some legislative risk (ie: the government finds them "too" tax efficient and legislates new laws to prevent their existence). Both drawbacks are more than mitigated by the benefits, imo.

With my corporation operating with small business deduction tax brackets, it's very advantageous to only have to pay 11% total tax (Alberta) and retain the other 89% in the corporation in these funds to grow.

4) Account allocation: OP had stated that it was better to hold equities in the TFSA and fixed income (ie: holdings with lower expected returns) in the RRSP for tax reasons. I'd build on that to mention that certain funds have more tax efficiencies in certain accounts, depending on dividend yield, type of fund/income generated, etc. For example, US-domiciled ETFs are great in the RRSP as there's no withholding tax on dividends due to a US-Can tax treaty. More info: https://canadiancouchpotato.com/2012/09 ... oes-where/

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