My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with BDO. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, December 21, 2020

2020 year-end financial clean-up

This is my last post for 2020 and I wish you and your family a Merry Christmas and/or Happy Holidays and a Happy New Year. Let us hope, 2021 brings a successful vaccine rollout and some return to normalcy.

As in many prior years, my last post of the year is about undertaking a "financial clean-up" over the holiday season. I feel this "clean-up" is a vital component to maintain your financial health. This year I will consider the effects of COVID on your clean-up.

So what is a financial cleanup? In the Blunt Bean Counter’s household, it will entail the following in between eating and watching the 2021 IHF World Junior Championship (it looks like the tournament will be a go and will have an all Canadian referee contingent, which will make many people very happy).

Yearly spending summary


I use Quicken to reconcile my bank and track my spending during the year. If I am not too hazy on New Year’s Day, I print out a summary of my spending by category for the year. This exercise usually provides some eye-opening and sometimes depressing data, and often is the catalyst for me to dip back into the spiked eggnog.

But seriously, the information is invaluable. It provides the basis for yearly budgeting, income tax information (see below), and amongst other uses, provides a starting point for determining your cash requirements in retirement. Whether you use Quicken, Excel or just a bunch of hand-written sheets, it is important to summarize your yearly spending. If you do not track your spending in any manner, maybe for this year, select January, February, April, May, November and December to get a mix of pre-COVID months, COVID-adaptation months and living-with-COVID recovery months. Next, go through your bank account and summarize your expenses for those months, and extrapolate them for the year accounting for any other large out-of-the-ordinary expenses in the other months.

Most of us will have spent significantly less in 2020 due to COVID. If you have a summary of your 2019 spending, a comparison will likely reflect a large drop in your discretionary spending. Review these expenses and consider whether you can keep your spending somewhere between 2019 and 2020 when we return to “normal.” Your fixed expenses are likely fairly similar, but you may be able to reduce some of those expenses.

Investment portfolio review


The first couple weeks of the new year is a great time to review your investment portfolio, annual rates of return (for 2020, but also 3-, 5- and 10-year returns if you have the information) asset allocation and to re-balance to your desired allocation and risk tolerance. The million-dollar question is how your portfolio or advisor/investment manager did in comparison to appropriate benchmarks such as the S&P 500, TSX Composite, an International index and a Bond Index. This exercise is not necessarily easy (although all investment managers and some investment advisors provide benchmarks, they measure their returns against). The Internet has many model portfolios you can use to create your own benchmark if you are a do-it-yourself investor.

While the markets bounced back strongly from the initial COVID drop in March, the returns I am seeing from clients are varying widely. Thus, it is especially important this year to review your returns against the appropriate benchmark. This means that if you have a conservative portfolio, you should not expect to have some of the large technology gains a more aggressive investor would have. However, if your returns are way off your conservative benchmarks, you need to discuss with your advisor the reasons for the variance.

It may be a good year to look at the returns of certain balanced funds (various banks and private funds such as Vanguard offer these funds) as a comparable for 2020. These funds can be 60%/40% equity to fixed income or vice versa—or other combinations. You just need to do a bit of digging to find the appropriate fund to compare to your portfolio allocation (it will never be an exact comparison).

The reason you would look at these balanced funds is because they are typically low cost and you would hope your advisor at worst achieves returns similar over 3-, 5 and 10-year periods and provides some value-added services to you.

Tax items


As noted above, I use my yearly Quicken report for tax purposes. I print out the details of donations, medical receipts (also useful for your medical insurance re-imbursements I discuss below) and other expenses that may be deductible for tax purposes such as auto expenses (this acts as checklist of the receipts I should have or will receive). Almost all of us used our home office for business or employment purposes this year, so you should print out or summarize your home-related expenses. Also stay tuned for news on Form T2200 from the CRA, which is finalizing its protocols for the form during this time of increased work from home. See this CRA press release for information on the simplified T2200 for home office expenses.

Where you claim auto expenses, you should get in the habit of checking your odometer reading on the first day of January each year (since, if you are like most people, you probably do not keep the detailed daily mileage log the CRA requires). This allows you to quantify how many kilometres you drive in any given year, which is often helpful in determining the percentage of employment or business use of your car. This year, many people will have only used their car three months of the year for employment or business, so your odometer reading on January 1, March 31, and December 31, 2020 would be the three most important readings (see if you have an oil change or car repair around these times that noted your kilometres on the service invoice). 

Medical/dental insurance claims


As I have a health insurance plan at work, I also start to assemble the receipts for my final insurance claim for the calendar year. I find if I don’t deal with this early in the year, I tend to get busy and forget about it.

To facilitate the claim, I ask certain health providers to issue yearly payment summaries. This ensures I have not missed any receipts and assists in claiming my medical expenses on my income tax return. You can do this for physiotherapists, massage therapists, chiropractors, and orthodontists, and even some drug stores provide yearly prescription summaries. This also condenses a file of 50 receipts into four or five summary receipts.

Year-end financial clean-ups are not much fun and somewhat time consuming. But they ensure you get all the money owing back to you from your insurer, ensure you manage the amount of taxes you pay to the CRA, and jump-start your budget planning. 

As noted earlier, this years summary will provide very telling data on your level of discretionary spending, pre-COVID and during COVID. Use this information to budget your discretionary expenses going forward. Finally, a critical review of your portfolio and investment advisor could be the most important thing you do financially as you prepare for 2021. 

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, December 14, 2020

When should I start receiving my CPP?

People often ask: “When should I start my Canada Pension Plan ("CPP") retirement benefits?” Unfortunately, the answer is not necessarily black and white. Between government rules on CPP withdrawals and the many nuances of an individual’s life, planning when to start receiving CPP can get complicated quickly. While the program actually gives you a fair bit of control over when and how much CPP you receive, that control can leave your head spinning.

This week I invited Jason Claydon, a Winnipeg-based senior advisor in our Wealth Advisory Services at BDO, to share some of the issues and factors he considers with clients.
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By Jason Claydon

The regular age to start receiving CPP retirement benefits is 65, and the amount you receive is based on your contribution history to the CPP program. You can receive a Statement of Contributions from the government by logging into your My Service Canada account or requesting a copy by mail. This statement provides an estimate of your retirement benefit.

You can start receiving CPP benefits as early as age 60 or as late as age 70. The benefit is reduced by 0.6% for each month (7.2% per year) that you start receiving CPP prior to age 65. The maximum reduction is 36%, which happens if you start receiving CPP at age 60.

Conversely, if you delay the benefit past age 65, you receive an increase of 0.7% for each month you delay (8.4% per year). This can reach a maximum of a 42% increase in the benefit if you wait until you are 70.

Is there a formula that calculates when to start receiving CPP?


There are actuarial calculations to help you determine when to start CPP. For example, if two people have the exact same financial situation, one person starts receiving CPP at age 60, and the other person starts at age 65—it would take the individual starting at age 65 until at least age 74 to catch up in the total amount of benefits received. Various factors affect this “breakeven” age.

I should note that many people disregard the actuarial calculations and take CPP early or at 65 simply because they feel a “bird in the hand is worth two in the bush” when it comes to guessing their mortality.

In any case, it’s not just health that should guide your decision on when to start receiving CPP benefits. It’s also important to review your overall financial situation, other sources of retirement income, and your tax situation.

When to receive CPP: An example


Let’s look at John and Jane Smith as an example. They are small business owners, both 62 years old, and want to retire at age 63 with $72,000 per year ($6,000/month) of after-tax income. They have saved $1.2m in their RRSPs, have $80,000 in each of their TFSAs, and have a $750,000 investment account in their holding corporation. Jane is also receiving a $20,000/yr pension from a previous employer.

They have had some past health issues but consider themselves relatively healthy. However, John has a family history of premature death—both his parents died in their late 60s. Jane’s parents both lived into their late 80s.

They are no longer contributing to their RRSPs but want to know if they should continue to let their RRSPs grow and delay withdrawals to the calendar year in which they turn 72 or if they should start withdrawals earlier when they retire at age 63. They are concerned about taxes and the significant tax liability on their RRSPs, which could leave their estate with a hefty tax bill.

Options for John and Jane


John and Jane could defer CPP benefits to age 70 and instead replace that income by starting withdrawals from their RRSPs at age 63. They could each withdraw funds each year to help meet their retirement income objective while staying within the lower tax brackets. They might even consider additional RRSP withdrawal amounts (within the lower tax brackets) to fund their annual TFSA contributions in retirement.

By deferring their CPP past age 63, they would receive annual increases to their CPP benefits, as noted above.

What John and Jane did


John and Jane decided to defer their CPP benefits (for now) and will start RRSP withdrawals at age 63. They realize there is an opportunity cost of starting RRSP withdrawals earlier and not continuing to maximize their future growth, but managing the tax liability on their RRSPs through tax-efficient withdrawals at lower tax rates is important to them. Essentially, they want to pay a little more in taxes now to help reduce taxes later on.

They made this decision as part of a comprehensive financial plan to address their entire financial situation, including their other assets. This included gradually withdrawing assets from their corporation in retirement. They are financially independent with the amount of savings they have accumulated for their retirement. This factored into their decision to defer CPP, and they will review their decision on an annual basis.

They will also have to make a decision in three years when they turn age 65 on whether they want to start or defer Old Age Security (OAS) benefits. OAS benefits are eligible to be received at age 65, and similar to CPP benefits, OAS benefits can be deferred past age 65 at an annual increase of 7.2% up to age 70.

The answer to when to take CPP benefits (and Old Age Security for that matter) is not a clear black-and-white answer. Like John and Jane, you should consult with your advisor to review your overall financial situation, your financial priorities, and the various options available to you. And then monitor and review your situation on a regular basis with your advisor.

Jason Claydon is a senior advisor in BDO’s Wealth Advisory Services practice. He can be reached at 204-956-7200 or by email at jclaydon@bdo.ca.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.