I married someone with about 100k in an investment portfolio that I do not think aligns with our financial objectives. I want to transfer this to a new joint portfolio (new institution too), but doing so will force us to pay tax on capital gains that have accrued in their account the last several years.

What alternative is better?

  1. Sell the investments, pay the capital gains tax, and re-invest in the better portfolio.
  2. Keep the investments where they are.

My impression is that option 1 is superior because we will need to pay capital gains tax eventually, the only difference is in scenario 1 we pay it now rather than in 20 years. That being said, perhaps I am mistaken and paying taxes later is better.

Note that we are Canadian and the current portfolio isn't great, but it also isn't absolutely terrible, its just too conservative.

Is there a scenario that works best in all cases, or are there circumstances in which either option would be superior?

  • The other alternative is to define your strategy as spread across the two portfolios, leave this one conservative for now, and shift the other to being more aggressive so the total mix is the one you want. – keshlam Apr 11 '16 at 15:03
  • Ah, yes good thinking. Two issues with this I guess. 1. The old portfolio is conservative but not a good one at that. 2. We do not necessarily have another portfolio... – Behacad Apr 11 '16 at 15:07
  • I'd say sell today. Why? Because "I do not think aligns with our financial objectives". Sell then have peace of mind, its a small price to pay in taxes. – Pete B. Apr 11 '16 at 16:31

There's no scenario that is best in all conditions.

Let's say you will lock in a profit of $10,000 immediately, and end up paying $2,000 in capital gains taxes. That's money that otherwise would be growing inside your investment.

The counterpoint, of course, is that transferring your investment to one with a lower cost means the proposed investment has a higher expected return.

So, it's going to depend on the expected return of each investment (which includes the cost of each investment) and the time frame of your investment.

In the 2015 tax year, I sold mutual funds with a cost of approximately 0.35% in order to switch to ETFs with a cost of approximately 0.06%, locking in capital gains at the time. In hindsight, I'm not sure that was worthwhile; the capital gains are rather costly and my investment horizon is shorter than yours. But it's at least debatable. If the cost difference or expected return is significantly larger, your decision may be easier than mine.

  • 1
    This sounds exactly like what I want to do. What would be the best way to figure this out? Create a spreadsheet with MERs, loss from tax, a projected earnings, etc? – Behacad Apr 11 '16 at 15:14
  • Yeap. It should be fairly straightforward, albeit not trivial. Good luck! – ChrisInEdmonton Apr 11 '16 at 15:54

I agree with ChrisInEdmonton that there is no single answer. However, another option to consider is selling the holdings gradually to keep yourself in a lower tax bracket. Supposing your taxable income can increase by $X while remaining in the same tax bracket, you can sell just enough to boost your income up to the top of the bracket. This can be an efficient middle option. You will still pay taxes on the gains, but by spreading the sales out over multiple years, you can pay a lower tax rate on all the gains, rather than having the gains "spike" into higher brackets with one huge sale. (I'm not versed in the specifics of income/capital gains taxes in Canada, so there may be wrinkles to look into, but I think the basic idea is clear.)

  • Yes I think this makes sense, thank you! I am not too concerned about this as the capital gains are likely not that great, and I would rather just get it over with, but the advice is good! – Behacad Apr 11 '16 at 18:01

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