At the start of February, I withdrew about $24,000 worth of stocks from my RRSP account; these stocks are unloved these days. The stocks were down between 25 to 30% from their September high. At withdrawal, Questrade withheld $8000 in income tax for our governments. I then immediately bought the same stocks in my margin account at Interactive Brokers. To make up for the income tax amount withheld by Questrade, I borrowed the amount on my margin account at the current interest rate of 2.563% per annum.
These days, it seems like stock markets are back climbing again. Therefore, it looks like my RRSP withdrawals are over for now. Looking back over the last two months of RRSP withdrawals, I have sold stocks and withdrawn $ 104,000 from my RRSP account. At the September high last year, these stocks had a value of $156,000. I will add this $104,000 withdrawal to my 2019 income tax return. Some of these dollars will be taxed at 53% but given the market correction, I figure that I am only paying at most 33% income tax since the withdrawal only represents 66% of the market high value ($104,000 / $156,000). Questrade has already withheld $31,200 in income tax. I will pay the income tax balance owing to governments at the end of April 2020.
Readers… I suggest you too keep an eye on your unloved stocks in your RRSP account… especially Canadian ones. If you want to keep these stocks « forever » and their prices are down more than 25%… you have a rare opportunity to withdraw these at a much lower tax “hit” and position them in a margin account to generate income at a much lower tax rate in the future.
February dividend harvest is usually thin… this year … no different. With some US funds in my margin account, I bought 1 share of Berkshire Hathaway (BRK.B-N). I now have 73. Since this US stock does not pay dividends, I like to keep it outside of my RRSP as I can only benefit from its price increase over the years to come. Thus, it can only generate capital gains of which only 50% is taxable. When I keep it in my TFSA account… well, the income is tax free!
Note that brokers withhold 15% of dividends paid out by US companies and our governments tax these « foreign » dividends at the same tax rate as interest or salary… but, we do get a credit for the amount of taxes withheld. This withholding tax does not apply to US stocks in a RRSP account. Still… I prefer non dividend paying US stocks outside my RRSP.
This month, in my margin account, I expect to receive $3600 in Canadian dividends and $761 in US dividends. In my RRSP account, I expect to receive $216 in Canadian dividends and $965 in US dividends. Therefore, I will put this cash to work in April buying stocks… hopefully in a down market! Note that my fixed income investments are mostly preferred shares that I hold in my margin account. That explains the large amount of dividends I receive in that account.
In my TFSA account, I average $218 in dividends per month. Note that with the stocks I pulled out of my RRSP account, I now have about $130,000 of stocks I will transfer into my TFSA account in the years to come to shelter their income from income tax.
Talk to you next month,