The RRSP Hullabaloo

There has been a sudden surge of angst in the media recently in regard to; whether you should contribute to your RRSP or TFSA, whether the mandatory minimum yearly withdrawals from your RRIF are too high, and finally, how higher tax rates in the future could affect your RRIF at the time of withdrawals.

I just don’t get this angst. High income earners are already contributing to both their RRSP and their TFSA. They are tax neutral at worst in their RRSP’s as they get a refund on their RRSP at the highest marginal rate of 46.41% and currently pay tax on RRIF withdrawals at 46.41%.

Low income earners are not making RRSP contributions, so unfortunately, they are not part of any argument. So, who does this discussion impact? Maybe the lower middle class, the middle class and the upper middle class.

At this point I want to clarify that if your current marginal income tax rate is equal to or higher then your anticipated marginal tax rate at retirement, you can’t be worse off RRSP wise, subject to inflation and increases in the marginal tax rates. I would suggest that for most people, their marginal rate will be lower at retirement.

In response to a blog along those lines by Larry Macdonald (click here to see Larry’s excellent blog), I wrote the following (I have amended this slightly from my response to Larry):

Let’s say Andrea makes between $80,000 to a $120,000 in his peak earning years of 45-65. I would say Andrea is upper middle class with his earnings. During those years he contributes on average $10,000 to his RRSP and let’s say the RRSP grows at 6%. Finally, let’s say that from age 65 until age 71, Andrea and his wife Barbani fund their retirement and Raptor tickets by living off other savings and an inheritance and do not encroach on his RRSP until age 71.

Andrea’s RRSP contributions from age 45-65 would have grown to approximately $350,000 at age 65, give or take a few bucks, and would further grow to $500,000 by age 71 when he has to convert his RRSP to a RRIF. His minimum RRIF withdrawals would be almost $40k or so at 71, dropping down to the lower $30’s as he ages.

Assume Andrea and Barbani’s CPP and OAS is $30k combined (probably typical for a family with a wife who worked, but had some years off to raise the kids).

Thus, the family will have around $70k a year in taxable retirement income. Assuming today’s marginal tax rates and using split pension amounts to share the tax hit, each spouse would pay income tax of around $4,000 or 11% after taking into account the age and pension amounts.

During the years Andrea earns $80k to $120k he saved 40-46% for each RRSP contribution and at retirement he is only paying 11%. For what I would consider not far off the typical Canadian living in a large city, I see no argument against the use of a RRSP. Of course inflation would factor into this calculation. However, the point of the above exercise is to reflect the 30% or so difference in Andrea’s current marginal rate and the low rate he and his wife would incur at retirement.

In regard to the TFSA argument, in the above example, $10,000 contributed to a RRSP nets a refund of approximately $4,600 and the tax on the cash coming out of the RRIF is $1,100 per $10,000 (11% on $10,000). Thus, the net after-tax cash flow is $13,500 ($10,000 original RRSP contribution + $4,600 original refund less $1,100 income tax) far in excess of the $10,000 you could alternatively put in your TFSA. 

The above is obviously very oversimplified to make a point. I did not account for the tax free growth in the RRIF and TFSA and the fact the tax-free growth in the RRSP is taxed and the tax-free growth in the TFSA is not. However, if you put the $4,600 refund from your RRSP into your TFSA, you would still be substantially better off with the RRSP, due to the low rate of income tax upon the withdrawal of your RRIF, even though all the growth of the TFSA is tax-free.  

There are various factors that could change the above results. Tax rates can increase over time, inflation can rear its ugly head  and where one spouse dies, the surviving spouse could get caught up in higher tax rates and the income splitting benefit stops with the passing of the other spouse.

All in all, I just don’t see the cause for angst around this topic. 

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

How To Hold A US Vacation Property

With the return of the US estate tax; albeit at a reduced 35% rate with a $5,000,000 exemption for 2011 and 2012, Canadians once again have to consider planning for potential US estate taxes. The portion of the $5,000,000 exemption available to non-resident Canadians is equal to $5,000,000 (in the past the exemption has been converted to something known as a unified credit)  multiplied by their US situs assets divided by their worldwide estate. Thus, most Canadians will not have US estate tax issues for 2011 and 2012 because of the revised estate exemption and lower tax rate. However, the US estate tax debate is far from over and the exemption could fall precipitously in 2013 and beyond, while the tax rate could potentially increase.

So how do you plan for 2013 and beyond when buying a US vacation property in 2011 and 2012? Firstly, assume a lower exemption going forward, say $1,000,000 and an estate tax rate as high of 55% (both these numbers have been rumoured). Then consider what your exemption may be based on the pro-ration of your projected US situs assets after your 2011/2012 vacation property purchase as a percentage of your worldwide assets. If that number seems to be creating US estate tax, you may wish to consider one of the purchase option structures below in conjunction with professional advice from someone who specializes in US taxation.

First a quick step back. For anyone who bought US vacation properties prior to June 2004 in what were known as single purpose corporations, those properties are still exempted from US estate tax. However, all good things must come to an end and effective June 2004, the CRA stated that going forward, Canadians would be assessed a taxable benefit if they purchased their US vacation properties in a single purpose corporation. However, the CRA did grandfather existing single purpose corporations until the earlier of the sale of the US real estate by the single purpose corporation or the disposition of the shares of the single purpose corporation.

Over the last few years, various structures and plans have been set forth and considered to replace the single purpose corporation, however, it now seems that most professionals have settled upon a new structure of choice, a Canadian resident discretionary trust.

The use of a Canadian resident discretionary trust is usually suggested for the purchase of more expensive US vacation properties, say over $300,000 and for individuals who wish to transfer the US property to their spouse and/or children upon their death. If the trust is properly structured; legal professionals say the trust must be irrevocable and cannot be considered a grantor trust in the United States, then any US estate tax will be deferred until the death of the beneficiaries (spouse and children).

It should be noted, the above structure may not work if rental income is earned and the use of a discretionary trust may be problematic if financing is required as US lenders are averse to lending to a Canadian resident trust.

In any event, if you plan to purchase a US vacation property and consider the use of a discretionary trust, you should utilize the services of tax lawyer familiar with the issues. I would suggest that in most cases the lawyer who handled your Canadian house purchase will not be qualified to handle this transaction.

Finally, where the vacation property cost is in the $200,000 to $300,000 range, you may want to consider joint ownership with various family members. Again, you should obtain some US advice, but being penny wise will definitely make you pound foolish in dealing with the complicated issue of US vacation property ownership.

Winter Driving Rant


Talking about vacation properties and warm climates has boiled my blood. Has anyone noticed that as soon as it snows, people immediately fall into one of two groups? The first group consists of people who want to see how fast they can drive on a slick snowy day, and the second group is full of people who drive like they have never seen snow before and endanger themselves and others by driving so slow that other drivers must try to pull past them.

However, my biggest winter driving peeve is the people who do not clear their rear windshield of snow. Firstly, how can they drive safely without being able to see what is behind them, and secondly, as the driver behind these people, it is impossible to see what is going on in front of them.

Winter driving is tough enough without either of these annoying groups. 

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.

Charitable Giving

There have been several articles in the last couple of months about the decline in donations to Canadian charities. Statistics Canada reported Canadians donated one billion less dollars in the two-year period from 2007 to 2009. The reasons for the decrease in giving range from the poor economy to the number of donation scams and finally, the large allocation of donated funds to charity administration.

Rob Carrick recently had an article in the Globe and Mail expressing concern about Canada’s ‘generosity deficit” and ways to rejuvenate charitable giving. He provided information on how you can easily incorporate giving into your life and the tax benefits of making charitable donations. I had an email exchange with Rob stating that in my opinion, the problem is not a rejuvenation issue as much as a change in society’s attitude toward giving. I want to expand on this issue in this blog. 

First, let me state that I think a substantial issue is the economy and when, and if, people feel good about their job prospects and the economy, a significant amount of donations will come back. But, as someone who has been involved with the Make A Wish Foundation and the Reena Foundation, I know multiple charities are just chasing the same big donors. Where will the growth come from outside of these big donor corporations or wealthy individuals?

At this point I am going to state some personal opinions that may be way off or misguided. I will get to some income tax considerations later on; but hey, this is my blog and today I am veering off a little.

Some of the articles I have read note that the average age of donors is now 53 instead of 51. I think this statistic is significant and it can’t be explained away by saying that younger people are not faring as well in the economy. As a tax accountant, I have done thousands of tax returns for many very wealthy Canadians. You would be surprised at how many returns have just a $50 donation to the Cancer Society or Sick Kids, etc. There are many entrepreneurs not following the charitable gospel espoused by Warren Buffet and Bill Gates I think the donation issue is a cultural issue or family issue. I can almost trace giving down a family tree as I prepare income tax returns for selected families. When a child is brought up in a charitable household they almost always follow through as a contributor to charity.

In my opinion, charities are going to have more trouble going forward as the older generation passes on and charitable values diminish; as the younger generation seems to increasingly shun religious institutions. As the concept of charity springs from religion, charities will continue to suffer unless parents can ingrain giving as part of a child’s upbringing religious or otherwise.

So what is the financial benefit of a charitable donation? Once you exceed the $200 minimum donation limit, each dollar saves you 46.4% in income tax in Ontario through the donation tax credit. So really, you are only out of pocket $54 for each donation.

If you wish to donate public securities you do not have to pay the capital gains tax on the security donated. Thus, you not only get the 46.4% donation credit, you save 23% in income tax on the capital gain.

There are additional charitable tax planning ideas that can reduce the after-tax cost of donations using flow-through shares and insurance, however, they are beyond the scope of this article.

Terra Restaurant

Excellent restaurants are few and far between in North Toronto, but a screaming exception to that rule is Terra.

I have been to Terra a couple times recently, once with my wife for dinner, and once for a business meeting. Both meals were excellent, especially my dinner visit.

For our dinner visit we had the tasting menu. I usually agree to ordering a tasting menu because my wife enjoys them. Personally, I am usually starving when I finish, as the portions typically get lost under the garnish. However, at Terra I was full at the end.

The dinner started with a tasty Amuse Bouche.

The second course was a duo of two of my favourite items, a lobster potsticker and Seared Ahi tuna in a mango salsa. Both were excellent.

The third course was a very substantial helping of potato gnocchi with mushrooms, scallion and parmesan in a roasted garlic cream sauce. It was outstanding, but very filling. The portion was too large, not a usual complaint for a tasting menu.

The fourth course was a sorbet, to cleanse the pallet as they say.

The fifth course was a choice of salmon or a beef filet. The beef filet was 10oz – massive for a tasting menu. Both my wife and I had the filet and it was excellent.

The sixth course was a sampling of cheeses and finally the seventh course was a combo of a miniature crème brulee and chocolate torte.

It was an excellent all around dinner.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

The Blunt Bean Counter Published on Seeking Alpha

My blog, Resverlogix: A Cautionary Tale, was published as an article by Seeking Alpha on January 16, 2011. Seeking Alpha is a stock market blog that provides free stock market analysis primarily from money managers, investment newsletter writers and the general public. In 2009, Time.com rated Seeking Alpha as one of the top 10 financial blogs calling it "the grandfather of financial blog aggregation" and saying "This is by far the largest collection of financial blog posts in the world." Seeking Alpha was also the recipient of a Forbes' Best of the Web Award.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Stock Message & Chat Boards

As someone who enjoys monitoring stock message boards and online forums, I am going to give you my opinion on how to utilize and monitor these boards.

My first piece of advice is to assume any non-factual post on a forum is self-serving – i.e. if the post is not factual information from a press release, issued financial statements or a document on Sedar or Sedi, you must be skeptical of the poster’s intentions. That is not to say that most posts are disingenuous, but you must start with the presumption they are disingenuous.

You must always be aware of pumping and dumping. This typically occurs with thinly traded stocks where someone purchases the stock and then, usually under several aliases, posts great things about the stock on stock forums. There have been cases of this in the US, the most notorious involving fifteen year old Jonathan Lebed who bought thinly traded stocks and flooded market forums with messages touting the stocks. When he achieved his goal of pumping the stock he would sell. He supposedly made over $800,000 in this manner until the SEC caught up with him and he negotiated a $300,000 settlement without admitting any wrongdoing.

Once you have accepted that you must be skeptical of every post, you then need to weed out the, how shall we put this, “the less intelligent posters.” Most boards have a significant percentage of unsophisticated posters who really have no idea what they are doing or saying. Weeding those investors out is the easiest part and you can just simply put them on ignore. What is trickier is ensuring the intelligent posters have no vested interest other than a community discussion on the merits of a particular stock.

There is no shortcut in determining which posters you should follow. Most forums allow posts to be recommended, so you should start with the most recommended posters, but recommendations are sometimes based more on quantity of posting than quality, so that is not enough on its own.

You have to read posts to determine the knowledge of the poster and the quality of the posts and, after a while, you begin to grasp which posters are worth reading. This can take months or even years. For example on the Investor Village board, I have always read the posts of a certain poster with interest. He has great knowledge in the Oil and Gas industry and over time has picked several winners in the Oil and Gas patch with one big miss.

Within stock forums, a Darwinian effect can even take place where better posters are hand selected to become part of private forums. This eliminates having to weed out the posters who have no clue what they are talking about.

Where private boards are not started, the Darwinian selection works well, since other excellent posters become attracted to those they perceive as intelligent and certain boards then fill up with good posters. For example, the poster I discuss above is like a pied piper, wherever he goes other intelligent posters seem to follow. A good board will have a mix of posters, some who are great researchers and find every piece of public information on a company, those that have an expertise in a certain field (i.e. are in the Oil and Gas business or are medical professionals following bio-tech stocks) those that can interpret legal documents and those that can interpret financial information. When a board has all those attributes, you have increased your odds with the investment as ownership of that particular stock is constantly questioned or reinforced.

Reinforcement is a major issue if you read message boards. The board can become so enamored with a stock that people lose objectivity as the posters each reinforce the brilliance of their investment in a particular stock and anyone fairly questioning that opinion if often treated as a “shorter,” someone who wants the stock to drop. Human nature being what it is, this is the hardest issue to safeguard against, as greed becomes contagious and the herd mentality overruns objectivity.

If one has the time or inclination, stock forums can be a valuable asset in monitoring your investments and finding new investment ideas. However, remember its caveat emptor or in this case, let the message board reader beware. 


Door in the Face

As I was walking into my office building last week I was behind a young woman. She opened the door, did not look behind her, and just kept walking. If I was not paying attention, the door would have slammed in my face. As I was taught from a young age to always hold the door open if someone is behind you, I find it rude when someone does not follow suit. Anyway, I did a little mental experiment and tried to follow close behind several people over the next couple days to see if they held the door. I would say it was about 70/30 in favour of those holding the door open. But, for those that did not hold the door, there was no indication that they even considered there was the possibility of anyone being behind them. I also found it interesting that in my non-statistically significant sample, it was younger women in general who paid no heed. I am not sure if that has any meaning, maybe they are used to having the door held for them.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

The Blunt Bean Counter Mentioned in Globe Investor / The Reader

Thanks to Rob Carrick of the Globe and Mail for noting my blog on the taboo of money (Intergenerational Communication Gap) in his Personal Finance Reader Blog.

Rob is, of course, a well-known and respected business writer for the Globe and Mail contributing Personal Finance and Portfolio Strategy columns. He also has a unique Facebook page which encourages interaction with his readers and showcases a genuine care for his readers and their opinions.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Intergenerational Communication Gap

In an article for CNBC, author Jessica Rao quotes Dr. Nancy Molitor, Clinical Psychologist and Public Education Coordinator for the American Psychological Association, as saying “Money is the most taboo, fearful subject that we can encounter as people.” An inability to discuss this taboo subject can have tremendous implications when taken in context of families and their money.

We are all familiar with the term generation gap, but the lack of communication between generations can be very costly from a both a financial and social perspective. The substantial wealth transfer taking place in Canada from parents to children, or from children to parents, makes clear communication between generations more important now than ever, yet the communication is mitigated by this taboo topic of money.

So what am I talking about? Let’s consider Emily, a widower with two children. Emily’s husband Bob passed away a couple years ago, but during his lifetime he amassed a significant estate due to the sale of his composite hockey stick company ten years ago. Emily has two children, John, a Bay street lawyer making $800,000 a year and living in the upscale Toronto Rosedale neighborhood, and Susan, stuck in a bad marriage, who never finished University and married early.

Emily was brought up in an era where you don’t discuss your family assets with your children. John knows he will inherit millions of dollars when mom passes away, but gives it little thought as he is very comfortable and only acknowledges the inheritance in that he does not fully contribute to his RRSP. Susan on the other hand has had a somewhat strained relationship with her mom since her early marriage. Although they  are currently on better terms,  Susan is too proud to ask her mom for money and she does not think she would receive a warm reception even if she got over her pride and spoke to her mom about her finances. What Emily does not know is that Susan’s husband is a cocaine user and she would like to leave him, but she is concerned about how she could survive. She also would give anything to go back to University to become a social worker, but that is currently just a dream.

Now imagine if everyone felt comfortable discussing money? Those that know Emily, realize that she would give Susan some sort of early inheritance, but she does not want to insult Susan and she is not aware of her husband’s issues and Susan’s dreams. Further imagine you were brought in as a family friend and could open up the intergenerational communication gap. Emily would be thrilled to provide an early inheritance to allow Susan to leave her husband and pay for the legal bills and, with Susan free of her husband, she would have the financial ability to go back to school to pursue her dream of being a social worker.

How is this gap bridged? I can’t answer that question. But I know I have advised clients who have the financial means that they should try and have a heart to heart with their children in respect of their children’s financial needs.

How about the alternative scenario of children who have the means to support less financially secure parents? Sam is a widower. He was a factory worker who scrimped and saved to buy a house and put his two kids through school. Sam does not have enough money to retire and decides to obtain a reverse mortgage on his house such that when he dies, the mortgage owing is deducted from the sale proceeds of the house. This is often a costly form of financing.

Sam is too proud to approach his children about his financial situation. However, if you were able to bridge the intergenerational gap, you would be able to inform Sam that his children, who are both successful, feel that they owe everything to Sam and would be happy to either gift dad some money or provide him a loan at lower interest then the bank so he wouldn’t have to reverse mortgage the house.

The two scenarios above have many variations. However, pride, secrecy, and perceived “grabbing of the family money before the body is cold” prevent any kind of open communication.

I have no magical fix, however, if you are the parent, consider speaking to your children about their financial situations and dreams to see whether you can assist them in realizing those dreams. If you are tight for money in retirement, at minimum let your children know if you are undertaking a reverse mortgage or similar financial arrangement so they can potentially assist you or, at a minimum, understand that your estate has been compromised by a mortgage. 

If you are the child in need, have a frank conversation with your parents to let them know your issues so they don’t perceive you to be “money grabbing” and, if you are a successful child with a parent of limited financial resources, offer to help or to pay for your financial advisor to sit down with your parent.

Maple Leaf Rant

Little did I know that when my parents let me stay up late to watch the Toronto Maple Leafs win the Stanley Cup in 1967, that it would be the beginning of a Stanley Cup drought of 43 years and counting.

So when the Maple Leafs hired Brian Burke a couple years ago as general manager, I was pleased. Burke had success with the Anaheim Ducks, seemed to have the sense of humor needed to deal with the Toronto sports media and had an aura that said “Don’t worry, I know what I am doing and I will get it done.”

In my opinion, Burke also arrived at a time that Maple Leaf fans were so worn down by mediocrity and worse, that the Leaf Nation would allow him time to build properly using the draft and astute signings.

However, for some reason, Burke, who I am sure would succeed 8 times out of 10 as a GM, seems to have badly misfired in Toronto; as surprisingly, he, and not the Leaf fans, appears to have limited patience.

Burke’s first puzzling move was signing Martin Gerber late in the 2009 season to bolster a weak goaltending situation. As a fan, I was ecstatic that the goaltending was weak. The Leafs had a chance to get into the lottery for a top pick and poor goaltending may have helped them lose games and achieve a higher draft pick. However, Gerber won several meaningless games for the Leafs that year to move them down to the seventh draft pick. Considering Gerber was then released following the season, his signing was the first perplexing move made by Burke.

The second odd move occurred when Burke started signing veteran free agent defensemen the next fall. Once again, one would have thought he would have traded all the veterans for younger players to build from youth and to ensure a high draft position the following season.

The third and most puzzling move was the trade of two number one draft picks and a second round draft pick for Phil Kessel. One can understand Burke’s thinking in that Kessel was young and his acquisition was like getting a guaranteed number one choice. However, the Leafs gave up three draft picks and if Kessel (a player whose temperament has been questioned) performed well, he would seemingly only help the Leafs to maybe fight for one of the last playoff spots.

Well, we all know that last year, the Leafs did poorly and Boston got the Leafs’ second pick in the draft and it now looks like the Bruins may get another high pick this year. Burke may end up building the Bruins, not the Leafs. Meanwhile, the Leafs only have a few individual players who appear to be useful for the future and no draft pick again in 2011.

The whole direction Burke has taken has been very confusing and disappointing and I now have gone from having confidence to being sceptical that Burke can fix the Maple Leaf mess.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.