What You Need to Know About Your TFSA

Photo by Rick

The New Year is quickly approaching and this means that it’s time to start planning your savings for 2013.  Do you know how much you can afford to save in the New Year or how much you want to save in 2013? A general rule of thumb is for people to save 10% to 25% of their net monthly income; however this of course this depends on several different factors such as your debt repayment obligations, your total family income as well as your total monthly expenses.

If you are planning to save a percentage of your income you should definitely consider investing in a Tax Free Savings Account.  In 2009 the Canadian government introduced the TFSA as a way to encourage Canadians to save money every year.

The TFSA is an investment account that is offered by full service brokerage firms, discount brokers and banks to all Canadians who are over the age of 18 years old.  As of 2009 Canadians can invest $5000 per year; therefore if you have never contributed into a TFSA you can currently (as of 2012) invest up to $20,000 (4 years x $5000 per year). The TFSA contribution limit is increasing to $5500 per year in 2013.

How to contribute into your TFSA

– $105 per week

– $211 biweekly

– $458 monthly

The investment options in a TFSA are similar to other investment accounts – they include cash, guaranteed investment certificates, mutual funds, exchange traded funds and stocks. All interest, dividends and capital gains earned on investments within a TFSA are completely tax free. This means that you do not receive a tax deduction when you contribute money into a TFSA, but you also have no tax consequences when you withdraw money.  TFSA investments do not necessarily have to be used for retirement and your savings can be withdrawn at any time. We will discuss TFSA investment strategies over the upcoming weeks, so be sure to keep reading for more TFSA tips.

Current TFSA Interest Rates on Cash Deposits (as of December 18, 2012)

What To Do With Your Christmas Bonus?

It’s that time of the year when employees start to receive their annual evaluations and employers start to pay out annual Christmas bonuses. Many people contemplate the payout options for their Christmas bonus and they often seek the advice of a financial advisor.

When clients ask me what they should do with their Christmas bonus my advice always depends on their individual budget, their average tax rate and their personal savings capacity.  However, regardless of your personal financial situation the options are always the same. Canadians usually have 4 different options to choose from when you are deciding what to do with your bonus.

Option 1: Put your bonus into your RRSP.  This is a very common bonus option for employees because it helps increase your personal savings (aka your net worth) and it may also give you an RRSP contribution receipt to declare as an income deduction on your annual income taxes.

Whether or not you receive an RRSP contribution receipt depends on how your employer chooses to pay out your bonus.  If the bonus is paid to you as part of your salary and it is contributed into your RRSP with after-tax money (meaning you already paid tax on the lump sum bonus amount) you will receive an RRSP contribution receipt. However if your employer is contributing the money on your behalf with pre tax dollars you will not receive an RRSP contribution receipt to declare on your income taxes.

It is very important to inquire about the RRSP options for your bonus before making a decision on whether or not you wish to contribute your bonus into your RRSP.

Option 2: Take your bonus in cash.  This is another very common option for employees who are receiving a Christmas bonus.  Having a lump sum of cash deposited into your bank account just in time for the holidays can be very helpful for all of your seasonal expenses.

If you chose to take your bonus in cash keep in mind that you may have to pay a substantial percentage of the gross amount in taxes; this could leave you with a significantly less amount of your bonus money after taxes.  However keep in mind that you may be able to recuperate a portion next year when you file your annual income taxes.

In Canada we have a progressive tax rate system. This means that Canadians do not pay the same percentage of tax on the first $10,000 of income earned at the beginning of the year as we pay on the last $10,000 of income earned at the end of the year.

You may be able to recuperate the difference between the tax rate paid on your bonus at the end of the year (i.e. your marginal tax rate which is the highest percentage paid on the last dollar of income you earned during the year) and your average tax rate. As an example if your bonus is $10,000 and you paid tax on it at a rate of 42% but your average tax rate is only 38% you should receive an income tax refund of $400 ($10,000 x 0.04).

Option 3: Chose a combination of the 2 options.  If you want the best of both worlds you can chose to take a percentage of your bonus in cash and you can allocate a certain percentage of your bonus into your RRSP.

Option 4: Defer your bonus and take it in January.  Depending on your personal income, your marginal tax rate and your average tax rate it may be beneficial for you to defer your bonus and take it in cash in the New Year. This of course is only beneficial if your marginal tax rate is substantially higher than your average tax rate.

What are you doing with your Christmas bonus? Tell me on Twitter @TKBlogs

Photo by meddygarnety

Money Magazine – Canadian Money Magazine in Canada for Canadians

Money Magazine
Money Magazine Cover

MONEY® Canada Limited, a 100% Canadian owned financial media company publishes its eagerly anticipated print offering – MONEY® Magazine.

 MONEY® Magazine is has been in existence for a number of years, and is picking up its momentum now as the Canadian financial markets prepare to enter their busiest time of year. Packed with feature articles from some of Canada’s best financial writers, MONEY® Magazine hopes to capture an audience among both seasoned investors as well as those new to the investing world. Experts in the realm of Canadian Money a most important and meaningful subject matter.

With Financial Literacy as its primary goal, MONEY® Canada Limited is proud to announce this newest edition of MONEY® Magazine. Reached for a comment in Richmond Hill, Ontario, Owner and Publisher, James Dean had this to say about the awaited issue, ‘We’ve worked very hard to provide real journalism, opinion, and insight from some of Canada’s best [writers]… we’ve got something for everyone in the this issue. Real Canadians can learn a great deal from our publication.”

In addition to the great news, reviews, and interviews published for the benefit of the readers, MONEY® Magazine is also pleasing financial advertisers with this new high-gloss, high definition full color magazine. The next issue of MONEY® Magazine comes out in January 2013. Advertisers are encouraged to call MONEY® Advertising for rates and bookings 416-360-0000.

 MONEY® Canada Limited is a publisher of financial content across all media. From websites and magazines, to books, blogs, and broadcast quality video, MONEY® is Canada’s premiere choice for financial services advertising, marketing, and promotion. Canadian Money Magazine and Money Magazine online are synonymous with the MONEY Newsletter and the MONEY Magazine full four color process publication.

More about MONEY® Magazine, can be found at Money.ca

Quebecor saves money $45 million annually with Sun Media Restructuring

Sun Media Corporation announced Tuesday a restructuring initiative expected to result in over $45 million in annual savings.

The moves, which include the closure of production facilities in Ottawa and Kingston, include the elimination of nearly 500 positions across the organization.

“This restructuring is regrettable but warranted by changes in our industry which force us to align our cost structure with the new reality,” said Pierre Karl Peladeau, president and CEO of Sun Media.

“With the recent announcement of a major strategic redesign of Sun Media’s organizational structure, restructuring further streamlines and optimizes our operations. By doing so, Sun Media is proactively leading the way to ensure long term success.”

Peladeau said the initiative doesn’t diminish his company’s commitment to its publications, readers, advertisers or employees.

“We will continue to deliver quality content, with local presence, and maximum value to our advertisers,” he said. “We very much regret the impact that this has on employees who are departing our organization and would like to thank them for their contribution.”

November 11, 2012 Lest we forget – The Price of Peace and the cost of War

The Arithmetic of War: $9 Million Compared to $9 Billion for Next Generation Fighter

The cost of War and the price of Peace

Canada has a long history of service to international human rights, diplomacy and democracy.  Technology equips every soldier, tank, battleship and fighter jet. The need to be at the forefront of weaponry and innovation is a fact.

Prime Minister Stephen Harper, Finance Minister Jim Flaherty, Minister of National Defense Peter MacKay and Veterans Affairs Minister Steven Blaney continue forth on the procurement of $9 billion F-35 contract, while Veterans have had their funeral and burial benefits frozen since 2001. The current thinking is Canada can afford $9 billion for upgrades to its airforce but in doing so can justify slashing the operational budget of Last Post Fund by some 29% (or $1 million in 2013-2014). This is why the Last Post Fund, which delivers the Veterans Affairs Funeral and Burial Program, had to launch a national fundraising campaign to the tune of $9 million in order to fully fill its mandate towards modern-day veterans not eligible for the Canadian government’s Program (those who served after WWII and Korean War). Other projects for which donation monies are required include the perpetual care of the National Field of Honour where more than 20,000 persons are interred, and the provision of permanent military-style markers for eligible veterans who lie in unmarked graves (between 20,000 and 30,000 across Canada).

Therefore $9 billion is 1,000 times the $9 million it would take to allow the Last Post Fund to meet all veterans’ needs, be they traditional or modern-day veterans.

Write your Member of Parliament



  • You can read about the Last Post Fund capital campaign here.


  • You can donate online here.

We ask fellow Canadians to honour Veterans’ Week November 5 to 11, culminating in Remembrance Day services at your local cenotaph.  Show your support for Veterans by letting your MP know your vote means remembering Veterans – especially in death.

Contact Jean-Pierre Goyer, Executive Director

lpfinfo@lastpost.ca   Toll Free: 1 800 465-7113

Our mission is to ensure that no eligible Canadian or Allied Veteran is denied a dignified funeral and burial due to insufficient funds at time of death.

“Neither a borrower nor a lender be.”

Not exactly a new quote but one that seems to have stood the test of time – in some respects anyway.  For whatever reasons, most “westernised” societies (and most other societies for that matter) have come to regard debt as some measure of success.  I know I date myself but I remember an old Andy Capp cartoon (from England) – and he says “If you owe 5 pounds you are a failure, if you owe 5,000 pounds you are a success, if you owe 50,000 pounds you are a business-man and if you owe 500,000 pounds you are a government.  I’m on my way!”  Keep in mind Andy was always on the dole, owed everybody money and he was toasting himself in a Pub with a beer purchased by someone else!  Keeping in mind this was a cartoon from the 1960s, if you extrapolate to today, it may still be a valid statement.

If debt is a measure of success as Andy states, then I guess most people in Canada are successful – but at what price?  Cy N. Peace quoted from 1957: “Modern man is one who drives a mortgaged car over a bond financed highway on credit card gas!”  How true for most of us – at one time in our lives or another.  But is this the best way to live?  Just a question, not making any judgements on anyone – I have debt too, and I have been in deep debt many, many years ago.

At the ripe old age of 22, I had fallen prey to the “you have been approved” letters in my mail and ended up with 62 – yes sixty-two – different credit cards and owed more than $25,000 in total.  At that time, I was earning the princely sum of $451.00 per MONTH before deductions and of course had rent, food, dating and other expenses – not a pretty sight but I found a very trusting banker who helped me re-arrange things and I paid it all off at 100 cents on the dollar – no settlements, discounts or waived interest.  Boy did it HURT!!!

I never went to parents or relatives for loans – I had seen in my own family that those situations just never turned out well – for anyone.  The family dynamic is broken irreparably in most cases and bitter feelings abound along with jealousy and a varying sense of future entitlement – usually around the time a parent passes away.  However, I am a cynic and I know that would never happen to anyone else or their family!

“The man who won’t loan money isn’t going to have many friends – or need them.” a quote from the great basketball player Wilt Chamberlain.  A very interesting perspective I admit and not that far off-base – big-time when loans aren’t properly documented – particularly if they are from family.  In real estate, the philosophy is “location, location, location” – in financial matters it is always “document, document, document”.  This means everything – dates, pay-back date, interest rates, periodic payments and consequences of default – and then stick to them.  Regardless of the fact the people may be relatives or friends, treat the entire transaction as a business agreement and handle it in exactly the same manner as any lending institution.  Nothing more and nothing less.  Verbal agreements are not worth the paper on which they are printed.

Sign on bank: “We can loan you enough money to get you completely out of debt.”  I don’t know which bank but I have no choice but to laugh – some people actually believe it too – unfortunately.

New sources of financing for businesses and entrepreneurs are now reality including “crowdsourcing” – being done these days predominantly over the internet and most appear to be scams regrettably.  The concept is fine – many small loans from many people, but what is the risk?  Where is your protection?  Remember caveat emptor – let the buyer (lender) beware!

My Overview of the Canadian Life Insurance Industry

I know that writing this piece is going to provoke a reaction from many fronts – and that is GOOD – it means people are thinking for themselves and challenging the status quo!  Regardless, I am going to present my thoughts for your consideration.

In concept, insurance has been around since Greek and Roman days and evolved through France and other parts of Europe through “tontines”.  If you want to purse history some more, see one of my blogs at www.money.ca.  The Canadian Life Insurance industry goes back to the mid 1800s for its roots.  Initially, there was only one product – ordinary (or whole) life.  You paid a premium, there was some build up of cash if you cancelled before dying and your beneficiary collected money when you died – you paid premiums for your entire life.  Nice and simple back then – now where are we?

Depending on the day of the week, products are added and withdrawn as part of the normal impact resulting from consumer choices, government policies and intervention and social influences. Certainly, the changing global investment climate has had a major impact on product design and pricing for both new and existing products.  Today are there more than 100 completely different products available to consumers covering variations for life insurance, disability insurance, critical illness coverage and long-term care benefits plus investment products similar to GICs and variable products that are similar to mutual funds.  Prices for insurance products – all of them – are on the rise after several years of declines.  Primarily this is due to changes in the investment climate and operating costs.  Don’t look for them to drop in the foreseeable future.

On the pure life insurance side alone, products range from current versions of the original ordinary life policies to ones where premiums and death benefits can fluctuate – some under the control of the policy owner and some controlled by the insurance companies.  Generically, life insurance products are broken down into guaranteed and non-guaranteed and then further segmented between Term Insurance, Universal Life and Traditional Whole Life coverage.  It does get confusing – and frustrating – for both consumers and advisors.

On the “investment” side of the industry you have products such as GIAs – Guaranteed Investment Accounts – that operate and offer rates similar to GICs and Term Deposits offered by banks, trust companies and credit unions/caisse populaires.  You also have available investments that operate in a manner similar to mutual funds – usually called segregated funds but correctly called Individual Variable Insurance Contracts or IVICs.  These products contain minimum guarantees for the market value and death benefit for your investment according to their terms and conditions.  Guarantees can range from 75% to 100% depending on the product you select.  All investment products sold by life insurance companies have additional features not available through banks, trust companies, credit unions/caisse populaires including the ability to have a named beneficiary and enhanced protection against claims by creditors.  A well-qualified advisor is necessary to ensure that you fully understand the complexities of IVICs.

The key is working with a professional advisor – and they come in many disguises!  Some are associated primarily with a single insurance company or dealing entity while others go the pure “independent” route.  None is better than the other – they are different and serve different roles and tend to develop different types of relationships with clients.  You need to find an advisor with whom you can relate – do they speak your language – and I don’t mean English, French, Italian, Hindi, Punjabi, Mandarin, Korean, etc. – I mean do they use words to which you relate easily and understand?  Do they communicate in a simple and uncomplicated manner?  Do they treat you as an equal part of the process?  Do they answer all of your questions clearly?

Getting a referral from a trusted friend or family can certainly simplify the process of finding such a person.  You can also search the internet using your favourite browser and search engine.  Professional qualifications are always important – but the key to being satisfied is the relationship you develop with the advisor – not the number of initials after their name (I’m one to talk!).  You can check out my blog at www.money.cafor further information about the professional credentials you can expect to find with well-qualified advisors in the life insurance industry.

Segregated Funds – no they aren’t – they are Individual Variable Insurance Contracts!

IVICs – quite a mouth full – seg funds is so much easier and shorter.  Despite the street name, these really are variable insurance contracts – they aren’t mutual funds or any other type of fund actually. Also noteworthy – they are not new either – some seg funds trace their roots back to the 1950s.  So why all the hype these days?  Well, the market is several billion dollars – but why?

One of the earliest with which I came into contact was one from North American Life back in 1971 and the next was the SunFund “A” (Sun Life of Canada) back in 1976.  (I’m not that old that I recall specific funds from the 50s and 60s!)  Many other companies had them too – Canada Life, Manulife, Investor’s Group, etc.  These early versions were very uncomplicated compared to the current street models.  They typically came with a very high front-end load or service charges, sometimes as high as 15% on new deposits.  The maturity protection on the funds deposited was a flat 75% of net deposits and was available after 10 years and every 10 years thereafter.  The Death Benefit guarantee was also easy to calculate – 75% of net deposits – period.

No resets, no GMWB, GLWB, no 100% Death Benefits or Maturity Benefits or combinations of 100% death benefits and 75% maturity benefits.  Ah for the simple days of our youth.

While they operate in many respects as do mutual funds, there are significant differences too.  First, they are issued by life insurance companies and the regulation of the products and their sale comes under the Provincial or Territorial Insurance Acts – they are not subject to the rules and regulations that relate to mutual funds or other securities like bonds or stocks, etc.  Second, because they are considered life insurance (refer to their technically correct name above) they have the attributes of other life insurance products (whether they are non-registered or issued as part of RRSPs, RRIFs, TFSAs or RESPs) such as the ability to have a named beneficiary thus the proceeds on death pass outside the estate of the deceased.  This saves time and money – no probate fees, no lawyer needed to claim benefits, etc.  As a result of this feature, their third attribute can be important to many people, they enjoy enhanced creditor protection compared to mutual funds, bank accounts, GICs, Term Deposits, stocks or bonds.

All investments have costs associated with them and seg funds are no exception.  Compared to mutual funds, the Management Expense Ratios (MERs) are generally higher than mutual funds due to the costs of providing guarantees on death and maturity.  Additional costs are imposed by the “life insurance” wrapper involving creditor protection and beneficiary appointment provisions.

Some insurance companies offer various “add-ins” such as a guaranteed minimum withdrawal benefit or guaranteed lifetime withdrawal benefit plus the ability to “reset” your guaranteed values if you desire.  Just as buying a car, the more bells and whistles, the more they cost.  Be sure you understand these additional options, their costs and benefits before you make your final purchase decision.

GMWB – Guaranteed Minimum Withdrawal Benefit is a feature that is available for an additional cost and, as the name implies, when the contract matures (at a date of your choosing, within limits) the insurance company guarantees that a minimum monthly withdrawal benefit will be paid for a fixed period.  The GLWB – Guaranteed Lifetime Withdrawal Benefit – also for an additional cost, provides a certain level of income for the rest of your life – regardless of how long you live.

“Resets” allow you to lock-in market increases, should you so desire.  The result however, is that your 10-year maturity guarantee period starts at zero again – be careful how you use this feature.  Some companies restrict its use to once or twice per year – check with your advisor before you buy.

All companies selling these products provide advisors with the ability to illustrate various scenarios that will show how these products perform – up markets, down markets – erratic markets – you name it!

Some of the reasons, other than the “life insurance” wrapper benefits, that clients choose seg funds over mutual funds are obviously the availability of guarantees.  Having the guarantees in place allows people, perhaps, to invest above their “normal” risk tolerance level.  The enhanced creditor protection is of great value to business owners and professionals in our increasingly litigious society.  The ability to have named beneficiaries protects the privacy of the deceased, designations are not contestable (in the absence of fraud) and don’t require the owner to treat all beneficiaries either equitably or equally as is the case when distributions to heirs go via your Will.

Consider them carefully, they may be a good fit for some of the basics of your long-term plans!

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.

Term Life Insurance Explained

“Fun is like life insurance; the older you get, the more it costs.” – Kin Hubbard – American Humourist – well, when talking about term life insurance, this is certainly true – the insurance companies even guarantee that the cost will go up in their policies!

Term insurance is supposed to be the least-expensive temporary kind of life insurance available and is designed to be out of force when most people die – past age 75.  It isn’t an accident it was created in that manner.

The need for term life insurance is simple and obvious: people may need large amounts of temporary coverage for either re-payment of debts, or to provide income replacement to dependent family members when a breadwinner passes away.

Term products have come and gone over the years in various disguises, but today, we are left with two types – level renewable term that normally expires by age 75 or so plus Term-to-100, which is simply permanent insurance with no cash values so despite its name, it isn’t term insurance anyway!

We used to have reducing term – which had a level premium for the entire term but the face amount reduced each year – roughly in line with the outstanding balance of a mortgage or other fixed-term loan.  I am not aware of any such coverage being available in Canada any more other than as Creditor Group Insurance sold by various lending institutions and credit card companies.

So back to the renewable term products – today, usually available as 5-, 10- or 20-year renewable term.  Premiums increase at every renewal date and are guaranteed in the policy for each successive renewal period until the expiration date – usually age 75 but sometimes as late as 80 or 85 – for a MAJOR increased premium.  Very few people into their 70s or better are happy paying premiums that may triple or quintuple in a 5-year period – so they let it lapse – exactly what the insurance companies expect, and want!

As mentioned earlier, many lending institutions and credit card issuers promote credit life insurance, along with balance payment coverage or disability income payments if the borrower us unable to work as a result of a covered illness or accident.  To be sure, these extra coverage do provide benefits in the event of a covered death or disability – but there are restrictions – as you would expect.  Most important is that the borrower or cardholder does NOT own the coverage – the lending institution or card issuer owns the policy.  The borrower or cardholder don’t set premium rates – which normally change either every year or in 5-year age bands – the premiums are set entirely at the discretion of the insurance company.  Third, the borrowers’ or cardholders’ family are not the beneficiary of the life insurance – the institution or issuer is the beneficiary – and it is the same on the disability benefits – benefits are payable not to the insured person but to the lenders.  The lenders are protected but how much protection is really in place for the borrowers and their families?

There are two other issues flying below the radar.  The first is that either the insurance company or the lending institution/card issuer can cancel the coverage at any time without advance notice to covered borrowers or cardholders. The second point is that this type of coverage is not portable.  If you move your mortgage to a new institution, they might not offer creditor insurance at all – so now what?

Not to kill this discussion, but finally this coverage is not as cheap as it may appear.  In virtually all cases, a client is better served with more appropriate coverage, terms of coverage, premiums, portability and control of the plan by purchasing personally-owned coverage through a qualified financial advisor.  Regardless of your desired approach, make sure to get answers regarding all of these points – caveat emptor – let the buyer beware!

In closing – a quote from a most intriguing Canadian gentleman: “I detest life-insurance agents; they always argue that I shall someday die, which is not so.” –  Stephen Leacock – Canadian Humourist