Gregory Holmes has $150,000 in a portfolio of Canadian common shares that is unregistered, that is, it is not in an RRSP or TFSA.

Gregory Holmes has $150,000 in a portfolio of Canadian common shares that is unregistered, that is, it is not in an RRSP or TFSA. He expects to earn 4% EAR in capital gains on the portfolio during the next year and 2% EAR in dividends. The adjusted cost base of his portfolio is $100,000. His taxable income for the year was $85,000 and he lives in Ontario. Assume 2017 tax rates and that he pays taxes at the time of the sale.

Dividend tax credit:

Gross up = 38%

1. Federal rate = 15.02% x Grossed-up Amount
2. Provincial rate = 10% x Grossed-up Amount

He also has a mortgage on his house that has 12 months left to pay (payable at the end of each month). His monthly payment is $8,156.86 and the rate on his mortgage is 4.00% compounded semi-annually. He has an option to repay the entire mortgage now with no penalty.

a)   Should he sell the portfolio of shares to pay off the mortgage? Justify your answer.

There is an important consideration in this decision that doesn’t show in the mechanical calculations of part a). What is it?