Tax Free Savings Accounts explored

TFSAs have now been around for 4 years – introduced in 2009.  Let’s look at the background for their introduction.  The Canadian and world economies had just been through a major collapse in 2008.  People were pulling money out of capital markets.  With money removed from markets, investment capital became very scarce.  Our Federal Government needed to do something to get people investing again – TFSAs were their solution.

But why create something new?  We already had a couple of special tax-preferred plans available – RRSPs and RESPs – what was different?  Much public (and Opposition Party) opinions were that RRSPs really benefitted upper-middle class and wealthy Canadians so raising the annual limit wasn’t very politically palatable.  The same feelings applied to RESPs.  So something new was needed.

Enter the TFSA.  Conceptually, it treats all Canadians equally – the maximum annual contribution limit is a flat $5,000 and it is a cumulative limit.  Miss a year, or only make a partial contribution, the unused portion is carried-forward for use in the future.

While the Government wanted to stimulate investing, its own tax revenues were falling steeply due to the same market collapse and subsequent recession – so allowing contributions to be deductible was a non-starter for Finance Minister Jim Flaherty.  The only thing left was to allow the value of the investments to grow tax-free and let people withdraw money – original deposits and growth – tax-free.

So the workings are fairly simple – you deposit money when and as you wish and don’t get a tax-deduction.  Once deposited, the money grows, based on the results of your investment choices, and you don’t pay tax on the growth.  You can withdraw any portion or all of the funds in your TFSA at anytime without tax consequences.  So far so good!

The follow-up question is not as easy however – in what financial products or instruments should you invest within the TFSA?  From an economic perspective, the government wants to encourage more investment in capital markets – stocks and related securities – but are these the best investments for a TFSA?  I suggest not – and here is why.

If I invest in our capital markets outside an RRSP, RESP or TFSA, I don’t pay tax on all of my capital growth and if there is a loss, I at least have the opportunity to claim all or part of the loss as a deduction against other capital gains.  Not so if the investment is inside these products.  Dealing strictly with TFSAs, any loss on my investments inside the TFSA is non-deductible at any time – on the other-hand, gains are never taxed.  So, on the upside – things are great, on the downside, things are not so good.

As a general guideline, investments that would be taxed higher outside a TFSA should be used inside – such as interest income and dividend income – which tells me that GICs, Term Deposits, Bonds, Money Market Funds, Bond Funds and blue-chip Dividend Funds make more sense while higher-risk, capital-growth-oriented funds MAY be better held personally as non-registered investments.

The Pig and The Python – Inter-generational wealth transfer.

Depending on which set of statistics you read or believe, some multiple trillions of dollars are going to change hands over the next decade or so in Canada.  From grandparents – the Zoomers to parents – the Boomers to children – Gen X – the grandchildren and maybe the great-grandchildren – Gen Y.

It will be interesting for sure, so the purpose here is to provide an overview of some of the issues that confront that first generation – the Zoomers.  These people have been around, in many cases, through the 1920s and the dirty-thirties.  They worked hard for everything they had – there were no handouts.  They inherited virtually nothing from their parents – maybe a bit of a homestead if they were very lucky.

They sacrificed constantly for their children – everything they did was for the children and they went without most of the luxuries of life that most people (right down to the Gen Ys) now take for granted.  But the Zoomers are worried.

Most of my clients are Zoomers and range in age from 93 down to their early 70s.  Almost without exception, they are asking this question:  “What do I do with my money?  I worked for it and don’t want to see it wasted.  I raised them, what more do they expect?”  Their words, not mine.  They talk about their children of course – the Boomers, and often their grandchildren and sometimes even the great-grandchildren, but they are having difficulty rationalising giving away their money and assets.

The Zoomers have all too-often seen that other people who inherit money don’t seem to treat it with respect – they “blow it”, “waste it”, “they didn’t appreciate it” and “p__sed it all away”.  Whether or not these are valid descriptions depends, of course, on your own perspective.  But reality or not, that is the perception of a very high percentage of seniors.  The question now is, therefore, how can they pass it along and have some assurance that it will be more wisely used?

We can’t control everything in the future or how people choose to use an inheritance.  However, we can provide some guidance and even restrictions, in the form of either a formal document – such as a Will or Trust Deed – or informally by meeting with your planned heirs while you are still kicking around and outlining your beliefs and expectations.  You might consider leaving each heir a letter along with your Will.

Whether your legacy involves investments, real estate, insurance or collectables, take the time to think carefully about who would benefit most and who you feel would respect your trust in them to carry on wisely with that which you built.  Your Will is a valuable tool – and a well-trained and experienced family and estate lawyer is your best ally as you prepare this document.  Remember, you don’t have to give everything away at once or in a lump sum – you could let some people use the asset or receive part of the income and then pass any remainder on to another generation or heir, or perhaps a charity.

Trusts – whether Testamentary (created in your Will) or Inter-vivos (created during your life time) – are excellent tools for many people and for several reasons.  First of all, your Will becomes public knowledge when it is probated – anyone in the world can see it, see your assets, your debts and see who received what.  Inter-vivos Trusts on the other hand are completely private.  No-one other than your named Trustee knows what assets are in the Trust or how they are disbursed.  Another issue is that it is possible for your Will to be contested by a disgruntled heir – or someone who thinks they should be an heir, whereas there is no right to contest an Inter-vivos Trust (in the absence of fraud!).  A final issue is that under most Provincial and Territorial Legislation, you are required to treat all beneficiaries with in a class (children are on class, siblings are another class, grandchildren, etc.) equitably – not equally, just equitably.  There is no such requirement with an Inter-vivos Trust.

Trust law is a relatively narrow speciality, so question your legal advisor about their preferred areas of practice and expertise before you allow them to work on your behalf.  Obviously, I haven’t covered all possibilities here but I urge readers to take the time and discuss these issues with your spouse and your potential heirs before you contact your legal advisor.  Your financial planner is also an important resource when considering your legacy – and don’t wait too long!  Mother-nature has a habit of catching up to us sooner than we expect.

“That’s a wrap Mr. DeMille” Wrap Accounts – a Q and A

With apologies to Cecil, what is a “wrap”?  That depends on your perspective – there are two main versions of wrap accounts – traditional and mutual fund.  A traditional wrap account offers several different types of investments to help meet the needs of the individual investor. Their main attraction is they offer investors access to multiple fund families and multiple managers.  A mutual fund wrap account is a basket of mutual funds normally only from one company.

Traditional wraps allow small investors to access professional portfolio managers, which were once only available to large institutional investors and the extremely wealthy.  Traditional wraps typically require an initial investment of at least $25,000.   Mutual fund wraps generally have smaller investment minimums, sometimes as low as $2,500. 

A wrap account is a form of managed money that combines — or wraps — commissions and management costs into one fee based on the value of the assets within the plan.  Unlike mutual funds, this fee is paid from the assets as a separate expense and may therefore become tax-deductible by the investor.  While these managed accounts sound a lot like mutual funds, they offer greater customization and may require higher minimum investment levels.  Typical wrap fees range from 1% to 3.5% and are calculated annually and paid quarterly.

Some mutual fund companies have programs in which they select portfolios of mutual funds wrapped together into a customized portfolio.  They are readily accessible but they can be expensive, as they tend to tack on an extra fee of anywhere from .75% to 1.75% on to the existing MERs of the funds.  These additional fees cover such items as more extensive reporting and automatic rebalancing plus general supervision of the managers.

Other companies offer unique pools of investments instead of mutual funds.  These pools are normally run by well-known portfolio managers and also promote the benefits of re-balancing, research, consulting, monitoring of the performance of the selected managers, reporting and other custodial services.

ETFs – Exchange Traded Funds – are not wrap accounts by themselves but some dealers are offering ETFs that are grouped according to general risk profiles.  Rebalancing and enhanced reporting may also be available for these specialized accounts.  They are generally only available through full-service brokerage houses and their investment advisors – not mutual fund representatives.

The mutual fund industry is enormous, and constantly growing.  With so many funds from which to choose, selection can be a major challenge!  Building and monitoring your portfolio can be a bit overwhelming for some and for those people a wrap account may be an attractive alternative.  Just remember to make sure you understand the costs involved and satisfy yourself about the value of the dollars you are spending. 

Courtesy to Jim Yih for some of his comments – and Investopedia –

Week-end Money Update – August 31, 2012

MONEY Canada – Canadian Money

The Toronto stock market registered a solid gain amid signs of Canadian economic growth and U.S. Federal Reserve chairman Ben Bernanke kept the door open for another round of economic stimulus.

 The S&P/TSX composite index rose 63 points to 11,949..

 The Canadian dollar closed up 67-100ths to 101.45 cents US as Statistics Canada said gross domestic product increased by 0.2 per cent in June, against the 0.1 per cent rise that economists had expected.

 The Dow Jones industrials moved up 90 points to 13,091 as Bernanke said that the Fed will act to promote growth as needed. The Nasdaq composite index climbed 18 points to 3,067.

 Oil gained $1.85 to US$96.47 a barrel.

 Traders are now looking ahead to the Fed’s next rate announcement on Sept. 14, after officials take in the release next Friday of the August job creation data.

 There’s plenty of other market moving events next week, including Thursday’s interest rate announcement by the European Central Bank, when it’s hoped the ECB will announce moves to control borrowing costs of some of the weakest eurozone countries.

Check back for updated business and financial news Tuesday morning before the market open.

Market Round-Up – August 17, 2012

The Toronto stock market closed higher as rising commodity prices, positive economic data and another commitment to preserve the euro currency union left the TSX at a fresh 3 1/2 month high.

The S&P/TSX composite index extended gains to a fourth session, up 57 points to 12,090.

The Canadian dollar backed off a quarter of a cent to 101.1 cents US after the Consumer Price Index declined 0.1 per cent on a seasonally adjusted basis in July. That was lower than expected and reinforeced the view that the Bank of Canada will keep interest rates unchanged for some time to come.

U.S. markets were also up at the end of a positive week, helped along by positive readings on consumer confidence and an index of future U.S. economic activity.

The Dow industrials edged 25 points higher.

The Nasdaq composite index was ahead 14 points.

Oil gained 41 cents at US$96.01 a barrel.

The TSX ended the week up almost 1.7 per cent, leaving the main index up about 130 points year to date.

Have a great weekend!

Indian Mutual Funds

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Bio Finance 2010 The who what where when and why?

BioFinance 2010 is the leading investor conference in Canada
for the life sciences industry. This three-day event brings together key
industry players interested in investment opportunities and issues affecting
companies in the life sciences sector. Presenting companies will span a range of
industries including: biologics, medical devices, drug delivery, vaccines,
diagnostics, bio-energy, green technologies, bio materials, industrial biotech,
and research services.

BioFinance 2010 will be held on April 6-7, 2010 at
the Toronto Marriott Eaton Centre. It begins with a gala Opening Reception on
April 6 and concludes with Sponsors Receptions on April 7.

In addition
to the BioFinance program, Sponsors will also be hosting individual events on
Tuesday April 6 and Thursday April 8. The details and location are currently
being developed. Please visit our website again for updates.