H.M. Wise Asset Management

Value Added Services

I offer the following services to my clients, in addition to financial planning and investing advice:


GICs  

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
Laurentian Bank 1.45% 1.75% 2.00% 2.35% 2.60%
Royal Bank 1.30% 1.40% 1.80% 1.60% 2.20%

Tax Free Savings Account  

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 In return, all growth, whether through interest, dividends, or capital gains, can be withdrawn without incurring any tax liability.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:


Self-Directed Mortgages  

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!


RRSP Loans and Investment Loans  

RRSP Loan

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!

How to Become a Millionaire

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.

Investment Loans

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. Email me for copies of 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".


Other Opportunities  

Flow-Through Shares

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.

Charitable Donations

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.

Charitable Foundation:
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
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!

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!


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