It’s almost Tax Time. Here is a list of some items worth noting for this year’s tax filing.
- RRSP contribution deadline: March 3, 2014 to be able to deduct on your 2013 tax return.
- Due Date for filing: Taxes owing on all personal tax returns are due April 30, 2014.
- Life Changes: Newly married/separated, moved, started a family, etc? These changes can affect your tax outcome.
- Direct Deposit: CRA will stop issuing cheques as of sometime in 2016. Direct Deposit can be set up with your 2013 tax filing.
- Ontario Healthy Homes Reno Tax Credit: Over 65, or do you live with someone over 65? You may qualify for a tax credit when you make your home more accessible.
- Foreign Income Reporting: Taxpayers who own foreign property NOT used for personal use and/or are assets used in an active business, may need to file a separate “Foreign Income Verification Form”. Specified Foreign Property includes: amounts in foreign banks, shares in foreign companies, real estate holdings outside Canada, and others. The penalties for non-compliance are severe.
- U.S. Status: Please advise us of your U.S. Status.
- Ontario Trillium Benefit: If you qualify for this benefit you can now choose to receive a single payment in July of 2015, or monthly beginning in July 2014.
Given the ever changing landscape of tax regulation research shows that approximately seventy percent of individuals and small businesses use tax preparers to file their taxes. We believe that it is money well spent to consult a professional and should be viewed as money well spent. Preparing tax returns can be complicated and understanding each taxpayer’s unique situation is crucial in ensuring the best tax outcome.
At TriDelta we work with many accountants and tax experts and will be happy to refer you to a specialist depending on the complexity of your financial situation.
Shoebox Tax Prep & Accounting Services compiled this list of tips to get you thinking about your tax return www.shoeboxtaxprep.ca
For most of us, the concept of retiring at 55 is dead. It is dead because many would struggle to finance a retirement that will last 30 plus years, but also dead because many people are realizing that they don’t actually want to be retired for 30 years.
Since 1975, the average number of years spent in retirement has grown by more than 30%.
Not everyone seems to be enamoured of that idea — Statistics Canada said last week in a comprehensive survey that once-retired people are returning to the workforce in droves. About 60% of those aged 55 to 59 opted to return to the workforce, the survey suggested. And about 45% of those aged 60-65 elected to return.
The study doesn’t nail down if it was money or other reasons that drove us back to the working world but these are significant numbers that we likely wouldn’t have seen 40 years ago. The study stopped at 65 but I think in the coming years we will see more and more people working well into their 70s.
According to The Canadian Human Mortality Database, the average life expectancy for a 55-year-old male is 27.1 years, or to age 82. Given that it is an average, roughly half of all 55-year-old males will live beyond 82. This is based on 2009 data.
In 1975, the number was 20.7 years, or to age 75.7.
This may not seem like a huge difference at first, but looked at another way, the average length of retirement for a 55-year-old male has grown 31% since 1975, from 20.7 years to 27.1 years. That is very meaningful.
If we look at the same numbers for a 65-year-old male, today the average life expectancy is another 18.8 years, versus 13.8 in 1975. This represents a 36% increase in average retirement for a 65-year-old male since 1975.
For females, the trend is the same, but slightly less dramatic. A 55-year-old female can expect to live another 30.5 years on average, meaning roughly 50% of 55-year-old females will live beyond 85. This has grown 17% for women since 1975.
A 65-year-old female can expect to live another 21.8 years, meaning roughly half will live beyond 86.8 years. This has grown 22% for women since 1975.
The point of all of this is that retirement planning needs to change, and a significant part of that relates to employment.
Let’s take a look at a 55-year-old male today.
He may have 20 to 40 years of life in front of him and may be nearing the end of his career. This makes no sense for most people – both for financial and quality of life reasons. There needs to be a better fit between this person’s skills, work goals, financial goals and the broader workplace.
This shouldn’t be that difficult to figure out.
The private sector is always looking for people to hire that will add to a companies’ profitability.
In many cases, someone who might have been making $150,000 a year working full time at age 55, might be very happy to work six months a year or 20 hours a week at age 65 and make $50,000. This could be very productive for many companies.
I believe that there are currently two factors preventing a better workplace fit for those who want to work into their late 60s and 70s, and even 80s.
1) 9-5 workdays That rigidity certainly isn’t good for traffic during rush hour, but it also prevents too many valuable workers from continuing to work. Whether it is a much shorter or flexible work week or more piecemeal project work, there needs to be more workplace creativity in order to be able to take advantage of the great talent available.
2) Ageism There continues to be a belief that older workers can’t contribute or add value. Their ‘old school’ ways and lack of technology skills or “unwillingness” to burn the midnight oil are typical comments heard in the workplace. Despite these perceived weaknesses, we also know that things really get done based on communication skills, people management, problem solving, and looking at things from a different perspective.
This reminds me of an ‘old school’ manager I once had who would often be seen going over his files from the ’70s and ’80s. Occasionally he would pull one of them out, blow off the dust, and say “let’s see how we dealt with this same issue the last time.” It was amazing how often we would discover that today’s new business issues had already been dealt with many years before.
There is also a broader economic issue for Canada. As a country we would be in much better shape if we can tap into the productivity of those over 65. This wasn’t such a big issue in 1971 when those over 65 were just 8% of the population. Today that number is 16%, and it is expected to be 24% in the next couple of decades.
If 65 really is the new 55, then we better figure out how to make it work.
Ted can be reached at email@example.com or by phone at 416-733-3292 x221 or 1-888-816-8927 x221
Reproduced from the National Post newspaper article 20th February 2014.
RRSPs are simply one big tax game. The aim is to get at least the same (if not better) tax refund when you put money in, than you will be forced to pay when you ultimately withdraw from your RRSP or RRIF.
For those who make a high income – let’s say $300,000 in taxable income – RRSP contributions are great. Depending on the province, every dollar they contribute to RRSP’s effectively lowers their income by $1. This provides a lower tax bill of 39 to 50 cents. As long as tax rates don’t change, you are guaranteed not to lose the RRSP game because at worst, you will have to pay the same rate when you withdraw funds from your RRSP or RRIF, as you received when you made the contribution.
Therefore someone with a high taxable income should definitely contribute to their RRSP if at all possible. The challenge is that they often have more money that they would like to shelter but the RRSP contribution limit doesn’t allow for it.
For most people, they can contribute 18% of their earned income. In the case of the $300,000 income earner, that would translate into $54,000, however the limit comes in to play for them at just $23,820 for 2013.
In order for this person to improve their retirement planning, they have several options:
1) Maximize TFSA contributions. For a couple, you can add $11,000 to your TFSAs this year. In my estate planning work, especially when looking out 30+ years, we try and structure things so that TFSAs are the last pool of assets that are left in an estate – as they face no taxes (other than probate). TFSAs will become almost as important as RRSPs for retirement planning.
2) Make a portion of your taxable (non-registered) investments growth oriented, low income investments. These funds will create low taxes along the way, but should grow nicely over a long period of time, and can fund retirement without having to worry about being taxed on withdrawals. Examples of high growth, no dividend income companies might include: Adobe Systems, Priceline, Google, Constellation Software.
3) Use insurance as a tax sheltered alternative. If this person wanted to put $40,000 a year into their RRSP but is limited to under $24,000, one alternative option would be to put the other $16,000 into a life insurance policy on a parent or in-law. The ideal age for this type of insurance is 65 to 75. Assuming a parent is 30 years older than you, and passes away at age 90, then you will receive a non-taxable payment at age 60, just in time for your retirement. In many cases, the rate of return on this investment will be very good – 7%+ after tax equivalent – and the investment will help diversify your returns as the insurance is not correlated or tied to stock markets, real estate or bond markets . While some people feel that this is an inappropriate ‘investment,’ we have found that many parents are happy to help their children and ultimately their grandchildren in a way that costs them nothing other than a short health checkup.
4) Tax strategies such as flow through shares – which can come in two forms. Flow through shares are aimed at helping to lower the tax bill for those who have incomes in a top tax bracket. The first form is better known. In this case you invest say $50,000 into a flow through, you can get significant tax savings through a variety of investment credits. The risk is that you must invest these funds in highly volatile companies that are usually doing mining exploration. The second form is less well known, and is more conservative. It essentially takes away the investment risk, leaves you with a tax savings that is potentially smaller, but is guaranteed from Day 1.
5) Other strategies for high income business owners, incorporated professionals, and occasionally for key executives of a corporation, would include strategies called Individual Pension Plans (IPP) and/or Retirement Compensation Arrangements (RCA). These strategies are too complicated to address in detail here, but serve as tools to provide additional pension income to those who are restricted by the RSP contribution limits currently in place.
While RRSP contribution limits do impose some retirement planning challenges for those with a high income, a variety of good tax planning exists to provide some alternatives that might be even better than simply having more money going into your RRSP.
Ted can be reached at firstname.lastname@example.org or by phone at 416-733-3292 x221 or 1-888-816-8927 x221
Reproduced from the National Post newspaper article 13th January 2014.
Contributing as much as possible to your RRSP has typically been considered the best way to plan for retirement. But, when you consider after-tax income, there might be times when cashing out part of your RSP can increase your after-tax cash flow, reduce future taxes and help ensure that you qualify for Old Age Security (OAS) payments.
RRSP contributions offer two main benefits: 1) Tax deferred growth: money invested in RRSPs grows tax-free until the money is drawn down, typically when converted into a RRIF – after age 71. 2) Income tax arbitrage: Since the RRSP contributions are fully tax deductible and the RRSP withdrawals are fully taxable, investors are able to significantly reduce their taxes by contributing to RRSPs in their working years when incomes and marginal tax rates are higher and then pay income tax at a lesser rate when withdrawing from an RRSP or RRIF in retirement. For example, a 45 year old earning $110,000 a year is able to reduce her taxes by 43.4% for every dollar contributed to her RRSP, but if her income in retirement is $60,000, she will be paying tax at 31.2%, a net after-tax benefit of over $0.12 on every dollar. But, there are opportunities where income tax arbitrage favours withdrawing funds from an RRSP. Two examples are illustrated below.
Wealthy Widow / Widower
Linda and Frank provide a good example of the potential after-tax benefits of RRSP withdrawals for widows (and widowers). Linda and Frank were married for 35 years. Both had worked most of their lives, and neither was entitled to a pension other than the Canadian Pension Plan (CPP). Both had also amassed RSPs of over $500,000 each. Frank recently passed away and Lisa at age 66 decided to retire.
Lisa’s income, which had been $100,000/yr., suddenly declined to about $20,000 in retirement. Her marginal tax rate dropped from over 43% to just 20%, but her RRSP, which was now combined with her husband’s, increased to over $1,000,000. If she chooses to begin withdrawing money from her RRSP at age 66, when her tax rate is substantially lower versus waiting until age 71 to begin her RRIF, she could save substantial after-tax dollars and significantly reduce her OAS clawback.
Assuming, modest 4% growth per year, Lisa’s RSP will be worth over $1,300,000 by the time it is converted to a RRIF and she begins her withdrawals at age 72. Since the minimum withdrawal rate at age 72 is 7.48%, she will be required to withdraw over $95,000 per year, bringing her total income to well over $110,000 when including CPP payments and small cash investments. She will have to pay over $30,000 of that money back to the government each year in taxes AND likely forgo over $6,000 per year in OAS payments as they begin being clawed back with incomes above $70,954.
If Lisa instead took out approximately $50,000 per year from her RSP from age 66 -72 she and her estate would save over $145,000 in taxes and reduce OAS clawbacks by over $55,000 (assuming that she lives until age 85). This is a net benefit to her and her estate of over $200,000 in after-tax dollars.
High Income Earning Spouse
RRSP withdrawals can also be highly beneficial for couples where one spouse earns substantially more than the other, providing over $11,000 in after-tax income in the example below.
Jeff and Sarah are a couple in their early 40s. Sarah, a graphic designer, decided to work part-time to be home more often with her kids. Jeff, a lawyer, earns $170,000 per year. Sarah earns $30,000. Jeff spends most of his salary to cover family costs, so he has over $50,000 of RRSP contribution room remaining and is rarely able to max out his contributions. Sarah has an RRSP of $50,000.
If Sarah cashes out $20,000 from her RRSP in year 1, $20,000 in year 2 and $10,000 in year 3 and Jeff uses those same funds to make his own RRSP contributions, the couple could save $11,420. The reason the benefit is so large is that Jeff pays tax at the marginal tax rate of 46.4%, so each $1,000 contributed to an RRSP provides an after-tax benefit of $464. Sarah’s average tax rate on the withdrawal would be 24.4% or a cost of $244 for every $1,000 withdrawal. Therefore, every $1,000 that Jeff contributes to his RRSP and Sarah takes out from hers provides a net after-tax benefit of over $220. The strategy makes most sense for couples where one spouse earns substantially more than the other, that spouse has a large amount of RRSP room remaining and he/she is unlikely to use that room for many years. There will be withholding tax charged on Sarah’s RSP withdrawals, which can be claimed back when she files her tax return.
Spousal RRSP plans are a further way of utilizing this same strategy to increase a family’s after-tax income. Jeff is able to take a full tax write-off for every dollar contributed to a spousal RRSP. But after three years, any withdrawals from a Spousal RRSP will be attributed from a tax perspective to Sarah. Consequently, by Jeff contributing $20,000 a year to a Spousal RRSP for Sarah and then Sarah withdrawing that same sum at least 3 years later, the couple can increase their after-tax cash flow by $4,400 per year.
Taking funds out of RRSPs during years where earnings have declined substantially, e.g. if you decided to take a prolonged vacation or sabbatical, or if you are out of work for an extended period of time, may be another way of benefitting from income arbitrage.
RRSPs are a great way for investors to save for retirement, but there are occasions as described above where partially cashing them out can increase overall client wealth. During the financial planning process, our objective is to ensure that each client’s retirement goals are met by focusing on the appropriate investment mix and by using the most effective strategies available to increase after-tax cash flow and the value for their estates.
To find out more about this and other tax effective investing and planning strategies, please contact Lorne Zeiler at 416-733-3292 x 225 or by e-mail at email@example.com.
Equities maintained strong upward momentum during the fourth quarter of 2013 completing an excellent year. The sustained & better than expected US economic reports, fueled a global market surge that surpassed our expectations.
Virtually every major global equity market was up double digits for the year with a few notable exceptions including China and Brazil. Indications suggest that the global recovery following the major market shocks in 2007 & 2008 has taken hold. The recovery is being led by the US economy and is believed to be sustainable although will likely deliver its fair share of surprises as it unfolds further.
Emerging market equity returns were slightly positive in the fourth quarter, but as a group recorded slightly negative returns for the year.
Precious metals remained under pressure throughout the quarter and were well down on the year. Gold investors recorded a negative 28.3% return.
Fixed income on the other hand showed signs of stress in light of the broad based US economic strength, exasperated by talks of the US Federal Reserve tapering. Most global bond indices were flat or slightly negative. The DEX Universe of Canadian bonds recorded its first negative return of -1.19% in well over a decade. Losses were driven by government issued debt and bonds with longer maturity dates while corporate bonds in aggregate returned 0.84% for the year.
The Bank of Canada remains concerned that inflation remains well below target, but is also troubled by record high consumer debt levels spurred by low interest rates. This dilemma suggests that they will likely remain neutral (in other words, not increase rates) for some time.
Despite the difficulty of double guessing the Bank of Canada, our opinion is that longer dated bond yields may rise albeit not for some time. Once Canadian rates move higher increases will likely remain within a tight range between 2.5% and 3%.
We reiterate that bonds have a key role to play as part of very necessary diversification as we build wealth. We also focus on capital preservation while delivering clients with a steady stream of predictable income. We forecast that our bond portfolios will deliver an approx. 3.5% return in 2014.
In 2013 our Core bond portfolio returned 3.68% and our Pension bond portfolio 1.66%, despite our benchmark DEX losing 1.19%.
US Fed policy remained the big discussion amongst market strategists who debated timing and the extent of QE tapering. December delivered the first decision to begin the easing process with a $10 billion monthly reduction of bond purchases from $85 to $75 billion starting in January 2014. The fear of tapering hindered 2013 bond performance, but we believe it is no longer a big issue and that bond markets have now priced in the effect of eliminating it entirely in 2014.
Despite the positive economic news including the IMF and World Bank forecasts of better global growth in 2014, caution is warranted, particularly after the steep market gains. Our 'TriDelta 2014 Financial Forecast' published in late December details our outlook for the year ahead.
2013 was another positive year for TriDelta clients. The Toronto Stock Exchange equity index (TSX) returned 7.3% in the fourth quarter and 13% for the year whilst the Canadian Corporate bond component of the DEX Universe Index was up 0.87% for the year while the overall DEX Universe was down 1.19%.
Most TriDelta clients had a net return for their portfolio between 6% and 16% depending on their risk tolerance/asset mix. Pure equity returns before fees were 22.45% for our Core portfolio and 18.41% for our Pension portfolio.
TriDelta Equity Model Returns in Canadian Dollars (to December 31, 2013):
||1 year (2013)
Sectors: Info Tech +15.7%, Industrials +16.8% & Health Care +13.8%
Core Model Stocks: Core - Constellation Software +24.5%, 3M +22%, Priceline +18.8%
Pension Model Stocks: Norfolk Southern + 24.8%, Abbvie +23%, Apple +22.3%
What did not work well in Q4?
One of our beliefs at TriDelta is to be very open about our business, its successes and its weaknesses. Openness is not a hallmark of the financial industry, but something that we believe is important in order to build trust, strong performance and partnership with our clients.
Sectors: Materials +0.8%, Utilities +4.7%
A few of our holdings had negative returns, some of which are listed below:
Core Model Stocks: Manitoba Tel -11.1%, S&P 500 Short -9.4%, Tourmaline -4.5%
Pension Model Stocks: Iamgold -13%, S&P 500 Short -9.4%, Cdn Oil Sands -.9%
The Best and Worst performers of 2013
We strongly believe in the power of dividend growth and those companies who have a history of increasing their dividends over time. These companies have generally outperformed the market with lower volatility. This quarter was no exception and we were proud to own the following companies that increased their dividends:
||% Dividend Increase
One company we owned removed their dividend entirely, which was a disappointment. It was Iamgold Corp
We’re proud to have protected and grown our client wealth in 2013.
We have also successfully delivered on our core beliefs of comprehensive financial planning, tax efficiency and an investment plan that generally lowers volatility, typically increases income and ensures we own many of the best companies as identified by our exclusive quantitative led selection process.
2013 is another example of our achieving above average risk adjusted returns in an extremely low interest rate environment. We remain committed to our proven investment approach and philosophy.
Thanks for your continued support.
|TriDelta Investment Management Committee