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Jenny in the Corner Office Podcast
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Why to cheer the IPP’s defined benefit provision
Why to cheer the IPP’s defined benefit provision
The DB provision will always provide a larger benefit than the DC provision
- By: Lea Koiv and Mark Lesniewski
- March 25, 2019
The changes to tax rules on split income and passive income have accountants and advisors inquiring about individual pension plans (IPP).
Since 1991, owner-managers who are “connected persons” (in general terms, someone with at least a 10% ownership interest in the employer corporation, or related to the employer) have again been able to establish IPPs. The plans recognize up to 28 years of past service, and contributions are tax deductible for the employer. Where this is the case, the employer contributions for this past service could be significant.
IPPs have a 2% rate of accrual, with a defined benefit limit for 2019 of $3,025.56. Someone with compensation of $151,278 (of which 2% is $3,025.56) will have accrued the maximum pension for 2019.
If the earnings for the prior 28 years allowed for the maximum, the accrued annual pension as of Jan. 1, 2019 would be $84,715.68. CPP (and possibly OAS) bridge benefits could be provided as well. Adding to the IPP’s attractiveness, all pension benefits can be indexed to CPI.
The defined benefit versus the defined contribution provision
Virtually all IPPs established in 1991 had only a defined benefit (DB) provision, while most implemented in recent years have a defined contribution (DC) provision to accommodate younger family members (typically below age 40) where the DC provision will provide for a larger annual contribution than the DB provision. If not, the plan text can easily be amended.
The question that is increasingly being asked is whether having a hybrid plan with both DB and DC provisions can be used in other ways to provide value.
Our answer: perhaps.
The DC provision’s value
The DC provision can be comprised of two accounts. For years when a member participates in the DC provision, total employer and employee contributions are capped at 18% of compensation, up to the money purchase limit ($27,230 for 2019). CRA will require minimum employer contributions of 1% of compensation (unless the DB provision has excess surplus). The IPP provisions dictate the amount of required employer/employee contributions.
All registered pension plans are regulated by CRA and, in some jurisdictions, a provincial pension supervisory authority. CRA does not require minimum contributions for a DB provision, though the provincial authority may. Thus, some employers who face financial cash flow constraints may wish to limit their contributions to the DC provision’s 1% of earnings for jurisdictions requiring contributions. (There are other approaches for employers facing funding constraints. Ontario, for instance, allows for “adverse amendments” to the plan.)
The DC provision can also have an additional voluntary contribution (AVC) account. Imagine Joe, whose pensionable earnings are $100,000. If, in the year in which he participated in the DC provision, the employer was required to contribute the minimum of $1,000 (1% of $100,000), Joe could choose to contribute up to $17,000 (17% of $100,000) to the AVC. However, this strategy would generally deliver less than a DB provision for members aged 38 and older.
Implementing an IPP would generally not be appropriate if the employer doesn’t want to provide a significant DB pension to the eligible owner-manager, or anticipates being unable to do so.
If the employer later wishes to provide a DB pension for the years in which the owner-manager was a member of the DC provision, a past-service pension adjustment will be needed, as well as an actuarial valuation report.
Most IPPs include an AVC account, which allows investment management fees to be charged directly to the employer, rather than against the IPP’s assets. These investment management fees are tax-deductible to the employer, allowing for greater accumulation within the AVC account compared to an RRSP. The member could transfer RRSP assets—other than those that form part of the “qualifying transfer” required to fund past service under the DB provision—into the AVC account when implementing the IPP.
Optimal IPP contributions
In Table 1 we illustrate two case studies taking into account the significant deduction for terminal funding. The maximum funding valuation, which must be employed for designated plans, artificially caps contributions to the IPP. Terminal funding can occur once all plan members have started collecting a pension and the IPP has been de-designated.
| Table 1 | Janelle, age 64 on Jan. 1, 2019 | Lionel, age 60 on Jan. 1, 2019 |
| Retirement pension | ||
| Years of service | 28 | 28 |
| Lifetime benefit assuming a maximum accrual (unreduced) | $84,700 | $84,700 |
| Bridge pension (to age 65) | $13,750 | $13,750 |
| Total payment until age 65 | $98,450 | $98,450 |
| Funding | ||
| Past service contribution by employer | $529,000 | $441,500 |
| Qualifying transfer from RRSP | $679,320 | $679,320 |
| Terminal funding | $985,000 | $1,436,000 |
| Total value of IPP on Jan. 1 | $2,193,320 | $2,557,220 |
What if the individual had been in the RRSP system?
Let’s see what rate of return (ROR) Janelle and Lionel would have had to achieve in their RRSP (net of fees) to arrive at the same Jan. 1, 2019 balance as their IPPs.
The maximum RRSP room for someone contributing from Jan. 1, 1991 to Jan. 1, 2019 is $528,050, taking into account the maximum RRSP room of $27,230 for 2019.
We looked at two scenarios. In the first, Janelle and Lionel made the maximum contribution to their RRSP every Jan. 1. In the second, they didn’t contribute in the earlier years and put in a flat amount of $52,805 every Jan. 1 from 2010 through 2019.
If we look at the numbers in Table 2, we see that if Janelle had the means (and the discipline) to contribute the maximum to her RRSP every Jan. 1, she would have had to earn returns of 9.9% per annum (compared to 10.8% for Lionel) to match her IPP total.
| Table 2 | Required ROR for Janelle | Required ROR for Lionel |
| Annual RRSP contributions from 1991 to 2019 | 9.9% | 10.8% |
| Maximum annual RRSP contributions from 2010 to 2019 | 29.5% | 32.6% |
Contributions to RRSPs are often deferred. The good news since 1991 has been that RRSP contributions can be carried forward. Unfortunately, the amounts are not indexed. If Janelle and Lionel spent their earlier years investing in their businesses and only started contributing to RRSPs in their later years, the required rate of returns jump to 29.5% and 32.6%, respectively.
In our current investment environment of low inflation and low bond yields, none of the annual returns in Table 2 are achievable over longer periods. This means there is real value in the DB provision. There could be some value in the DC provision, where provincial rules require minimum contributions, but these circumstances should be analyzed carefully. The DB provision will always provide a larger benefit than the DC provision.
Clearly, the IPP is a powerful tax-planning and retirement tool.
What Should You Be Doing in This Current Market Correction
What Should You Be Doing in This Current Market Correction
Markets do not always go straight up and for the past few months we have had some significant daily market moves. In the last three days, we saw the Dow Jones Index fall over a thousand points.
It is important not to panic during these times but to remember why you are investing in the ancial markets
The key to successful investing in your portfolio is to have a pre-determined investment process and not to get emotional about the markets. When markets have large swings in daily valuations, it is tough not to act on emotions and to remember your investment process.
One day or week does not make a market
Having discipline in volatile markets is critical to making the right investment decision.
- The consistent use of an investment process will maximize your investment returns and help achieve your long term goals.
- In my 40 plus years of being a student of the market, the one thing that I know that works is being disciplined and sticking to your process, the only way to weather the storm, is to stay the course.
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- Don’t deviate from the plan
- It it the foundation for success.
Know and understand the securities you are invested in. Major sell-offs often provide opportunities for buying companies on the cheap and/or to average down you existing holdings
Regular rebalancing of portfolios will help mitigate the impact of volatile markets
Financial Planning for Canadians with Disabilities
https://www.bnnbloomberg.ca/investing/video/financial-planning-for-canadians-with-disabilities~1524106
Bill Shaw, president at Treegrove Investment Management, explains a long-term savings plan that many people may not be aware of: the Registered Disability Savings Plan that helps Canadians with disabilities save for the future. Shaw says the program includes government contributions and possible tax credits to help boost savings.
Disability and Special Need Financial Planning
The Registered Disability Savings Plan (RDSP) is a long-term savings plan to help Canadians with disabilities and their families save for the future. If you have an RDSP, you may also be eligible for grants and bonds to help with your long-term savings.
You should consider opening an RDSP if you have a long-term disability and are:
- eligible for the Disability Tax Credit;
- under the age of 60 (if you are 59, you must apply before the end of the calendar year in which you turned 59);
- a Canadian resident with a Social Insurance Number; and
- looking for a long-term savings plan.
You may contribute any amount to your RDSP each year, up to the lifetime contribution limit of $200,000. With written permission from the RDSP holder, anyone may contribute to the RDSP.
- Many Canadians are not aware that that they can qualify for the Disability Tax Credit (DTC). If you qualify for the DTC, many additional financial planning opportunities are available to you.
- First and foremost, you can open up a Registered Disability Savings Account. By doing so, the federal government encourages saving with generous contributions to RDSPs, even when people don’t contribute themselves.
- The RDSPcan be invested and will grow on a tax deferred basis. When money is withdrawn, part of it (the government contributions and investment income) is considered taxable income to the RDSP beneficiary.
- Currently, the number of RDSP accounts opened to date is estimated to be about 15% of the people who qualify for the RDSP. Approximately 643,000 Canadians between the ages of of zero and 59 who are eligible to open an RDSP, showing that the plans are still underused by disabled individuals and their families.
- The major benefit of opening an RDSP is to obtain free government grants. These grants are called Canada Disability Savings Grants. An RDSP can receive a maximum of $3,500 in matching CDSGs in any one year and a total maximum of $70,000 over the lifetime of the RDSP’s beneficiary. The amount a beneficiary can receive will depend on the individual’s or family’s income For RDSP beneficiaries under age 18, it’s the net income of the child’s parents or guardians that is used to qualify. For those 18 or over, it’s their own family income that is used to qualify, even if they still live with their parents.
- For those just opening a plan, Ottawa allows a 10-year carry forward of unused grant and bond entitlements. Since RDSPs have been around since 2008, people can claim unused grant and bond money going back to that year.
For more information, please email Bill@Treegrove.ca
13 Things You Should Give Up If You Want To Be Successful
13 Things You Should Give Up If You Want To Be Successful
”Somebody once told me the definition of hell:
“On your last day on earth, the person you became will meet the person you could have become.” — Anonymous
Sometimes, to become successful and get closer to the person you can become, you don’t need to add more things — you need to give some of them up.
There are certain things that are universal, which will make you successful if you give up on them, even though each one of us could have a different definition of success.
You can give up on some of them as soon as today, while it might take a bit longer to give up on others.
1. Give Up On The Unhealthy Lifestyle
“Take care of your body. It’s the only place you have to live.” — Jim Rohn
If you want to achieve anything in life, everything starts here. First, you should take care of your health, and there are only three things you need to keep in mind:
- Quality Sleep
- Healthy Diet
- Physical Activity
Small steps, but you will thank yourself one day.
2. Give Up The Short-term Mindset
“You only live once, but if you do it right, once is enough.” — Mae West
Successful people set long-term goals, and they know these aims are merely the result of short-term habits that they need to do every day.
These healthy habits shouldn’t be something you do; they should be something you embody.
There is a difference between: “Working out to get a summer body” and“Working out because that’s who you are.”
3. Give Up On Playing Small
“Your playing small does not serve the world. There is nothing enlightened about shrinking so that other people will not feel insecure around you. We are all meant to shine, as children do. It is not just in some of us; it is in everyone, and as we let our light shine, we unconsciously give others permission to do the same. As we are liberated from our fear, our presence automatically liberates others.”
— Marianne Williamson
If you never try and take great opportunities or allow your dreams to become realities, you will never unleash your true potential.
And the world will never benefit from what you could have achieved.
So voice your ideas, don’t be afraid to fail, and certainly don’t be afraid to succeed.
4. Give Up Your Excuses
“It’s not about the cards you’re dealt, but how you play the hand.”
― Randy Pausch, The Last Lecture
Successful people know that they are responsible for their life, no matter their starting point, weaknesses, and past failures.
Realising that you are responsible for what happens next in your life is both frightening and exciting.
And when you do, that becomes the only way you can become successful, because excuses limit and prevent us from growing personally and professionally.
Own your life; no one else will.
5. Give Up The Fixed Mindset
“The future belongs to those who learn more skills and combine them in creative ways.” ― Robert Greene, Mastery
People with a fixed mindset think their intelligence or talents are pre-determined traits that cannot be changed. They also believe that talent alone leads to success — without hard work. But they’re wrong.
Successful people know this. They invest an immense amount of time on a daily basis to develop a growth mindset, acquire new knowledge, learn new skills and change their perception so that it can benefit their lives.
Who you are today is not who you have to be tomorrow.
6. Give Up Believing In The “Magic Bullet.”
“Every day, in every way, I’m getting better and better” — Émile Coué
Overnight success is a myth.
Successful people know that making small continuous improvement every day will be compounded over time and give them desired results.
That is why you should plan for the future, but focus on the day that’s ahead of you, and improve just 1% every day.
7. Give Up Your Perfectionism
“Shipping beats perfection.” — Khan Academy’s Development Mantra
Nothing will ever be perfect, no matter how much you try.
Fear of failure (or even fear of success) often prevents you from taking action and putting your creation out there in the world. But a lot of opportunities will be lost if you wait for things to be right.
So “ship,” and then improve (that 1%).
8. Give Up Multi-tasking
“Most of the time multitasking is an illusion. You think you are multitasking, but in reality, you are actually wasting time switching from one task to another “
— Bosco Tjan
Successful people know this.
That’s why they choose one thing and then beat it into submission. No matter what it is — a business idea, a conversation, or a workout.
Being fully present and committed to one task is indispensable.
9. Give Up Your Need to Control Everything
“Some things are up to us, and some things are not up to us.” — Epictetus
Differentiating these two is crucial.
Detach from the things you cannot control, focus on the ones you can, and know that sometimes, the only thing you will be able to control is your attitude towards something.
Remember: nobody can be frustrated while saying “Bubbles” in an angry voice.
10. Give Up On Saying YES To Things That Don’t Support Your Goals
“He who would accomplish little must sacrifice little; he who would achieve much must sacrifice much; he who would attain highly must sacrifice greatly.”
— James Allen
Successful people know that in order to accomplish their goals, they will have to say NO to certain tasks, activities, and demands from their friends, family, and colleagues.
In the short-term, you might sacrifice a bit of instant gratification, but when your goals come to fruition, it will all be worth it.
11. Give Up The Toxic People
“Stay away from negative people. They have a problem for every solution.”
— Albert Einstein
People you spend the most time with add up to who you become.
If you spend time with those who refuse to take responsibility for their life, always find excuses and blame others for the situation they are in, your average will go down, and with it your opportunity to succeed.
However, if you spend time with people who are trying to increase their standard of living, and grow personally and professionally, your average will go up, and you will become more successful.
Take a look at around you, and see if you need to make any changes.
12. Give Up Your Need To Be Liked
“You can be the juiciest, ripest peach in the world, and there’s still going to be people who hate peaches.” — Dita Von Teese
Think of yourself as a market niche.
There will be a lot of people who like that niche, and there will be individuals who don’t. And no matter what you do, you won’t be able to make the entire market like you.
This is completely natural, and there’s no need to justify yourself.
The only thing you can do is to remain authentic, improve and provide value every day, and know that the growing number of “haters” means that you are doing remarkable things.
13. Give Up Wasting Time
“The trouble is, you think you have time” — Jack Kornfield
You only have this one crazy and precious life. That’s why you owe it to yourself to see who you can become, and how far you can go.
However, to do that, you need to ditch meaningless time wasters and stop allowing them to be an escape from your most important goals.
To do that, you should learn how to take control over your focus, attention and make the most out of your 24 hours within a day.
Remember that you will die, so never stop creating your legacy and doing the things that will enrich your life.
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The ‘Fairway Theory of History’ Appears to Hit the Mark
https://worldview.stratfor.com/article/fairway-theory-history-appears-hit-mark
contributor perspectives
Oct 15, 2018 | 09:00 GMT
5 mins read
Board of Contributors
(GOH CHAI HIN/AFP/Getty Images)
Contributor Perspectives offer insight, analysis and commentary from Stratfor’s Board of Contributors and guest contributors who are distinguished leaders in their fields of expertise.
Highlights
- In 2009, Richard Haass, head of the Council on Foreign Relations, put forward the ‘fairway theory of history,’ an observation that the number of golf courses in a country roughly parallels its openness.
- He used golf course distribution on the Korean Peninsula, with hundreds of courses in South Korea compared with just one in the North, to bolster the idea.
- The theory appears to hold true for China, where the number of courses declined after President Xi Jinping began his power consolidation efforts.
Whether taking a turn on the local course or watching the pros ply their trade, golf has long held a fascination for me. It has a reputation as a sport for the well-off, but it has made strides to attract players of all income levels. And its magical moments are available to anyone who has access to a television. Watching coverage of the recent Tour Championship and hearing the roar of thousands of spectators greeting former phenom Tiger Woods on the 18th green as he put the exclamation point on his first victory since 2013 is something I will never forget.
Beyond its value as entertainment and exercise, however, golf can provide geopolitical insight, at least according to a theory advanced by Richard Haass, the long-serving president of the venerable Council on Foreign Relations. In an article titled “What Golf Teaches Us About Geopolitics” and published in Newsweek magazine in September 2009, Haass argued that the links game offered a useful lens through which to think about the world. His thesis was that a country’s relationship with the game to a large degree matched the degree of its economic and political openness. Growth in the former, he asserted, usually occurred alongside growth in the latter; and the reverse was also true. As for what lay behind this relationship, Haass wrote: “It is not just that the game tends to flourish in countries that welcome tourists, who can bring new ideas along with their bags of clubs. Large numbers of golf courses reflect the emergence of a domestic middle class, the traditional foundation of democracy. And they suggest a society where citizens not only enjoy leisure time but take basic security for granted.”
This possessed important implications for those looking to understand the United States’ challenges abroad. “Countries that have numerous golf courses tend to be friendlier toward the United States,” Haass wrote. “Governments closing golf courses tend to be the most anti-American of all. Think of it as the fairway theory of history.”
Haass used the geographic dispersion of golf courses on the Korean Peninsula to bolster his argument, noting that the situation in South Korea, a staunch U.S. ally of many years, stands in strong contrast to that of its rival to the north. Following the fairway theory, it would come as no surprise that 444 golf facilities exist south of the Demilitarized Zone, at least according to a 2017 report by the R&A, the organization that puts on the British Open. In contrast, golfers have only one choice if they want to play a round in the Hermit Kingdom — the Pyongyang Golf Course.
‘Governments closing golf courses tend to be the most anti-American of all.’ — Richard Haass
Although it went unmentioned by Haass, the situation in Japan also supports his theory. Indeed, the place of the game in the country seems especially revealing about the state of the national economy. During the 1980s economic boom, golf course construction entered a state of frenzy. Thousands of new facilities opened and fairways became important places of business networking and negotiation. But the bust years that followed led to stagnation from which the game has never recovered. National Public Radio reported in November 2017 that the sport’s popularity was down some 40 percent since 1996. Even so, this long-standing friend to the United States remains a major market for golf and is home to the third-largest number of courses in the world, with 2,290, according to the R&A. (The United States, which has more than 15,000 courses, far and away ranks first in the R&A census; second-place Canada was not far ahead of Japan with 2,295.)
One cannot assess Asia without including China, of course. Like many observers at the time, Haass believed back in 2009 that China was slowly evolving into a more free and open society. The fruits of its economic reforms had by then demonstrated remarkable results. That expansion continued in the years that followed, and the country is today a true giant on the world scene. Even so, few still believe in the optimistic narrative of progressive change. As Stratfor readers well know, China’s economic dynamism remains unquestioned. But the Chinese government under President Xi Jinping has taken an authoritarian turn. Its relationship with the United States is increasingly tense in a number of spheres. Immense effort has been made to deploy capabilities to counter U.S. military power in the area. It has also used economic leverage to undermine U.S. influence in the region. For its part, the United States is shifting its military focus toward the Indo-Pacific region in an effort to counter China and has slapped import tariffs on billions of dollars of Chinese goods.
So does the fairway theory apply here, as well? A piece written by my colleague Tolga Ozyurtcu examined the Chinese leadership’s oscillating attitude toward golf. Beginning in 2004, the sport in the country entered a period of sustained development; five years later, nearly 600 courses could be found there. At one point, golf was even included as a sport deserving of greater promotion in national policy guidance on the country’s fitness and leisure industries.
But, as Ozyurtcu noted, the sport has fallen out of favor under Xi. A 2015 decree placed restrictions on golf that applied to China’s Communist Party members. While governmental sensitivity on the subject cooled for a time, Xi ordered in January 2017 that over 100 golf courses be closed. This was followed by an announcement a few months later that all Communist Party officials were banned from the game. By the R&A’s count, there were 383 golf facilities in China in 2017, almost 100 fewer than the organization noted in 2015.
The fairway theory, it seems, might still have relevance.
The CRA is cracking down on aggressive manipulation of TFSAs and all other registered plans
The CRA is cracking down on aggressive manipulation of TFSAs and all other registered plans
You could face a 100 per cent penalty tax on the fair market value of any ‘advantage’ that you receive
Filed under
As Canadians, we sure do love our TFSAs. The ability to earn tax-free investment income and gains for life, coupled with the flexibility to withdraw funds, tax-free, at any time and for any purpose and then recontribute the amounts withdrawn in a subsequent year, make these savings vehicles a favourite choice among millions of taxpayers.
But, unfortunately, it seems the temptation to manipulate the completely tax-free nature of TFSAs is too great for some, which is why there are several anti-avoidance rules in the Income Tax Act to prevent abuse and manipulation of all registered plans, including not only TFSAs, but also RRSPs, RRIFs, RESPs and RDSPs.
This past week, the Canada Revenue Agency published an extensive folio going through what’s known as the “advantage rules” for registered plans and providing numerous examples of how the anti-avoidance rules work and when they might apply, because if they do apply, the result is extremely harsh.
How harsh? Well, if you do find yourself offside, then you could face a 100 per cent penalty tax on the fair market value of any “advantage” that you receive that is related to a registered plan. The CRA does have the ability to waive all or part of the tax “in appropriate circumstances.” While originally the advantage rules applied only to TFSAs, they were extended to RRSPs and RRIFs in early 2011 and to RESPs and RDSPs in early 2017.
The advantage rules are part of a broader set of rules in the Tax Act that govern registered plans. For example, these plans can only invest in property that is a “qualified investment” (such as publicly traded stocks, bonds, mutual funds, GICs) and must not invest in property that is a “prohibited investment” (generally, private company shares or debt in which the plan holder has a significant interest).
In addition, however, registered plans must avoid investments or transactions that are structured so as to “artificially shift value into or out of the plan or result in certain other supplementary advantages.” According to the CRA, “These rules … represent overriding investment restrictions for registered plans intended to guard against abusive tax planning.”
The CRA further states that the rules are mainly intended to target abusive tax planning arrangements “that seek to artificially shift value into or out of a registered plan while avoiding” the typical contribution limits for registered plans, such as the current $5,500 TFSA annual dollar limit or the 2018 maximum RRSP deduction limit of $26,230 (or 18 per cent of the prior year’s earned income, if lower).
One example of an advantage is a deliberate over-contribution to a TFSA where an individual intentionally contributes more to her TFSA than her TFSA contribution limit with a view to generating a rate of return sufficient to outweigh the cost of the regular 1 per cent per month TFSA over-contribution tax.
Another situation that could give rise to an advantage is where an individual receives a benefit personally arising for his investment inside a registered plan. The CRA cites the somewhat unrealistic example of Daniel who buys units of a mutual fund in his RRSP that owns a number of rental properties at various ski resorts in Canada. As an investor in the fund, Daniel is entitled to rent any of the properties at a 25 per cent discount from the normal commercial rental rate. In January, Daniel rents one of the properties for two weeks for $750 per week, instead of the normal rate of $1,000 per week. The $500 discount constitutes a benefit that is conditional on the existence of Daniel’s RRSP and thus Daniel is therefore liable to pay advantage tax of $500.
An advantage also can include an increase in the total FMV of an investment held inside a registered plan which can be attributed to “a transaction or event … that would not have occurred in a normal commercial or investment context between arm’s-length parties acting prudently, knowledgeably and willingly, and one of the main purposes of which is to benefit from the tax-exempt status of the plan.’’
The CRA cites an example of an employer, a private company, that is looking to take advantage of the tax-free status of a TFSA. The private corporation issues a special class of non-voting preferred shares to the TFSAs of several key employees and sets both the subscription price and redemption value at $10 per share. Employees are required to have their shares redeemed when they leave the company.
Each year, the amount of dividends payable on the shares is determined at the discretion of the board of directors, but ranges between $50 and $150 per share per year, based on the financial performance of the corporation against pre-established performance benchmarks. In the CRA’s mind, this arrangement is “not commercially reasonable” and thus would give rise to an advantage as it would be reasonable to consider that the dividend payments were made “in substitution of the corporation paying bonuses or other remuneration to the employees.”
While the examples cited in the newly released bulletin are theoretical, a recent decision of the Tax Court, also out this week, involved a taxpayer who was reassessed nearly $125,000 in penalty tax applicable to the advantage the CRA says he received in connection with the transfer of private company shares to his TFSA.
The taxpayer went to court to challenge the constitutionality of the 100 per cent advantage tax on two grounds. The first was that a 100 per cent tax “fell within the provincial jurisdiction of property and civil rights … since the 100 per cent tax rate was a confiscation of property and was not necessary to the effective exercise of the federal taxation power as it overreached what was necessary to meet the aims of the section.”
The taxpayer’s second argument was that because the CRA has the discretion to reduce the 100 per cent advantage tax to zero, “Parliament … improperly delegated the rate-setting element of (tax) … to the (CRA) … in contravention of … the Constitution Act.”
Not surprisingly, the court disagreed concluding that the rule taxing the advantage at 100 per cent did not infringe on the right to make laws respecting property and civil rights on the basis that the section was “in pith and substance” taxation and “fell within a valid TFSA scheme of taxation within a valid (Tax Act).”
The judge, upholding the 100 per cent advantage tax, concluded, “The provisions are clear, were properly passed by Parliament into law … and are constitutionally valid.”
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice Group in Toronto.
TFSA vs RRSP: How to decide between the two
https://www.moneysense.ca/save/investing/tfsa/tfsa-vs-rrsp-decision/
TFSA vs RRSP: How to decide between the two
Here are five factors to consider when making your choice
(Shutterstock)
Q: I have a question about RRSPs and TFSAs.
My average income is $100,000. Which account I should top up first?
How does it work in retirement?
—Kevin
A: Determining whether it is better to contribute to a Registered Retirement Savings Plan (RRSP) or Tax Free Savings Account (TFSA) depends on several factors, Kevin. I’ll try to identify some of the main determinants.
Tax bracket
If your income is $100,000, a $1 RRSP contribution should save you 35-46% tax, depending on your province or territory of residence. This assumes you don’t have any other tax deductions to claim.
If you contribute $10,000 to your RRSP instead of $1, the tax savings will be similar. But if you contribute $50,000, the tax savings will drop. This is because Canada has marginal tax brackets that decrease as your taxable income decreases, and therefore, RRSP deductions become less valuable as you move into lower tax brackets.
Ask a Planner: Leave your question for Jason Heath »
If we assume your Canada Pension Plan (CPP) and Old Age Security (OAS) government pensions and your RRSP and TFSA will provide your only sources of income in retirement, you would need a large RRSP to be in a higher tax bracket in retirement, Kevin.
Typical withdrawals between 65 and 70 may be 4-5% or your RRSP value, for example. If we assume maximum CPP and OAS pensions of around $21,000, you would need another $79,000 from your RRSP to have $100,000 of taxable income in retirement like you have now. At 4-5% of the account value, that would mean you would need a $1,500,000 to $2,000,000 RRSP to have a comparable income.
There are some other nuances to consider like OAS clawback, for example, but the point is $100,000 is a high income and most retirees with pre-retirement incomes that high tend to have lower incomes in retirement, Kevin, unless there are extraordinary circumstances. If you have a spouse who will have less retirement income than you, pension income splitting will even allow you to move some of your eligible Registered Retirement Income Fund (RRIF) withdrawals onto their tax return, thus further minimizing your family tax rate.
Time horizon
When you’re saving, you must consider how and when the savings are going to be used. Is there a chance you might need some of the savings for a child’s education? A renovation? Or for some other purpose?
Having some TFSA savings to fund medium to long-term expenses pre-retirement could be a reason to consider a TFSA contribution over an RRSP contribution, Kevin, given TFSA withdrawals are tax-free and RRSP withdrawals are taxable.
Debt
When choosing to invest over paying down debt, you generally do so on the assumption you will earn a higher rate of return on the investments than the interest rate you are paying on your debt. Effectively, you are deciding to borrow (or not pay down debt) to invest.
TFSAs could be part of a debt repayment strategy, whereby you “sell high” so to speak, using TFSA withdrawals when your investments have risen in value to make lump-sum debt repayments.
As interest rates rise, conservative investors may have a hard time earning a better return on their TFSAs than the guaranteed return they could earn paying down their debts.
Group plans
If you have a company match on a group RRSP or similar tax-deferred account like a Defined Contribution (DC) pension plan, Kevin, I’d almost certainly choose these over a TFSA.
Matching employer contributions are free money that should tilt your savings decision in favour of a workplace account over other savings options unless the match is low, or the investment options are terrible. Neither tends to be the case.
In retirement
Withdrawals from TFSAs are always tax-free, whether you’re working or retired, Kevin. Withdrawals from RRSPs are always taxable.
As mentioned previously, most people are in a lower tax bracket in retirement than during their working years. If someone has very modest retirement savings and income, RRSP withdrawals can negate their eligibility for government benefits like Guaranteed Income Supplement (GIS). So, if someone expects to have very modest retirement income including CPP of less than $24,000 as a single retiree or $34,000 as a couple, TFSAs may be that much better an option than RRSPs.
When saving and planning for retirement, it pays to take a long-term approach with today’s decisions – and to personalize them. Whether on your own or with a professional, retirement planning can help validate your choices and assist you to set targets for the future.
Ask a Planner: Leave your question for Jason Heath »
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
The pot stock boom is about to bust
October 17 may be the beginning of the end for high-flying cannabis stocks
It’s going to be an exciting month for pot smokers, cannabis companies and government tax collectors, but one group should temper their legalization day expectations: Canadian investors.
As everyone knows by now, pot stocks have soared over the last few years. The Marijuana Index, an index that tracks the shares of several cannabis companies, is up by about 573% since October 2015. That’s been great for people who bought into the sector back then, but it’s a problem for those who are thinking about getting in now or continue to hold stocks today.
Until now, most of the sector’s gains have been driven by expectation – people think the cannabis industry is going to be huge, much like how people in 1999 were betting on an Internet boom. Unfortunately, there’s going to be a lot of disappointed folks when, on October 17, the promise of pot becomes a reefer reality.
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Sky high expectations
Whether the cannabis industry is going to be massive is not in question. Grand View Research estimates the legal marijuana industry will be worth $164 billion by 2025. What’s problematic for investors is that it will still be years before these operations see any meaningful results.
Canada may be the first major country to legalize weed, but no company would bet their business on serving the Great White North alone. Statistics Canada expects $1 billion worth of legal marijuana to be sold in the fourth quarter this year, which is a fraction of the global sales potential. And, at this point, export potential is nearly non-existent.
Scott Willis, head of research at Grizzle, a cannabis-focused investment analysis firm, thinks that Canadian sales estimates are also too optimistic. He says people will continue buying their goods on the black market for at least another year. Why? Because dealers deliver, their product will be less expensive than what’s sold in stores and with edibles still illegal until later in 2019, users still need their own supplier to access certain goods. “The black market already has this stuff and will deliver the same day,” says Willis.
Then there’s basic supply and demand fundamentals. For companies to make money – and not one is turning a profit – they must get this balance exactly right, which will be impossible to do in an industry that doesn’t yet exist. It’s lose-lose for producers, says Willis. If they don’t ramp up production fast enough and can’t make as much as planned, then earnings will fall. If they grow too much and demand isn’t as great, then there will be oversupply and earnings will drop, too. “Everyone’s promising that it will go perfectly,” he says.
A cannabis crash
This wouldn’t be such an issue if pot stocks were trading at reasonable valuations. Willis points out that booze companies are trading at about 10 times 2019’s enterprise value-to-EBITDA, while tobacco operations are trading at 14 times 2019 EV-to-EBITDA. Cannabis companies, which he says should trade in line with other sin sectors, have a 2020 EV-to-EBITDA of between 20 and 45 times.
While these stocks could continue to climb higher in the days after legalization, they will eventually fall – by about 60%, he says, which is what has happened in the past. “The government has set expectations of what they think demand will be in the first three months,” says Willis. “They’ll then put out a press release in January saying what demand really was and if that misses, which is pretty likely, all the stocks will tank. People will be worried that the market isn’t converting to legal as fast as they thought.”
Once these stocks drop, it could take years before they rise again. After legalization investors will be – or should be – focused more on fundamentals than expectation and the fundamentals don’t look so hot right now. Producers won’t start turning a profit until at least the end of 2019, says Willis, and most need to find a way to get their cost of production down. The ones that can’t will go out of business. As well, like other commodity industries, supply and demand must get in balance. Valuations, which have become so stretched, will overshoot on the downside.
All that said, if you’re thinking about getting into this sector to ride the legalization wave, then you’re too late. “If you see a stock going up 100% in one month probably then you probably don’t want to be buying it,” says Willis. “A lot of those gains have been realized.”
While there is long-term potential, investors should wait at least a year before even considering buying into the sector. It’s important to see how the industry evolves, how the demand picture looks, what other countries plan to legalize – this is key because, again, Canada can’t be the only market – and how quickly people go from dealer to dispensary.
Wait until valuations drop to at least that 20 times level, says, but lower is even better. “It’s going to be harder for expectations to be exceeded,” says Willis, “but easy for people to be disappointed.”