Buying the Stocks and ETFs When Borrowing to
You have to be more careful when buying stocks outside
your RRSP, because when you buy and sell stocks in a non-registered
account, there are tax consequences to consider. Therefore, you want
to buy good quality stocks and ETFs that you can hold
forever (buy and hold).
When borrowing to invest (leverage), you should not invest a large amount
all at once.
Make your purchases periodically (monthly, quarterly) over a number of
years. This is called dollar cost averaging, and reduces volatility.
Stocks and ETFs normally increase in value slowly over time, but they also seem
to crash at least once a decade.
When you are buying stocks and ETFs in a non-registered
account you have two choices
|high dividend paying Canadian stocks/ETFs eligible
for the enhanced dividend tax credit
These are good choices for everyone.|
If you are in one of the lower tax brackets,
receiving these dividends can actually reduce your taxes
payable in most provinces/territories.|
If you are older, nearing
retirement, and need income from the investments, you will want to
have more Canadian stocks/ETFs, because the tax on these dividends is
much lower than on foreign dividends. Since the stocks are
paying high dividends, they will usually have lower capital gains.|
stocks will usually be in the financial and utility sectors.
In order to not get overloaded in one sector, you should be selling this sector of
stocks in your RRSP/RRIF while you are purchasing them outside. See our
chart on the World
Economy by Category, and try to keep 20 to 30% of your investments in each
of the four sectors.|
Canadian or foreign stocks/ETFs which generate low
or no dividends
These are good choices for some people.|
If you are many years from retirement, and don't need the income, you
might be better having these investments, which generate more capital gains and
There will be no tax on the capital gains as
long as you don't sell anything.|
Once you are retired, you will probably have to
sell stocks to generate income.|
If you are buying stocks that do not pay
dividends, read the article regarding interest
expense on money borrowed to purchase stocks, to ensure your
interest will be deductible.|
Tax Tip: Buy good quality stocks and
ETFs, and plan to hold them forever.
Revised: September 19, 2017