I offer the following services to my clients, in addition to financial planning and investing advice:
I offer the following services to my clients, in addition to financial planning and investing advice:
The following table indicates our GIC rates as of 28 Jan 2014. Rates can change quickly, so please call for the latest rates. Minimum investment is $5,000. All GICs are CDIC-insured.
|Financial Institution||1 year||2 years||3 years||4 years||5 years|
The Canada Pension Plan, Old Age Security, and any defined benefit pension plans that you might have form the heart of your retirement income. All of these income streams have a lifetime guarantee.
If you don't have a pension plan, a life annuity can serve as a substitute. Life insurance companies offer annuities. In exchange for a lump sum, the insurance company contracts to provide you and your spouse a fixed, continuing, monthly income for the rest of your lives. The payments are ultimately guaranteed by Assuris, the insurance equivalent of CDIC. Assuris guarantees the deposit up to $100,000. This is equivalent to the CDIC guarantee for GICs.
Pension plans and government benefits have no estate value; nor does an annuity.
At current interest rates, $100,000 placed into an annuity will give a 65-year-old male an indexed lifetime income of around $500/mo. The more practical option may be a joint last-to-die annuity, with payments rising over time with inflation. $100,000 placed into a joint annuity indexed at 2% will give a couple both aged around 65 an initial income around $430/mo (rising by 2% each year).
These quotations illustrate the incredible value that a government pension offers to a civil servant. Angela recently retired from teaching. She qualifies for an indexed $4,300/mo pension. Her sister, Adele, worked as an interior designer, and has no pension. Adele needs to have a $1,000,000 RRSP to get an annuity income that is equivalent to Angela's pension.
TFSAs have now been around since 2009. They are the greatest innovation for financial planning since the introduction of RRSPs. For some people, they may be more appropriate than RRSPs.
To summarize, a TFSA is an account in which you can invest after-tax dollars. In return, all growth, whether through interest, dividends, or capital gains, can be withdrawn without incurring any tax liability. Unused contribution room is carried forward indefinitely. The full amount of withdrawals can be put back into the TFSA in future years. Account holders need to be aware that re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
The 2015 TFSA contribution limit is $10,000 for every person 18 years of age or older. If someone hasn't made any contributions so far, the lifetime contribution limit is $41,500 in 2015. Going forward, the annual contribution limit will remain fixed at $10,000 per year.
Here are some of the ways in which a TFSA might be useful:
You can hold your own mortgage in your self-directed RRSP. You can select your own terms and conditions. Certain fees also apply. This is an often-overlooked source of financing. It's also a good way of gaining fixed-income content within a self-directed plan.
It's not for everyone, but give me a call to find out if it is suitable for you.
Check out my article Give Yourself Your Mortgage! in Canadian MoneySaver!
Mortgage Insurance vs Personal Life Insurance
I do not like mortgage insurance in general. It is "declining term" insurance, in which the premiums remain fixed, but the face amount goes down. Insurance needs typically increase, not decrease, as one gets older! The unit cost of declining term insurance rises exponentially as the face amount gets smaller!
I particularly don't like mortgage insurance offered by the bank. Why? …
My analysis is similar to that of CBC Marketplace:
Segregated funds have best application for those who would have trouble passing a life insurance exam, and for the self-employed for whom creditor-proofing is important.
Check out my article Stock Market Insurance in Canadian MoneySaver!
Temporary (or Term) Insurance protects against a risk for a set period of time. House and car insurance are examples of temporary insurance; we buy these to gain protection for the following year.
Your future earning power is your major financial asset. Insurance that protects this asset is one of the essential cornerstones of a good financial plan. While Group coverage is good, you might become independent in the future. It is prudent to get individual insurance while in good health — it's cheaper than you think!
The term chosen for insurance needs to match the term of the risk; for example if we want life insurance protection to cover the period while children are growing up, we will typically need 20 years of coverage. So we should get "20 year term".
If you have "mortgage insurance" as part of your mortgage payment, and you've had the house for a while, you may find that private life insurance is cheaper than the bank-supplied mortgage insurance.
Term insurance should be "renewable" and "convertible".
The cost of insurance upon renewal is very high. When a policy comes up for renewal, you can either renew, or shop for a new policy. If you are in good health, it is cheaper to take a medical exam and buy a new policy. If in bad health, you renew. This characteristic, known as "adverse selection", means that the insurance company is stuck with a pool of bad insurance risks who renew, while the good risks leave. This is a vicious circle, and the insurance companies have had to dramatically increase their renewal rates to compensate for the risk.
The renewal dilemma works for Term Insurance offered by professional societies and unions too. Once you are over the age of 40, the plans sponsored by such societies as APEGGA are more expensive than private coverage. This is particularly so if you have better-than-average health! The following chart shows the difference between the Canadian Council of Professional Engineers (CCPE; umbrella group for provincial associations such as APEGGA) group term policy, and standard private term insurance.
Universal Life Insurance
UL is appropriate for those who need permanent (lifetime) insurance as opposed to temporary (term) insurance. Permanent policies build up a cash reserve that can fund the policy in later years, permit premium holidays, or provide cash when needed for emergencies.
While an estate passes tax-free to a spouse, Revenue Canada wants its cut when an estate is to pass to a child or others. All assets are deemed sold at fair market value at time of death; as a result most assets are taxed at your highest marginal tax rate.
UL is very useful when you want to leave a substantial estate to your heirs or to charity. The insurance proceeds pay the tax bill, leaving the estate intact. UL also is useful if there are multiple heirs, and a single large illiquid asset such as a family business or cottage. One child can receive the cottage (plus sufficient cash to pay the taxes due), while the other children receive cash proceeds from the insurance policy.
The UL policy owner assumes an interest rate risk. The cost of the policy is very sensitive to this interest rate assumption. If returns are better than projected, the cash reserve builds up, increasing the owner's options. On the other hand, if returns are less than projected, the owner may have to increase the funding of the policy to keep it in force. Therefore, you always want a UL projection to be made on a very conservative basis - never more than 6%!
UL can be very cost-effective, even when used to protect against a temporary need. The next chart shows the net cost of a UL policy that I designed to be fully funded at age 65. The net cost is premiums paid, less the cash surrender value. At age 65, the cash surrender value is far higher than the cost of 20 years' premiums!
If You Have 2 or More Kids, You May Have an Estate Problem
Canadian tax law says that when one member of a couple dies, the estate is passed on to the surviving spouse without incurring any tax problems. Problems can arise when assets get passed to the next generation, even if those assets are held in joint custody.
A major source of difficulty arises if you have a substantial illiquid asset like a second home, cottage, or business that you want to pass on to one of your children, while giving the other children financial assets like your RRSP or investments. The tax law says that all assets are deemed to be sold on the day of death. This triggers capital gains on the appreciation of the property, and the final estate tax bill can be substantial. Suppose you estimate that the capital gain on your property and investments is going to be around $500,000. The taxable capital gain is half that, and the tax rate on the estate will be 39%. The tax bill will be just about $100,000.
The executor will sell the financial assets in order to pay the taxes, and then settle the estate from the residue in accordance with your will. The child who inherits the property gets the asset free and clear, but the other children will likely get far less than you had planned, and less than they had expected. Not good!
The solution is permanent life insurance in sufficient amount to pay the anticipated tax bill. The proceeds from a life insurance policy are not taxable, and the beneficiary can be either the estate or the children (probate fees are not an issue in Alberta). You basically have 2 choices: you can let the kids fight it out once you're gone, or you and your spouse can plan ahead with purchase of a joint last-to-die permanent insurance policy.
Note: Due to increases in the regulatory burden, I can only offer RRSP loans to those wanting to make substantial catch-up loans - a minimum of $25,000.
How big should your RRSP be? A rule of thumb that I developed quite some time ago is that annual withdrawals from a retirement plan should not exceed 6% of the capital. If we reverse this, and say that we need pre-tax retirement income of $5,000/mo ($60,000/yr), then we'll need to have $1,000,000 in our RRSP upon retirement.
When saving for retirement, the two most important parameters are time and rate of return. Table 1 indicates the monthly contribution necessary for someone to amass $1 million in savings. As is evident, the task is easiest when time is on your side!
One way of getting time on your side is through an RRSP loan. It's a quirk of human nature, but many people find it easier to make regular payments on a debt than to put money aside for savings.
An RRSP loan puts the investment to work now, while you pay off the loan later. An RRSP loan can cut the numbers shown in Table 1 down by as much as 1/3 as long as you use the tax refund to pay down the loan principal, and you pay off the entire loan within a year.
Here's the math. Suppose you take out a $30,000 RRSP catch-up loan in February, with the proceeds invested in accordance with your time horizon and risk tolerance. If you're in the 33% tax bracket, this will give you a $10,000 tax refund, which you'll use to pay down the loan principal.
You have chosen a 1-year amortization of the loan, and have deferred payments until May. By that time you'll have received your tax refund and paid down the loan, so the outstanding principal is only $20,000. You make 8 monthly payments of $2,540.80 and a small 9th payment, and you've retired the loan in time for the following February.
Your invested amount is $30,000; your out-of-pocket cost (including interest) is $20,532.50.
But wait! There's more. In this example, you have become used to paying $2540.80 per month. Why not continue the practice for the other 4 months when loan payments aren't required? That's another $10,000 per year. If also put into the RRSP, it will generate a further $3,300 in tax refund!
You can scale these numbers up or down, but as long as you repay the loan in a year you'll get that big boost to your RRSP savings.
An RRSP loan is not without its dangers, of course.
Note: Due to increases in the regulatory burden, I no longer offer investment loans, even though they can be useful for some people. In addition, the "Investing for Income" strategy is no longer viable because lenders currently do not permit mutual fund distributions to be paid in cash when the portfolio of mutual funds is used as collateral for the loan.
Low interest rates make an investment loan a viable strategy for building wealth. Check out my two MoneySaver articles. The June 2001 issue covered borrowing to acquire an income-producing investment ("Investing for Income"), while the July 2001 article covered borrowing for long term growth ("Investing for Growth")
How can we participate in Canadian resource development, and save taxes at the same time? Through an investment in flow-through shares!
Junior oil and gas and mining exploration companies can "flow through" their Canadian exploration expenses (CEE) to their shareholders, who can deduct those expenses against their other income. In addition, the federal government offers a 15% tax credit on mining exploration expenses over and above the CEE.
What does this mean to you?
Here's a hypothetical example: Say you have income of $150,000 and a marginal tax rate of 39%. You place $10,000 into a flow-through offering that provides $9,000 of CEE. Your taxable income will drop to $141,000, lowering your tax bill by $3,510. The 15% federal tax credit provides additional tax relief of $1,350, for a total tax saving on your tax return of $4,860 on an investment of $10,000. You also still have $10,000 worth of junior mining shares that have the potential to rise in value.
I prefer mining flow-throughs to the energy-based ones, primarily because the super flow-through feature is only available for mining exploration. My favoured issuer provides excellent opportunity and investor-friendly features. The limited partnership will rollover in 18 months, an exceptionally short time for flow-through entities.
All junior mining shares purchased by the partnership must be with companies listed on the TSX or TSX Venture exchange, providing excellent liquidity and transparency. The geological consultants that the general partners have hired have an excellent global reputation.
Please give me a call for further information.
All-Inclusive Banking Service
One of Canada's largest financial services firms has introduced a unique banking service that I can offer to my clients. This service allows you to combine savings, chequing and borrowing into a single account. Account access is excellent, with a debit card, ATM privileges, cheques, telephone and internet banking, and MasterCard.
Most importantly, it includes your mortgage! Any bank deposits that you make are immediately credited against your mortgage balance, lowering the interest that would otherwise be payable.
By making use of this type of banking/mortgage account, clients are reducing the length of their mortgage commitment (and therefore the amount of interest expense) by 25-50% with no change in the cash used to pay the mortgage.
The concept, though new to Canada, was started years ago in Australia and is now a proven way to bank. It commands about one third of all new mortgage loans in Australia.
The federal government introduced a significant change to charitable donations a few years ago. When marketable securities like stocks or bonds are donated to a charity, the donor will receive a charitable donation deduction for the market value of the security, and there will be no capital gains tax applied on the transaction.
Bill and Melinda Gates have one; so can you. I'm talking about a Family Charitable Foundation. Doesn't something like The Jones Family Charitable Foundation have a nice ring to it? Kind of makes you feel you're right there with Bill and Melinda, doesn't it! One of the mutual fund companies - Mackenzie - has made it easy for you to establish your own personal Charitable Foundation without requiring Gatesian gobs of money.
With a Charitable Foundation, you receive a donation tax credit for the money that you put into the Foundation as seed money. Each year, the Foundation then proceeds to distribute the investment earnings of the fund to the charities of your choice. The initial capital remains in the Foundation to continue to grow. Note that you receive the tax slip when you put money into the Foundation, not when the Foundation distributes the earnings to the charities.
Suppose you establish The Jones Family Charitable Foundation through Mackenzie's facility. You fund it with an initial contribution of $10,000 (cash or marketable securities), and set a distribution policy that 5% of assets will be disbursed each year to your local United Way (the choice of charity is up to you, but 5% is the maximum level of allowable disbursement). You will receive a donation tax slip for $10,000 and the United Way will receive $500 as the earnings from the Foundation.
You can add funds to the Foundation each year, receiving a tax slip for each contribution. In turn, the Foundation will be in a position to distribute enhanced funding each year to your designated charities. Furthermore, the Foundation is separate from your estate, so your children can continue to build your Foundation up to become a real force for good in your community.
Are you interested in bringing order to your charitable giving, and creating a legacy? Please give me a call to discuss how we can establish "The (your name here) Charitable Foundation".
Charitable Donation Examples
John Smith has a generous heart. He heard that his local hospital was making a special fund-raising drive in order to obtain some new equipment. John wanted to make a substantial contribution to the cause.
He had 1000 shares of ABC Resources that he had purchased for $10/share. The market value rose to $100. If he sold the shares for proceeds of $100,000, he would have had a taxable capital gain of $45,000 (half the capital gain of $90K). He would need to keep $17,500 aside to pay the taxman, so he would only be able to donate $82,500 to the hospital fund.
Instead, John donated his 1000 shares of ABC Resources to the hospital, and the hospital subsequently sold the shares on the market. The hospital received $100,000 from the sale, and John received a donation tax slip for $100,000. No capital gains tax was payable.
By donating the shares instead of cash, the hospital received a larger donation. John had a warm feeling in his heart and he received great accolades for his generosity. The bigger donation tax credit was a bonus!
Alice Wilson has a charitable heart, and also wanted to contribute a substantial amount to the hospital fund.
Unfortunately, she had a somewhat smaller wallet than did John Smith. She heard, however, that it was possible to use Flow-Through shares to create something called "The Triple Dip".
If you read my earlier entry about Flow-Through Shares, you'll know that a Mining Flow-Through gives the investor a write-off of their initial investment against their income (same as an RRSP contribution), plus an additional 15% tax credit that is applied directly against taxes. Depending upon the investor's tax bracket, the tax benefits are equivalent to 50¢ for every dollar invested.
Alice purchased $10,000 of a Mining Flow-Through limited partnership that was scheduled to dissolve after 18 months, with the partnership interest converting into units of a mutual fund. She was able to get a tax refund of $5,000 the following April because she had made this investment.
18 months rolled by. The limited partnership converted on schedule into the mutual fund. The venture was only moderately successful, and Alice received $10,000 in mutual fund shares - the same amount as she had initially invested.
Alice had a problem. She wanted to donate the full $10,000 to the hospital fund, but if she sold the mutual fund she would have a big capital gain. One of the rules of flow-throughs is that the Adjusted Cost Base of the flow-through shares is zero. Should Alice sell her shares, she would be subject to capital gains tax on half her entire proceeds, or $5,000.
Her solution: she donated the mutual fund shares to the hospital fund! The hospital sold her mutual fund for proceeds of $10,000 and placed Alice's name on the plaque of Special Benefactors. She received a donation slip for $10,000, and the following April got a tax refund of $3,000 because of the donation tax credit.
Alice made a real difference to the hospital through her generosity, but her after-tax cost was only $2,000 - well within her annual budget for charitable donations!