I offer the following services to my clients as part of my mission to provide financial planning and investing advice:
We can offer high-interest Investment Savings Accounts to our clients. These are available through subsidiaries of major Canadian banks, and are CDIC insured up to $100,000. One of the banks that we deal with has 5 subsidiaries, so you could deposit up to $500,000 and still receive full CDIC protection. US dollar accounts are also available, though at lower interest rates. US dollar accounts are not CDIC- insured.
This is a true savings account. There is no locked-in period, and funds will be available on a next-business-day basis, transferred directly to your existing bank account. Interest is calculated daily, and credited to the account monthly. Investment Savings Accounts are available for both Personal and Corporate clients. Personal accounts can be either open or registered (ie RRSP, RRIF, or TFSA). The ISA can be held within an existing self-directed RRSP without the need to open a new plan.
Interest rates change frequently, so please call me for the latest offer. As of 31 January 2019, rates on offer from my favourite supplier are:
|Personal||CAD||$1 - $99,999||1.60%|
|USD||$1 - $99,999||1.65%|
|Corporate||CAD||$1 - $99,999||1.55%|
|$100,000 - $7,499,999||1.70%|
|USD||$1 - $99,999||1.65%|
|$100,000 - $7,499,999||1.80%|
Rates quoted as of 31Jan19. Rates can change frequently. Call me for the latest rates.
Note: due to changes in the regulatory environment, I am currently unable to provide clients with GICs. We hope to get this issue straightened out before too long.
The following table indicates some GIC rates as of 20 March 2019. Rates can change quickly, so please call for the latest rates. Minimum investment is $5,000. All GICs are CDIC-insured.
Rates quoted as of 20Mar19. Rates can change frequently. Call me for the latest rates.
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.↑
Mutual funds can be a very efficient way of getting income from a non-registered account. Many fund companies offer a tax-efficient structure known as T-SWPs across their entire product line.
In a standard mutual fund, distributions paid to the investor are made from the interest, dividends and capital gains that the fund accumulates during the year. The distributions are taxable in the hands of the investor. In a T-SWP, the interest, dividends and capital gains are kept within the fund, and a portion of the investor’s original capital is paid to the investor as Return of Capital (ROC), which is not taxable. Instead, the Adjusted Cost Base (ACB, which can be considered as the investor’s net invested amount) goes down by the amount paid out as ROC.
Note that if the ROC paid out roughly matches the fund’s income from interest, dividends and capital gains, there will not be any actual decline in the value of the investor’s holdings! I like to use the analogy of a deck of cards. The income into the fund goes onto the top of the deck, while the distributions get dealt out of the bottom. As long as the number of cards added to the top of the deck equals the number of cards being taken from the bottom, the number of cards in the deck remains constant.
T-SWPs are generally offered with 5% or 8% distributions, based upon the Jan 1 value of the fund. Since payments are Return of Capital, the ACB will be greater than zero for 12 years (8% T-SWP) or 20 years (5% T-SWP). For all that time the T-SWP will provide extremely tax-efficient income. Once the ACB reaches zero, the continuing income is treated as a capital gain, which itself is very tax-efficient.
Note as well that ROC is not considered as earned income, so it does not affect any means-tested government benefits.
Finally, if the T-SWP is with the fund company’s corporate class structure, other benefits can accrue. Call me to discuss.
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.
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 Example #1:
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!
Charitable Donation Example #2:
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!↑
TFSAs have 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 previous federal government increased the TFSA contribution limit to $10,000 for every person 18 years of age or older, but removed indexing for inflation. The current government reduced the limit to $5,500, but restored inflation indexing. As a result, the 2019 contribution limit is $6,000. If you haven’t made any contributions so far, the lifetime contribution limit is $57,500 in 2018, rising to $63,500 in 2019.
Here are some of the ways in which a TFSA might be useful:
When the previous Conservative government introduced the Tax Free Savings Account, the stated goal was that 95% of Canadians would be able to invest their hard-earned money in tax-sheltered vehicles. Nowadays, that means for most of us we can choose between putting funds into an RRSP or a TFSA.
Which is better? The answer, of course, is it depends! Table 2 indicates a few of the features of the RRSP and the TFSA. I think the big issues are: need for liquidity, tax rate in retirement, and whether you will be subject to the OAS clawback in retirement.
RRSP versus TFSA
|Contributions made with pre-tax money (100% deduction from earned income)||Contributions made with after-tax money (no tax deduction)|
|Earnings within the plan compound tax-free||Earnings within the plan compound tax-free|
|Withdrawals taxed as ordinary income. Could impact OAS clawback rules or low-income GIS.||No tax on withdrawals. No impact on income tested benefits.|
|Can get money into a spouse’s hands through a Spousal RRSP and get a personal tax deduction||Can get money into a spouse’s hands by contributing to spouse’s TFSA. Can also contribute to a child ‘s (18+) TFSA.|
|Must convert to a RRIF by the end of the year when the holder reaches 71. No further contributions allowed (except to spousal RRSP if spouse is younger).||No age limit on contributions|
|Withdrawals can’t be re-contributed||Can re-contribute withdrawals, generally in any subsequent year.|
|Designed for long-term retirement savings as an alternative to a pension plan||Highly flexible; could be used for long-term or short-term savings|
|RRSP/RRIF passes to spouse upon death without any tax consequences||TFSA passes to spouse upon death without any tax consequences. (NB: there is a difference between Successor and Beneficiary!)|
|Upon 2nd spousal death, value of RRSP is deemed withdrawn in full and taxed as ordinary income. Could result in a huge tax bill to the estate.||The rule should be that the value of the TFSA is deemed withdrawn, upon the death of the 2nd spouse, and since withdrawals are not taxed there should be no tax consequences. However, in reality the rules are more complicated than that.|
Perhaps a good strategy would be to put enough money into your RRSP to get your earned income into the next-lower tax bracket, then maximize your TFSA contributions, then top up your RRSP with any extra money. Don’t overlook the potential of a spousal RRSP for income-splitting during retirement.
People are living longer. According to Statscan, I can expect to live until I’m 86, and Carmen can expect to live until 89. Odds are pretty good that one of us might be around to see the magic 100!
You (and your spouse) can likely expect similar longevity. Given this reality – that a couple aged 65 may need to have retirement income for another 35+ years – the financial plans that I prepare for seniors generally plan for no drawdown of capital for the expenses of ordinary living. This gives the plan the flexibility to deal with unexpected expenses, both good and bad, which inevitably eat into your nest egg.
History has shown that a balanced portfolio of stocks and bonds can support a 5% annual withdrawal rate without erosion of capital. (A 6% withdrawal rate used to be sustainable, but that was in an era of much higher interest rates on the bond portion of the portfolio). Chart 1 shows how a pension-style balanced portfolio consisting of 60% equities and 40% fixed income has performed since 1980. (I did not include dividends in this analysis; this approximates a portfolio management fee of 1.5%).
The portfolio has had a 7.6% annualized return since inception. Its returns more recently have been lower than average: the last 10 years have averaged 5.9%, and the last 20 years only 4.5%. These recent returns reflect the sub-par performance of the Toronto TSX Composite Index: 4.4% over the past 10 years, and 4.0% over the past 20 years.
In Chart 2, we have assumed a 5% withdrawal rate from this portfolio every year since 1 January 1980. We never reduce income in bad years, but increase income whenever possible back to the 5% rate.
The blue shaded area shows the account value at the start of each year. It has grown over the past 39 years, from an initial $100K to $193K, despite taking annual withdrawals. The yellow bars show the annual withdrawals. They started at $5000 (5% of the initial $100K), rose to $15,000 in 2001, and have stayed at that level since. The red area shows the cumulative amount that has been withdrawn from the account over 39 years. At $456K, the amount withdrawn has far exceeded the original investment, but the account value has remained intact.
One thing to note in Chart 2 is that the timing at which you begin withdrawals is important. It might seem counter-intuitive, but it is best to start withdrawals at the bottom of a bear market, rather than at the top of a bull market, if you want peace of mind during retirement.
Stock markets were generally strong for the first half of this analysis (1980-2000), and both account value after withdrawals and the size of those withdrawals increased steadily; in fact, withdrawals tripled over that time period! However, the Canadian stock market has been in a profound slump since 2000, and the returns from this balanced portfolio have not been able to keep up with the annual withdrawals. Nevertheless, Chart 2 shows that we have been able to maintain our annual withdrawals even during an extended period of poor equity returns, while the capital value has only declined by about 1/3 in 19 years. It shows that a 5% withdrawal rate is sustainable even over an extended time frame of sub-par equity returns.
The previous section showed that you’re unlikely to ever run out of money in retirement as long as withdrawals are kept at 5% of the account value.
The problem is that Table 3 shows that once you hit 71 years, the required minimum withdrawal from a RRIF is greater than 5%!
RRIF Minimum Withdrawal Schedule
Start of Year
(% of Jan 1 value)
|*Age is at start of year|
The solution is to take that “excess” money that you are forced to withdraw, and deposit it into your TFSA. For example, suppose you are 75, and have a $500,000 RRIF. You are required to withdraw 5.82% of $500K, or $29,100. But the sustainable withdrawal would be only $25,000 (5% of $500K), so you’d contribute $4,100 into your TFSA.
One of the benefits of this strategy is that your TFSA now becomes the source of funds for those inevitable unexpected expenses. Money can be withdrawn from the TFSA without any tax consequences, and re-contributed when finances permit.
The Registered Education Savings Plan (RESP) is a savings account for parents who want to save for the child’s post-secondary education. Contributions to the RESP are not tax-deductible, but growth within the plan, whether interest, dividends or capital growth, accumulates on a tax-deferred basis until the funds are withdrawn. If the child attends university, college or trade school, the growth portion of the RESP’s value is taxable in the hands of the child while the contribution portion is not taxable. Under normal circumstances the child will have tuition, books and related expenses that more than offset any potential tax payable.
The big benefit of the RESP is the Canada Education Savings Grant (CESG). The federal government will contribute an additional 20% of all contributions into a RESP, up to a maximum of $500 each year, until the end of the year when the child turns 17. While there is no minimum or maximum annual contribution limit, it makes sense for parents to contribute $2500 per year to most efficiently take advantage of the CESG. If a parent has been unable to make an RESP contribution in a year, the maximum CESG catch-up is $1000. Therefore, parents should start their child’s RESP either in the year the child was born, or the year following.
Low-income parents may qualify for additional CESG and the Canada Learning Bond.
The maximum lifetime CESG is $7200; the maximum lifetime parental contribution is $50,000.
As with all government programs, the RESP is filled with all kinds of rules and regulations. This is particularly true if the child doesn’t continue their formal education after high school. Call me if you need more information about your specific circumstances.
Most grandparents want to help their grandchildren get off to a good start in life. In today’s world, post-secondary education - whether at a university, career-oriented college, or an apprenticeship - is a necessity.
A Registered Education Savings Plan (RESP) is an excellent way of saving money for a grandchild’s future education. The big benefit is that the federal government kicks in an additional 20% on top of your contribution, up to a maximum of $500/yr. You’ll maximize the fed’s contribution if you contribute $2,500/yr to the RESP.
If the parents and both sets of grandparents are all contributing to a child’s RESP, their cash outlay only needs to be $69.44 per month to maximize the CESG grant. This should be affordable for most families.
While a child can be beneficiary of multiple RESPs, the federal maximum grant applies to the sum of all contributions to all the plans.
As grandparent, you can set up an RESP with you as subscriber and the child as beneficiary, or you can have the parents set up a plan in which you are a contributor.
We used the second method for Zoe’s RESP. Kelly-Anne is the subscriber, and we contribute to Zoe’s RESP. The advantage is that KA’s parents, and of course KA and David, all contribute to the same plan, and we can keep track of total annual contributions.
The Registered Disability Savings Plan (RDSP) is a federal program designed to help people with disabilities achieve some measure of financial independence. The federal government assists by providing matching Grants for contributions made by others into the plan. If family income is very low, the federal government also has a Bond that does not require a matching contribution.
A person with a disability should consider opening an RDSP if they are a Canadian resident, have a social insurance number, receive (or eligible for) the federal disability tax credit, are under age 60 (no minimum age limit), and desire to build up long term savings. The federal and Alberta governments fully exempt the income and assets of the RDSP when calculating eligibility for government financial assistance programs.
The annual Grant limit is $3500, and the lifetime maximum is $70,000. The federal government will contribute up to 3x the amount contributed by others into the beneficiary’s RDSP.
The Bond limit is $1000 per year, with a lifetime maximum of $20,000. Family income must be less than $25,500 in order to qualify for the full Bond; after that level the size of the Bond is pro-rated.
There is no annual contribution maximum. However, the lifetime maximum is $200,000. Earnings in the plan grow tax-free until withdrawn from the plan.
As always with government programs, there are a lot of rules and restrictions placed on the RDSP program. However, if you or a loved one qualify, the RDSP is a great way to build up personal savings that can be later used for any purpose whatsoever.
Please contact me at firstname.lastname@example.org if you’d like further information.↑
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) from our RRSP/RRIF, 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. The following chart 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 $60,000 RRSP catch-up loan in February, with the proceeds invested in accordance with your time horizon and risk tolerance. If you're in the 36% tax bracket, this will give you a $21,600 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 $38,400. You make 9 monthly payments of $4,447.47 and you've retired the loan in time for the following February.
Your invested amount is $60,000; your out-of-pocket cost (including interest) is $40,027.23.
But wait! There's more. In this example, you have become used to paying $4,447.47 per month. Why not continue the practice for the other 3 months when loan payments aren't required? That's another $13,342.41 per year. If also put into your RRSP, it will generate a further $4,803.27 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.↑
Having a will is important. This is true even if you are quite young; the possibility always exists that you could be hit by a bus while minding your own business.
The will describes in detail how you want your assets to be distributed upon your death. It should be completed by a lawyer who has spent enough time with you to understand what you want. Unfortunately, in some cases the completed will ends up with language that doesn’t represent your wishes, or has an ambiguity within it that can create problems when you are no longer around to resolve them, or is simply out of date.
An arms-length executor (ie not someone who has a financial interest in the will’s contents) can review your will to make sure that the provisions are clear and what you want.
I will confess that I’ve never had the dubious honour of being named the executor of anyone’s estate. I have, however, been involved in helping executors finalize an estate and distribute the assets in accordance with the will. My conclusion is that naming a relative or friend as your executor is something that you shouldn’t do to even your worst enemy! The kids can sometimes be bad enough, but once the spouses of the children get involved all h**l breaks out all too often.
So I strongly recommend using the services of an arms-length executor, such as a trust company, to handle the duty. They have done it before, and know the ropes. Their fee is a bargain.
Carmen and I will be using a trust company as our executor. Although we don’t have a huge estate, we do have property in Canada, Nicaragua and Costa Rica. Our kids are in Ontario and California. We’ll let the trust company sort it all out.
I’m finding that as clients get older, many want to simplify and consolidate their estate. I’ve had discussions with several trust companies, and can now offer you a comprehensive estate planning package that includes review of your will, corporate executor services, and institutional portfolio management of your estate, both before and after death. This includes management of any testamentary trusts that might be set up under the provisions of the will. This comprehensive service requires a minimum estate value of $2 million, but we can mix-and-match services from different suppliers for those with somewhat smaller estates.↑