Estate planning and distribution of investments. What could go wrong? Here’s a story of a father who aimed to divide his estate equally between his sons. Bernard, a widower, sold his home and settled into a comfortable rental townhome at a new retirement village. Once he’d invested the equity from his primary residence, his non-registered investment portfolio was about equal to his RRIF balance. Because a RRIF with a named beneficiary doesn’t pass through probate, Bernard opted to name a beneficiary to save on probate fees. He named his eldest son, Stephen as beneficiary, and to offset that bequest, named his other son, Jeremy, as the heir to his estate, which consisted solely of the non-registered investment portfolio. Even Steven! Or so he thought. When Bernard passed away, it was time to settle up with the CRA. Jeremy was pleased to learn that there’d be very little income tax associated with the non-registered investment portfolio because there’d been almost no investment growth. But Bernard’s RRIF was fully taxable! Jeremy had to tell his brother, “Our inheritances aren’t so even, Stephen”. Since Stephen was named beneficiary of the RRIF, it was payable to him, in full, by the bank. But its tax liability was the responsibility of Bernard’s estate and had to be paid from the non-registered portfolio willed to Jeremy. The match wasn’t even close. Fortunately for these two brothers, their relationship was rock solid, and they were keen to see their dad’s estate divided equally between them. They knew this was their father’s wish, because they’d had a family huddle to discuss it and their dad had also documented his intentions. Stephen and Jeremy split the tax bill equally from the proceeds of their inheritances. Even Steven! Consider this… While naming a beneficiary (other than the estate) on certain financial instruments means they won’t be subject to probate fees, any tax payable on death is the responsibility of the estate unless the spouse is the beneficiary, then there is no tax liability. When planning, consider the after-tax value of your assets, or account for taxation in your planning. If the heirs of the estate are receiving equal portions, naming them equally as beneficiaries on the financial instrument keeps things even-steven.

Lately, we’ve all been seeing a few less dollars in our wallets. Between groceries, fuel and the cost of homes, things are surely getting more expensive. The word “inflation” is being tossed around, but what in fact is inflation and how does it affect interest rates and your investments? Interest Rates and Inflation Inflation can be defined as a general progressive increase in the prices of goods and services in an economy. When prices rise, each unit of currency can buy fewer goods and services. Monetary policy seeks to stabilize the rate of inflation in an economy by controlling how much cash is infused into the economic system and where rates are set. While we won’t be discussing how money gets into the economy (but if you’d like to learn more about how money gets into the economy and how it works, this video by Ray Dalio does a great job of explaining it), we will be looking at the relationship between interest rates and the rate of inflation. When interest rates are low, money is cheap. Individuals will borrow more to spend and invest, businesses will borrow more to invest in the growth of their own companies, restructure existing debt and buyback shares. In fact, a share buyback can lead to an increase in the price of shares. When money is cheap, established companies will borrow to buy back their own shares on the open market. When they buy back their own shares, they are reducing the number of shares available and increasing the value of each remaining share while the market cap remains the same. However, when interest rates are high, individuals will borrow fewer dollars and save more. Businesses will also borrow fewer dollars and invest less in the growth of their companies. For this reason, a low interest rate environment will stimulate an economy and encourage growth whereas high interest rates stifle growth and stabilize (or contract) an economy. Now, you might be wondering why we would ever raise rates if lower rates lead to more growth. The answer? Inflation. When money is cheap there is more of it being created, more money in an economy leads to a reduction of purchasing power. The more money there is, the less value that money has. If we keep rates low to stimulate the economy, then inflation can run rampant. If we keep rates high to curb inflation, then we stifle growth. It’s a fine balance and there is a constant battle being fought between interest rates and inflation. Here’s an example. If an interest rate is, say, 5% but inflation is, say, 3% then the real rate of interest is only 2% (5-3=2). The real rate seeks to streamline the cost of money and the increase of prices. Let us look at it this way, assume that $100 dollars can buy you 100 apples. Now let us assume that there is no inflation and we have invested our $100 at 5% interest for a single year. When the year has ended, our $100 has turned into $105 and our ability to buy apples has increased from 100 to 105. Now let us look at the same scenario but assume that the price of apples will experience 5% inflation. Our $100 dollars invested at 5% for a year will still result in $105 at years end. But if apples inflated in price by 5% from $1 to $1.05 then we can still only buy 100 apples. The money itself grew by 5% (from 100 to 105) but we cannot buy any more apples at year end because the price of apples has gone up too. We can see that inflation reduces purchasing power. The objective of the central bank, through monetary and fiscal policy, is to target a real rate that will allow for growth while keeping inflation in check. What Does Inflation Mean for the Stock Market? Broadly speaking, the stock market can be divided into value and growth categories. Growth stocks are typically new and faster growing companies that may not yet be profitable. These companies need cash to grow and raising cash becomes more challenging when the cost of borrowing increases. A value stock is one that has strong current cash flows and isn’t borrowing to grow as much as a growth company. When coming up with a value of a stock using a discounted cash flow model, in times of rising rates, a growth stock will be impacted to a higher degree than a value stock. This is why we have seen tech and growth stocks come off in recent months and seen value plays like energy, infrastructure, banks and insurance companies rally. Moreover, banks and insurance companies will do well with an increase in interest rate margin – the spread between how much they pay on deposits versus how much they make on investing deposits. With rates rising, this spread could theoretically increase. What Does Inflation Mean for the Bond Market? Again, speaking in general terms, inflation can have a negative impact on bonds and other fixed income assets. The nature of valuing a bond, not unlike the DCF (discounted cash flow) method for valuing a stock discussed previously, is contingent upon discounting cash flows at a prevailing rate. When rates go up the price of a bond goes down, that is, there is an inverse relationship between the price of a bond and the yield of a bond. Another way to think about it is, when interest rates go up, the interest payments from existing fixed income securities are less competitive than new bonds at the higher rate so the price of existing bonds at the previous, lower rate goes down. Basically, when inflation goes up, rates must go up too. When rates go up, existing bonds come down in value. Please keep in mind that everything we have discussed is from a theoretical perspective. There are plenty of moving parts and different securities will behave differently. The objective here is to illustrate general economic concepts in a vacuum

Investing is a fantastic way to set aside a few dollars now, so you can enjoy the fruits of your labour well into the future. We have more than a few great investment articles that can help you find your way, and in 2021, these were our three most visited investment-related blogs and we’d like to reshare them with you! The Power of Compound Interest – What’s compound interest and how can it help you maximize your hard-earned dollars? Read this article to find out how increasing your savings (even just a little) via monthly, pre-authorized deposits can help boost your future security. The Best of Both Worlds: Segregated funds in a volatile market – Volatile markets are nothing new – the market is constantly fluctuating. But if you’re an investor or nearing retirement years, this type of instability can be more than a little stressful. Read this article to find out how segregated funds just might provide a pathway to stability in an uncertain market. TFSA vs RRSP vs Both. What’s Best for Me? – TFSAs and RRSPs – both excellent investment options, but there’s much to consider when determining which one is right for you. Read this article for an overview of the ins and outs of both to see which one aligns best with your investment goals. If you have questions or would like to know more about any of these topics, please contact our office.

Oftentimes, investors are instructed to own a well diversified portfolio in accordance with their risk tolerance and then maintain it through all market conditions until their situation changes or they are faced with a major life event. This is all well and true, but if you’re an investor who is entering their retirement years, generating a high return, while important, is only one factor which ultimately influences how long your savings will last. Another important factor is the order in which returns are earned. To put it simply, regular withdrawals diminish the dollar value of a portfolio, and it is precisely this dollar value upon which your future returns are compounded. Experiencing negative returns early on can result in running out of savings much sooner than if the portfolio experienced positive returns at the outset – definitely something you as an investor want to avoid. Let us consider the two scenarios below. In both cases, the new retiree is beginning with $1 million in capital and both will withdraw $50,000 per year. The only difference in this particular situation is that the sequence of returns has been reversed. That is, Mrs. Green experienced positive returns early in her retirement years whereas Mrs. Red experienced negative returns early on. The annual average growth rate is the same across both scenarios and if there were no withdrawals, the final dollar amounts would be the same too. However, in the scenario where withdrawals were made, the sequence in which returns are earned is quite relevant – Mrs. Red is left with a shortfall at age 83 while Mrs. Green still has $2.5 million at age 90. Quite the difference in retirement dollars. So, how do you as an investor reduce your sequence of returns risk? Well, mitigating the effects of market volatility is one way. Proper diversification among multiple asset classes that don’t correlate and create lower portfolio volatility especially when nearing the decumulation years, can generate income and minimize the risk of drawing down on assets during a down market. And while the numbers used in the above example are extreme and unlikely to manifest in actual market conditions, they do illustrate the concept well; namely, that the sequence of returns from an investment portfolio experiencing withdrawals can have a material impact on the overall retirement picture and it is prudent to manage this risk.

Figuring out how much to contribute to your RRSP is important. Do it right, and you maximize your tax savings now, while setting yourself up for a good income after retirement. Do it wrong, and you could find yourself paying more taxes than you have to. Luckily, planning how much to contribute to your RRSP isn’t complicated — once you understand all the moving parts. In this post, we’ll go over everything you need to know to plan your RRSP contributions and maximize the tax advantages. Who can contribute to an RRSP? You can contribute to an RRSP if you: Have earned income Have a social insurance number Filed a tax return Have RRSP contribution room available Are under 71. The end of the year that you turn 71 is your last opportunity to contribute. Before planning your contributions, if you need a refresher on what RRSPs are and how they work, check out this article, What is an RRSP and How Does It Work? The 2021 RRSP contribution & deduction limit There’s a limit to how much you can contribute to your RRSP and it changes each year. For the 2021 tax year, you can contribute up to 18% of the earned income you reported for last year’s taxes (2020 tax filing), or $27,830 — whichever is less. Fortunately, you’re able to beef up your 2021 contributions even after the calendar turns. The deadline to contribute to your RRSP for the 2021 tax year is March 1, 2022. Remember, even if you miss the deadline, unused RRSP room carries forward and adds up. If you haven’t maxed out your account in previous years, you should have a considerable amount of space available to you. How much should you contribute to your RRSP? When you contribute to an RRSP, you’re investing towards a better quality of life for your future self. So if you have money to contribute, it’s almost always a good idea to do so. Generally speaking, you should aim to contribute at least 10% of your gross income each year to your retirement savings. Start contributing in your early 20s, and that 10% per year could add up to a sizeable savings and a comfortable retirement. Start later in life — say, your late 30s — and 10% a year may not cut it. To see how much money you can expect in the future from your invested contributions, check out this RRSP tax savings calculator. Find the right number with a financial plan Keep in mind, these numbers are just general guidelines. Ultimately, the only way to know whether you’re contributing enough is to build a financial plan that accounts for when you plan to retire, all of the different income sources and savings you expect to have, and how much you plan to spend each year. With that information, you can work backwards and figure out whether you’re saving too much or too little. When you shouldn’t contribute to an RRSP There are a few instances when you may be better off not contributing to your RRSP, and instead putting your money elsewhere. Here are a few examples: If you have high interest debt, such as a credit card balance. Paying down that debt should take priority. If your tax bracket is the same or lower than the tax bracket you’re expecting to be in during retirement. In that case, your money may be better off saved in a TFSA until you’re in a higher tax bracket. If you’re in a lower tax bracket now, but expect it to increase in the short-term. Say you’re expecting a big raise next year, you might want to use a TFSA for the time being. We have a great article that compares RRSPs vs TFSAs, and when you should choose one account over the other. How to figure out your RRSP contribution limit To see your current RRSP contribution limit, including value carried forward, look at your most recent notice of assessment from the Canada Revenue Agency (CRA). You get this notice of assessment after filing your tax return. You can also view your limit using CRA’s My Account. (If you don’t already have a log in, get one! It will make your life much easier come tax time.) RRSP contributions & pension adjustments If you pay into an employer plan such as a pension, that might impact your limit. Your Notice of Assessment from the CRA will show you how your pension adjustment affects your RRSP contribution limit. Here are some of the ways your employer plan can impact your RRSP limits: Pension adjustments and your RRSP contribution limit: If you belong to a pension plan through your employer or union, the amount you can contribute to your RRSP is decreased. If you have a defined benefit plan, the CRA will estimate the value of the benefit you earned over the course of the prior year. If you have a defined contribution or deferred profit sharing plan, the adjustment is the total amount you and your employer contributed during the prior year. Your Notice of Assessment from the CRA will show you how your pension adjustment affects your RRSP contribution limit. How to contribute to your RRSP There are two approaches to planning your RRSP contributions: Short term and long term. With the short-term approach, you contribute as much to your RRSP as possible every year in order to get the biggest tax deduction you can. This may benefit you now, but in retirement it could cost you. Once you turn 71 — or sooner, if you decide — you’ll need to convert your RRSP into a Registered Retirement Income Fund (RRIF). At that point, you’ll be forced to withdraw a minimum amount from your RRIF each year as income. The more money you contribute towards your RRSP today, the more you’ll have to withdraw later. Keep in mind, if your minimum withdrawal amount ends up being more than you actually need to maintain your lifestyle in retirement, that extra income will put you in a higher tax bracket, so

The 2022 RRSP deadline is fast approaching! This is the time of year when Canadians tend to rush and contribute a little extra in order to unlock a bigger tax refund. Here are the key things you should know about the RRSP deadline: When is the deadline to contribute to an RRSP? March 1, 2022 is the deadline to contribute to your RRSP for the 2021 tax year. This is the last day that you can contribute to your RRSP if you want to take advantage of deductions and increase your tax refund this spring. Why is it important to meet the deadline? The deadline is important simply because you’ll reap immediate benefits when it comes to your tax return. And tax savings are the biggest benefit of an RRSP to begin with! What happens if you miss the RRSP contribution deadline? If you can’t contribute before the deadline, don’t sweat it. Any remaining contribution room rolls over and is added to your limit for the following year. You only need to meet the deadline if you want to apply those contributions towards your taxes this year. How much can I contribute to my RRSP? You can contribute 18% of the earned income you reported on your tax return for the previous year (2020), or $27,830, whichever is less, plus any unused contribution room that you have available from previous years. How RRSP tax deadlines work The Canada Revenue Agency (CRA) lets you make RRSP contributions for the previous tax year in the first 60 days of the following year. They do this to give you time to find out how much employment income you earned in the last tax year and contribute accordingly. Come tax time, you may receive multiple RRSP contribution receipts, depending on when you make your contributions. The first will reflect all contributions you made between March 2 and December 31, 2021 and any additional receipts will reflect contributions you make in 2022 before the March 1 deadline. Keep in mind, you don’t actually need to wait for your official RRSP receipts to file taxes. If you know the amount you contributed, you can report it on your return. The official receipts will ultimately come in handy for reference if you’re audited. Want to avoid deadline stress next year? Set up automatic contributions Did you procrastinate on your RRSP contributions this year? You’re not alone. A full 60% of Canadians tend to wait until the last two weeks before the deadline to contribute. But the last-minute scramble is stressful — and costly in the long run. When you wait until the bitter end of the year to save, you miss out on the potential for compounding growth in your investment accounts. Make yourself a resolution that you can actually keep this year by setting up automatic contributions. Doing so will not only make your life easier, it will probably leave you richer at the end of the year. How much will my contribution affect my tax refund or amount owing? Use this handy RRSP Tax Savings calculator to help calculate the affect a contribution will have on your taxes. What should I do with my RRSP tax refund? If you’ve been paying income tax and contributing to an RRSP throughout the year, you’ll probably receive a nice tax refund. It may feel like the government is giving you free money, but in reality it’s the other way around. The government is paying you back for the loan you gave them throughout the year. If you’re on track to reach your investment goals and want to use the money to go on a vacation or put a down payment on a new car, do it! But remember that money can grow to be worth much more in the future if you choose to invest it back into your RRSP. Ready to contribute before the deadline? Reach out to your advisor to discuss your own RRSP options, to open a new account or make an additional contribution. For a similar article about RRSPs, read read What is an RRSP and How Does it Work.