The beginners struggle

[SBQ]

SBQ, thanks for this insight on how investment taxation works in North America. A couple more questions (OK three) if you don't mind.

1/ The RESP (education savings plan): The government matches your contribution dollar for dollar and you can pull out the money to pay uni fees. But how much money can you put in if you are 17 and want to go to university? Minimum wages in NZ are much higher than in the USA for example (not sure about Canada). So if you have an entry level part time job as 15, 16 year old you aren't going to be able to save that much, even with a 1:1 top up. And tuition fees in the USA (not sure about Canada) are much higher than NZ? So overall aren't you going to be much better off taking a Uni course in NZ (no fees in year one remember) than in North America, even despite a 1:1 government subsidy on RESP contributions?

2/ You say dividends accumulated in these schemes are 'tax free'. But in the USA the company has already paid tax on the money they pay out as dividends. So in this sense the dividends are taxed at the time of payment, even if you as an individual shareholder do not pay the tax yourself. I am surprised in your implication of there being no withholding tax on dividends either!

3/ Once you reach retirement you can cash in your 'tax free' portfolio. But you are taxed once your portfolio is redeemed aren't you? So 'tax free' really means 'deferred tax'. Otherwise you wouldn't be telling us how you can minimise tax by choosing the point at which you cash your superannuation in. So how much tax do you pay when you cash in your portfolio in the end?

TIA

SNOOPY

@1) It's not dollar for dollar matching! Key factors in RESP is you have a lifetime maximum $50K contribution limit. Cdn gov't match 20% of your contributions to a maximum of $500 per year and a lifetime maximum of $7,200 so you're best to start young like at age 3 or 4 if you intend uni enrollment right after highschool (of course not limited to as it can be any age - many go back to school in their 40s and 60s). The 20% figure is key so to get the most benefit, you should contribute $2,500 a year and if you missed 1 year of contribution, you could on the next year put in $5,000 and you would get $1,000 grant ; note this is limited to 1 year ie can't put in $25,000 and get 10 years of grant. There is ALSO in additional CESG and Canada Learning Bond for those on the low income. All that is invested compound tax free and when the student goes to, the deal is their income would be low or pretty much zero. In Canada the 1st level of income around $12K is tax free - much similar to how Australia does. Keep in mind in Canada, if the RESP is invested in assets to produce capital gain; in Canada ONLY HALF of the gain becomes taxable income. So if they sold $24,000 in shares and had $12,000 in gain; they would report only $6,000 as taxable income which is only half of the $12K exemption threshold.

But what if the student finds uni education isn't what they wanted? No problem. Up to $50K the RESP can be rolled into their RRSP (conventional retirement savings plan similar to Kiwi Saver).

So the RESP is not designed to start at age 17 and go to uni the next year ; at best you would only get the $500 grant. Like any investment plan you have to think in several years or decades.

https://www.greedyrates.ca/blog/resp-canada/

@2) In NZ we have with-holding on everything because of IRD's obsession of taxing accounts before the person can get hold of the funds. In N. America the only withholding you see are for non-residents. Basically when you open up a bank account, if you provide a tax #, the bank assumes "it's YOUR responsibility" as a resident to declare the interest or investment income at tax filing every year. In Canada all banks / brokers etc are required to send tax summary docs to their clients but if you live overseas, well the rules are different and there must be withholding. In NZ, to the wage/salary earner there is no requirement to file a tax return; no tax return means no assessment to get some sort of tax credit back despite there may be a credit if the person overpaid in withholding by being in the wrong tax bracket; unfortunately to IRD's benefit.

Dividends are taxable in Canada but at a much lower rate than general income. However the lowest tax impact is capital gain. But in accounts like TFSA, the broker files in an exemption where the dividend is fully paid with no with-holding. On my father's TFSA account, he received dividends on his BP shares (which is a UK company) in full amount. Interestingly this applied on the international level and not dividends received from Cdn listed companies. How? Because companies that issues dividends do not withhold tax on it. It's entirely up to the INDIVIDUAL to file their tax return and declare their dividend income. Now flip the tables around and how would the foreign investor feel by owning NZ shares that have withholding on the dividends? How would they get that taxed portion back? Perhaps this is why most foreign managed funds have sidestep NZ investments and why we see a dwindling level of liquidity on the NZX.

@3) I assume you're referring to TFSA? Unlike the other registered investment plans RESP, RDSP, RRSP, the TFSA is entirely 100% tax free during the years invested AND when you sell up; really 100% tax free. But likewise, any losses are not allow for claim for credit.

The investment world in Canada has many to suit each individual's situation. Those with disabled children get RDSP. Those into academics look to RESP. Those who are rich and wealthy look to TFSA, well actually all residents can benefit with the TFSA. One thing common in ALL these investment plans is the 'deferral of tax' with exception of TFSA with doesn't matter when you sell up. The oldest program would be RRSP which is similar to Kiwi Saver but much more elegant. What is not elegant to structure your income in years you have low or year income and the ABILITY TO CHOOSE how much you want to have as taxable income? Isn't that what retirement is all about? If i'm 67 and want to buy a new caravan or RV, I would sell the amount of shares I want, pay the capital gain tax enough to cover my living cost and new toy and as you know, most seniors have little or no salary / wage income so they would benefit being at the lower end tax bracket. Whereas in Kiwi Saver, the funds are slammed tax every year on the performance of the fund; with no distinction of the individual's tax situation over their lifetime. So to answer your question, how much tax does a person pay at retirement? Well that's entirely up to you until the day you die, for which the entire account would be deemed sold and tax on the capital gains would apply (fortunately, only 1/2 of the gain is taxable income).

[Snoopy]

In NZ, to the wage/salary earner there is no requirement to file a tax return; no tax return means no assessment to get some sort of tax credit back despite there may be a credit if the person overpaid in withholding by being in the wrong tax bracket; unfortunately to IRD's benefit.

Well that isn't quite how it works. A wage/salary earner in NZ will still have to file an IR3 if they have other income as well, like NZ shares that are not in a PIE, overseas shares, earnings from trusts etc. etc. But generally the tax system has been redesigned over the years so that pure wage and salary earners do not have to put in a tax return.

Your wording is perhaps better when you say there is no requirement to put in a tax return. But just because there is no requirement to do it, that doesn't mean you should not do it: For exactly the reasons you point out above SBQ.

Dividends are taxable in Canada but at a much lower rate than general income. However the lowest tax impact is capital gain. But in accounts like TFSA, the broker files in an exemption where the dividend is fully paid with no with-holding. On my father's TFSA account, he received dividends on his BP shares (which is a UK company) in full amount. Interestingly this applied on the international level and not dividends received from Cdn listed companies. How? Because companies that issues dividends do not withhold tax on it. It's entirely up to the INDIVIDUAL to file their tax return and declare their dividend income.

I think it is not unusual for capital gains to be taxed at a lower rate than income. When capital gains tax was introduced in Australia it was to be taxed at half the rate that income was taxed at. Why? Because not all of the capital gain was capital gain above the rate of inflation. Taxing capital gain at half the income tax rate was the ATOs way of adjusting the tax take to reflect the capital eroding power of inflation.

AFAIK Australia and NZ are the only two countries that give individual shareholders credit for tax paid by any company they hold shares in as an entity. Tax has already been paid at the corporate rate by US companies at least, before any dividend is paid to shareholders. I wonder if the lower tax rate paid on Canadian dividends is Canada's way of accounting for this?

Now flip the tables around and how would the foreign investor feel by owning NZ shares that have withholding on the dividends? How would they get that taxed portion back? Perhaps this is why most foreign managed funds have sidestep NZ investments and why we see a dwindling level of liquidity on the NZX.

Most NZX companies, when they pay dividends to foreign shareholders, pay a foreign 'Supplementary Dividend' that effectively wipes out the withholding tax on dividends paid to foreigners. There are arrangements with the IRD that allow NZ companies who do this, not to pay more tax than they 'otherwise would' if they had no foreign shareholders.

@3) I assume you're referring to TFSA?

Yes

Unlike the other registered investment plans RESP, RDSP, RRSP, the TFSA is entirely 100% tax free during the years invested AND when you sell up; really 100% tax free. But likewise, any losses are not allow for claim for credit.

The investment world in Canada has many to suit each individual's situation. Those with disabled children get RDSP. Those into academics look to RESP. Those who are rich and wealthy look to TFSA, well actually all residents can benefit with the TFSA. One thing common in ALL these investment plans is the 'deferral of tax' with exception of TFSA with doesn't matter when you sell up. The oldest program would be RRSP which is similar to Kiwi Saver but much more elegant. What is not elegant to structure your income in years you have low or year income and the ABILITY TO CHOOSE how much you want to have as taxable income? Isn't that what retirement is all about? If i'm 67 and want to buy a new caravan or RV, I would sell the amount of shares I want, pay the capital gain tax enough to cover my living cost and new toy and as you know, most seniors have little or no salary / wage income so they would benefit being at the lower end tax bracket.

With the tax treatment in Canada you have outlined, I can understand why you object to the tax paid under the New Zealand system SBQ! If you pay no tax at all in your Canadian TFSA, even upon redemption, it is hard to imagine any other country being able to compete with that. I guess there must be some restrictions on TFSA though. I presume you can only take money out of it once you hit 65? Is there a limit on the amount of money you can put into a TFSA?

So to answer your question, how much tax does a person pay at retirement? Well that's entirely up to you until the day you die, for which the entire account would be deemed sold and tax on the capital gains would apply (fortunately, only 1/2 of the gain is taxable income).

Half the capital gain being taxable in Canada is equivalent to the Australian system of paying tax on all of your capital gain but at half the income tax rate.

SNOOPY

[Joshuatree]

Dont be sorry, just give us a date

[mfd]

Many NZ companies fully impute their dividends, generally those who do most of their business in NZ. This does not have anything to do with FiF classification - most decent sized Australian companies are excluded from FiF. There is a list somewhere on the IRD website I believe.

If my dividends are fully imputed, I as a high rate tax payer pay an extra 5% compared to the company retaining the earnings. Not so bad. Even better for those on lower tax brackets who can claim the imputation credits back.

Agree some countries have more generous tax exemption, but this is not a deciding factor for me choosing where to live so it's barely relevant to me.

[SBQ]

Many NZ companies fully impute their dividends, generally those who do most of their business in NZ. This does not have anything to do with FiF classification - most decent sized Australian companies are excluded from FiF. There is a list somewhere on the IRD website I believe.

If my dividends are fully imputed, I as a high rate tax payer pay an extra 5% compared to the company retaining the earnings. Not so bad. Even better for those on lower tax brackets who can claim the imputation credits back.

Agree some countries have more generous tax exemption, but this is not a deciding factor for me choosing where to live so it's barely relevant to me.

Yes but should the business model be sacrificed just because it does or does not have imputation credits? They're distorting the picture by trying to prop up investors to favour such NZ companies when in the grand of schemes, abroad, you have far larger and lower risk, and more profitable companies to invest in.

We may be going off track here to the 'beginner's struggle' topic. I'll add to how the person in NZ is better off with buying another house instead of investing in shares. Key benefit being banks have no problems lending on houses at attractive low mortgage rates (leveraging). While you can margin to buy shares, the rates are horrendous and let's not forget, most NZ brokers charge like a 1% fee on the client's entire portfolio value as a 'mgt admin fee' that Buffet cringes about.

[Snow Leopard]

So this Buffet bloke, he just buys the index then?

[SBQ]

So this Buffet bloke, he just buys the index then?

Upon his death, for what is left after he's gifted all his wealth, he's instructed to invest only in the index ETF.

https://www.marketwatch.com/story/wa...nds-2014-03-13

"
My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers."

Why? Because as he's explained before, there exists no fund manager that can prove otherwise of consistently beating the index return.

Also some of you may ask why has Buffet been able to beat the market index for MOST of the years since he took over Berkshire? I mean it's like he's speaking in contradiction to himself. It's because his caliber to investing differs to managed fund. For eg. brokering deals for merger and acquisitions, being able to led out cash at obscene rates, the list goes on and you can bet NONE of the Kiwi Saver funds would be in any position to make such deals. During the GFC, Goldman Sac needed $$... so they went to Buffet, in return he demanded 10% on the $ + with warrants and options. You can bet the strike price on the options deal with GS was to his terms. So all these gravy incomes come into Berkshire that benefit the shareholder. As his right hand man said to Buffet at the at their AGM some years ago, "Why are you telling the audience this?.. they've essentially done better than the index ETF by buying Berkshire".

[justakiwi]

Thank you for this explanation. I have never understood the apparent contradiction until now.

Also some of you may ask why has Buffet been able to beat the market index for MOST of the years since he took over Berkshire? I mean it's like he's speaking in contradiction to himself. It's because his caliber to investing differs to managed fund. For eg. brokering deals for merger and acquisitions, being able to led out cash at obscene rates, the list goes on and you can bet NONE of the Kiwi Saver funds would be in any position to make such deals. During the GFC, Goldman Sac needed $$... so they went to Buffet, in return he demanded 10% on the $ + with warrants and options. You can bet the strike price on the options deal with GS was to his terms. So all these gravy incomes come into Berkshire that benefit the shareholder. As his right hand man said to Buffet at the at their AGM some years ago, "Why are you telling the audience this?.. they've essentially done better than the index ETF by buying Berkshire".

[percy]

Did you see The Moose.?

[jonu]

Did you see The Moose.?

Why is the plural of mouse mice? And the plural of moose moose? Weird!