Keeping up with the Joneses

Mr. Jones dropped by to discuss how he could protect his income from the market and Revenue Canada (now CCRA).

Last year Mr. Jones was uncomfortable holding stocks and mutual funds and decided to sell at a loss and trigger a capital loss. His argument to me was that at age 70 he may never be able to use up his capital losses in the future because he could not see himself investing in the stock market for quite a while.

Its fine for my neighbors since they are in their fifties and have a long time to recover from market drops so they will eventually reap the rewards of triggering capital gains. Since I put my money into fixed income (GICs and bond funds) that only pay interest, I cant take tax advantages that my neighbors can afford to said Mr. Jones in a frustrated tone.

I said to him what if I could invest your money in a bond fund (which he was comfortable holding since it has less risk than an equity fund) and generate capital gains that you can claim against your capital losses? How much would you pay for such a bond fund? Imagine getting 4-5% interest next year and not paying tax on it.

Well, guess what? – a couple of mutual fund companies in Canada have developed bond funds that generate capital gains inside their corporate class tax funds. This idea only started last year so most investors haven’t heard of it. But as more and more Mr. Joneses switch to safer investments, safer doesn’t have to mean more tax.

Mr. Jones decided to switch some of his bond fund holdings into corporate class bond funds (essentially the same type of bonds inside the bond fund he was holding) and recapture capital losses triggered in the last year. When Mr. Jones sells his tax class bond fund in the future, chances are it will be tax-free.

The next day I had a visit from his neighbors. They asked me how they can keep up with the Joneses.

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