Edmonton Tennis Courts

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Just a quick posting that i had planned to do over a year ago. Way back when i first got myself into tennis mode, I started scanning Edmonton for tennis courts. I did the scanning on google maps, and my result was a pretty filled set of tennis courts in and around Edmonton. And i mean PRETTY DAMN FILLED, as in, even private backyard courts are marked (sorry if this is your back yard court, i am just being complete). While the private courts are probably not of any use, the public and semi-private ones might be. So here is the map. It is open for collaboration, so please do not vandalize it, and please contribute if you have anything new.

EDIT: Sorry, i accidentally added a space in the link, it is now fixed.

Edmonton and Area Tennis Courts

Dealing with Return of Capital distributions

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Return of Capital (or RoC) distributions are sometimes sold as tax free distributions. This is true, but not without some hidden knowledge. True, you do get the distribution tax free; but false, you WILL have to pay taxes on your investment. RoC works like the following:

Invest $1000 in Stock A
We’ll assume for simplicity, that the stock’s share price does not increase or decrease in value until the distribution date
Stock A pays a distribution of 5% ($50), of which 100% is RoC.

That $50 is totally tax free! Why? well, because your cost base of your investment is now only $950. That’s not to say you only have $950 invested, your book value is still $1000, but $50 of your original investment is returned to you as a distribution. So what does this really mean? well, even though you have not made any money on your investment (share price remained the same), if you sold your investment at this share price, you would trigger capital gains since your investment “made” $50 (since your ACB is only $950). Extrapolate this into the future and you will see that you eventually end up with an ACB of $0, which means that you will eventually have to pay capital gains taxes on 100% of your book value, that is you pay your book value at your marginal rate, YIKES!!!.

Ok, so you are probably wondering why in the world would you want something that returns RoC distributions? well, in the proper investment vehicle, you will not have to deal with the capital gains, such as a TFSA or an RSP account. I think RoC’s are useful for corporations, but i really can’t tell you why. All you need to remember is that they can be dangerous because of their ACB adjusting properties.

To make things worse, if you are using borrowed money to invest (making your loan interest payments tax deductible), then any RoC distributions can wreak havoc on your loan’s tax deductibility. This is because the amount of the RoC is “no longer invested” so you could not claim that your full loan amount is being invested to generate income. There is a fix for this, and here it is. You can either calculate the portion of your distribution that is RoC and simply re-invest that portion right away (thus keeping the loan fully invested). Or you can alternatively capitalize your loan’s interest with RoC income, because your loan’s interest is still tax deductible if you use your loan to pay for your loan’s interest (hopefully that makes sense, if it doesn’t then don’t worry, it’s all good).

That last point is especially important for Smith Manoeuvre warriors, since you can take advantage of funds that have RoC in your SM account. I really don’t suggest doing this on purpose unless there is a compelling reason. In my case, the reason being that there are no Canadian dividend ETF’s that are fully tax efficient. Best i could find was XDV and it still has a small RoC portion. The fix isn’t cut and dry, but it is still fairly simple, just a few extra manual transactions. Ideally, however, I would rather avoid RoC’s altogether.

p.s. Thanks to Frugal Trader over at Million Dollar Journey for the insight into capitalizing the LoC interest. I had originally just thought of re-investing, but capitalizing is much smarter since you can just re-borrow it again right away.

Smith Manoeuvre Started

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It took me a while to get going, but i have finally decided to get moving on my smith manoeuvre. My SM is going to differ slightly from the standard approach, mostly due to my home equity still being relatively low (until i have my house re-appraised in the future). How my SM differs is that I will be doing, what i am going to call, a couch potato smith manoeuvre. As you can probably guess, this is a combination of the couch potato portfolio and the smith manoeuvre. Specifically, I will be investing in broad ETF’s that have historically high dividend distributions, as well as I will be investing in both US and CAD equities to keep the proper weightings. This will result in my SM portfolio being slightly less tax efficient than the ideal SM strategy. However, for the initial startup with my situation (low equity), it is not too much of a burden and definitely helps the process get moving.

So here is the run down on how i have everything set up.
Smith Manoeuvre AccountQuestrade Non Registered Account

  • PFF – iShares S&P US Pref Stock Idx Fnd
  • IDV – iShares Dow Jones EPAC Sel Div Ind
  • XDV – iShares CDN DJ Canda Slct Dvdnd Indx Fnd

I also have a TD self directed RSP account, which also holds IDV and PFF (RSP account is the most tax efficient for international equities). And I plan to open another Questrade account (TFSA) that will hold XRB, XSB, and XRE. The bonds and REITs are less important right now so it will likely be a few months before they finally get purchased. The reason for this is because (like my RSP contributions) the funds must come from my after-tax income, since bonds are not very SM compatible and REIT distributions are RoC (which are also not compatible with a SM).

I am still quite young so my weightings have been set at 10% for Bonds and REITs, 20% for Canadian equities, 35% US equities, and 35% international equities. RSP contributions are currently annual and just the US and international funds, but SM contributions will be more often and contribute to Canadian, US, and international funds. SM contributions will occur once the HELOC reaches $1000 or higher (3 – 4 biweekly mortgage payments).

Beyond these 3 accounts, I also hold other equities (Canadian and US) which i won’t include in the weighting. The main reason for this is that one is a GE stock purchase plan with my employer, and the other is ECA and CVE shares that i have owned for over two decades. Since it would take years of US and international contributions to even reach my desired weighting with Canadian equities, they will remain outside of the weighting. Additionally, since these are three funds only, and my goal is diversification, there is no point including such high contributions in the global weighting. In time, I will cash in my ECA and CVE shares and use the money to pay down the principal on my mortgage. I have to be careful though because it will trigger monumental capital gains (seriously, well over 500% gain on ACB), so I need to plan it carefully so i don’t generate a massive amount of taxes owed. With the funds added to the HELOC (whatever i don’t set aside to pay for the capital gains) I would end up purchasing equities based on the weighting, so ECA and CVE would no longer be held. Also, if i ever decide to part from my employer, I would most certainly sell my GE shares and use the income to purchase according to the weighting again. Furthermore, the GE shares are no very tax efficient right now anyways, so I really have no motivation to continue holding them in their current account.

Finally, i created a somewhat complicated spreadsheet (on google docs) to help manage the constant balancing of the portfolio’s. Once i have been using it for a bit i will post a template. For the time being though, it may still have bugs so i don’t want to confuse anyone beyond the need with an unfinished project.