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Many visitors come to Young and Thrifty these days through our article on Canada’s Robo Advisors.  If you have general questions about what a robo advisor is, or who they work best for, please check that one out.  If you want to see what Canadians who have used robo advisors think of them, please check out our first-ever survey on Robo Advisors in Canada.

Today we’re going to dive into something a little more complicated than the usual robo basics.  Many in the financial industry have now concluded that robo advisors might be a solid move for most Canadians; however, there are still a few misconceptions that need clearing up in regards to what robos can do for their clients.

For example, while I’m a fan of financial planner and all-around money expert Shannon Lee Simmons, she stated in a recent Globe and Mail interview that when it comes to her TFSA and RRSP: “I don’t have a lot of time to spend on do-it-yourself stock picking, and my investable assets don’t qualify me as a high-net-worth client that a professional would be interested in taking on. So, a robo-adviser works for me. It lets me grow my nest egg with a low-fee, well-diversified portfolio that doesn’t require much time to administer.”  But when asked about triggering capital gains taxes (investing outside of a registered account such as TFSA, RRSP, RESP, etc) Ms. Simmons responded: “If I had a non-registered account, I wouldn’t use a robo-adviser at all so that I could control the tax-loss selling and rebalancing.”

I should reiterate that I think Ms. Simmons is a great author and has shared some very cool personal finance wisdom.  On this point though, I must respectfully disagree with her logic.  This is only the most recent example I’ve seen of this thinking by the way, so Ms. Simmons is by no means alone when it comes to this theory.

Wait… There is Life After RRSP and TFSA?


First of all, it’s probably important to point out that the majority of Canadians will likely never invest outside of their registered accounts.  If you manage to max out your TFSA and RRSP, you’re probably in pretty darn good financial shape – and if you have children with a maxed out RESP – well then I tip my hat to you!

For those of you who have accumulated enough assets to worry about investing in a non-registered account (there are also some niche situations where it makes sense to have a non-registered account instead of a TFSA or RRSP – but in the interest of not being here all day, we’ll go into those another time) I don’t think that should really affect your decision to go with an automated wealth management platform instead of going the DIY route.

If one believes that the benefits of hands-off, automated index investing used by robo advisors are appropriate for their TFSA and RRSP, then the same rationale should hold true for a non-registered account as well.  Now, it’s entirely possible that you are one of the .01% or so of people who are qualified and motivated enough to be an active stock picker, or who belong in the larger group of people like myself who prefer to choose to rebalance their own indexed investments within a discount brokerage account in order to slice every bit of fee-related fat from the investment bone.  If you feel that you fit into either one of these categories, then I’m going to go ahead and assume you’re already putting those strategies into play and that the opportunity cost of DIYing your own investments is less valuable to you than the .3-.4% you’re saving in MER fees.

If however, you’re like most Canadians (including Ms. Simmons) and feel that DIYing just isn’t worth your time for one reason or another (whether it’s an aversion to math, the time/effort required, or just a general intimidation involving money-related terms) and have set up a robo advisor to handle your RRSP and TFSA portfolios, then that value decision should stay the same when you hold a non-registered portfolio.

“Taking the L” at Year End

Ms. Simmons identifies the only real difference between her TFSA and hypothetical non-registered investments when she references “tax-loss selling and rebalancing”.  Again, worth repeating here that for the majority of Canadians, this is getting into some pretty advanced personal finance and taxation knowledge, so just know that for most people, this is the cherry on top of the investment sundae.  Now, the basic idea behind “tax-loss selling” is that when a tax deadline such as the end of the calendar year approaches, it might make sense for your overall financial portfolio to “Take an L” as my boy Big Sean says, so that it can “Bounce back” the following tax year.  If your rap game analogies aren’t on point, here is the slightly more vanilla description.

1) Because your investments are not “protected” from tax inside a TFSA, RRSP, or other registered account, they are subject to taxation on the capital gains and dividends that have accrued throughout the year.

2) If a part of your portfolio – such as… say your VCN ETF, which gives you exposure to the largest companies in Canada – has not done well that tax year, you can sell units of this ETF and book a “loss” (or “an L” in rap parlance).

3) This “loss” means that during the tax period your ETF lost value.  So, if you had 100 units of VCN, which you purchase for $30 each, and come Dec 27th, those same units were valued at $28 each, you could sell those 100 units of VCN and claim a $200 loss.

4) Why is everyone so  excited to “lose” you might ask?  The idea is that these losses can be used to offset investment gains – and thus shrink the size of the tax bite that will come out of your portfolio.  For example, if you purchased 100 units of VXC for $33, and during the tax period in question, they rose to $35, then you’d have a $200 capital gain that you would owe tax on, right?  That is unless you used the loss from the VCN investment to offset these gains.  This offsetting effect can be applied in a few different ways (again, at the risk of TMI – I’ll leave this discussion for another time).

5) Now, you don’t want tax-loss selling to pull your overall portfolio out of balance – which is likely what most people are worried about when it comes to the automated buying-and-selling transactions carried out by a robo advisor.  If you handle our hypothetical VCN sale using DIY strategies, you could either wait 30 days to re-purchase those shares at the (hopefully still low) price of $33.  Obviously your portfolio would be slightly “out of balance” for those 30 days.  Alternatively, you could purchase an ETF that has very similar market exposure – such as say XIC – immediately after selling your VCN units.

6) At the risk of sounding like a broken record here, please remember that it is not necessary for most Canadians to dive into this stuff.  Focus on the sundae and not the cherry if some of this is going over your head.

It’s Not All About Taxes

While tax-loss harvesting and rebalancing were the focus of Ms. Simmons’ comments, they don’t address what might be the most important consideration for non-registered assets: tax-efficient asset allocation.

Tax-efficient asset allocation can go a long way in improving your after-tax returns. The basic idea is that bond income is taxed at your full marginal tax rate (just as if it was income that you’d earned at a jop), but capital gains and eligible dividend income are taxed at lower rates (rates vary depending on several factors).

If taxes were the only thing that mattered, you would simply convert all of your bonds into eligible dividend-paying equities and BOOM – you just cut your taxes payable… but at the same time, you also just made your portfolio a lot riskier! Balancing multiple objective such as risk, return, income levels and taxes payable is about as advanced as it gets in personal investing and even many of the “professionals” don’t do it right.  Long story short, if you’re confident in your mathematical abilities to address all of these concerns when you do your own rebalancing, then by all means, continue to DIY – but don’t do it because robo advisors are “bad” at tax considerations.

While it is true that several robo advisors do not offer specific portfolio options that are able to take non-mainstream objectives such as tax-efficient portfolios, tax-loss selling, income-generating portfolios, or USD portfolios into account, there are still robos out there that can take care of these kinds of calculations for you.  Justwealth is one such Canadian option that specializes in creating a wide variety of portfolios that handle the re-balancing and tax-loss selling considerations that most don’t believe to be currently available in the robo world. If you were to consider a robo-advisor for investing your non-registered assets, we suggest you start by reading some recent posts on Justwealth’s blog: The True Cost of Tax Efficiency: Part I. For more information on Justwealth, see our full Justwealth Review and exclusive promo offer code.

The management team at Justwealth prides itself on their collective decades of experience within the financial sector and their ability to meld together the world of “fin” and “tech” from a slightly different perspective than many of the robo advisors that cater to younger audiences.  As part of this bevy of financial planning experience, several people behind the scenes at Justwealth have worked extensively with tax-loss selling and transfer-in-kind logistics that focus on after-tax return.

In other words, if you’re hearing that only full service financial advisors can take care of you when it comes to large portfolios that have non-registered pieces to them, or that you need to DIY to get the benefits of tax minimization – think again.  You also don’t have to limit robo advisors to your TFSA and RRSP holdings.  If you need something a little more custom-designed, check out Justwealth’s offerings and let us know what you think.

The best news of all is that until the end of April, Young and Thrifty readers who invest with Justwealth get up to $500 Cash Back! Justwealth is a more focused robo-advisor that can accommodate the needs of higher net worth investors and provide more personalized service to their clients. Although their technology might not have all the bells and whistles that others may have, their expertise in asset allocation and reporting capabilities are quite advanced and we have only gotten 100% positive feedback in regards to their customer service, and the selection of investment strategies available.


Article comments

AndrewG says:

Wealthsimple offers tax-loss harvesting, but also points out that it’s not for everyone. I’ve moved there recently but I now lose the ability to put specific assets in specific accounts to gain related benefits (US-listed ETFs in RSP to mitigate dividend clawback) . Mind you I have a spreadsheet system that ensures the aggregate of all my accounts was inline with the asset class allocations…which Robo advisors don’t do. I still track my Wealthsimple accounts on that spreadsheet as it gives me a simple historical change record month to month of how the whole of my investments are doing. Nobody out there offers that service.

BartBandy1917 says:

I read her comments in the Globe as well and wondered about them as well. I wondered whether tax loss harvesting really helps in the long run. I’m no tax expert, but I understand that you get a refund or offset against other income, but then you repurchase at a deflated value which hopefully regains lost ground and advances – in that situation wouldn’t you be facing even greater capital gains to pay tax on when you eventually sell?

For me, the other question her comments raised was whether you can control asset location in a robo portfolio? For example, putting all your fixed income in the RRSP account, your international equities in a TFSA and perhaps your US/Cdn in a taxable account. I see from your JustWealth link that they explain shifting to more tax efficient ETFs in a taxable account, but not removing any specific asset class/geographic exposure from the taxable and putting it in the registered.

I guess if you face this sort of challenge, you are probably smart enough to manage it on your own. I’d appreciate hearing your thoughts.

Kyle says:

Hi BB. In theory you might be deferring those capital gains, but if you time it right, those gains will be applied to a likely lower marginal tax rate when you retire right? Some of the robos will allow you to customize your account like that – especially if you are a “large fish” that has plenty of investable assets. My guess is that they’ll walk you through some tax considerations you might not be aware of yet. For example, contrary to what you might initially think, sometimes it doesn’t make sense to have your fixed income in an RRSP account. See this for more info: http://canadiancouchpotato.com/2014/04/24/do-bonds-still-belong-in-an-rrsp/ The variables and math can get pretty in depth on this stuff.