Taxation rates are, of course, the be-all and end-all for preferred share investors, which is one reason why I try to stay on top of marginal tax rates.
These marginal tax rates are stored in HIMIPref™ in a series of taxRateDataRecords which are kept on server-side. They are usually queried via the taxRateDialogBox:
They can also be found printed (on paper and on screen) for the active account at the bottom of the reportSummary.
To get the taxRateDialogBox, it is easiest to run the programme and choose mainMenu|Reports|activePortfolio|taxRate|trading. You can also get it by right-clicking on the relevant column on the portfolioList.
A user has asked whether he should change the taxRateDataRecords for his account, since it’s a little different from the “Highest Marginal Rate in Ontario” used as the default. The answer is yes … but not to expect too many changes in the system for a small change.
To determine whether a trade is recommended or not, HIMIPref™ estimates the total return after tax for both the bought and the sold issues. After adding a little bat’s blood, a trade is recommended if the expected additional return compensates for the known costs of execution (totalFrictionBid), plus a little extra to compensate for risk, plus a little more extra because the whole point of the exercise is to try and make some money.
Tax rates come into play via three channels:
- Tax Loss Selling (or, alternatively, capital gains avoidance. It’s good to lose tax-deductable money and reduce taxes! It’s bad to incur capital gains unless the poor sap buying your position is also paying your taxes!
- Differentiation between Interest and Dividends : This is a biggie, at least insofar as not buying Interest bearing prefs just because the headline yield is high is concerned.
- Differentiation between Capital Gains and Dividends : This is most important when the tax rates for these types of income is greatly different … an account may have capital losses for tax purposes, for instance, and thus want to tell HIMIPref™ that, given its druthers between $1 capital gain and $1 dividend, it would druther have the capital gain, thank you very much. However, most provinces nowadays won’t have much difference … on the other hand, lots of people have capital losses they can offset free of charge.
In sum, I’d say: Sure. Make the change, even if it’s a small change. After all, why go to all the trouble of throwing away information? In most cases it won’t make a lot of difference, but every now and then it’s worth a little bit of money.
Users cannot add taxRateDataRecords themselves. Send me an eMail specifying the desired values for the record and I’ll set up whatever you like – and we’ll discuss which taxRateSchedule you should select in the portfolioInputBox.