Trader – Adviceon Library

Is your RRSP ready for you to retire?

The Canadian government regulates the Registered Retirement Savings Plan (RRSP) program, allowing it to have unique tax benefits as you save for your retirement. Annual RRSP contributions can reduce the amount of income tax you pay in the year of your contribution. These monies invested annually grow on a tax-deferred basis, and tax is only paid at the time of withdrawal. RRSP Planning is a very integral part of your investment planning.

Have a look at the graph below to see how RRSP money accumulates over time based on a maximum annual investment.

Your investments grow tax-free Your RRSP investments accumulate within the plan tax-free, as do any addition to your contributions, including capital gains, interest, dividends, and any other growth via dividends or distributions paid out on an investment fund. The longer your money stays sheltered from the taxman, the greater the tax-free accumulative earning power of your investment. However, taxation occurs once income is withdrawn from your RRSP.

Planning Together – Spousal RRSPs and Tax

A spousal RRSP allows a couple to place assets in the lower-earning spouse’s registered account. The benefit of this manoeuvre enables the account owner to withdraw more in retirement at a lower tax bracket while retaining spousal RRSP ownership, controlling the choice of the RRSP investment vehicles. The owner also governs when withdrawals are made and pays the income taxes upon withdrawal (if the funds have been in the account for three years).

What happens when the RRSP account holder dies?

For estate planning purposes, upon the decease of the account holder, the RRSP is paid out to the beneficiary designated for that account.

How Much can you contribute to your RRSP?

Your Contribution Limit To find out your allowable RRSP contributions you are allowed to deduct for your income taxes, check Last Year’s Deduction Limit Statement on your latest Notice of Assessment or Notice of Reassessment. Canada Revenue Agency (CRA) establishes guidelines for the minimum and maximum overall yearly amount a person is eligible to contribute to their RRSP. The basic formula used to determine a taxpayer’s eligible contribution is as follows: 18% of earned income minus any Pension Adjustment = the eligible contribution amount.

Who can contribute to an RRSP? All Canadian taxpayers with “earned income” in the previous tax year, or those having unused contributions carried forward from previous years can contribute to their RRSP. A person is eligible to make contributions to their RRSP until December 31 in the year they reach age 71, provided that they have contribution room.

Two methods of contributing to your RRSP You may invest by purchasing a lump sum investment prior to the deadline. The alternative is to invest on a monthly basis using dollar-cost averaging. You can always top up your RRSP contribution (up to the allowable limit), just prior to the deadline year by year.

The RRSP limit Table

Source: CRA

Revised: January 2021

Do your heirs expect to inherit?

Do your heirs expect to inherit an old homestead property, a family cottage, a residence, your farm, an art collection, furniture, or business shares? They may have to be liquidated by the estate, perhaps at a loss, to pay any existing tax liability. Life insurance proceeds may help to side-step probate, or estate administration tax, and can cover any estate liabilities that could impinge on bequests that you want to make to your loved ones.

Make sure that your gifts stay in your family. Deemed dispositions of capital assets at death occur even if an asset is willed directly to an heir. A capital gains tax liability remains in the deceased’s final tax return and reduces the value of the estate.

5 Methods to reduce taxes that will be due upon your death.

Use the spousal (and disabled child) rollover provisions of RRSPs or RRIFs.
Leave assets that have accrued capital gains to your spouse to defer tax.
Leave assets without capital gains to other (non-spouse) family members.
While you are alive, gradually sell assets having capital gains, to avoid dealing with the capital gains all at once in your estate.
Purchase life insurance to cover capital gains taxation in the estate.

Taxes may be payable on gains.

Income-producing real estate, a second residence, or cottage, and any other assets left to surviving family members, such as shares of a business, of stocks and investment funds may face capital gains taxation.

You may also want to consider charitable donations to lessen taxes in the estate. Hire an estate planning lawyer and make sure your Will is updated and includes your estate planning directives.

TFSAs can help transfer money to your heirs.

Money accumulated in a TFSA does not attract taxes at the time of death. If you want to create increased transferable after-tax wealth, consider moving money into TFSAs from non-registered investment accounts. Note: It is important to get an Advisor’s guidance, and perhaps an accountant to implement this in a careful tax plan.

Be careful, though to also consider taxable implications when considering selling non-registered assets. Ask your tax advisor if you will be triggering a taxable gain? Possibly utilize TFSAs to their maximum potential, and monitor the comparative tax impact of transferring wealth from RRSPs/RRIFs to heirs of the estate.

Invest by paying yourself first

Some people never pay themselves first.

After most people have paid for their necessities, there seems to be little left over for investing.

Determine your perspective on investing. Always spending and never investing is a serious dilemma often based on a certain mindset that can easily change for the better. Do you view yourself as a consumer or an investor?

If you see yourself as a “consumer”, you may experience that there is never enough paycheck left at the end of the month for investing. However, is this caused by a lack of income or your own spending patterns? The first barrier to investing is a “perceived lack” of investment capital, often not reflecting reality. Unfortunately, what we think often becomes our reality.

Investors have personal discipline Conversely, “Investors” take an honest mathematical look at their expenses, separating discretionary income from what one needs to live on, knowing that impulsive buying decisions, even to purchase many small things on sale can add up.

This disciplined viewpoint allows them to have money to invest. Once paid, the first “consumption” decision can be to purchase an investment suitable to their goals and objectives. The rest of their paycheck is then spent with no worries on required consumption for the rest of the month.

Investors get good advice, and then act. Many people are impatient or confused when it comes to the science of investing. True “Investors” all have a key characteristic that makes for success — taking the right action with professional advisory assistance. They also understand that without experience and knowledge, investments decisions can be made in haste, and potentially destroy an otherwise good investment plan.

What are the 5 Laws of Wealth Creation?

Here are five wealth creation principles that will remain true forever.

1. You must get time on your side by investing early in your lifetime. Time adds value to money. Delayed investing shortens your time, which increasingly requires the compensation of higher and higher returns to meet your retirement goals. Examine the following graph to see how time affects your investment growth.

Source: Financium

2. Your investment growth must exceed inflation. If you earn 8% on a $10,000 investment per year, over 20 years with inflation at an average 4% your actual investment will grow to $457,620, but your actual buying power in the future will only be $208,852 (while your money is growing, inflation is increasing the cost of goods). The graph below indicates how inflation might affect your investment’s future buying power.

3. Algebraic factors apply to investing. You can indicate your multiple on capital invested by applying mathematical rules, factoring in both time and rate of return.

· Double Your Money: Rule of 72. To find out how many years it will take to double your money, divide 72 by your average annual rate of return.

· Triple Your Money: Rule of 113. Divide 113 by your average annual rate of return to see how many years it will take to triple your invested money.

4. Taxation can reduce your investment returns.

Every dollar of tax retained through tax-planning is a dollar earned.

· Deduct what you can against your income. Business owners have the advantage of deducting many operating expenses from their revenues.

· Contribute to registered investments. For both business owners and employees, registered investments may allow deductions against earned income and may offer tax-deferral.

· Defer as much taxation as possible. The beauty of registered investments is that they allow some tax planning benefits depending on your income, and capital available to invest.

5. Become an active investor. It is important to begin investing early in life when you get your first job or begin your career. By beginning early, you can have the above stated mathematical laws of doubling and tripling your money working for you. Many wait far too long before investing and lose the value that time can add to a good investment portfolio by increasing the future accumulation of investment money.

The following table will let you know just how much you will need to invest to accumulate one million dollars.

Source: Financium

What is a Power of Attorney (POA)?

If you were to have a stroke, heart attack, or severe operation—a disability to which you could not take care of your affairs, who would take over? What if this was the last day you could make a mindful decision on your behalf?

You transfer directorial powers over your affairs to a Power of Attorney

In such a situation, a Power of Attorney (POA) allows people you trust to manage the prescribed affairs of your life.

Without a POA, your family though ready to pay your bills, and help manage your bank account and your investments, for example, may need special court approval to act for you. They could face a bureaucratic nightmare to acquire authority to pay your bills (from your provincial public trustee).

• Clarity can be defined. A POA leaves no room for misunderstanding the range of authority over your assets. You may need to set restrictive clauses in a POA that addresses your unique concerns.

• You will give up the powers of your signature The POA relinquishes the control of your signature and all the authority associated with it. Unless it states otherwise, the attorney may use a POA immediately upon signing.

• It must be witnessed. Improper witnessing annuls legal completion and sets the POA up for contention. Thus make sure the document is witnessed correctly.

• Be careful of restrictions you may not want to be included. Some broad-form POAs include optional clauses often left included, whereas they may not be applicable. These may have regulations on the attorney you may not want to impose.

• You may want to restrict beneficiary changes. If you want the attorney to have power over changes of beneficiaries to life insurance or investment assets, make that clear. If not, clearly restrict the right to change beneficiaries.

A warning which may or may not apply to you

Unfortunately, once authorised with your directive powers, an attorney could feel it is their privilege to become an “empowered benefactor” of your (you, the donor’s) estate once they lose capacity. So, having a lawyer articulate your specific wishes in your Power of Attorney documentation is a good idea.

To empower and entrust another with your authority, may be the last time you can make a responsible decision on your behalf, so make it carefully.

Where significant wealth is involved, consider a POA explicitly designed to give powers to assist in governing your financial affairs.

Business plans must include retirement planning

Many business owners focus on their business and must remember to invest seriously for retirement.

The Retirement myth of the Entrepreneur: Most business owners believe their company will provide investment capital when sold, or if passed on to the next generation, a salary or dividend payments. For some, their financial stability rides on the company’s future success.

Make hay while the sun shines. Don’t be overly optimistic that your company will succeed and create good revenue forever. Planning becomes necessary when a business represents an estate’s significant value. You may make hay while the sun shines, but be sure to stack a lot of it away for future use.

Many are not convinced that they need to plan their estate or the succession of their business. Despite the economic importance of their business, most business owners are still determining the tax liability if both spouses were to die. An estate plan can ensure that these taxes will be paid from one or a combination of the following sources:

Life insurance
The business, from cash flow or liquid assets
RRSPSs/RRIFs (taxed when both spouses die)
TFSAs
Sale of real estate or a significant asset.
Non-registered investments

We are all ageing despite our business successes. Please take the time to do some essential estate planning to figure out who will take over the company and where your retirement income will come from. Review your personal and corporate-owned life insurance, disability coverage, and key-person insurance. Revise or complete both your will and power of attorney.

In some cases, paying relatively small life insurance premiums can entirely solve the estate’s future capital gains tax problems or generate capital to replace the tax that may be payable in your estate. It is essential to purchase insurance currently versus when older or health declines. If your health is a concern, ask your life insurance specialist if he can search the market for you.

Life insurance can eliminate company debt and help a succeeding son or daughter with new business capital. Finally, it can equalise the division of your estate among all of your heirs.

Note: Life and disability insurance taxation vary in accord with the strategies used by the life insurance specialist, changing legislation, and hiring an accountant to guide effective business strategies relative to succession or an estate.

Considerations when designing an Estate

Estate planning is a process that allows one to determine how their assets will be distributed upon death. As we prepare to pass our lifetime assets to our heirs, there are key components of an estate plan that should be given careful consideration.

The fundamental component of any estate plan is the Last Will and Testament commonly referred to as the will. It is also important that an individual maintains and updates their will and two powers of attorney documents: 1) for property such as real estate, bank accounts, and investment assets, and 2) a power of attorney for personal health care.

Review your estate planning documents

Life changes can affect the integration of each of the above strategic solutions. Therefore, it is important to review the above aspects of an estate plan every three to five years. For example, there may be a change in family structure, so beneficiaries may need to be reviewed. Or, if you remarry, your existing Will may automatically become nullified.

Your net assets can change Keep an eye on your net worth. Other life changes that require updating your estate plan include changes in your net worth, or if the value of your residence or investment changed. If you have significant changes in net worth, have your accountant make sure that the best tax arrangements are in place.

Business strategies to protect your net assets If you are the shareholder of business assets, make sure that a buy-sell agreement is in place in the event of your death or disability, assuring that every owner is covered with life and disability (income replacement) insurance.

An estate plan may benefit from using formal trusts to reduce taxes. Life insurance products such as segregated funds and term funds can also be used to circumvent or minimize probate or government estate administration taxes (EAT) or attending legal fees. In most cases when a beneficiary is named in a life insurance policy, proceeds will pass and the capital in most cases will transfer on a tax-free basis to beneficiaries, thus avoiding probate or EAT scrutiny.

For an estate plan seeking to transfer large capital assets to named heirs, it would be wise to discuss these capital-transfer techniques with an accountant and/or tax lawyer.

How can I minimize the need for estate probate?

There are a few tactics whereby you can reduce the need for an estate to be probated by the government:

• Defer possible probate by holding assets jointly. Probate fees may be charged when that asset is transferred later through the will of the second spouse.
• Establish a person as a beneficiary on your life insurance policies independent of the estate. This way, all monies pass to the heirs tax-free. If the estate needs probating, this portion of the assets will not be included in the estate, as the death benefit will flow directly to the heirs circumventing scrutiny. Life insurance strategies are excellent financial tools to circumvent probate on larger wealth transfers to heirs. Family wealth can be positioned to pass through life insurance policies, delivering tax-free benefits without probate. Any tax due on policy investments will be taxed to the estate of the deceased policy owner. This method has frequently been used to transfer inter-generational estate wealth in the millions. Your advisor can keep you up to date on potential taxes in the estate.
• Name your beneficiaries on your registered investments such as RRSPs and RRIFs. Insurance products may allow you to side-step probate in this way. To protect themselves, banks and trust companies will probably require probate or a letter of indemnity from the estate’s lawyer if the assets are significant. If your spouse is your beneficiary, consider a secondary beneficiary should your spouse die at the same time you do.
• Consider setting up a spousal testamentary trust in your will to avoid double probate. When the second spouse dies, the assets can be distributed via the trust directives as opposed to a will.
• With your spouse, set up mutually-owned property as ‘joint tenants with rights of survivorship’ to transfer these assets automatically outside of the will.

Once a will has been probated paid the estate administrative tax (EAT), the executor can start transferring assets as directed by the will. Some assets can be transferred easily within a short period of time. Others have to wait until the estate expenses have been paid, including any final income taxes due to Canada Revenue Agency (CRA), after which they will issue a tax clearance certificate.

How do I make financial agreements with my fiscal partner?

When establishing a financial strategy involving other stakeholders, such as paying down a mortgage, develop a written plan that all parties agree on. You can create written point-form agreements for each to sign in investing, registered investment planning, debt repayment, etc.

When determining your goals, it is essential to think positively and avoid language such as, “We will never have enough to retire,” “We can’t seem to get ahead,” or “This debt is killing us.” Statements like this often become self-fulfilling.

Instead, it is essential to design an action plan and start working towards it with all the stakeholders, such as your spouse or partner, referred to as your fiscal partner. Write your goals out regarding financial concerns such as:

Reduce or eliminate debt. One of the encumbrances of investing for retirement is that you may be servicing too much credit card debt, much of which is interest. Both fiscal partners may have credit cards doubling the family debt load and vastly reducing your net worth. Thus, paying down the debt on all credit cards makes sense, starting with those with the highest interest rates first. Aim to be 100 % debt-free of abnormal debt-weighting in your net worth statement where possible (mortgages and car payments are typical).

You and your fiscal partner will appreciate the new clarity and increased financial freedom this gives. Slavery to debt repayment is financial bondage and will increase fiscal-related emotional stress on responsible partners.

You can start or maximise your monthly investment plan. Your plan will depend on your income and expenses. If you are young, begin investing now. Any given sum can frequently double depending on time and interest rate growth. At 6 %, it can double every 12 years; at 4 % every 18 years. Divide the interest rate into 72 to get the years until doubling occurs.

This simple mathematical illustration reveals the importance of beginning to invest while you are young. If you are near retirement, you may ascertain that you need to ramp up your investing, increasingly over the fewer years you have. The average Canadian retires now at age 62. Become aware of your retirement options, choosing agreed strategies with your partner beforehand.

Reallocate assets as you near retirement. A portfolio still invested in nearly 100 % equities near retirement is risky. To reduce stock market risk, a portfolio may have some fixed income (government bonds, corporate bonds, safe mortgages, and real estate)—your partner’s risk tolerance while investing.

Take advantage of tax-saving vehicles. Registered investment vehicles can help you reduce or defer the tax hit. Some plans can offer government grants that supplement your investment contribution to help your children attend post-secondary school. Discuss the viability of tax arrangements using registered investments best suited to both fiscal partners.

Don’t sell suitable investments amidst a volatile market loss. It may be better to stay invested and adjust your portfolio after the market begins to retrace upward, any losses after a market volatility period. If you hold an excellent fund, the stocks within that fund are probably good. Nevertheless, please keep your investment goals in mind, get periodic updates, and review the situation with your fiscal partner. Your financial partner may be unable to handle the stress caused by a volatile market, so plan with this in mind.

Maintain financial accounts with transparency. Total honesty is necessary. Spouses and partners who share mutual financial goals have a right to be aware of the banking and investment accounts and the movement of funds via frequent, transparent discussion. One spouse should only borrow and use credit with the other spouse’s agreement, where funds must be accounted for together in mutual fiscal arrangements.

There should only be personal boundaries where agreed, such as business agreements, risk, or debt and income necessary for solvency. You can set such boundaries in advance, or hard feelings can develop. Business accounts or contracts increasing risk should not co-mingle with personal finance or funds if you are incorporated. Sole proprietors should view business debt as personal debts.

Why is portfolio strategy important?

Portfolio strategy is a method used for investment planning. Here we look at some of the sub-categories within investment planning:

Having a strategy helps you to understand your tolerance for risk.

Each of us has a personal level of risk tolerance which indicates how much risk one is willing to take while investing in markets that always go up and down. Your advisor can help you establish your own unique governing guideline.

Understand your investment time frame.

You may want to save for your child’s education, your retirement, a vehicle, or a home down payment. Each of these projects can take a certain amount of time, which is a component you apply to your calculations and potential future value with tax considerations and/or registered government tax programs.

Re-evaluation and Re-balance your portfolio holdings.
You also may want to monitor, re-evaluate, and balance your portfolio. When you consider how your assets performed, you will also need to consider any market situations that may be occurring. Some assets may have returns that are greater than their benchmarks, others may not.

While rebalancing your portfolio, you can re-establish original asset allocations. When you are re-balancing assets be cautious of any tax consequences for selling early, or buying and selling too often.

Develop your “Investment Plan”.

Once your investment plan is written down for reference, it will provide a road map to help you attain your investment goals while not getting you off track due to analysis paralysis, or the many distractions that may cause people to procrastinate. If you find that you just can’t get motivated but know time is slipping by, call us and we will be glad to work with you to develop a portfolio strategy, within your overall investment planning. Getting assistance from a professional advisor will ease the stress of thinking about investing and help free your mind to enjoy life?

Don’t become a Chameleon.

Beware of following the investment crowd or chasing last year’s stock or fund winners. Past performance is not an indicator of future gains while investing in securities, or equity funds that invest in stocks and/or bonds.