Friday, September 13, 2019

Short Takes: Financial Literacy, Swap ETFs, and more

Here are my posts for the past two weeks:

Eliminating Mandatory Minimum RRIF Withdrawals

Currency Exchange at BMO InvestorLine

Ancient Teachings on Earned vs. Inherited Wealth

Here are some short takes and some weekend reading:

Preet Banerjee argues that if current methods of teaching financial literacy aren’t working well, we should be trying to improve them rather than abandon them. I agree. He started the article with a clever quote: “‘I’m glad school taught me the Pythagorean theorem instead of how to do my taxes. It’s come in really handy this Pythagorean theorem season’ - @CollegeStudent on Twitter.” Much of what I learned when doing my taxes the first time isn’t relevant to me today. This is one of the challenges with teaching financial literacy: what lessons will remain relevant for decades as banks and retailers adapt their methods of undermining our attempts to manage money well? Ironically, it’s the math I learned in school that earned me a good living and gave me the tools to make good financial choices. So, I’m glad school taught me the Pythagorean Theorem rather than how to do my taxes.

Canadian Couch Potato explains how Horizons Swap ETFs are affected by the federal government’s draft legislation and what Horizons is doing to preserve their tax-efficient structure. He also explains how the recent changes to TD’s e-series mutual funds are good for investors. More good news is that these e-series funds are now accessible through online brokerages.

Aaron Hector describes some ideas for keeping part of your OAS payments even if your income is above the OAS clawback ceiling.

Big Cajun Man reports that tuition in Ontario actually dropped over the past year according to Stats Canada.

Friday, September 6, 2019

Ancient Teachings on Earned vs. Inherited Wealth

“I see that you are indifferent about money, which is a characteristic rather of those who have inherited their fortunes than of those who have acquired them; the makers of fortunes have a second love of money as a creation of their own, resembling the affections of authors for their own poems, or of parents for their children, besides that natural love of it for the sake of use and profit which is common to them and all men. And hence, they are very bad company, for they can talk of nothing but the praises of wealth.” – Socrates, Plato’s Republic

Ouch. That hit close to home for me. I built my own savings rather than inheriting it. I see my savings as my own creation, and I probably talk about money more than many in my life would like.

I tend to like hearing the old proverb, “shirtsleeves to shirtsleeves in three generations,” because it sets the builders of wealth ahead of those who inherit and squander wealth. But Socrates sees this very differently. He prefers those with inherited wealth because they’re willing to talk about things other than money.

I never thought of it in these terms before, but it seems likely that those who built their own wealth prefer the company of others who’ve done the same, and those who inherited money prefer the company of others who have inherited money.

Fortunately, I have a few hobbies not related to money.

Wednesday, September 4, 2019

Currency Exchange at BMO InvestorLine

Every so often I’m forced to change the way I convert large sums between Canadian and U.S. dollars at BMO InvestorLine. The basic method I use stays the same, but some of the details change as InvestorLine responds differently. The method I use saves a lot of money compared to using the InvestorLine foreign exchange system.

Banks and brokerages hide fees in their currency exchange rates. To see the extra charge, start by taking a sum in Canadian dollars, say C$10,000, and finding out how many U.S. dollars you can get. Then see what this U.S. amount would get going back to Canadian dollars.

Many people might guess they’d get their original C$10,000 back, but they’d be wrong. In a recent test I did at BMO InvestorLine, I’d get back C$9754, for a loss of C$246 in two currency exchanges. That’s $123 per exchange. Starting with C$100,000, the cost worked out to $464 per exchange. I use a method called “Norbert’s Gambit” to reduce these costs to about C$25 and C$50, respectively.

Norbert’s Gambit begins with finding a stock that trades with low spread in both Canada and the U.S. One such stock is Royal Bank (ticker: RY in both countries). To go from Canadian dollars to U.S. dollars, I start by buying RY in Canada with the Canadian dollars. Then I sell the RY in the U.S. to get U.S. dollars. Two days later when the trades settle, I’ve completed my currency exchange. To go from U.S. dollars to Canadian dollars, I do the reverse: buy RY in the U.S. and then sell RY in Canada.

As always, there are details that can trip you up. One detail is that even though I never sell stock I don’t own, InvestorLine doesn’t record it this way. If I’m going from Canadian to U.S. dollars, I end up with a positive number of RY shares in the Canadian side of my account and a negative number of RY shares in the U.S. side.

InvestorLine automatically “flattens” my account to get rid of the positive and negative numbers of RY shares, but always one business day late. Then they charge me interest on the phantom short sale. I’ve done this a dozen or more times in RRSPs and cash accounts, and I get charged 21% annualized for the day (or 3 days if it runs over a weekend). For a C$100,000 exchange, this is about US$40 interest per day. InvestorLine has reversed this interest charge every time after I ask them to, but having to ask is annoying.

Some people report that they don’t see these interest charges. I can think of three explanations. One is that InvestorLine doesn’t charge less than $5 interest per month in margin and cash accounts. So, smaller exchanges might not generate more than $5 interest. A second possibility is that these people manage to get InvestorLine to flatten their accounts on the correct day, although I can’t get them to do this anymore. The third possible explanation is that interest doesn’t appear until the 21st of the month, and some people just might not notice the charge.

I used to send messages to InvestorLine on their internal message system asking them to flatten my account on settlement day, but this never worked. Calling them on settlement day and ask them to flatten my account used to work, but doesn’t any longer. So, I’m reduced to waiting until they charge me interest and asking them to reverse it. This has worked every time so far.

Below is the detailed set of steps I follow going from a Canadian to U.S. dollars. Just substitute “U.S.” for “Canada” and vice-versa for how I convert currency in the other direction. I offer no guarantee that my method will work for you, because your accounts may be set up differently from mine and InvestorLine changes their systems periodically.

1. Check that the next two trading days are the same in the U.S. and Canada. It takes two days for trades to settle. If a holiday closes stock markets in only one country during that time, my trades would settle on different days. I don’t proceed further unless all settlement will happen on the same day. If the settlement date is different in the U.S. and Canada, this can cause a short position and lead to an interest charge that I can’t get reversed.

2. Buy RY stock in Canada. If the Canadian dollars are coming from the sale of some Canadian ETF, I make that trade immediately before buying RY stock; there’s no need to wait for the first trade to settle. The amount of RY stock I buy doesn’t have to exactly match the proceeds from the first sale. I can buy more RY if my account was already holding some Canadian dollars, or I can buy less RY if I want my account to be left with some Canadian dollars. I make sure to account for trading commissions because the cash level InvestorLine shows doesn’t deduct commissions until two days later when the trades settle. I make sure the trades in step 2 all take place on a Canadian exchange and in Canadian dollars.

3. Sell RY stock in the U.S. This should be the same number of shares of RY as I purchased in step 2. If I’m planning to use the resulting U.S. dollars to buy a U.S.-listed ETF, I make that trade immediately after selling the RY stock; there’s no need to wait until the RY sale settles. Once again, I make sure to account for trading commissions. I make sure the trades in step 3 all take place on a U.S. exchange and in U.S. dollars. Note that I place all the trades in steps 2 and 3 on the same day, preferably in a span of a few minutes.

4. Set a Calendar reminder for 2 business days after the 21st of the month to check if I was charged interest. So far, I’ve been charged interest for one business day every time, even though I have no short position. InvestorLine has one-day delays between certain actions and when they take effect or become visible in my account. This appears to be the explanation for the interest charge. If you make the trades within a few days of the 21st of the month, the interest charge may not appear until a month later. I’ve had InvestorLine representatives insist that their system automatically flattens accounts without false interest charges, but I’ve been charged interest more than a dozen times.

5. If interest was charged for the so-called short position, send a message asking that the spurious interest charge be removed. I get a different nonsensical response every time I do this, but they have always reversed the charge.

6. If interest was charged, set another calendar reminder 5 business days later to confirm that the interest charge was removed. The interest charge has always been removed for me, but in theory, I might have to do another round of messaging and checking whether the problem is fixed.

Because I’ve included so much detail, this may look like a lot of work, but it isn’t too bad at all. It’s definitely worth it to me to save hundreds of dollars.

Tuesday, September 3, 2019

Eliminating Mandatory Minimum RRIF Withdrawals

Every so often we see calls for the government to eliminate mandatory minimum RRIF withdrawals. Ted Rechtshaffen writes this “win-win change would be cheered by seniors and likely lead to higher taxes in the long run.” He fails to mention the tax-planning strategies it opens up for wealthy seniors.

Under current rules, Canadians have to turn their RRSPs into RRIFs and make minimum withdrawals by age 71. These withdrawals are taxed as regular income. Wealthier Canadians who don’t need this income tend not to like having to make these minimum withdrawals.

Here are a few ideas for tax planning if the government eliminates mandatory minimum withdrawals.

Marrying a much younger spouse

Normally, when you die, all your remaining RRIF/RRSP assets become taxable income. An exception is that you can pass these assets to a spouse’s RRIF without any tax consequences. Currently, this tends to happen after a RRIF has been depleted by mandatory minimum withdrawals. Without these withdrawals, a full lifetime of RRSP savings could be passed to a spouse. If that spouse is young, tax deferral could continue for decades.

Taking this idea further, suppose an old man and old woman with comparable-sized RRIFs enter into marriages of convenience. The man marries the woman’s daughter, and the woman marries the man’s son. After the man and woman die, they have effectively passed their RRIF assets to their children to benefit from another generation of tax-free growth.

You may question whether anyone would go to such lengths, but keep in mind that there may be millions of dollars at stake. Do we really want a tax system that rewards this type of tax planning?

Reducing OAS clawbacks

Consider a senior who needs RRIF income to maintain her lifestyle but her income is high enough that her OAS payments get clawed back either partially or completely. She may be able to alternate between years of high and low RRIF withdrawals to reduce the combined tax plus OAS clawbacks she pays.

Income smoothing

Seniors with highly variable income could smooth their income by not taking RRIF withdrawals in high income years and taking large RRIF withdrawals in low income years.


Eliminating mandatory minimum RRIF withdrawals would do little to help typical Canadians, but opens the door for more tax-planning opportunities for wealthier seniors. I see little societal value in making this change. I’m neither for nor against reducing taxes. But it should be done in a simple way, not by allowing complex strategies to work.

I doubt we’ll see an end to calls for this change from estate planners. In addition to benefiting the wealthy, it gives estate planners more tools to make themselves valuable to their clients.