This week’s missive will get back to some of the basic block and tackling we face at times as investors. Not to downplay the market madness, it seems everyone and their brother now has a view on the pandemic. Certainly not immune to the downdraft, in hindsight my decision to sell my taxable Canadian stocks on February 28th makes me look like a genius. The reality is essentially sheer dumb luck. It did, however, provide the cash to nibble on subsequent down days.
The Canadian IRA Taxability Answer
I did receive my first dividend from TMX Group a couple of weeks ago and to my chagrin saw Canadian tax withheld even though it’s in my IRA. Obviously one of the outliers I previously referenced. While my appeal failed, my broker did confirm two of my companies reside in this category, the other being Hydro One. I did gain some insight which I figured I’d share.
- To be processed as compliant with the tax treaty, companies have to use the DTC – which comes with a cost. Most Canadian companies trading in the US absorb this fee as a cost of doing business.
- Canada has their own version of the DTC – CDS which is owned by none other than the TMX group, which uses (at least for US based stockholders) Citi for disbursement without treaty compliance review.
- Brokers have no recourse but to withhold Canadian taxes in IRAs for CDS processed dividends. Meaning there is no tax benefit for US citizens holding non-DTC processed securities.
These two will be sold from the IRA when the markets recover a little. Meanwhile both are also held in my taxable account where I can claim a tax deduction when taxes are filed.
With the heightened level of uncertainty, more than a few bloggers have shared their approach towards increased safety. Dividend Diplomats ran a piece on Debt to Equity Ratios and Chuck Carnavale reviewed a Debt to Capital analysis. While both metrics are fundamentally sound – and I’ll likely add to existing holdings that are on these lists – both share a flaw that is highlighted by the current black swan event. Companies in unprecedented numbers are drawing down their credit lines or issuing new paper, both of which have an impact on the ratios. I mean, is Disney any less of an investment with $6B additional debt offset by $6B cash? Other than a slight increase in carrying expense, I would argue no but they do have other issues with the magnitude currently unknown. My take is this is where the ratings agencies theoretically should be earning their keep.
My process is to essentially begin the process of reducing the speculative portion of the portfolio. Eliminating my one BDC (MAIN – smaller business exposure), Entertainment Properties (high social distance exposure), Newell (a recipient of an SEC subpoena). This is one time a dividend cut or suspension doesn’t necessarily mean a sell if the purpose is cash preservation. I did reduce – but not fully sell – Cracker Barrel on their delay and suspension.
Additionally, I keep abreast of the news to identify potential opportunities. You’ve heard the mantra, Don’t Fight The Fed? How about profiting from the economic stimulus they’re embarking on? Blackrock is a (partial) proxy for this angle. I say partial as I doubt the fees will generate a meaningful profit to them.
As no one knows when and how this will end and I doubt I have the time on my side to play the long game, the better part of valor is to strengthen the hand I have. Someone younger can carry more risk but caution is warranted in my opinion. Either way, try to make some lemonade from these lemons.