It’s tax time — will you do it yourself, or hire a professional?

In 1988, I got my first job working at an accounting firm. It was a great year to start in the accounting world as most clients were still doing everything manually. Individual tax packages could be picked up at the post office or mailed to clients for those who wanted to prepare the personal tax return (T1) themselves, small businesses often recorded transactions on manual ledgers and nearly every corporation would have to hire a local accountant to prepare the annual financial statements and file the corresponding corporate tax return (T2).

Accounting firms were largely the only ones using computers and newer technology to prepare and file tax returns. At this time there were three accounting bodies, Chartered Accountants (CA), Certified General Accountants (CGA) and Certified Management Accountants (CMA). These three organizations are now unified under one organization, and referred to as a Chartered Professional Accountant (CPA).

Corporate Tax Returns

Over time, point of sale systems, accounting systems, payroll systems and automation have been introduced directly to businesses. This made the larger volumes of transactions more manageable. In some cases, business owners learned how to do this on their own. In most other situations, accounting firms and bookkeepers helped business owners with this transition. Today, the owner of the business and bookkeepers normally compile all the daily information. This compiled information is then provided to CPA firms to do the final journal entries, financial statements, tax returns and regulatory filings. In the future with cloud computing gaining popularity, businesses will not be limited to using accountants within a limited geography.

On a daily basis, we are communicating with our client’s accountant to ensure that they are getting the information from us that they need. For example, if a holding company has a portfolio of investments, it wouldn’t be unusual to have hundreds of transactions in a year (i.e. purchases, sells, interest income, and dividend income). Annually, we will export all of the transactions during the year into an excel spreadsheet that is forwarded to both the client and the client’s CPA. This spreadsheet saves the accounting firm time by not having to enter every transaction. We also forward all the PDF copies of the statements, fee summary, realized gain (loss) statement, and T-1135 Foreign Verification statement. Nearly every one of our corporate/business clients uses a CPA firm. Proving this information to your CPA firm enables them to spend time giving you proactive big picture advice rather than spending time on data entry.

 

Personal Tax Returns

In the initial meeting with a new client, we always obtain the name of their accountant who prepares their personal income tax return. We obtain the accountants name, email, phone number, and fax number. Most accountants will have an annual tax checklist that they provide to their clients with the information they require. We also provide a letter to clients with a summary of the information that they can expect to receive from our team, firm and others. The letter outlines the timing of when they will receive the tax information. Because the information is coming from multiple sources and at different times, we encourage our clients to have a system to organize this information and pass on everything they receive to their accountant.

The timing of when you give your information to your accountant is important. We always encourage clients to wait until the beginning of April before giving their information to their accountant to ensure they have all the information needed to properly file their tax return.

We keep good analytics with respect to whether our clients use the services of a professional accountant. Ten years ago, about 85 per cent of our clients used the services of an accountant. Five years ago, the percentage using professional accountants had dropped to 75 per cent. Today, 67 per cent of our clients are using the services of an accountant.

Of the 33 per cent of our clients who do their own tax returns, nearly all use a software package, such as Turbo Tax. We still have a handful of clients who like preparing their tax return with the paper copies and mailing them in.

 

Professional Advice

Not everything is constant with tax policies and accounting rules. CPAs have to adapt to these changes quickly. In some cases there is a lot of overlap between the advice given from CPAs and financial advisers. One example is managing taxable income, especially in retirement. The decision of where cash flow is generated should give consideration to the tax consequences. This is especially important when clients have corporate investment accounts. The level and timing of wages and dividends can fluctuate and should be integrated into the timing of registered account contributions and withdrawals. With so many different types of registered accounts (RRSP, RRIF, LIRA, TFSA, RRSP, RDSP) it is important to have the correct combination based on your short and long term goals. Some of the decisions are driven by required cash flow and some are based on minimizing tax during your lifetime.

If a person is doing both their own self-directed investing and doing their own tax return, then they would not have any professional to obtain advice. Both accountants and wealth advisers are being asked financial and estate planning questions all the time. What is really valuable is when an accountant and wealth adviser provide proactive advice. The term, “you don’t know what you don’t know” certainly applies. The gap in knowledge can range from things that impact tax decisions in the shorter term like the contribution and withdrawals noted above. The decisions you make today could impact taxation for several years in areas such as income splitting rules, changes in RRIF minimums, and whether to collect CPP early. Accountants and wealth advisers have the tools to help with projections and decision making.

Quality of life and changes in your life are both good reasons to have qualified professionals that you know and trust. Even though you may be fully capable of doing your own taxes today, it will take time and you may miss something that you are not aware of. One simple proactive tip from an accountant or wealth advisor could save you thousands of dollars in taxes.

Deterioration in health has many cascading financial consequences and this becomes especially true if the spouse that does the tax returns becomes sick or passes away. It puts even more stress on the spouse during a difficult time if they have neither an accountant or wealth adviser that they know to speak with. During a meeting we may learn about a client’s health deteriorating. Depending on the severity, it can impact tax and estate planning. One example that has an income-tax impact is when we have recommended clients to talk to their doctor about completing Form T2201 for the Disability Tax Credit Certificate. Often at times people may qualify for the disability tax credit, but they did not know. We have had many clients get thousands of dollars back in taxes once they received appropriate advice. If we see years with high medical expenses then this could be an opportunity to offset with other taxable income, such as a higher RRIF withdrawal.

With accountants and wealth advisers working together, you will have two sets of proactive eyes making sure you are getting the best advice. In addition, you can spend your spare time, saved by not doing your taxes, with things that you really enjoy doing.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria.

Investment options within your RRSP

The key word in Registered Retirement Savings Plan is savings.

The government allows Canadians to defer up to 18 per cent of the previous years earned income, up to a maximum of $26,230 for the 2018 tax year.

In order to reach the maximum, earned income would have to equal $145,722 or higher. If you are a member of a pension plan, then the maximum is reduced by a pension adjustment.

After filing your annual tax return, you will receive a Notice of Assessment which has your current year RRSP Deduction Limit Statement.

Once your Deduction Limit is known, you may consider contributing early to an RRSP provided cash flow permits. One way to do this is to immediately use any tax refund, if any, to fund the current year RRSP contribution. If you are maximizing every year, then a single lump sum contribution equal to the amount on your RRSP Deduction Limit Statement may avoid the risk of over-contributing.

If cash flow is limited then setting up a Pre-Authorized Contribution (PAC) on a monthly basis may help you maximize contributions. It is important to adjust the PAC amount annually to adjust to your annual RRSP Deduction Limit. Whether you contribute monthly or by lump sum, it is important that you know your limit and do not over-contribute.

Every year you have to decide how to invest the new contribution. In addition to deciding how to invest the current year contribution, you have to continually manage your existing RRSP holdings to get the best long term results.

We have had discussions with clients new to investing that had mistaken an RRSP as a type of investment. RRSP is a type of account but not a type of investment. The Income Tax Act (ITA) outlines that the RRSP is limited to holding qualified investments, such as cash and deposits, listed securities (on designated stock exchanges), investment funds (i.e. mutual funds), and debt obligations (i.e. GICs, Term Deposits, Canada Savings Bonds). There are several other less common types of investments for RRSP accounts but for purposes of this column I will stick with the most common.

Many people rush into a financial institution to deposit funds primarily to get the RRSP Contribution receipt for tax purposes. Although cash is a qualified investment with RRSP, sitting permanently in cash is not a good long term option as returns would be limited.

Before an RRSP contribution is made you should understand the differences between financial professionals and financial institutions. There are significant differences with financial professionals in the scope of both experience and licencing. Some have worked through various market corrections and others are just starting a new career. Some financial professionals are licensed to sell only insurance products, other are licensed through the Mutual Fund Dealers Association (MFDA) and sell mutual funds. Wealth advisers may be licenced with the Investment Industry Regulatory Organization of Canada (IIROC) and have the ability to sell listed securities and mutual funds. You should ensure that the Wealth Advisor you approach has the licensing appropriate to your needs.

With respect to the wide range of financial institutions, you can choose from virtual/online options, insurance companies, traditional banks, credit unions and mortgage investment corporations. You should first determine what type of investment you would like and also what type of services. Even within traditional banks, you have several options including: self-directed, bank branch, and full service. If someone wants to do their own investing and is comfortable with technology then they can consider the online self-directed platforms. These are also referred to as discount brokerage as they have lower fees as you’re primarily doing the work yourself. Options at the bank branch level are typically term deposits/GIC and mutual funds.

Guaranteed Investment Certificates

Some investors purchase GICs, term deposits, and different types of bonds within an RRSP to manage their investment risk level. These types of investments typically pay interest income that is predicable, and volatility is lower. The primary downside to these investments is the relatively low interest rates and return potential. Short-term debt obligations have low real returns after inflation and taxes are factored in. Long-term debt obligations can be surprisingly volatile especially with changes to interest rates. If capital preservation is the primarily objective and time horizon is short, certain types of debt obligations may be suitable.

Mutual Funds

Mutual funds have been around for more than 90 years and have been a very popular type of investment. The concept of a mutual fund is easy to understand in the sense that it is a group of investors who pool their money together and have it managed by a Portfolio Manager. The first stage is picking a fund that matches your investment objectives and risk tolerance. Once the fund is picked, the portfolio manager makes all the decisions and investor does not need to be involved. Another benefit is that investors can choose to contribute a lump sum to the fund or set up automated pre-authorized contributions every month which makes forced savings easy. For inexperienced investors, or those with smaller amounts to invest, a mutual fund allows you access to a professional money manager. You do need some guidance to ensure you pick a mutual fund(s) with the appropriate asset mix and level of diversification. All of the banks offer a selection of mutual funds.

Listed Securities and Wealth Advisers

Investors that have accumulated significant savings have another option available to them. The full-service wealth division of Canada’s largest banks provide a wide range of investment options, typically for clients with investable assets over certain thresholds (i.e. $250,000, $500,000, $1,000,000). As noted above, wealth advisors are registered with IIROC and are able to purchase a wide selection of investments within an RRSP, including the investments noted above, as well as listed securities. One type of popular listed security is common shares that trade on exchanges such as Toronto Stock Exchange, New York Stock Exchange and Nasdaq.

The greater the size of an investment portfolio, the easier it is to obtain diversification with individual holdings. The benefit of transitioning to individual securities is lowering your cost of investing and having more control over the risk level of the account and each security added. It is easier to diversify your portfolio by sector and geographic exposure. Individual blue chip equities typically generate greater income and provide better transparency.

Avoiding significant mistakes is a key component to the success of an RRSP. Common mistakes we see are being too conservative or too aggressive. Keeping the funds in cash or being too conservative will not result in wealth accumulation after inflation and income tax are factored in. Investing in speculative holdings, unnecessary concentration, and making emotional decisions during periods of volatility are also common mistakes.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250.389.2138.

50 questions to consider before making an RRSP contribution

An RRSP could be an important vehicle in reducing the amount of tax you pay in your lifetime.

However, an RRSP may not be for everyone.

Last week, we reviewed marginal tax brackets and took a mathematical approach to determine whether you should contribute to an RRSP. Incomes below $39,676 in 2018 could save between zero cents and as much as 20 cents on each dollar contributed. Incomes above $205,842 save 49.8 cents on each dollar contributed.

Many individuals have taxable income above $39,676 and below $205,842. We will refer to this as the grey zone. The mathematical approach has many shortfalls.

Below are fifty questions to help those in the grey zone determine if making an RRSP contribution is right for them.

1) How old are you?

Typically the younger you are the longer you have tax deferral. Tax deferral is the number one benefit of an RRSP, not the immediate tax deduction for the contribution. A 40 year old could have over 30 years of deferral. A 65 year old has six years.

2) What is your income level?

If your income is very low then it may not make any sense to contribute. If you are in higher marginal income tax brackets, then the income tax savings can be significant. Last week we outlined the math for those will regular forms of income.

3) Does your income level fluctuate year to year?

Certain professions have income levels that fluctuate year to year. With some years being so low that dipping into savings is necessary. The greater the fluctuations in income the more important it is to have some emergency funds outside of an RRSP.

4) Do you have future large income tax years?

In cases where clients have moderate levels of income today but intend on selling an asset such as a rental property for a significant capital gain in the future, building up and saving the contribution room or building an “unused” component, to offset the large income tax years can often be a good strategy.

5) Are you looking to purchase a principal residence?

If one of your goals is to purchase a principal residence then the majority of your savings should be done in either a non-registered account or a TFSA for easier access. The one exception could be the RRSP Home Buyers Plan (see below).

6) Are you eligible for the RRSP Home Buyers Plan (HBP)?

First time home buyers can participate in the RRSP Home Buyers Plan(HBP). This program allows you to withdraw up to $25,000 in a year from your RRSP towards a qualifying home. If your income is higher and you do not yet have $25,000 in an RRSP then contributing to an RRSP up to this level and then withdrawing the funds under the HBP can be a good strategy for new home owners. A RRSP can not only help you save for retirement — it can also help you save for your first home.

If you and your spouse both borrow the same amount from your RRSP accounts you can put up to $50,000 combined towards a down payment. The HBP enables you to get access to the money you saved, the investment growth, and receive the tax savings.

With the HBP you are essentially borrowing from yourself. You have to pay the amount you borrowed back within 15 years. If you took out $25,000, you must pay back into your RRSP $1,666.66 annually. If you miss these repayment amounts then you will be taxed on the missed payment.

7) Have you contributed to an RESP for any minor children?

Often I see parents not taking advantage of the Canada Education Savings Grant (CESG) linked to RESP contributions. The government matches 20 per cent on the first $2,500 contributed annually per child, up to age 18.

8) How old are your children?

If cash is limited, often at times an RESP contribution is a better use of funds, especially if the children are approaching 18 and have not yet obtained the lifetime maximum of $7,200 CESG.

9) Have you set up a Registered Disability Savings Plan (RDSP) for a minor or adult child with a disability?

The RDSP has benefits even for those who do contribute. The government also give funds under a matching program which is dependent on the beneficiary’s family income. If funds are limited then Contributing to an RDSP often is a better option.

10) Do you have a Tax Free Savings Account (TFSA)?

Individuals with lower income today are generally better off to contribute to a TFSA. If income levels rise then you can always move the funds out of the TFSA and contribute to an RRSP in the future.

11) Have you maximized contributions to your TFSA?

An RRSP contribution can assist you in reducing the current year income but will eventually be taxed when the funds are pulled out. On the other hand, the TFSA grows tax-free but does not assist you in deferring any of your earned income in the current year. By taking a longer term view, the TFSA for those with lower income, and amounts to save, should seriously consider a TFSA over an RRSP.

12) Are you, or dependents, attending post-secondary education?

Often at times these costs can help with lowering your taxes payable. Obtain an estimate of all potential deductions and factor this in when determining what amount, if any, to contribute to an RRSP.

13) Are you claiming any disability deductions and credits?

The disability tax claimed either for self, or others, can significantly lower your income tax liability. It is important to factor these credits in when making RRSP contribution decisions.

14) Did you know that your RRSP can help you get an education?

The RRSP program is called Lifetime Learning Plan (LLP). Your RRSP can help pay for the education and training you may need to build a new career or make a change.

The LLP enables you to take out up to $10,000 per year ($20,000 maximum) from your RRSP to pay for tuition for you or your spouse.

With the LLP you are essentially borrowing from yourself. You have to pay the amount you borrowed back within 15 years. If you took out $10,000 you must pay back into your RRSP $666.67 annually. If you miss these repayment amounts then you will be taxed if you miss a payment.

15) Do you have family, child care, and caregiver expenses?

If you have these types of expenditures then you may be eligible for deductions and/or credits on your income tax return. These deductions and credits should be factored in when looking at the amount of RRSP contributions to make. It is important to know that some credits are non-refundable and contributing to an RRSP in some situations may not be as worthwhile from a deduction standpoint.

16) Do you have significant medical expenses in the current year?

If you had an unusually high level of medical expenses in a current, or a 12 month period, you should advise your financial adviser. It may be that these medical expenses have already helped reduce your projected taxes payable to an acceptable level that making an RRSP contribution is not necessary in the current period.

17) Do you have excess cash in the bank?

If you have excess cash that would otherwise be invested in a non-registered account and generating T3 and T5 income then an RRSP can help reduce two forms of income. By investing these funds in an RRSP you will not be receiving a T3 or T5, or have to report the capital gains on dispositions. These savings along with the deduction can make sense if the cash in the bank can be committed to retirement.

18) How did you intend to fund the RRSP contribution?

If you do not have money to fund the RRSP then that sometimes helps with the decision-making. Clients have asked me whether it makes sense to borrow money to put into an RRSP. Interest on RRSP loans are not deductible. Historically, there have been a lot of articles that discuss how to use a short term RRSP loan in February that can be partially paid back (provided you get a refund) once your tax return is filed and assessed. If the funds can be paid back quickly, with minimal interest costs, then it can make sense.

19) Do you have a spouse to name as the beneficiary?

If your spouse is named the beneficiary of your RRSP then you have less risk of an adverse tax consequence if you were to pass away (see question 50). Contributing to an RRSP, with your spouse named as the beneficiary, has two benefits in my opinion. The first obvious benefit is that it assists both of you in retirement should you live a normal life expectancy. The second benefit is that it provides assistance to your spouse in retirement in the event that you were to pass away before retirement.

20) Where can you find out how much you can contribute?

The most common approach is to look at last year’s Income Tax Notice of Assessment (NOA). The RRSP deduction limit table will provide these numbers. If you are unable to find the NOA then you can log into CRA My Account.

21) Are you aware of the different types of investments to put into your RRSP?

An RRSP is a type of an account and not a type of investment. The options for what you can put into an RRSP can vary significantly. Putting the cash into the RRSP is only the beginning. The most important part is ensuring the capital is protected and invested appropriately to grow for the decades ahead. We encourage you to do some research. Next week we will outline investment options for your RRSP.

22) If you make an RRSP contribution, have you estimated how much tax you will have deferred in the current year?

Many online RRSP calculators can compute the tax savings for a contribution. This works great if you have regular forms of income, such as T4 employment income. If you have certain other types of income, such as dividend income from a corporation, then it is best you have your accountant do the projections for you.

23) Are you aware that you can contribute to an RRSP and save the deduction (considered “unused”) for future years?

One might ask, “why would I contribute money into my RRSP and not immediately claim all of it as a deduction in that year?” Perhaps the best way to answer this is by looking at a real scenario where a couple may have worked hard for over 20 years to pay off their mortgage and become debt free. During all those years of focusing on paying down debt they accumulated a significant RRSP deduction limit. Unexpectedly this same couple receives a significant inheritance. They decide to move $50,000 into an RRSP account. By moving some of these funds into an RRSP they have immediately tax sheltered and obtained deferral of the income and growth. They have a goal of retiring in five years and have mapped out a plan of deducting $10,000 of the unused each year for five years.

24) Are you a member of any Registered Pension Plans?

If you are a member of an RPP then you will see a Pension Adjustment (PA) calculation on your annual Income Tax Notice of Assessment. Depending on your income level, and the quality of your RPP, some or nearly all of your RRSP deduction limit will be reduced by the PA. An RRSP was primarily design for individuals without an RPP. Those without an RPP should consider an RRSP more closely. Even those with an RPP, an RRSP is definitely worth considering if you have both the deduction limit and cash flow.

25) Do you have non-deductible debt?

A mortgage on your principal residence is normally non-deductible unless you have a business component operating from your home. Credit card charges and personal lines of credit are also normally non-deductible. The more non-deductible debt you have the less attractive committing your savings to RRSP contributions. Any high interest credit card or other debt expense should be a top priority to tackle before making RRSP contributions. This is especially true if the debt is non-deductible.

26) Do you have any deductible debt?

If your interest costs are deductible then these costs also help lower your taxable income. If with your excess savings you choose to pay off deductible debt then this would result in lower interest costs for you (which is good) but also results in a lower interest expense deduction. If funds are dedicated to an RRSP then you have the benefit of both the interest expense deduction and the RRSP deduction.

27) What are the balances of all lines of credit, loans, and mortgages?

Looking at your pre-payment options and the interest rates on each form of debt is important. Also important is to focus on paying down the non-deductible debt before the deductible debt. If all the debt levels and interest rates are reasonable then considering an RRSP contribution can provide you the balance of both real estate and financial assets.

28) Have you made any significant donations?

If you have made, or are planning to make, a significant charitable donation then you should factor this into the amount to contribute to an RRSP. Both federal and provincial charitable tax credits are available which would reduce income taxes payable.

29) Were you intending to borrow funds to contribute to an RRSP?

Interest on a loan for an RRSP is not tax deductible. If the RRSP loan is at a good rate and you feel you can pay the loan off within a reasonable period of time (i.e. with tax refund) then it may make sense in higher income earning years.

30) What are the rates on your non-deductible and deductible debt?

When I meet with clients and they have questions about where to put the excess cash, TFSA, RRSP, paying down debt. One of the first items I’ll ask for is the terms of any existing debt (i.e. interest rates, prepayment privileges, and whether or not the debt is deductible.) Sometimes we are able to propose a series of transactions to make more of your interest costs tax deductible.

31) Should I set up a spousal RRSP?

A spousal RRSP contribution may make sense if there is a disparity between taxable incomes in the long term. I like to look at longer term projections and try to equalize taxable income throughout retirement to lower taxes as a household. Care has to be taken to ensure attribution rules do not kick in with withdrawals.

32) Do you and your spouse work?

One of the pitfalls to an RRSP for single people is the loss of employer or if a financial emergency comes up. Two income families can weather this risk often at times without having to dip into RRSP funds to pay the bills.

33) Are you intending to become non-resident of Canada in the future?

The strategy with respect to an RRSP can be impacted if the long term intention is to retire in a foreign country. Any withdrawals out of an RRSP if you are non-resident will be subject to a flat 25 per cent withholding tax or at a reduced rate pursuant to the tax treaty with the foreign country. If you are normally in the highest tax bracket, becoming non-resident before any withdrawals can work to your advantage. If you had planned to have retirement income within the first income federal income tax bracket then you are likely to pay close to twice the normal tax if you’re non-resident.

34) When are you planning to retire?

Providing details on your retirement to your financial advisor will also help with determining if an RRSP contribution makes sense. In some cases, your RRSP deduction limit can be used to roll in retirement allowances and offset a high income final employment year.

35) What is your ratio of non-registered funds to registered funds?

Prior to entering retirement, it is advisable to also have investments in a non-registered account and funds in the bank. If all of your investments are currently in an RRSP then you should talk with your advisor about TFSA and non-registered accounts. Ideally you should have the ability to adjust your cash flow needs without having adverse tax consequences in retirement. The non-registered account is often at times the solution to deal with these fluctuations.

36) Do you have a corporation where income can be tax sheltered?

The ability to tax shelter funds within a corporation has historically come with many benefits. In past years many accountants have advised small business owners to keep excess cash within the corporation and avoid RRSP contributions. Cash flow to the shareholder was often done in tax efficient dividends. Recent changes in tax rules has resulted in many business owners meeting with accountants to determine the best strategy going forward, including RRSP contributions.

37) Have you spent the time to invest the funds appropriately?

Investment options within an RRSP vary considerably. The choice of investments should reflect your risk tolerance, investment objectives, and time horizon. It goes without saying that if RRSP funds are invested appropriately you will achieve your retirement goal sooner. Next week we will discuss the various investment options within an RRSP.

38) Do you have the discipline to keep the funds invested through to retirement?

One of the biggest mistakes young investors make is pulling funds out of an RRSP early. RRSP withdrawals become taxable income when they are withdrawn. The RRSP room is lost indefinitely and cannot be replenished. Prior to making a contribution, you should determine if you can commit the funds for its intended purpose. If in doubt, you should consider a TFSA or non-registered account.

39) Are you aware of the pre-authorized contribution (PAC) approach to RRSP savings?

One approach to saving for an RRSP is to do forced savings every month. For a lower income client who still wishes to save within RRSP, coming up with a lump sum amount of cash can be difficult. If that client were to pay themselves $500 every month then slowly over time they would build up an RRSP nest egg. It is important with a PAC that you always keep an eye on your contribution limit and adjust the PAC accordingly. The benefit of a once a year lump sum is that you can always ensure that the amount contributed is equal, or below, your deduction limit.

40) Do you know the consequences for putting too much into an RRSP?

All over-contributions of more than $2,000 above your deduction limit will incur a penalty of one per cent per month. To avoid receiving brown envelopes from CRA, take extra care to not exceed your allowable contribution limits.

41) Does it make sense to have more than one RRSP account?

The Income Tax Act does not put a limit on the number of RRSP accounts you may have. For all intents and purposes we recommend having only one or two RRSP accounts. Having one RRSP account with an advisor will help them manage your asset mix, sector exposure, geographic exposure, and position size on each investment. If you have the option of a group RRSP that is matching then having two RRSP accounts makes sense.

42) How do I combine my RRSP accounts?

Unfortunately combining RRSP accounts comes at a cost most times. Nearly all financial institutions will charge a transfer out fee. An example of the fee may be $125 + tax. Let’s say Jack rushes to make a last minute RRSP contribution for $10,000. He is so rushed that he also agrees to put the funds into a two year GIC at two per cent. The next year Jack does the same thing but at a different financial institution. When I met Jack the first thing he said to me was he was not making a lot of money on his RRSP accounts. Jack showed me four different RRSP accounts at different financial institutions. Jack had intended on doing the right thing each year but had slowly created a bit of a mess that was not performing above inflation levels. I explained to Jack that we could diarize to consolidate the GICs once they mature. I also explained to Jack that this will come at a cost. The relinquishing institutions will each charge him $125 + tax wiping away over half of the interest amount he had made. In my opinion, having one well managed RRSP with all investment options available is the best approach.

43) When do I have to convert my RRSP to a RRIF?

The Income Tax Act states that your RRSP must be collapsed by the end of the year you turn 71. Most clients choose to convert their RRSP to a Registered Retirement Income Fund, or RRIF. Other options are to de-register the full account. This option may be okay for small accounts when your other income is low. Normally, this is not advisable as the entire value of the RRSP becomes taxable in one year. Another option, is to purchase an annuity.

44) How long can I have an RRSP?

In British Columbia, the age of majority is 19. An RRSP has to be collapsed at age 71. Mathematically, one could have deferral for 52 years within an RRSP and continue most of that deferral even further within a RRIF. The reality is that many do not start contributing as early as age 19 and many have collapsed their RRSP accounts before age 71.

45) Is it possible to contribute to an RRSP after the age of 71?

You may contribute to your own RRSP until December 31 of the year you turn 71. You can also contribute to a spousal RRSP until December 31 of the year your spouse or common-law partner turns 71. If your spouse is younger then you, and you still have RRSP contribution room, then you may contribute.

46) Should I participate in a Group RRSP plan?

The primary purpose of a group RRSP plan is to encourage you to save some of your hard earned dollars. Your employer may offer this option by enabling you to contribute through payroll deductions. Often at times the investment options are limit to those offered by the group provider. In some situations, your employer may offer a matching program where you put in a set percentage of your pay and they will match up to a maximum level. In nearly all cases when an employer is willing to match your contributions it is worth participating in the Group RRSP.

47) Do I have to wait until I retire to transfer part or all of my Group RRSP plan to a self-directed RRSP?

Not all Group RRSP plans are the same. In most Group RRSPs you are permitted to transfer the investments to another RRSP account provided the plan does not have any provisions preventing the transfer. In most cases we recommend that when a sufficient amount has accumulated in the Group RRSP that the amount is transferred to your other RRSP account.

48) What is one of the most common errors you see with RRSP accounts?

I think all too often individuals are so focused on wanting to save as much tax in the current year that they forget to look at the big picture of minimizing tax during their life time.

49) What happens if I need cash out of my RRSP before retirement?

The standard withholding rates are 10 per cent for amounts up to $5,000, 20 per cent for amounts over $5,000 and below $15,000, and 30 per cent for all amounts over $15,000. The actual level of tax that you pay will be dependent on your other forms of income and if you have any deductions or credits.

50) What happens if I passed away with money in an RRSP?

I left this question for last for a reason. If your spouse is listed as a beneficiary then your RRSP would be combined with the surviving spouses RRSP and you would have complete deferral of immediate tax on the first passing. For all others, single people and widows, the tax deferral ceases on the second passing. Canada Revenue Agency is likely to collect nearly half of the amount you have remaining in your RRSP.

The above is just a sample of the potential questions that could be asked as the RRSP conversation unfolds. Understanding the reasons for the above questions can help both you and your adviser make informed decisions.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250.389.2138. greenardgroup.com

 

 

The mathematical approach to RRSP contributions

The Income Tax Act allows you to contribute up to 60 days after the end of the year to your RRSP.

For the 2018 tax year, the last day to contribute is Friday, March 1. This 60-day buffer gives you ample time to estimate your taxable income and determine if it makes sense to make a contribution.

Assuming it makes sense, the next step would be to look up your 2018 RRSP Deduction Limit. This can be obtained either by looking at your previous year’s Income Tax Notice of Assessment. Within this notice you should see a table that is titled “2018 RRSP Deduction Limit Statement.” This table provides your RRSP deduction limit for 2018 and will note the dollar amount of any unused RRSP contributions. If you have unused RRSP contributions, this amount must be subtracted from the RRSP deduction limit to obtain a net amount. Unused RRSP contributions are amounts that you contributed in past years but have not yet claimed.

To illustrate, your statement could show $26,480 on the RRSP deduction limit line. On another line it may show $12,100 of unused RRSP contributions. In this situation, the maximum you would be able to contribute, and be able to claim as a deduction, is the net amount of $14,380. CRA does permit individuals to contribute $2,000 over and above this net amount without being subject to the one per cent per month over contribution penalty.

Now you have estimated your taxable income and you know the maximum net amount to contribute.

In next week’s column, we have listed 50 questions people should ask themselves before jumping directly in. It is still early in February and you have lots of time to still make an informed decision.

Perhaps one of the more simplistic approaches is to estimate the tax savings if an RRSP contribution is made. Reviewing both the federal and provincial marginal tax brackets is the starting point.

Federal tax rates for 2018

• 15 per cent on the first $46,605 of taxable income, +

• 20.5 per cent on the next $46,603 of taxable income (on the portion of taxable income over 46,605 up to $93,208), +

• 26 per cent on the next $51,281 of taxable income (on the portion of taxable income over $93,208 up to $144,489), +

• 29 per cent on the next $61,353 of taxable income (on the portion of taxable income over $144,489 up to $205,842), +

• 33 per cent of taxable income over $205,842

B.C. tax rates for 2018

• 5.06 per cent on the first $39,676 of taxable income, +

• 7.7 per cent on the next $39,677, +

• 10.5 per cent on the next $11,754, +

• 12.29 per cent on the next $19,523, +

• 14.7 per cent on the next $39,370, +

• 16.8 per cent on the amount over $150,000

This math-oriented approach can be simplified through many online RRSP calculators. The estimates below are from https://www.ey.com/ca/en/services/tax/tax-calculators-2018-personal-tax

Taxable Income

Taxable income before RRSP contribution Taxes payable before RRSP RRSP contribution Taxes payable after RRSP Taxes savings difference ($) Taxes payable difference (%)
$10,000 $0 $10,000 $0 $0 00.00%
$20,000 $1,256 $10,000 $0 $1,256 12.56%
$40,000 $5,734 $10,000 $3,618 $2,116 21.16%
$80,000 $16,669 $10,000 $13,831 $2,838 28.38%
$120,000 $31,285 $10,000 $27,230 $4,055 40.55%
$160,000 $48,241 $10,000 $43,661 $4,580 45.80%
$200,000 $66,561 $10,000 $61,981 $4,580 45.80%
$240,000 $86,247 $10,000 $81,267 $4,980 49.80%

No Taxable Income

For individuals with no taxable income, we do not recommend contributing to an RRSP as there are no tax savings. If a child or individual has earned income and they are under the basic exemption it may still be beneficial to file a tax return. Filing a return will report the earned income, 18 per cent of which will be used to build up RRSP contribution room for the future. One day when the individual has higher taxable income they will also have RRSP room they can take advantage of.

Lowest Marginal Rates

Individuals who are in the lower marginal tax bracket but are expecting a significant increase in salary next year may be better off delaying their RRSP contribution. If an RRSP contribution is made then the individual may be better off not claiming the deduction and carrying forward the unused portion to the subsequent years when it is more advantageous. If your income is below the top of the first provincial tax bracket (2018 this is $39,676) you should look at all the non-mathematical components of the RRSP decision.

Highest Marginal Rates

Those in the highest marginal tax brackets may benefit the most from RRSP contributions. Canadian taxpayers have few ways to lower their taxable income — an RRSP contribution is one. As illustrated above, individuals in the 49.8 per cent marginal tax bracket may reduce taxes payable by about 50 per cent of the amount they contribute. In addition to the tax deduction any potential growth within the RRSP compounds on a tax-deferred basis until the funds are taken out as a withdrawal (hopefully in a lower tax bracket in retirement). If you are in the highest marginal tax bracket, with taxable income over $205,842, we normally recommend contributing to an RRSP from a mathematical perspective.

Many people are in the grey zone, with income above $39,676 and below $205,842. The mathematical approach is useful, but often is too simplistic. Next week we will outline 50 questions to help those in the grey zone determine if making an RRSP contribution is right for them.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250.389.2138. greenardgroup.com

Part VI – Real Estate: Skipping to Other Generations When Planning Your Estate

With the value in real estate and other holdings, many Canadians have accumulated a significant estate that involves planning.  Talking about estate planning need not be uncomfortable.  For many, this naturally leads to who you would like to receive your estate – either family, friends, and/or charitable groups.  The process involves mapping out a plan that minimizes tax, while at the same time ensuring your distribution goals are met.

The second stage of the estate-planning process is when we ask for clients to bring a copy of the documents they currently have in place. We also obtain a copy of their family tree and information about current executor(s), representative, or other individuals currently named in the will.

To illustrate the process, we will use a typical couple, Mr. and Mrs. Gray, both aged 73. They last updated their wills 24 years ago.  They have what is commonly referred to as “mirror wills” where each leave their estate to their spouse in a similar fashion.  The will also has a common disaster clause that if they were to both pass away within 30 days that the estate would be divided equally amongst their three children.  We will refer this to as the “traditional method”.

Since they last updated their Will, all three of their children (currently aged 56, 54, and 52) have started families of their own. In fact, the Gray’s now have seven grandchildren between the ages of 11 and 32, and two great grandchildren (aged seven and three).  None of which were born when they last updated their Will.

In reviewing their will, we noted that this traditional method of estate distribution left everything to their now financially well-off adult children, to the exclusion of their grandchildren. We highlighted that the current will does not mention the grandchildren or great grandchildren. In exploring this outcome, they expressed they wanted to map out an estate plan that also assisted those that needed help the most.

The last time the Gray’s updated their will they had a relatively modest net worth, but in the last 24 years they were able to accumulate a significant net worth. We had a discussion with Mr. and Mrs. Gray that focused around the timing of distributing their estate.

The traditional method effectively distributed nothing today and everything after both of them passed away.

We discussed the pros and cons of distributing funds early. During our discussion, the plan that was created was combination of components, parts involved a distribution to the grandchildren based on certain milestones.  They also wanted to make sure their grandchildren obtained a good education.  The estate plan details that we outlined in the short term were relatively easy to put in place and were as follows:

  1. For the youngest members of the family they wanted to set up and fund Registered Education Savings Plans (RESP) for all eligible grandchildren and great grandchildren. The RESP contribution shifted capital from a taxable account to a tax deferred structure. This effectively results in income splitting for the extended family. Another added benefit is that RESP accounts would receive the 20 per cent Canada Education Savings Grant based on the amounts contributed.
  2. For the family members already in university, the plan was to assist with the cost of tuition and other university costs up to $10,000 per year per grandchild.
  3. For the grandchildren who were at the stage of wanting to purchase a principal residence, they wanted to set aside a one-time lump sum payment of $50,000 specifically to assist each grandchild with the down payment on a home.

One of the more challenging areas of the Gray’s estate plan dealt with their real estate. In addition to their principal residence, they also owned a recreational property in the Gulf Islands. The recreational property had some significant unrealized capital gains. It was important for the Gray’s to ensure both properties were kept within the family, if possible. We called a family meeting together where we outlined different options to achieve this goal. The key with this part of the estate plan was communication with Mr. and Mrs. Gray and their three children. We were able to obtain a clear plan that was satisfactory to all family members.

The finishing touch to a well-executed estate plan is ensuring the details are clearly documented in an up-to-date will.

 

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the TC. Call 250.389.2138. greenardgroup.com

This is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in  this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a 
division of Scotia Capital Inc., Member Canadian Investor Protection Fund.

Part III – Real Esate: Benefits of Selling Real Estate Early in Retirement

In our last column we talked about CRA cracking down more on individuals who are non-compliant with respect to the principal residence deduction. Certainly individuals who have frequently bought and sold homes under the principal residence deduction will have to think twice and be prepared to be audited.

This article is really about the individuals who are contemplating a change in their life. Health and life events are often the two trigger points that have people thinking about whether to sell or not.   It can certainly be an emotional decision when it comes to that time.  Selling your home when you have control on timing when it is sold is always better than the alternative.

For our entire lives we have been focused on making prudent financial decisions and doing things that increase our net worth. There comes a point where you shouldn’t always do something that is the best financially.  If we only made decisions based on financial reasons you would never retire, you would work seven days a week, work longer days, and never take a vacation.  Throughout our working lives most people try to create a reasonable work-life balance.  In retirement I try to get clients to focus on the life part and fulfilling the things that are important to them.

Selling a principal residence could translate to a foolish move for someone looking at it only through net worth spectacles. I encourage clients to take off those spectacles and focus on what they truly want out of retirement and life.  At the peak of Maslow’s hierarchy of needs is self-actualization where people come to find a meaning to life that is important to them.   I think at this peak of self-actualization, many find that financial items and having to own a house, are not as important as they once were.

About ten years ago I remember having meetings with two different couples. Let us talk about the first couple, Mr. and Mrs. Brown who had just retired.  One of the first things they did after retiring was focus on uncluttering their lives.  They got rid of the stuff they didn’t need, and then they listed their house and sold it.  They then proceeded to sell both cars.  Shortly thereafter they came into my office and gave me a cheque for their total life savings.  Mrs. Brown had prepared a budget and we mapped out a plan to transfer a monthly amount from their investment account to their bank account.  They walk everywhere and are extremely healthy.  They like to travel and enjoy keeping their life as stress free as possible.  If any appliances break in their apartment it is not their problem, they just call the landlord.  Our meetings are focused on their hobbies and where they are going on their next trip.

I met another couple ten years ago, Mr. and Mrs. Wilson. They had also just retired.  They had accumulated a significant net worth through a combination of financial investments and they owned eight rental properties (including some buildings with four and six units).    At that time I thought they would have had the best of retirements based on their net worth.   The rental properties seem to always have things that need to get repaired or tenants moving out.  When I hear all the stories it almost sounds like they are stressed and not really retired.  Every year their net worth goes up.  Every year they get older, Mr. Wilson is now 75 years old and Mrs. Wilson is 72.  In the past I have talked to them about starting to sell the properties, to simplify their life and get the most out of retirement.   They are still wearing net worth spectacles and have not slowed their life down enough to get to the self-actualization stage.

My recommendation to clients has normally been to stay in their home as long as they can, even if this involves modifying their house and hiring help. This is assuming they have their health and the financial resources to fund this while still achieving their other goals.   Even in cases when financial resources do not force an individual to sell a house, the most likely outcome is that the house will be sold at a later stage in life and the proceeds used to fund assisted living arrangements.

Many people are house rich and cash poor. From my experience clients have two choices.  Option one is they can have a relatively stressful retirement trying to stretch a few dollars of savings over many years.  With this option you will likely leave a large estate.   Option two is selling the house and using the lifelong accumulation of wealth to make the most out of your retirement.    Although this option results in a smaller estate, you’re more likely to reach the self-actualization stage.

Kevin Greenard, CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the TC.  Call 250.389.2138. greenardgroup.com 

This is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.

 

Ten Tips on Working With A Portfolio Manager

HEALTHY LIVING MAGAZINE

Over the years, I have had many discussions with people about what is important to them.  Health is nearly always at the top of the list.  Connected to this is having time to enjoy an active and social lifestyle.

Life has become busy, and it is tough to squeeze in everything that you have to do, let alone have time left over for all the things you want to do. Sometimes it is simply a matter of making a choice. One of my favourite concepts I learned years ago in economics is ‘opportunity cost’. It can relate to time, money or experiences. We can’t get it back, borrow or save it. Time is sacred – especially family time and doing your own investing can take time and attention away from your family. So ask yourself – is doing your own investing worth the time you are spending on it?

One way to focus on the things you want to do is to delegate the day-to-day management of your finances to a portfolio manager who can help you manage your investments by creating what is called a ‘managed’ or ‘discretionary’ account. They are able to execute trades on your behalf without obtaining verbal permission, so when the market changes, they are able to act quickly and prudently.

Here are some tips for working with portfolio manager to improve your financial health:

Have a Plan

You are more likely to achieve the things you want if you set goals to paper. With fitness goals it would be things like running your first 10k race or lowering your blood pressure. Financial plans are the same – sit down with your portfolio manager and outline what you want to achieve with your estate, your investments and your retirement. Once a plan is in place, a periodic check-up takes a fraction of the time to ensure everything is on track.

Stay in Control

If you are worried about being out of touch with your investments, there are measures in place to keep you in the driver’s seat. One of the required documents for managed accounts is an Investment Policy Statement (IPS). This sets the parameters with your portfolio manager and provides some constraints/limits around their discretion. For example, you could outline in the IPS that you wish to always maintain a minimum of 40 per cent in fixed income. This lets you delegate on your terms, and ensures a disciplined approach to managing your portfolio. Technology has made it easier and faster for you and your portfolio manager to track your progress, review changes or update the program. Developing a written agenda that gets shared in advance of a meeting, whether in person or virtual, can create efficiencies and ensures nothing is missed. Whether it is email, Skype, or even text messaging – there are many ways for you to stay connected to your finances.

Think About Taxes and Legal Issues

Your finances often involve other professionals such as lawyers or accountants, so it is beneficial to get everyone connected early on. Work with your portfolio manager to complete a professional checklist that includes important names and a list of key documents. If your team can communicate directly with one another, it’s easier to map out planning recommendations and tax-efficient investment strategies. Your portfolio manager can also act as your authorized representative with the Canada Revenue Agency and can even make CRA installment payments on your behalf. Every summer, I am reviewing assessment notices, carry-forwards, contribution limits (i.e. TFSA and RRSP) and income levels to allow my clients to enjoy the outdoors and improve their quality of life

Put Family First

Having a complete picture helps a portfolio manager map out strategies to preserve your capital and to protect your family. If a life event occurs or your circumstances change – from new babies, to inheritances, to critical illness –  your portfolio manager can provide options and solutions. When the family member who manages the finances passes away suddenly, it can be very stressful for the surviving spouse or children during a time that is already emotionally draining. To help in this situation, many families create well thought-out plans that can involve working with their portfolio manager to make discretionary financial decisions in a time of transition. A Portfolio Manager can take care of your finances regardless of the curves that life throws them.

As a portfolio manager, I feel it is critical to be accessible and to keep clients well-informed with effective communication. What I am finding is that conversations are shifting to areas outside of investments, including the financial implications of health issues and changes within the family.

If you are looking for a way to simplify, reduce stress in your life, and proactively manage your finances, a portfolio manager might be a good way to improve your financial health.

 

Let’s make things perfectly clear

CAPITAL MAGAZINE

When hiring an accountant or lawyer, you’re billed after services are rendered. In the investment world, it’s not so transparent. With embedded costs, market-value changes, withdrawals and deposits, it hasn’t always been clear exactly what you’ve been charged.

The introduction of fee-based accounts and recent regulatory changes are making significant strides in providing better transparency to investors.

In the past, most types of accounts were transactional, wherein commissions are charged for each transaction. With fee-based accounts, however, advisers don’t receive commissions. Instead, they agree to a set fee schedule, usually charged on a quarterly basis. This fee is normally based on a portfolio’s market value and composition. Buy and sell recommendations are based on the client’s needs and goals. If an investor’s account increases in value, so do the fees paid; conversely, if an account declines in value, fees go down.

The recent increase in fee-based accounts correlates to the implementation of the second phase of the “Client Relationship Model” (CRM), a regulatory initiative passed by the Canadian Securities Administrators in March 2012. The CRM affects both the Mutual Fund Dealers Association and the Investment Industry Regulatory Organization of Canada.

While the key objective of CRM1 was relationship disclosure and enhanced suitability, CRM2 is designed to increase transparency and disclosure on fees paid, services received, potential conflicts of interest and account performance. All of these mandatory disclosures are being phased in from 2014 to 2016.

Last July, CRM2 mandated pre-trade disclosure of all fees prior to an investor agreeing to buy or sell an investment. With transactional accounts, an adviser must disclose all of the fees a client is required to pay, such as commissions when buying or selling positions. Many investors have complained about hidden fees, especially in mutual funds. With CRM2, all of these fees now have to be disclosed prior to the transaction.

Certain types of transactions had no disclosure requirements in the past. For example, an adviser used to be able to purchase a bond and embed their commission in the cost of the bond on the trade confirmation slip. Now, fixed-income trades also require full disclosure. In other cases, even if there was disclosure in the legal sense of the word, understanding this disclosure required clients to read the fine print in lengthy prospectus documents.

With fee-based accounts, the client has a discussion about fees with their adviser up front, and an agreement with full disclosure is signed by investor and adviser.

Another reason for the popularity of the fee-based platform is that many advisers can offer both investment and planning-related services. Many advisers can offer detailed financial plans and access to experts in related areas, such as insurance, and will and estate planning.

In a traditional transactional account, where commissions are charged for every buy or sell, it has always been challenging for advisers to be compensated for additional services such as financial planning. Consequently, many transactional-based advisers would not offer these services to their clients.

Fee-based accounts also offer families one more opportunity for income splitting by setting up account-designated billing for their fees. The higher-income spouse can pay the fees for the lower-income spouse.

Another benefit of a fee-based structure for non-registered accounts is the ability to deduct investment counsel fees as carrying charges and interest expense. Anyone who has non-registered accounts would be well advised to read Canada Revenue Agency’s interpretation bulletin 238R2. Investment counsel fees cannot be deducted for registered accounts, but there is the benefit of paying the fees for registered accounts from a non-registered account.

Adviser-managed accounts have been the fastest-growing segment of the broad fee-based group. In this type of account, the adviser is licensed as a portfolio manager and able to use discretion to execute trades. In setting up the adviser-managed account, one of the criteria is that the account must be fee-based. Regulators have made it clear a portfolio manager is not permitted to use discretion when it comes to commissions or transaction charges. One of the starting points to setting up a managed account is to get a defined investment policy statement that sets out the relevant guidelines that will govern the management of the account.