Answers on RRSPs, unexpected tax-slips, and what’s happening with Real Estate. Icing on the cake, see how a unique portfolio team bought and sold over time to gain near 100% profit: this is a process that continues to reward again and again. Today’s letter has something for everyone, and share this LINK with friends or family who need help, comfort, and financial confidence to enjoy success with money and life!
At the simplest, build RRSPs whenever you have earned income. #1 you ensure a healthy tax refund on your 2021 taxes. #2 your account grows tax-free. #3 is using your RRSP to buy a first-home, or #4 using it for Lifelong Learning. #5 is when you need an extended break from working – that sounds like an early temporary retirement – like a client who took six months in her fifties to sail the south Pacific on her RRSP.
March 1st is the absolute last day for 2021 RRSP contributions – do it sooner. If you need an RRSP loan to catch-up contribution on RRSPs, reach us immediately as we need those documents completed asap.
Steps to RRSP Success. #1 contribute regularly up to the amount CRA shows on your prior year’s Notice of Assessment. Step #2, we ensure your money is actively invested to reach your goals for growth and longterm strength. Step #3 is reviewing with us at least every 24 months, or whenever changes arise in your life, work, or other circumstances.
TFSA strategies fit here too, giving you extra tax-sheltering and contribution room but no tax-refund. In a low-income year (eg. younger clients) contribute to TFSA, so in a higher-tax year you can switch that to RRSP and increase your total tax refund. Later career, approaching retirement, there may be reason to reduce RRSP contribution and maximize TFSA. What’s vital is the discussions we have to direct your financial plan: we can reduce lifelong tax burdens to help maximize your wealth.
TAX SLIPS YOU DIDN’T EXPECT?
This often arises when someone has maximized their RRSP and TFSA accounts (or RRIF if they are retired) and had additional money to invest from savings, sale of home or business, or an inheritance. Eg. someone has $250,000 in a non-registered investment account and each year in Feb/March they will receive tax slips showing the capital gains, dividend income, interest and other income which has accrued over the past calendar year.
Until recently we could hide much of that income in corporate class funds but the federal government shut that down so more income will show on your tax slips, even if you didn’t draw income. Now the question we want to clarify quite simply is, Why is this? Here’s your answer:
One reason is our focus on “dividend income” but there is more . Hidden in segregated funds, mutual fund trusts deem dividends to have been earned by unit holders and so we receive tax slips to reflect the unsheltered dividend income. Bonds and cash will also pay “interest income” which appears in our tax slips. Then there’s “real estate income”, both commercial and residential. As well, our portfolio teams buy and sell securities over time to reduce risk and optimize longterm wealth. Naturally the goal is to buy low, sell high, then “rinse and repeat” from low cost to increasing rewards. Such transactions (also called dispositions) show as “capital gains”.
PATIENCE, PROWESS, PROFITS.
Let’s oversimplify a portfolio as if we had just two of Canada’s most dynamic (and sometimes largest) companies. On the one hand Canada’s international e-commerce giant Shopify, owned since it was below $500 per share and sold off on the way to $2200 where it peaked in October, briefly Canada’s most valuable company. With huge growth but tiny actual earnings, Shopify has dropped 60% in a few months, now $914/share and from here it may rise/fall or pause for a time. It may gain new attention again. On the other hand we always own Royal Bank and we’re happy indeed with recent growth from $90 to $145/share: there will always be fluctuations but it pays healthy dividends and inevitably rises in value over time.
Income funds have done similarly in recent seasons by reducing fixed-rate bonds which lose value as interest rates rise, in favour of shorter-duration commercial notes at 5% to 7%, and floating rate bonds which increase value as interest rates edge higher. These and other related strategies reduce risk and help build wealth.
Picture one specific stock as our MF U.S. Mid Cap Growth under Phil Taller and team built their position which became extremely profitable. HMS provided unique management services to the U.S. health industry: it was truly a hidden gem despite serving a vital niche, proving expert innovative processes, with reliable and expanding earnings. Taller and team specialize in finding these gems among small/mid-cap companies. In the picture you see green arrows as the team opened a small position in 2014 and continued building over time while the wider world was blind to this company, until 2018 when privately-owned Eliza Corp. bought out HMS for near-double what our team had paid. (Apologies, the image is fuzzy; I can resend in a direct email.)
Reports regularly show an ongoing stream of results from this pattern of portfolio prowess. Indeed, we wouldn’t want any idle or passive basket of goods hoping for the best; that is “so yesterday!” The very point of active management is to distinguish a preferred basket of the “best” goods, buying more when they’re on sale, selling and then exiting as maximum value is approaching. In a constantly changing world with constantly shifting values among equity markets, our portfolio teams are continually strengthening the potential of our investments.
Consider, our highest conviction funds with just 30-40 securities at a time, best in class, best in the world. Our teams have done vast research to spot these and build positions while undervalued in order to reap rewards when share-values reach full value. Dina DeGeer and David Arpin with Mackenzie’s Canadian Growth, also Phil Taller as mentioned with the US Small & Mid-Cap Growth, are excellent examples. Dina herself has outpaced 98% of her peers globally for the past thirty years. And it’s not just herself, but the teams our leaders have built to continue fine-tuning these practices.
- Relating to the discussion of tax slips for non-registered accounts, it’s worth knowing that paying a little tax each year for the capital-gains discussed here, can reduce larger tax rates that would be paid later (for example at death when CRA deems everything to have been sold the day before, triggering highest tax rates in the year of death).
WHAT’S HAPPENING WITH REAL ESTATE?
Real estate prices have risen 40% in the past two years, more like 500% in the past 20 years. You’d think this was the best investment in the world and “it never goes down” … but it does go down, sometimes like a crushing avalanche or mud slide. That’s when people can lose their whole equity, and either give their home to the bank, or scrimp to pay the mortgage even when a house is worth less than what’s owing.
Home prices rose quickly in the 1980s but I remember a house that was originally $250,000 which was sold five years later for $172,000. It sure frightened people when values dropped 30-40%! Those were stressful and anxious times.
Like night and day, some forces aim to lift prices while others tend to reduce them. No one can truly forecast what a given year (or five years) may hold. If someone in your family has an interest in housing values (senior age, thinking to sell; younger generation aiming to buy) you’ll want to consider:
Driving Prices Higher, maybe even 3% per month:
- Sentiment: prices have risen for 25 years so it will surely continue.
- Interest rates are still low: people can afford mortgages much larger than before.
- Post-pandemic wages may steadily increase so payments might get easier.
- Immigration into Canada and our cities increases the demand for owned housing.
- With family savings at all-time highs, parents & grandparents help young buyers.
- Governments have failed to make housing more affordable.
Prices Pause or the Balloon Pops: maybe 40% drop:
- Logic: when prices rise too far and too fast, they can retract for a time.
- Rising mortgage rates may put a brake on how far home prices can rise.
- People delaying purchase, saving more while waiting for a lower price.
- Renting: invest what you would have paid in home repair/maintenance.
- History: clear pattern that prices sometimes drop for 2, 3, even 5 years.
- Governments acting to speed new-builds and increase density.
- Caution: Sue and Ted moved to Toronto from the UK in 1973 and waited for prices to fall, but while waiting they spent all of their discretionary income. Despite a professional income they were still renting when they retired. They lost out on the home equity they could have built and the security it would have added for their senior years.
- Caution: Dan and Deb want to buy a starter home today and could scratch together just enough to make it happen. But what happens if an income is threatened by job change, illness, or unexpected repairs arise? And what if a few years from now their young family needs an upgrade for more space … could it have been better to wait, prepare a little longer to be financially stronger and then buy house #2 as the first home instead of risking negative-equity or losing the growth to realty commissions and land transfer costs?
If we could see the future … it would be easy to know what to do and when to do it. By some measures Toronto is among the most expensive housing in the world. The same amount of money could buy twice or three-times the house in most cities of the USA. Some international firms forecast Canada’s housing will tumble 40%. I don’t see that myself. I only know that values rise and fall, then rise again … and over time real estate proves an excellent investment. But the short-term is unknown. If falling values wipe out all the equity you invested, that hurts and it can take forever to rebuild your savings to get back into the housing market again. That’s why it’s important to weigh the cautions and make your decisions with care.
WHAT ARE YOUR GOALS?
WHERE DO YOU WANT TO BE IN THE NEXT 1-2 YEARS, 5-10 YEARS? THIS IS THE NUMBER ONE FOCUS OF OUR DISCUSSIONS SO YOU CONTINUE TO GROW STRONGER, INCREASE YOUR PERSONAL FREEDOM, EXCEED YOUR GOALS AND MAKE NEW ONES, AND ENJOY THE REWARD OF YOUR PERSONAL SUCCESS.
Yours in Financial Security for LIFE!
Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500
627 Guelph Line, Burlington, Ont. L7R 3M7. 1-877-937-3500
Certified Financial Planner, Certified Retirement Coach
Author: A Lifetime Of Wealth — And How Not To Lose It (2013). Protecting Life, Loved Ones, and Future Dreams (2013). Your Business, Your Retirement: Halton Retirement Study (2015).
** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to Canada Life, CIBC, Dynamic, Mackenzie Financial, RBC / PH&N, and more. Opinions in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to coordinate with your legal and accounting advisers to further your financial goals in home and business. We are grateful always to receive your comments and questions.
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