RRSPs (and Spousal RRSPs) – exactly what are they and when should they be used?

Go back to 1957 (sorry, for the younger audience members, probably before you were born!) – this is when RRSPs first came to the financial landscape of Canada.

The original intention – it remains the same today – is to encourage Canadians to set money aside to provide for their own post-employment life-style and personal care.  To reward Canadians for saving, the Federal Governments since that time have allowed us to deduct our contributions (within limits to be sure) from our Taxable Income.  As most people know, the earnings on investments inside our RRSPs is not taxed until we decide to withdraw them along with the original deposits and purchase some form of retirement income plan.

Pretty simple.  Over the years, the annual limits have increased from the original amount of $1,000 dating from 1957, to the more complex formula in use today.  Originally, there was no carry-forward of unused contributions – but we have had that now for more than a decade.

The date/age at which RRSPs and Spousal RRSPs have to mature has changed up and down over the past 5-plus decades – now, we have until December 31st in the year we turn age 71 to decide how we want to receive our income and make the necessary arrangements.  Who knows what changes will come in the future?

It is interesting to note that there is no minimum age at which an RRSP can purchased – technically it could be purchased for a child as soon as they are born and have an SIN – wait you say – a child has no earned income!  But each person has a once-in-a-lifetime chance to make an excess contribution of $2,000 – who says that can’t be made at age 0?  Think about the benefits of compounding!

Should everyone purchase an RRSP or Spousal RRSP?  Short answer is no.  So why not?  Many incorporated small business-owners pull money for their lifestyle using dividends rather than paying themselves a salary – dividends are not considered earned income so receiving them doesn’t create allowable RRSP room anyway.

Other people are the eventual inheritors of substantial estates or have guaranteed future income, so any money added to their post-employment income is going to result in OAS – and perhaps in the future some other Government Benefits – being clawed-back or taxed away.  Therefore, what is the point of saving in an RRSP?

One last point, RRSP and Spousal RRSP contributions should go into the name of the person who has the LOWEST expected post-employment/retirement income from all other sources.  Since we have a progressive (or regressive, depending on your perspective!) income tax system, the ideal scenario is that in a two-person family unit, each person receives an equal amount of post-retirement income – in that manner they will pay the lowest overall amount of tax!

To pay or not to pay? That is the question!

The topic we all love to hate – income taxes – Federal, Provincial or Territorial (plus non-resident taxes for non-Canadians who hold Canadian assets and investments and expat taxes for snowbirds)!

To answer the lead question – we don’t HAVE to pay – as long as are prepared to accept the consequences!  Assuming most people want to be free to live in their own homes and travel knowing they will be welcome to return, then taxes have to be paid.

For this commentary, I will focus on personal income taxes as they apply to the vast majority of Canadian tax-payers.  Non-Canadian and expat Canadians have special issues and their returns tend to be considerably more complicated – if you fall into one of these categories, I strongly recommend that you consult a Chartered Accountant or Certified General Accountant in Canada and a Certified Public Accountant in the Excited States{intentional} or a recognised and accredited accounting professional where you reside or stay in your snowbird role.

I prepare a significant number of personal tax returns each year – and the number increases constantly as more people become frustrated at the increasing complexity of our income tax system.  Compared to our southern neighbours, the same tax-payer in Canada would have an average of about 18 pages to their return while in the US (both state and federal combined) would total no more than 6 pages {yes, I also do US returns for some Canadians with investments and/or property down south}.  Please be assured, this is NOT saying that the US income tax system is better than the Canadian version – but it is significantly less complex.

CRA has made important strides to try and make things easier for many tax-filers.  E-file and Netfile are now available to a significant number of people here – it is all on-line, fully secure and you can do it yourself in most cases.  This service is currently free (I hope it stays that way too!) and refunds generally arrive back within 2 weeks – pretty good service.  To use E-file or Netfile, you need to wait until you are sure that you have received all of your tax slips – from employment, pensions, RRSPs, RRIFs, other investments, banks/trust companies/credit unions/insurance companies, charitable receipts, safety deposit box receipt, public transit receipts, EI, Children’s Tax Benefit, Universal Child Care Benefits, other social assistance payments and eligible medical/prescription receipts are the most common.  Waiting until the third-week of March is the best bet – some businesses and charities can be very slow to mail their slips and receipts – better to wait and be sure you have them all rather than rush things!

Even with the comparative simplicity of E-file, Netfile and other commercially available tax software, many people find themselves too intimidated to even attempt to use them – and I can understand their feelings!  Some people are still very leery about internet security – and with good reason given all of the press that abounds relating to hacking and breaches to even high-level and well-secured government websites and computer systems.

All of these issues combine to make tax preparation a growing industry – albeit I think for the wrong reasons!  But I digress.

If you decide to seek outside assistance, you will need all of the above information plus your own personal details and those for all members of your family including SINs for children if you have them available.  If you have children/teenagers, then additional information such as childcare costs, education expenses and receipts, fitness expenses will also be required.  Most professional preparers have a checklist they can mail or email to you that covers everything so you don’t waste time.  All preparers charge a fee and it is normally based on the time it takes them to complete your return – the better organised you are, the lower will be the fee – if they have to sort through a show-box or grocery bag – they will charge you for their time – as they should!

If you operate a business or have rental income, then much more information will be required.  For sole proprietors, self-employed individuals and partners, a detailed accounting of all income, business expenses (including equipment purchases and leases) is required plus a log of automobile mileage and expenses including gas, repairs, insurance, business parking, carwashes, the lease contract or purchase contract will also be needed.  Again, most preparers have a checklist you can use.

For those people who own investment real estate (including those with “mortgage helpers” in the basement – whether or not they are relatives!) will need property tax statements, property assessments, purchase agreements, rental agreements, utility costs, insurance, etc.

It is not possible in this short review to cover all eventualities – if you have concerns, contact a well-qualified preparer – your friends may be able to recommend someone or you can do your own searching in the yellow pages or on line – but make sure you are satisfied with their qualifications and service they provide before you hand over everything.  Also ask if their service and fee includes working with you to resolve any questions (within reason of course) that CRA may have – but remember, regardless of whether or not you have someone else prepare the return, YOU are legally responsible for the content and it is YOU that will pay the price for failing to provide accurate or complete information – NOT the preparer!

As most people know, ours is a “progressive” tax system – which means that the rate of tax increases (progresses) as our income increases.  Federally, we currently “enjoy” 4 tax rates above a minimum income threshold – 15%, 22%, 26% and the top bracket is 29%.  People with taxable incomes below the threshold pay no Federal Income Tax.  Once we have done the Federal side of things, we come to the Provincial or Territorial part of the number-crunching.  With the exception of our friends in Québec, Federal and Provincial/Territorial Returns are all filed with CRA who sends money out to the respect provinces and territories as returns are received.  For Québecers, they file their Federal return with the CRA and a separate Provincial return directly to Revenu Québec.

Items such as personal exemptions, tax credits etc. vary from province to province and territory to territory and can raise the top tax bracket close to 50% in some jurisdictions – and this can change at any time.  Every time the Federal Minister of Finance or the Provincial/Territorial counterparts stand up in Parliament or the Legislature, pay close attention, something will happen that WILL affect you in some manner.

Universal Life – liked or loathed?

What a great and timely topic!  Just to clarify things, UL is not a new product – it was originally available under the name “Variable Life” more than 60 years ago – this is just the latest incarnation and undoubtedly not the last version we will see.

The original concept stands true to today’s products – un-bundle things and see what might happen.  Let the policy-owner play with some things and the insurance company can twiddle the remaining parts.  Nothing new with the 2012 version, although both consumers and insurance companies have learned a few things along the way.

Most life insurance companies in Canada offer at least one version of this product while others offer three or four.  Generically, the owner selects a death benefit amount, a death benefit type, any additional benefits desired and a premium deposit from within a broad range and which investment options they desire.

Let’s start with the amount and type of death benefit coverage.  The least complex product is usually called “Level Death Benefit” and is very simple.  When the life insured dies (while the policy is in force of course!), the insurance company pays a flat amount to the named beneficiary – whether it is 1 day from now or 50 years in the future – the death benefit never changes.  There are often two other choices – “Indexed Death Benefit – IDB” and “Face Plus Fund – F+F”, both of which, if offered, come with increased costs.  With IDB, the amount of life insurance increases each year by either a fixed percentage or by reference to an outside index such as the Consumer Price Index – the cost also goes up annually.  For F+F, the death benefit is the original amount purchased plus any accumulated cash values and are paid to the beneficiary after the death of the insured.

Additional benefits may include such items as a Disability Waiver of Premium Rider, Guaranteed Insurability Benefit or a Family Insurance Rider.  Disability Waiver provides that premium deposits are waived if the owner is disabled according to the terms of the policy.  Guaranteed Insurability means that the life insured can get additional insurance in the future without providing medical evidence – within limits and up to certain ages only.  Family Riders typically provide term insurance coverage on a spouse and dependent children.

The Premium Deposit ranges from a minimum amount calculated by the insurance company (that only covers the cost of providing the death benefit and any riders) up to a maximum amount (also calculated by the insurance company) the allows the policy to accumulate cash values up to the maximum limits permitted by the Income Tax Act.  The owner can choose any amount from minimum to maximum and anywhere in between – and they can change the amount at any time of their choosing.

On to investment choices.  Initially, insurance companies felt they had to offer literally dozens of choices – one company had 49 options!  Fortunately, some level of rational thought has returned and most policies offer a range of 4 to 12 although some do offer more.  It is normal to offer a series of guaranteed interest accounts that function in the same manner as GICs and range from Daily through 1, 3, 5, 10 and maybe 20 years.  Rates are published at regular intervals and can also be found on the website of the respective insurance companies.  On the equity side of the investment house, most companies offer 4 or 5 indexes – such as a Canadian Balanced Index, Canadian Equity Index, Canadian Fixed Income Index or similar on an International basis – plus two or three performance benchmarks using well-known mutual funds.  It is important to note that the UL policy does NOT invest in these indexes or funds – it merely mimics the results of the movement – up or down – of the benchmarks.

There have been some horror stories in the history of UL – particularly when advisors were using assumptions – with the approval of the insurance companies I must add – that had projected results in the 14% to 18% annual range – and of course, that never happened.  The result was that many policies collapsed and clients were left without their life insurance – in some cases if clients wanted to retain their coverage they had to make additional deposits – sometimes in the tens-of-thousands of dollars!  Thankfully, most insurance companies now severely limit illustrated growth rates and insist on showing results under three different assumptions – usually at something such as 2%, 5% and then an alternative rate of maybe up to 7% or so.

The taxation of UL is no different than for any other permanent insurance product.  CRA rules allow the plan to accumulate values up to prescribed limits.  At death, there is no taxation of any portion of the death benefit.  If the plan is surrendered or cash values are withdrawn from the policy before a death claim occurs, a portion of the withdrawal may be taxed as Ordinary Income.  Most insurance company’s illustration software provides samples of how this works based on the level of deposits the client has chosen.

UL is both a very good product and a very bad product – it is there to serve specific markets and is not right for every client or every situation.  Primarily, it is very good at providing an economical death benefit for larger face amounts where clients want the insurance to be fully paid up quickly and the insurance is designed to pay for taxes on death.  It is also good at accumulating cash on a tax-preferred basis if a client has substantial disposable income and does not want to attract any additional taxes on investment income.  I do expect those last two statements to come under some dispute from some quarters as some advisors and insurance companies think UL is the be-all, end-all of permanent insurance – but it isn’t!  Don’t be fooled – always ask for at least one other alternative besides UL from your advisor and evaluate things for yourself!

You and Your money – “nobody cares as much about your money as much as you care about your money”

With apologies to grammar enthusiasts – this is a true statement.  Jim Yih is one of the more well-known presenters and financial commentators in Canada and this is the key point (and is a quote directly from him) that he makes during his many educational presentations.  You can read more about Jim and his beliefs and teaching here:  www.jimyih.com.  It really is the most important concept I would like to get across to people everywhere too.  Yes, we all need to use the services of professionals to assist us but we should never abrogate our own responsibilities in this regard – it is OUR money after all!

Will Rogers, an American folk legend and philosopher, is quoted saying: “before I worry about the return on my money, I will worry about the return of my money”.  I have always loved this quote and use it frequently when speaking with clients or during group presentations.  Sometimes we spend so much time chasing more money we forget to take proper care of that which we already have.  If you feel this is an important issue, you need to be sure that your advisors know this – and know it very clearly.  If we don’t share our beliefs with our advisors, then it is our own fault if the results do not match our expectations.

“I’d like to live as a poor man with lots of money.”  ~Pablo Picasso – certainly one of the most influential artists in the world (and a very interesting person too), makes a poignant point with this comment.  My interpretation of this quote is that he enjoys money but wants to stay humble and do the things that please him rather than just chasing more money.  Personally, this makes sense and reminds me to stay “grounded” and not get too full of my own success, whatever that might be.

As spoken by Woody Allen~ “Money is better than poverty, if only for financial reasons.” – is a tongue-in-cheek commentary on how money has become such an important part of our lives – and perhaps for the wrong reasons – who knows?

I mentioned earlier that we need to share our personal philosophies with our advisors – and I mean all of them – not just financial advisors.  Our lawyer needs to understand how we feel about legal matters in general in addition to providing specific feedback on any proposed actions or plans.  Our accounting advisor needs to understand how aggressive we are prepared to be when it comes to tax planning – are we prepared to let the “tax tail wag the dog” for example.

“In the old days a man who saved money was a miser; nowadays he’s a wonder.”  ~Author Unknown – could have been spoken just yesterday – many, many people today are having a great deal of difficulty saving money and it is understandable but preventable and fixable given proper commitment to your financial goals.

I don’t want to wrap up this article with jokes about economists or financial advisors and prognosticators, but this quote sticks in my mind – “If all the economists were laid end to end, they’d never reach a conclusion.”  ~George Bernard Shaw.  Economists are always interesting and are as fallible as weather forecasters.  They always speak in terms of “indicators” rather than cold, hard facts and certain results.  They call themselves scientists – and science is normally based on irrefutable facts – strange.

“Rule No. 1:  Never lose money.  Rule No. 2: Never forget Rule No. 1.”  ~Warren Buffett – no-one is ever perfect although we all try to be – to one extent or another.  As a goal, this ties in very closely with Will Rogers comment at the top of this article and is a good finale.

“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 – www.jimyih.com and Investopedia – www.investopedia.com

Market Update – Friday September, 9

The Toronto stock exchange was slightly higher in the afternoon, but lost some of its earlier momentum.
The S&P/TSX composite index gained 5 points to 12,427.
That’s after rising more than 55 points earlier in the session.
In commodities, gold prices lost much of their shine.
Bullion had risen more than $15 in the morning, but was trading up $1.90 near midday.
And the November crude contract gained 56 cents to $92.98 U-S a barrel on the Nymex.
Shares of RIM were lower as the company looked into a BlackBerry outage that affected users in Europe, Middle East and Africa. Chief executive Thorsten Heins released a statement apologizing for the outage, and the company says the technical glitch has been resolved. Meanwhile the new iphone 5 launch left stores empty as  it exceeds expectations for Apple.

On Wall Street, the Dow gained 20 points to 13,620.
The Nasdaq moved ahead 15 points.
The Canadian dollar was higher after a report from Statistics Canada showed that Canada’s inflation rate continued to slide in August. The loonie rose 11-one-hundredths of a cent to 102.52 cents U-S.

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.

The Last Post – New 20 Dollar Bill Remembers Vimy Ridge

LastPostFund.ca Give back to those who gave the most. New $20.00 Remembers Vimy Ridge do you?

OTTAWA, Aug. 27, 2012 /CNW/ – For most of us, references to Vimy Ridge only hint at a distant high school history lesson on the First World War. But with the passing of Canada’s last veteran of the First World War in 2010, it is becoming increasingly important for us to remember the sacrifices of a generation of men and women whose lives were touched by war.

Each November we don our poppies as a symbol of remembrance, but this year we’ll have another reason to pause and take note.

The new polymer $20 bank note will begin circulating in November; its new design may serve as a refresher history lesson on a victorious battle that is often described as Canada’s coming of age.

The back of the $20 note features the Canadian National Vimy Memorial and pays tribute to the contributions and sacrifices of Canadian men and women in all military conflicts. The iconic monument is located in Vimy, France, and commemorates the Battle of Vimy Ridge. The monument bears the names of the 11,285 Canadian soldiers with no known resting place in France.

Poppies also appear on the back of the new $20 note. These images of the flowers that are synonymous with remembrance will soon be seen by Canadians every day.

The Battle of Vimy Ridge

On 9 April 1917, all four divisions of the Canadian Expeditionary Force united for the first time to take Vimy Ridge, a strategically important position in France that had eluded previous attempts by Allied forces between 1914 and 1916.

The Vimy Memorial

Located at the highest point of Vimy Ridge, the memorial was erected on land granted permanently to Canada by France in 1922, in recognition of Canada’s war efforts. The inscription on the base of the monument reads, “To the valour of their countrymen in the Great War and in memory of their sixty thousand dead this monument is raised by the people of Canada.”

Designed by Canadian sculptor Walter Seymour Allward, the limestone monument features two pylons that stand 30 metres high. With a maple leaf carved in one and a fleur-de-lis in the other, the pylons represent the sacrifices of people from Canada and France.

There are twenty sculpted allegorical figures on the monument. Among them is a group known as “The Chorus.” They represent the virtues of Peace, Justice, Hope, Charity, Faith, Honour, Truth and Knowledge. Reaching upward with a torch, Peace is the highest figure on the monument.


The presence of red poppies in battlefields and burial grounds throughout Europe during the First World War inspired the symbol of remembrance that we know today. Mourning the death of a friend, Canadian military doctor and artillery commander Major John McCrae wrote “In Flanders Fields,” the now-famous poem that reflects on the living presence of poppies in a landscape devastated by war.

On 11 November, people around the world will pause to remember. With this new $20 note, Canadians will soon have another means to remember—year-round and every time they open their wallets.

For more information on polymer notes and their security features, visit www.bankofcanada.ca/banknotes.

Did You Know?

The $20 note accounts for over half of all bank notes in circulation. There are over 845 million $20s in circulation.

Watch the $20 Note Video

Visit www.bankofcanada.ca/banknotes and watch the new $20 polymer bank note video that describes the Vimy memorial and explains the note’s innovative security and design.

Vimy Foundation

For more information about the battle and the Vimy memorial, visit www.vimyfoundation.ca or www.museedelaguerre.ca/cwm/exhibitions/vimy/index_e.shtml

SOURCE: Bank of Canada


For further information:For high resolution images of polymer notes, more information and free training tools:
1 888 513-8212For story ideas or to get more information on Canadian bank notes, please contact media relations at 613 782-7305 or email jgirard@bankofcanada.ca.