Tax effects are an important consideration in preferred share investing, but there are nuances that sometimes snare the unwary into making bad decisions. If one takes the view that a particular issue is likely to be called at the next opportunity, for instance, one may then calculate the yield in the usual manner – but the income received will be heterogeneous, comprised of a dividend stream punctuated by a capital loss. Taxes on the dividend income (which will be higher than ‘normal’) will be paid in the year following receipt, while the offsetting tax benefit on the capital loss will be realized only in the year following redemption – and even then, will not be claimable until the investor has an offsetting capital gain. Another issue is the effect of the dividend stream on the OAS clawback, which is also discussed.
While I have little patience for the tax-obsessed naifs who are willing to spend a dollar on worry, market action and missed opportunities in order to save a quarter on taxes, these effects should be understood; there has been a brief discussion of tax effects on PrefBlog and a calculator is available; but this essay is a more detailed exposition.
Look for the research link!
