L! SUE CIA IS
T E SP EN EM TIR RE
THE CANADIAN RETIREMENT CRISIS
Retirees Ill-Prepared for Retirement According to New Nationwide Survey
Mario Canseco Insights West
Who is Mario Canseco? As Vice President of Insights West’s Public Affairs division, Mario Canseco is responsible for designing and managing research projects for clients in the public sector, non-profit organizations and associations, and for education clients. Mario’s expertise covers the full range of communications and branding research, and he has a unique ability to combine know-how in these areas to not only design incisive research but to also constantly keep in view how clients can apply the results, thus taking the insights a step further.
See the whole report
nsights West, a leading Vancouver B.C.-based Canadian than they had anticipated (30 percent). market research firm, and Credential Financial, a “Helping Canadians achieve sustainable financial strength national wealth management firm for credit unions and independent financial institutions, released December 14th throughout their lives is Credential’s vision, says Doce Tomic, the results from a recently conducted survey on retirement president and CEO, Credential Financial. “This study clearly planning that showed many working Canadians are extremely demonstrates that financial advisors are providing valuable financial advice to help Canadians plan ill-prepared for retirement. The online for retirement, especially when they need poll of a representative national sample it most.” further illustrated how retirees who had Canadian retirees worked with a financial planner during FINANCIAL PLANNER their working years were in much better who talked to a The survey reinforced the value of financial shape in retirement than those financial planner are working with an advisor or financial who did not. over the long-term. Of the 53 more likely to have planner percent who had worked with a financial CONTINUE WORKING enough money and planner for ten or more years, 65 percent The Canadians on Retirement said their retirement is “everything they survey revealed that while 42 percent a lower debt burden thought it would be” and 77 percent said of working Canadians “have a plan” for their retirement, 30 percent have not yet than those who did they have enough funds to “sustain them through their retirement years”. set aside any money for retirement. Data not. further shows this lack of preparation may “It is evident that discussions with a stem from a belief that working Canadians financial planner play a big role in making believe they have longer to plan for retirement than they actually Canadian retirees feel more secure in their retirement,” says Mario do. 62 percent of Canadian retirees say they retired earlier than expected. Further, 18 percent of retirees surveyed either find Canseco, Vice President, Public Affairs, Insights West. “Canadian themselves having to continue working in retirement to support retirees who talked to a financial planner are more likely to have themselves and nearly a third enter retirement with more debt enough money and a lower debt burden than those who did not.”
It’s All a Question of What You Want to Do….
Septen Financial Campbell River, BC Office
PUBLISHER’S MESSAGE Page 2
RRSPs EXPLAINED – HOW THEY CAN WORK FOR YOU Page 2
DISCOVER THE ADVANTAGES OF ALTERNATE ASSETS Page 5
YOUR RRSP AS A HOME DOWN PAYMENT Page 5
DON’T FREAK OUT ABOUT FINANCIAL PLANNING!
as anyone asked you “What do you want to accomplish financially?” or “What will your retirement look like?” Did you understand what they were asking you? For many people, when they are asked anything about their finances, they get the deer-in-the-headlights look or they draw a blank. This is because everybody’s interpretation of the word “finances” is different.
together to make sure your budget covers all of the other facets of your financial life. This is where we would look at things like, children’s education, retirement, tax-free savings, rainy day funds, something that we call “wealth protection,” which is really insurance – both life and disability – and also tax and estate planning.
When talking about one’s finances, there are many different parts that make up the whole. Finances could mean: “Do I have enough money to buy coffee today?” It might mean: “Will I have money left over at the end of the month to put into savings?” To the next person, it may be: “Do I have enough to buy a house?” or “When can I realistically retire?” And then there is: “What would happen if I lost my job – can I still pay my bills?” Or, “Can we afford to have children?”
You can see from the above that having a reasonable understanding of what you have, where you spend it, and what else you want to achieve, really is part of financial planning. Once you have a financial plan in place it is not cast in stone. It is a living, breathing moving document that needs to be reviewed, tweaked and massaged from time to time as your financial life changes.
The term “finances” is just a fancy word for anything to do with money. Income/salary, expenses, cash on hand, savings, insurance, debt, mortgages, etc. are all connected with money in one way or another. Having a good understanding of what money you have and where you spend it is the first step in creating a “financial plan.” At Septen Financial Ltd, we strive to get to know you as a client and to understand how you, yourself view money – either having some or not having any. This is called cash-flow planning. From there we move onto helping you understand what it is you want to accomplish financially – Oh, there is that word again! By determining what it is you want to accomplish, we can move on to the next phase – setting up a realistic budget that will work for you and your family. From there, we would, again, work
THE ADVISOR ADVANTAGE
Studies have shown that financial advice correlates with higher investor net worth. These same studies have found that investors with financial advisors have a higher net worth as compared to those without. Statistics show that 70 percent of people working with an advisor achieve their financial goals. So, I will ask you the same question I asked at the beginning of this article: What do you want to accomplish financially? What will your retirement look like? Still not sure? Let us help you figure it out. We can start with the basics or somewhere in the middle but the time to take action is now. The sooner you start working on your financial plan, the sooner you will feel confident that you can start making your dream a reality! Ultimately, you are in control, but we will guide you toward success. Call us today to get started.
THE CASE FOR THE TAX-FREE SAVINGS ACCOUNT Page 6
THE GUARANTEES OF A SEGREGATED FUND Page 6
IS YOUR BUSINESS WORTHLESS? Page 7
Only 30 per cent of Canadians say they plan to fully retire by 66, while 42 per cent of boomers say they wish they’d started saving for retirement at an earlier age.
THREE STRATEGIES TO BOOST CONTRIBUTIONS TO YOUR RRSP Page 7
2 TORONTO MONEY | FEBRUARY 2017
“Dedicated to the furtherance of finance literacy and well-being.”
THE GREATEST GIFT OF ALL
anada is sitting on a retirement time bomb. The sad facts are that may Canadians are heading toward retirement with insufficient savings behind them to live their final years in dignity. For those of you now employed and in the comparative bloom of youth, retirement will come whether you want it to or not; it is not an abstract idea forged by the media or the financial industry, or the fate of some and not others. Time will come when you will come to the decision you are simply too old to work any longer or, as in some unfortunate cases, the decision will be taken for you. Given this harsh reality, the question becomes: how well are you prepared? Contrary to popular opinion, the government has no interest in keeping you in the manner to which you have become accustomed when you reach old age; it is entirely up you. As we point out in these columns, a business you have devoted your life to won’t necessarily be your passport to a comfortable retirement, since in many cases would-be sellers find belatedly they have nothing to sell. Some may be attracted by the idea of working beyond retirement age but a caveat is order here; Canadian demographics point to an aging society in which more and more seniors will compete for a shrinking pool of the type jobs they would qualify for, given challenges such as health and mobility. As one might imagine, those challenges will become more severe as time progresses.
security. “When poverty knocks on the door, love flies out the window,” goes the old proverb. It is heartbreaking to think someone can lose the love and respect of family and community and become isolated at the most vulnerable time of their life, but it happens more frequently than we care to admit, and the possibility it could happen to us is a mental space many of us just cannot bear to visit. Perhaps the greatest gift one may give is one you may give to yourself, perhaps as an act of self-love and that is a secure retirement. The good news is that in recognition of the inadequacy of the national pension system by government and the financial sector, programs and structures do exist to enable you to enjoy to the full what should be the most rewarding and fulfilling time of your life. Our tough love question to our readers is that after a life time of work, don’t you owe it to yourself to put in place the necessary resources and planning now to support your lifestyle today into the future? Perhaps the hardest part may be making that first step. If this is something you haven’t thought of acting on before, and are hesitant for variety of reasons, some you can’t quite put in to words, remember it’s never too late to plan for retirement. Reach out to us and we will guide you through your options to help make the best choice for you. The solution is in your hands, just a phone call away to ensure that greatest gift is yours, and we’re at your service.
If you’re still reading this message, you perhaps are thinking we are engaging in smack talk, or at best, hard talk. We prefer to think of it as tough love talk. Some say love is the greatest gift of all. Perhaps so, but love itself is so often held hostage to issues of financial
RRSPs EXPLAINED – HOW THEY CAN WORK FOR YOU
Charles Duerden Septen Financial
ome Income Tax time, everyone hears a ton of catchphrases and things to remember. Most of the time it’s just nothing more than a lot of big words that don’t make a lot of sense to anyone. But, when it comes to saving for retirement and getting a tax break at the same time, RRSPs are a surefire bet! Here’s some major points about the RRSP and its benefit for working Canadians.
RRSP up until December 31st of the year your spouse turns 71. If not, then you must transfer your savings/investments to another type of account. One option is transferring your funds to a Registered Retirement Income Fund (RRIF) from which you must draw a minimum percentage annually. Another option is to transfer your funds – without tax liability – to an annuity which will provide a guaranteed income stream.
What is an RRSP?
What’s a spousal RRSP?
The Registered Retirement Savings Plan (RRSP) is a tax-advantaged saving account that can hold investments. Any earned income placed into an RRSP can normally be written off against taxation. The RRSP was introduced in 1957 to enable Canadians to have some other form of financial support other than the $40-per month Old Age Security. Pension plans at this time were the province of large companies and the Canada Pension Plan (CPP) was not to come into being until 1966.
It’s an RRSP that you open yourself in order to pay yourself an income at maturity, but that your spouse or common-law partner also contributes to, so allowing a couple to form a retirement fund for both partners. A spousal RRSP is one way a couple can “income-split” to reduce the family’s overall tax bill, if one partner has a significantly higher income than the other, by shifting income to the partner in a lower tax bracket.
What do you put into an RRSP?
The limit for 2016 is 18 per cent of what you earned in 2015 or $25,370, whatever is lower; for 2017 the dollar limit is $26,010. Mind you, if you are contributing also to a registered pension plan with employment income, this will reduce the amount of your RRSP “contribution room.” The T4 information slip provided by your employer in this case will have the pension adjustment or “PA” amount, and it is this figure that will be deducted from your RRSP contribution room.
An RRSP can hold savings but more commonly is used for holding investments. They can then grow in a tax-protected setting until such time as their owner wishes to draw upon them in retirement, by which time the expectation is that the owner’s tax bracket will be considerably lower than when they were employed. The list of investments that can be held in an RRSP is exhaustive to the point we have dedicated a separate article to the subject. (See “What Investments can be Held in an RRSP?”)
Who can open an RRSP? If you have an earned income, (that is if you have money coming in from a job you work at, or a service you provide), a Social Insurance Number (SIN) and filed a tax return, then you can open an RRSP and begin your contributions. In fact, you can continue to make contributions up until December 31st of the year you turn 71. After this age if you continue to have earned income, you can contribute to a Spousal
Toronto Issue 3 · February 2017
How much can you contribute to an RRSP?
Can you over-contribute to an RRSP? Yes, you can. You can contribute $2,000 more than your allowable limit, but hold on! For each month you’re in excess of that, your over-contributed amount will be hit by a one-per cent penalty tax.
What’s the deadline in contributing to an RRSP? Contributions are accepted throughout the course of the year, as deductions against income, and for an additional 60 days following the close of the tax year. For the 2016 tax year, contributions must be received by March 1st 2017.
How easy is it to withdraw money from an RRSP? You can withdraw at any time but if you do the Canada Revenue Agency (CRA) will add the amount to your taxable income for the year. In fact, the CRA requires that financial institutions impose a withholding tax on any monies taken out of an RRSP at the time of withdrawal.
What happens to my RRSP should I pass away? In the unfortunate event of your decease, the assets within your RRSP will pass to the beneficiary or beneficiaries you were asked to name when you opened the account. If your beneficiary is your spouse, as in the majority of cases, then your assets will pass to them tax-free. If they are not your spouse, then the CRA will look upon these assets as taxable income, and on receiving them, your beneficiary(ies) will be taxed at their marginal tax rate.
Is it true you can use an RRSP as a down payment for a home? It is true and we’ll go into that in further detail in our story “Your RRSP as a Home Down Payment.” Keep reading!
“Dedicated to the furtherance of finance literacy and well-being.” STEPHEN HILL Publisher ROBERT EGER Executive Editor CHUCK DUERDEN Managing Editor CHASE JESTLEY Creative Director NEXT ISSUE INC. Distribution www.torontomoneymag.com
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4 TORONTO MONEY | FEBRUARY 2017
“Dedicated to the furtherance of finance literacy and well-being.”
WHAT CAN YOU PUT IN YOUR RRSP? Discover the World of Alternative Assets
ecause Canadians have a wide choice when it comes to investing their hard-earned money, our federal government now grants Registered Retirement Savings Plan (RRSP) eligibility for a concomitantly broad range of assets. The move to broader inclusion has been driven by the lower returns from traditional RRSP standbys: savings accounts and guaranteed investment certificates.
Charles Duerden Septen Financial
What might be termed non-traditional assets include foreign currencies, gold and silver bullion as well as certificates, stocks traded on foreign exchanges, put and call options, commodity futures contracts, and even works of art, antiques and gems. Real estate of any nature, either residential, commercial or oil & gas producing, is currently prohibited from inclusion in RRSPs and the price of individual gems may be prohibitive for the average investor. Luckily, investments now exist in Canada that enable you to virtually place these hard assets into your RRSP or Tax Free Savings Account (TFSA), or even a Registered Retirement Income Fund (RRIF) or Locked-In Retirement Account (LIRA). Read on!
GET YOUR OWN GUSHER Imagine being able to hold securities in your RRSP that have oil & gas producing land as their underlying asset. Imagine, too, that these properties are not confined to Canada but are purposefully diversified to include oil-producing areas in the United States such as Texas and Kentucky. We are talking real assets here! Not only do these investments exist, they have been providing returns to Canadian investors for many years. How is it done? The managing partners negotiate rights for oil & gas producing acreages with proven potential, often in the tens of thousands of acres. These are then offered to investors, both institutional and retail, in the form of unit trusts or limited partnerships. These structures are created to enable Canadian investors to invest in the projects without having to deal with any cross-border taxation issues. The properties chosen have established production track records, low costs of recovery, and where the focus is on drilling for light oil. The successful partnerships in this field are able to offer investors and shareholders superior and sustainable returns through responsible in-depth analysis of each project from acquisitions through production and servicing of existing wells. Their shortterm goals are to strategically increase revenues from existing discoveries by streamlining production and reducing costs. Ongoing plan components such as production, development, technology, overlooked opportunities, as well as further acquisitions are all part of their forward-looking sustainability strategies. When field optimization has been achieved, the fund companies look to define a clear exit strategy.
GETTING REAL ABOUT REAL ESTATE We have mentioned that to date, real estate is not an eligible asset for inclusion in an RRSP, yet it is possible for the average investor to benefit from the revenue-generating and equity growth potential of this asset class, often in a tax-efficient manner. Interest in real estate has grown as interest rates have been depressed by central bankers in their efforts to stimulate the global economy and as inflation – the perpetual enemy of investors – has eroded what returns this traditional avenue of investment has been able to provide. The equity market has undergone great volatility since the collapse of 2008 with the result investors are increasingly reducing their exposure to this sector and allocating their capital instead to tangible property assets. Such assets offer the opportunity for diversification as well as boost performance at a rate greater than inflation.
The type of properties targeted as investments is quite broad and can include manufacturing facilities, commercial operations, retirement homes, apartment complexes, hospitals, office buildings, timberland, warehouses, hotels, shopping malls and other retail premises.
MAKING THE MOST OF MORTGAGES Everyone is familiar with the concept of a mortgage; it is rather like a loan for the purchase of a home and amortized for 25 years or so. They have long been a part of the Canadian investment scene but investing in them was only possible by those with extensive financial means. The introduction of mortgage-backed securities (MBS) democratized mortgage investment for Canadians, breaking the commitment down into far smaller and hence affordable units. They have become attractive investments because they make regular payments to those who invest in them. On the supply side, they create more available financing for home-buyers and for this reason those MBSs are RRSP/TFSA eligible. Mortgage investment corporations (MICs) act as both lenders of mortgages to would-be borrowers and thereby form mortgage pools against which the MICs issue MBSs. A mortgage pool may be defined as a group of mortgages held in trust as collateral for the issuance of a mortgage-backed security. Western Canadian MICs typically began as mortgage lenders and moved to become providers of short-term (one year) bridge financing for purchasers of purchasers of single-family homes, folks who typically wouldn’t meet the parameters of regular bank underwriting. The investment objectives of an MIC are two-fold. Paramount is the preservation of the capital of investors (that’s you!) by acquiring and maintaining a diversified, conservative portfolio of mortgage loan investments that generates attractive, stable returns in order to permit to pay monthly distributions to its shareholders. The second is providing an annual return (called a distribution in MIC parlance) that is expressed as a target in percentage terms before the commencement of the year. Investors have the opportunity to receive monthly payments to their bank accounts (advisable if their investment is not in an RRSP) or have their distributions compounded (advisable if it is in an RRSP). An MIC will typically handle the entire mortgage process from origination to underwriting and fund management, governed firstly by the conditions set by the Tax Act that enables the Corporation to qualify as a Mortgage Investment Corporation; and secondly, by the Corporation’s own market-specific underwriting criteria to ensure a prudent approach that achieves capital preservation of investor capital. General underwriting guidelines will stipulate, say, that investment in, or acquisition of, a mortgage with a single borrower shall not exceed 20 per cent of the value of a Corporation’s assets; that the average term to maturity of mortgages in the portfolio will not exceed 24 months; or that the target weighted average loan-to-value of the portfolio is 75 per cent. Leading MICs maintain affiliations and membership with associations such as the British Columbia MIC Managers Association (BCMMA) and the Canadian Association of Accredited Mortgage Professionals (CAAMP). If one is considering investing with an MIC, it would be advisable beforehand to check if it belongs to one of these professional bodies.
For as little as $10,000, individual Canadians can purchase a RRSP/TFSA investment that allows them to benefit from the income and capital appreciation of a wide range of properties in both the Canada and the United States, often of a quite specific nature and geographic location. The type of properties targeted as investments is quite broad and can include manufacturing facilities, commercial operations, retirement homes, apartment complexes, hospitals, office buildings, timberland, warehouses, hotels, shopping malls and other retail premises. By way of example, a trust open to investment by institutional and retail investors has a portfolio of worth over $1 billion made up of almost 6,000 rental units in 45 complexes located in 16 cities across Canada. One firm with Western Canadian roots has a portfolio of $35 million comprising 217 rental units and almost 19,000 square-feet of commercial space. Others eschew the residential market and focus on acquiring and managing commercial properties in the United States as well as Canada. A Canadian operation has recently acquired two mobile home parks in central Alberta and is inviting investments on the basis of income stream and equity growth. Another example of a location-specific investment opportunity is a fund dedicated to funding development projects in the Dallas/Fort Worth region of Texas, and yes, it is RRSP/TFSA eligible! Other location-specific investments serve niche commercial markets like the firm which has acquired a string of car washes in southern California. Yep, you read that right: car washes. The investment so offered is a play on the high-volume, low-cost nature of the car wash business in this part of the U.S. and the consistency of demand for its services. Again, the investment is eligible for all Canadian registered plans. All of the above may sound interesting, but are alternative investments right for your RRSP; if so, how do you go about acquiring them? You will, no doubt, have questions about past and projected returns, plus that perennial question asked by all investors about all investments: how do I get my money out? Don’t hesitate to call your local Septen Financial office to make an appointment and get the skinny on how alternative investments can work for you in your RRSP!
FEBRUARY 2017 | TORONTO MONEY 5
YOUR RRSP AS A HOME DOWN PAYMENT An Overview of the Home Buyer’s Plan, the Roles of Leveraged Investment and the B.C. H.O.M.E. Partnership Program
f you are looking to enter the housing market – and if you meet the definition of a “first time buyer” plus other conditions – the federal government will lend you a helping hand to buy or build by allowing you to withdraw funds directly from your Registered Retirement Saving Plan (RRSP). That’s tax-free. Amazing, eh?
Charles Duerden Septen Financial
How does this work, and how can you make it work for you, particularly if you find yourself short in the down payment department? This is made possible through the Home Buyers’ Plan (HBP) under which you are allowed to withdraw up to $25,000 from your RRSP in calendar year for the purpose of acquiring a home for yourself or a disabled relative. What’s more, your spouse can also draw up to $25,000 out of his or her RRSP if you’re planning to buy or build a home together, if and both of you meet the HBP’s qualifications. In the case of a spousal RRSP, monies may be withdrawn under the Program in the name of the annuitant, or owner, rather than the contributor. Here’s a word of warning: if you withdraw more than $25,000 you will be liable for taxation on the excess.
How can you make it work for you, particularly if you find yourself short in the down payment department?
As you might imagine, a program as generous as this does not come without conditions. First off, the contributed monies you withdraw from your RRSP must have been in the account for a minimum of 90 days before you can take them out under the HBP. Otherwise, they may not count as deductions for any year in which case the Canada Revenue Agency (CRA) will levy a tax on them. So watch out.
THE FOUR-YEAR LIMIT Second, the funds you have taken out from your RRSP must be paid back over the next 15 years. It does not matter if the original HBP withdrawal came from a regular RRSP or from a spousal one; the funds must be repaid to a regular RRSP. If you do not repay on schedule, the required amount is added to your taxable income for the year. However, you can repay the full amount into your RRSP(s) at any time. If you don’t, then the Canada Revenue Agency (CRA) will send you a Home Buyers’ Plan (HBP) statement of account, with your notice of assessment (or reassessment). Third, the home that you buy or build must become your principal residence within one year of completing the purchase or the construction. If you’re buying or building for a relative with a disability, that person must likewise occupy the home as his or her principal place of residence. In other words, the home must be for you rather than something you plan to rent out. Fourth, we come to the thorny question of what constitutes a first-time home buyer under HBP rules. Get this: rather than being disqualified if you have ever owned a home in Canada, the rules state you are considered a first-time home buyer if, within the preceding four years, you did not occupy a home owned by you alone, or in conjunction with your spouse or common-law partner. To make the program even more accessible, even if you have taken advantage of the HBP before you might still be able to participate again, providing your repayable balance on your HBP account is zero on January 1st of the year you wish to make another withdrawal.
SPECIALIZED LENDING All this is all well and good, I hear you say, but what if neither I nor my spouse have $25,000 in our RRRSPs or anything like the amount necessary for the down payment on the home of our dreams? Fear not, for as mentioned before in these columns, for qualified applicants it may be possible to borrow money from a specialized lender to purchase an investment to place in an RRSP. The same rules for withdrawing funds apply as before; an investment purchased with an investment loan must remain in an RRSP for 90 days before it can be withdrawn, and then of course liquidated to free up the necessary cash. That means having selected your dream home, and presumably qualified for mortgage financing also, you must cool your heels for three months before you can start moving to purchase it. At this point you’re probably wondering what happens to the loan you took out to purchase the investment for your RRSP. Well, it will continue to exist and continue to require servicing as part of your overall debt load. That’s the downside of this strategy; besides the debt of your mortgage you will also have the debt for your down payment. Obviously, it is an approach that should be attempted only if your credit is strong. And that’s where we come in; if you are considering using a leveraged load to access the Home Buyer’s Plan, or even using your RRSP to access the HBP without such a loan, come and talk to us here
at Septen beforehand. These are relatively complex financial strategies, and, as we have mentioned, not without an increase in risk.
MATCHING LOAN We would be remiss, particularly for our readers in British Columbia, if we did not mention a new program recently announced by the provincial government to assist would-be home homebuyers. If you are a first-time home buyer (that phrase again!) the B.C. H.O.M.E. Partnership Plan will match what you have saved for a down payment up to $37,500 or five per cent of a maximum purchase price of $750,000. For the first five years the loan will be interest free and payment free. After five years, buyers can either repay their loan or enter into monthly payments at current interest rates. Like most mortgages, loans awarded through the program become due after 25 years. Conditions as always do apply and in this case, unlike the Home Buyer’s Plan, an important one is that to qualify as a first-time buyer for the H.O.M.E. program you must not have owned an interest in a residence anywhere in the world at any time. Another stricture is that you must intend to reside in the home you are purchasing with the aid of the Program for the first five years.
EXPANDS POSSIBILITIES On the financial front, you must have obtained a high-ratio insured first mortgage on the property of your choice for at least 80 per cent of its purchase price. (A highratio mortgage is one in which a borrower places a down payment of less than 20 per cent of the purchase price on a home.) Also, since the Program is geared to fostering home-ownership among middle-to-lower income British Columbians, the maximum combined annual income of all persons on the title must not be greater than $150,000. Since this is a matching program, by implication you must have a down payment amount at least equal to the loan amount for which you plan to apply. It is readily apparent that when coupled with the federal Home Buyer’s Plan mentioned above, the B.C. H.O.M.E. Partnership Plan greatly expands the possibilities of home ownership for qualified applicants. That said, it should be stressed once more that given its complexity such a strategy should not be attempted solo but rather with capable financial advisor. Again, call your local Financial office to see if the above plans are for you. We’re here to help!
6 TORONTO MONEY | FEBRUARY 2017
“Dedicated to the furtherance of finance literacy and well-being.”
THE CASE FOR THE TAX-FREE SAVINGS ACCOUNT How it Works, How it Can Benefit You, and How it Compares to the RRSP
Charles Duerden Septen Financial
he Tax-Free Savings Account (TFSA) was introduced in January of 2008 as the most significant initiative by the federal government to encourage Canadians to save since the introduction the Registered Retirement Savings Plan (RRSP) a halfcentury earlier. Although it’s like the RRSP in that it uses the tax system to boost savings, it’s different and those differences will help you decide which (and when) of these two savings vehicles should be the repository of your hard-earned money. How does it work? If you’re 18 or over and have a Social Insurance Number, then you’re good to go, and can start socking your savings into a TFSA for the rest of your life if you so wish. In fact, there’s no deadline by which you must terminate a TFSA unlike an RRSP, which must be closed out by the end of the year you turn 71. You should note, though, that there’s no tax deduction for contributing to a TFSA as there is with a RRSP. So don’t go contributing to your TFSA expecting that it will give you major tax breaks; it won’t. On the other hand, there’s no tax penalty when you withdraw your funds from your TFSA like there is when who withdraw from an RRSP. The piper, i.e., the Canada Revenue Agency (CRA), must eventually be paid when you have an RRSP, but that evil day never occurs with a TFSA regardless of whether you are retired or just starting you career. So where does the “tax-free” bit come in? That refers to the assets you place in a TFSA; no matter what they are, they can grow and the bounty they produce will not be taxed. This is in sharp contrast to asset growth in an RRSP, which is “tax-deferred” rather than tax-free. Another point to bear in mind is that in contrast to an RRSP, assets within a TFSA are not, in general, creditor protected unless those assets happen to be segregated funds. Under insurance legislation, segregated funds in your TFSA cannot be seized by anyone who is successful in winning a judgement against you for monies owed.
CARRIED FORWARD Like RRSPs, annual contributions to TFSAs have their limits but the permitted amounts are lower. Whereas for RRSPs the limit (or “contribution room”) for 2016 is 18 per cent of last year’s income up to $25,370, that for the TFSA is $5,500 regardless of how much you earned the previous year. In both cases the unused contribution room can be carried forward. The total cumulative contribution room for a TFSA, if one had opened an account back in 2008 and never contributed a penny, currently stands at $52,000. On the topic of contributions, in both cases it is possible to over-contribute, and in both cases a similar penalty will be imposed. In the case of RRSPs, anything more than a $2,000 over-contribution nets you a penalty of 1 per cent per month on the excess; whereas you get hit right away with the same penalty on any amount over the $5,500 TFSA limit.
Is there any difference in the type of assets you can place into an RRSP versus a TFSA? The answer is no; despite the name implying that a TFSA is for savings, any asset eligible for an RRSP is likewise qualified to be placed in a TFSA. The list is extensive and we’ll go into that somewhat more thoroughly in our story titled “What Can You Put in Your RRSP?” The more common investments earmarked for RRSPs include shares of public companies traded on eligible exchanges as well as qualified shares of private corporations; guaranteed investment certificates (GICs); foreign currency; mutual funds; real estate investment trusts (REITs); mortgage loans; bonds; annuity contracts; warrants, rights and options; income trusts; royalty units; partnership units; and depository receipts.
NO CLAWBACK Given the above, how can the TFSA work for you and what might the advantages over the RRSP? A strong impetus behind the thinking of then finance minister Jim Flaherty in introducing the TFSA back in 2008 is that withdrawing funds does not create a taxable income and therefore any clawback by the CRA on Old Age Security (OAS) or Guaranteed Income Supplement (GIS) received by lower-income seniors. If an RRSP becomes large enough, so prompting larger withdrawals; or if the compulsory withdrawals from an equally large-sized RRIF become too high, then a senior’s taxable income might just be pushed over the limit ($73,756 for 2016) to trigger clawbacks. Channeling savings to a TFSA at some point to grow investments tax-free might therefore be a useful “safety valve” to avoid this consequence. For younger workers at the beginning of their careers, the attraction of a TFSA may be that they just can’t muster the larger amounts suggested by the contribution room of an RRSP, plus they are in a lower tax bracket and the potential for a large refund just isn’t there. Someone in British Columbia, for instance, earning $200,000 per annum and at the top combined provincial and federal tax rate of 47.7 per cent will get a refund of $11,925 on a contribution of $25,000. Younger workers may feel they it would be more realistic on their part to strive for the maximum contribution room of $5,500 of a TFSA. Those who are closer to retirement, and have maxed out their RRSP contribution for a particular year and are still looking for a tax-sheltered vehicle in which to grow investments, the TFSA presents a convenient (but not tax-deducting) alternative despite the lower contribution room. So where does that leave us? As we have seen, the TFSA is versatile enough to play a role in both short- and long-term planning, which may involve using this popular savings vehicle in tandem with an RRSP. Why not contact your local Septen Financial office where our friendly professionals will guide you to the decision that is best for you? After all, we’re Septen, and we’re here to help!
THE GUARANTEES OF THE SEGREGATED FUND Segs Combine Growth Potential of Mutual Funds with Certainty of Insurance Policy
Charles Duerden Septen Financial
t the sound of the words “guarantee” and “funds” a number of ears are, well, guaranteed to perk up. Perhaps this is too good to be true? Not so; the segregated f u n d , commonly termed a “seg fund,” is an investment fund packaged as a variable insurance product, and like all insurance products, comes with certain guarantees. In this case, the guarantee is a certain percentage of the fund at maturity (all seg funds have a maturity date); and likewise, a certain percentage should their owner pass away before maturity is reached. These percentages may be 75 per cent or higher. The upshot is that the maturity guarantee protects a percentage of your investment when your investment term – usually 10 or more years – comes to a close. This means you will receive at least the guaranteed amount, minus withdrawals and fees, of course. (An owner of a seg fund, by the way, is not known as an investor, but rather as a “contract holder” since subscription to a seg
involves the writing of an insurance contract.) As such, seg funds combine the growth potential of a mutual fund with the certainty of an insurance policy. They are termed “segregated funds” since they are kept separate as required by law from the general investment funds of an insurance company used to pay death and other benefits. (Our American readers might know the Canadian seg fund as a “separate account.”) Segregated funds are like mutual funds in that they are essentially a pool of investments like stocks and bonds; and as the price of these constituent assets rises and falls Segregated funds according to market demand, so does the value of the seg. can come with a reset
One important difference is that option which locks in seg funds can come with a reset option market gains for the which locks in market gains for the contract holder and so protect any contract holder. upswing in value from a subsequent downturn in the market. Such options can only be used sparingly, perhaps once or twice in a calendar year. Another difference is that segregated funds offer protection from probate in the event that you, the contact holder, should pass away. This means that there is no waiting for approval by a court of approval of a will and that your beneficiary, should one be named, will receive the assets directly. If certain conditions are met such as the beneficiary being a family member (e.g., a husband, wife, common-law partner, child or parent) the investment may also be protected from seizure by creditors in case of bankruptcy. This is an important feature for business owners or professionals whose assets may have a high exposure to creditors. These protections apply whether the seg fund is registered or non-registered, by the way. Are you looking for an investment for your RRSP this year, one that has more upside potential than a Guaranteed Investment Certificate (GIC)? Call us at Septen Financial to see how a segregated fund may fit into your retirement plans.
FEBRUARY 2017 | TORONTO MONEY 7
IS YOUR BUSINESS WORTHLESS? Why You Shouldn’t Rely on Selling Your Business to Support Your Retirement
Mike Feeney Septen Financial Campbell River, BC Office
The widespread idea you can sell a business for five times earnings is a fallacy.
ou have devoted your working life to building your business. You have slaved, sacrificed, and by the sweat of your brow, brought it to the point it is today. You have equipment, a team of capable workers, a fine reputation in the local business community, and an enviable list of customers. Sometimes you have put your health on the line and maybe other times the interests of your family, but you did it for the ultimate goal of selling the business for a handsome sum that would finance your retirement. It’s understandably crushing, then, when an owner on the very verge of a well-earned retirement discovers their business isn’t worth anything. This is particularly the case when the business itself is generating a positive (and healthy) cash flow. The sad truth of the matter is only 1 in 100 owners are successful in selling their businesses in any given year simply because in most cases the owner has nothing to sell beyond his or her personal connections.
One client told me: “When I told my guys I wanted to leave the business, one of them went home straightaway and formed his own business. He started calling my customers, armed with information he had learned from me.” Any effort by my client to sell his business was undercut. He then made the saddest comment I have heard from a client: “I should have saved as I went along.” The experience went to show that the widespread idea you can sell a business for five times earnings is a fallacy.
The sad truth is only 1 in 100 owners are successful in selling their businesses.
Another client was a home builder in the business for 40 years. Before the building boom he had eight trucks and eight employees under him. When the boom subsided he decided to sell his business but was immediately confronted with the questions of “for how much, and to whom?”
DIFFICULT TO SELL
This is constant feature of my work here as a financial planner in this part of Vancouver Island – owners viewing their businesses as their ticket to a happy and successfully retirement. However, two of my clients recently found that their businesses are worthless. These are hard-working people who put every spare penny into their businesses and eschewed the idea of saving money separately to invest and thereby build a nest egg for retirement. After all, the cash flow these enterprises generated was always strong, always on the up, so what could go wrong?
EASILY STEP IN The businesses in question had revenues of about $700,000 per annum. Since there is a belief that a business can be sold at three to five times earnings they believed, erroneously, they could comfortably sell their businesses for $2.5 million or thereabouts. Whenever I hear someone say their business is “worth so many times earnings” I have to ask the question, “Who are you are going to sell your business to?” Look at it this way: if your business relies heavily on sales and marketing, the people working for you will know your contacts and can easily step in and take over what business you are generating for free. In fact, if your business involves contracting and your employees are any good at all, they will more than likely already approached your customers with a view to doing work for them.
The problem was that everyone in the local construction business knew my client’s employees and figured they could easily scoop up any available work for themselves; some of them have worked for my client for up to 15 years and knew his contacts well. In other words, except for the resale value of his vehicles and other pieces of equipment, the business was practically worthless. The upshot was it proved difficult to sell and he received substantially less than “five times earnings.” How can you avoid the same pitfall? First, does your business depend on the personal touch to the point that if you walked away then productivity would go into a steep decline? Is it your relationships and your expertise in handling them that really make the business tick? Is cash flow your goal in going to work every day? If you find yourself answering in the affirmative to the above questions then don’t rely on the sale of your business as your passport to retirement. Concentrate instead on what you are good at doing: working your relationships to spur your cash flow but then look to investing a healthy proportion to ensure that you can exit your business in a satisfactory manner knowing that it has served its purpose. We have already mentioned how virtually impossible it is to sell a business because in general there is very little to sell. Don’t be left holding the bag. Make sure your retirement has a solid foundation by making an appointment with us today here at Septen Financial. We’ll show you how to leverage that cash flow you’re so good at creating into a real, truly comfortable and secure retirement. After all, that’s what we’re good at!
THE SAVINGS CHALLENGE Three Strategies to Boost Contributions to Your RRSP
veryone knows you should save for retirement and never before has this been so imperative than today, given Canada’s rapidly evolving demographics. Life expectancy is on the rise, so for 65-year old men, it’s 84 and for women, 87.
Charles Duerden Septen Financial
This means an aging population. Already, more than 16 percent of the population, some 5.8 million Canadians, are 65 or over, outnumbering those under 15 for the first time in our history, a development which is putting strain on the pension system. The trend will continue: Statistics Canada projects that by 2024, over65s will comprise 20 percent of the population. Rather than head to a golden retirement, 60 percent of Canadians will postpone the end of their working life because (a) they need income to generate income to meet their living expenses; and (b) government pensions are no longer sufficient.
A monthly payment plan benefits you by dollar-costaveraging the price of investments throughout the course of the year.
What to do? Here are three strategies to help you make best use of your RRSP contribution room.
Home owners who can defer their property taxes … may free up monies to contribute to an RRSP.
As far back as March of 2012, Maclean’s magazine reported a poll taken by Sun Life Financial revealed that only 30 per cent of Canadians say they plan to fully retire by 66, while in a survey from BMO Financial Group, 42 per cent of baby boomers say they wished they’d started saving for retirement at an earlier age.
STRUGGLE BY UNDER-55s One might think that in such an environment, Canadians would flock to make contributions to Registered Retirement Savings Plans (RRSPS) to let their investments grow tax-free until such time as they fall into a lower taxation bracket and enjoy the fruits of their thrift. On the contrary, contributions to RRSPs are declining according to BMO’s annual survey following the RRSP contribution deadline. In 2014, 65 percent of the contribution limit was put into RRSPs; in 2015, 57 percent; and in 2016, 53 percent. An RBC poll conducted by Ipsos Reid sampling 1,225 Canadian adults in the general population (aged 18 and over) also found that the average contribution to RRSPs for 2012 of $4,025 was the lowest level in four years at a time the maximum allowable contribution was $22,970. What’s going on? RBC Economics suggested in a January 2010 report that demographic factors were likely to keep RRSP contributions as a percent of disposable income trending lower through 2020. The report said that as baby boomers age, “the population was becoming more skewed towards age cohorts that historically have made smaller RRSP contributions.” The report cited rising house prices and the fact Canadians are putting more money into real estate as another reason for historically low RRSP contribution rates. Other anecdotal evidence suggests the struggle by under-55s to finance their children’s education and care for aged parents also undermines their plans for retirement, while 20- to 30-year olds feel retirement is sufficiently far off not to warrant their immediate attention.
EASIER TO BUDGET FOR At the same time, the way banks and other institutions market RRSPs could be the reason behind their fall from favour. Typically, they approach clients to top up their allowable contribution for the previous tax year before the March 1st deadline, a financial feat that leaves many feeling overwhelmed and discouraged. With the current limit at $25,370 for 2016, and a client who has only $2,000, that client may likely feel the challenge is too great.
First off, rather than scramble to come up with enough cash before the annual deadline, wouldn’t it make more sense to make smaller, monthly contributions throughout the year? Research by the financial institutions has continually shown that this type of contribution, rather than a once-per-year lump sum amount, is far easier to achieve for the majority of people. Besides being more realistic since it’s easier to budget for, a monthly payment plan benefits you by dollar-cost-averaging the price of investments throughout the course of the year. A lump sum contribution, on the other hand, means you have to take whatever price the market is offering on that particular day.
The key is to set up an automatic monthly savings plan, which will transfer money from your chequing account to your RRSP, choosing a date which is most convenient to you. Come and talk to us; we’ll be happy to show you how to set up your savings plan and the kind of investments that will make your hard-saved money grow.
DEFERRING TAXES Second, if you are a homeowner, are you accustomed to pre-paying your property taxes through a monthly payment scheme over the course of 12 months before the complete tax bill is due? If so, you may wish to look at contributing the same monthly amount to an RRSP. Those contributions though the year will be a write-off against your taxable income and result in a refund from Canada Revenue Agency (CRA). This can be put against your property tax bill, reducing the amount needed when it comes due. Third, many provincial governments offer qualified older home owners, or those with children, the opportunity to defer payment of their property taxes for the current tax year by means of low-interest loans. Home owners who can defer their taxes in this way may free up monies to contribute to an RRSP on a regular basis. When their tax refund eventually arrives, this can be used to pay down or pay off their loan. The above strategies are sophisticated and should not be attempted without the help and support of a financial advisor, and that’s where we come in. Remember, it’s never too early – or too late – to plan for your retirement.
8 TORONTO MONEY | FEBRUARY 2017
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