H.M. Wise Asset Management

• Investment Savings Account
• All-Inclusive Banking Service
• Reverse Mortgages

Investment Savings Account

We can offer high-interest Investment Savings Accounts to our clients. These are available through subsidiaries of major Canadian banks, and are CDIC insured up to $100,000. One of the banks that we deal with has 5 subsidiaries, so you could deposit up to $500,000 and still receive full CDIC protection. US dollar accounts are also available, though at lower interest rates. US dollar accounts are not CDIC- insured.

This is a true savings account. There is no locked-in period, and funds will be available on a next-business-day basis, transferred directly to your existing bank account. Interest is calculated daily, and credited to the account monthly. Investment Savings Accounts are available for both Personal and Corporate clients. Personal accounts can be either open or registered (ie RRSP, RRIF, or TFSA). The ISA can be held within an existing self-directed RRSP without the need to open a new plan.

The interest rates shown in the table below are for Portfolio Strategies nominee accounts. Rates for client-name accounts are slightly lower. As of 7 February 2023, rates on offer from my favourite supplier are as shown below. Interest rates change frequently, so please call me for the latest offer. :

Account Type	Currency	Amount Deposited	Interest Rate
Personal	CAD	$ unlimited	4.50%
	USD	$ unlimited<	4.40%
Corporate	CAD	$1 - $50M	4.50%
	USD	$1 - $50M	4.40%
	CAD & USD	>$50M	call
Rates quoted as of 7 February 2023. Rates can change frequently. Call me for the latest rates.

All-Inclusive Mortgage/Banking Service   ↑

Manulife Bank introduced a unique banking service that they call Manulife One that I can offer to my clients. This service uses your owner-occupied residence as collateral, just like a regular mortgage or home equity line of credit, but provides much more flexibility in terms of deposits and withdrawals from the account. Manulife also allows the collateral to be a non-owner-occupied residence in some Canadian cities, including Calgary. The basic requirement is that the owner has at least 20% equity in the property. Account access is excellent, with a debit card, ATM privileges, cheques, telephone and internet banking, and MasterCard.

Manulife recommends that you deposit your paycheque or other income into your Manulife One account. Every dollar that you deposit reduces your mortgage debt, which lowers your borrowing cost. Of course, on the flip side every withdrawal that you make from the account increases the debt and increases the cost of borrowing.

As with any mortgage or debt, there are required loan payments. However, with Manulife One you can adjust those payments up or down according to your needs, as long as you have borrowing room. The basic Manulife One account has a floating interest rate, based upon the Canadian Prime Rate. As of 13 February 2023, the base rate is 7.20%. However, they allow you to set up a sub-account if you prefer, with a fixed interest rate and amortization schedule like a conventional mortgage.

If you’ve paid off your mortgage, Manulife offers 2.00% interest on positive balances.

Manulife claims that clients who use Manulife One are reducing the length of their mortgage commitment (and therefore the amount of interest expense) by 25-50% with no change in the cash used to pay the mortgage.

Call me if you are interested in finding out more about Manulife One.

Reverse Mortgages   ↑

details coming shortly

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• Tax-Efficient Income in an Open Account
• Flow-Through Shares
• Charitable Donations
• Charitable Foundation

Tax-Efficient Income in an Open Account   ↑

Mutual funds can be a very efficient way of getting income from a non-registered account. Many fund companies offer a tax-efficient structure known as T-SWPs (Tax-advantaged Systematic Withdrawal Plans) across their entire product line.

In a standard mutual fund, distributions paid to the investor are made from the interest, dividends and capital gains that the fund accumulates during the year. The distributions are taxable in the hands of the investor. In a T-SWP, the interest, dividends and capital gains are kept within the fund, and a portion of the investor’s original capital is paid to the investor as Return of Capital (ROC), which is not taxable. Instead, the Adjusted Cost Base (ACB, which can be considered as the investor’s net invested amount) goes down by the amount paid out as ROC.

Note that if the ROC paid out roughly matches the fund’s income from interest, dividends and capital gains, there will not be any actual decline in the value of the investor’s holdings! (Of course, the market value will fluctuate up or down according to the whims of the capital markets.) I like to use the analogy of a deck of cards. The income into the fund goes onto the top of the deck, while the distributions get dealt out of the bottom. As long as the number of cards added to the top of the deck equals the number of cards being taken from the bottom, the number of cards in the deck remains constant. While the number of cards might remain constant, the value of each card might change because of market forces.

T-SWPs are generally offered with a 5% distribution, based upon the Jan 1 value of the fund. Since payments are Return of Capital, the ACB will be greater than zero for 20 years (5% T-SWP). For all that time the T-SWP will provide extremely tax-efficient income. Once the ACB reaches zero, the continuing income is treated as a capital gain, which itself is very tax-efficient.

Note as well that ROC is not considered as earned income, so it does not affect any means-tested government benefits.

Finally, if the T-SWP is with the fund company’s corporate class structure, other benefits can accrue. Call me to discuss.

Flow-Through Shares   ↑

How can we do our part for the Green Revolution and save taxes at the same time? Through an investment in flow-through shares!

We’ll start this discussion by referring to Canadian tax law. It has always been the case that companies can deduct their expenses from income before calculating tax owed. However, many junior companies don’t have any revenue against which to deduct their expenses; hence the creation of a provision in Canadian tax law that allows certain companies, traditionally in the resource sector, to “flow through” their Canadian Exploration Expenses (CEE) to their investors, who can deduct those expenses against their other income. This is just like an RRSP contribution, and is nothing extraordinary.

However, recently the federal government expanded the concept of Canadian Exploration Expense (CEE) to include “Canadian Renewable and Conservation Expenses” (CRCE). Companies whose activities would have CRCE can “flow through” their CRCE to their investors, who can deduct those expenses against their other income. Activities eligible for CRCE include:

• co-generation and specified waste-fuelled electrical and heat generation systems;
• wind turbines;
• electrical generating equipment that uses only geothermal energy;
• small hydroelectric facilities;
• stationary fuel cells;
• photovoltaics and "active" solar equipment used to heat a liquid or gas;
• equipment powered by certain waste fuels (e.g. wood waste, municipal waste, biogas from a sewage treatment facility);
• equipment that recovers biogas from a landfill; and
• equipment used to convert biomass into bio-oil.

This is so new that I don’t currently have any offerings in this space, but no doubt they are coming soon.

What makes flow-throughs more interesting are the additional tax credits that the federal government and some provincial governments provide to investors. A tax credit comes directly from your taxes otherwise payable. The federal government offers a 15% Minerals Exploration Tax Credit (METC) for investors in qualified mining exploration projects in Canada. The governments of British Columbia, Saskatchewan, Manitoba and Ontario also offer tax credits for exploration done in their province. Quebec offers a tax deduction as an incentive, rather than a tax credit.

The biggie, though, is a new Critical Minerals Exploration Tax Credit (CMETC) that the federal government announced in the 2022 budget. This provides a 30% tax credit to flow-through investors who support exploration projects for 31 minerals deemed critical to the new Green Economy:

Here's a hypothetical example.

The XYZ Critical Minerals Flow-Through Limited Partnership has the following characteristics: it has 10% administrative costs, so that 90% of your investment will be eligible for CEE. The promoters plan to spend 2/3 of their exploration dollars on critical minerals projects, with the other 1/3 on non-critical minerals (for example gold, silver or iron ore). 2/3 of the CEE will be eligible for the CMETC of 30%, and the other third will be eligible for the METC of 15%. All junior mining shares purchased by the partnership must be with companies listed on the TSX or TSX Venture exchange, providing liquidity and transparency. The promoters plan to dissolve the partnership in 18 months, at which time the partnership units will be automatically rolled over into a mutual fund. Partnership units cost $100 each, and the minimum purchase is 100 units.

Say you live in Alberta and have taxable income of $150,000. Your combined federal and provincial marginal tax rate is 38%. You place $10,000 into the XYZ Critical Minerals Flow-Through Limited Partnership, so you receive $9,000 of CEE and your taxable income gets reduced to $141,000. Your tax bill gets lowered by $3,420. The 15% METC on 33% of the CEE provides additional tax relief of $446, and the 30% CMETC on 67% of the CEE gives you another $1,809 in tax savings. Your total tax savings will be $5,675 on your investment of $10,000. Your “at-risk” money is only $4,325, yet you also still have $10,000 worth of junior mining shares that have the potential to rise in value.

It is worth noting that flow-through shares have an assumed Adjusted Cost Base of NIL, so if the rollover mutual fund units are merely sold you could get a future tax bill that will cut into your profit. Most flow-through investors tend to buy flow-throughs every year, reinvesting their proceeds and using the CEE and tax credits to eliminate the taxes payable from prior purchases. The following section on Charitable Donations shows another way to avoid this tax hit.

Charitable Donations   ↑

The federal government introduced a significant change to charitable donations a few years ago. When marketable securities like stocks or bonds are donated to a charity, the donor will receive a charitable donation deduction for the market value of the security, and there will be no capital gains tax applied on the transaction.

Charitable Foundation   ↑

Bill and Melinda Gates have one; so can you. I'm talking about a Family Charitable Foundation. Doesn't something like The Jones Family Charitable Foundation have a nice ring to it? Kind of makes you feel you're right there with Bill and Melinda, doesn't it! One of the mutual fund companies - Mackenzie - has made it easy for you to establish your own personal Charitable Foundation without requiring Gatesian gobs of money.

With a Charitable Foundation, you receive a donation tax credit for the money that you put into the Foundation as seed money. Each year, the Foundation then proceeds to distribute the investment earnings of the fund to the charities of your choice. The initial capital remains in the Foundation to continue to grow. Note that you receive the tax slip when you put money into the Foundation, not when the Foundation distributes the earnings to the charities.

Suppose you establish The Jones Family Charitable Foundation through Mackenzie's facility. You fund it with an initial contribution of $10,000 (cash or marketable securities), and set a distribution policy that 5% of assets will be disbursed each year to your local United Way (the choice of charity is up to you, but 5% is the maximum level of allowable disbursement). You will receive a donation tax slip for $10,000 and the United Way will receive $500 as the earnings from the Foundation.

You can add funds to the Foundation each year, receiving a tax slip for each contribution. In turn, the Foundation will be in a position to distribute enhanced funding each year to your designated charities. Furthermore, the Foundation is separate from your estate, so your children can continue to build your Foundation up to become a real force for good in your community.

Are you interested in bringing order to your charitable giving, and creating a legacy? Please give me a call to discuss how we can establish "The (your name here) Charitable Foundation".

Charitable Donation Example #1:

John Smith has a generous heart. He heard that his local hospital was making a special fund-raising drive in order to obtain some new equipment. John wanted to make a substantial contribution to the cause.

He had 1000 shares of ABC Resources that he had purchased for $10/share. The market value rose to $100. If he sold the shares for proceeds of $100,000, he would have had a taxable capital gain of $45,000 (half the capital gain of $90K). He would need to keep $17,500 aside to pay the taxman, so he would only be able to donate $82,500 to the hospital fund.

Instead, John donated his 1000 shares of ABC Resources to the hospital, and the hospital subsequently sold the shares on the market. The hospital received $100,000 from the sale, and John received a donation tax slip for $100,000. No capital gains tax was payable.

By donating the shares instead of cash, the hospital received a larger donation. John had a warm feeling in his heart and he received great accolades for his generosity. The bigger donation tax credit was a bonus!

Charitable Donation Example #2:

Alice Wilson has a charitable heart, and also wanted to contribute a substantial amount to the hospital fund.

Unfortunately, she had a somewhat smaller wallet than did John Smith. She heard, however, that it was possible to use Flow-Through shares to create something called "The Triple Dip".

If you read my earlier entry about Flow-Through Shares, you'll know that a Mining Flow-Through gives the investor a write-off of their initial investment against their income (same as an RRSP contribution), plus an additional 15% METC tax credit that is applied directly against taxes and an additional 30% CMETC tax credit on any funds that the Flow-through spends exploring for Critical Minerals. Depending upon the investor's tax bracket, the tax benefits are equivalent to 50¢ for every dollar invested.

Alice purchased $10,000 of a Critical Minerals Flow-Through Limited Partnership that was scheduled to dissolve after 18 months, with the partnership interest converting into units of a mutual fund. She was able to get a tax refund of $5,000 the following April because she had made this investment.

18 months rolled by. The limited partnership converted on schedule into the mutual fund. The venture was only moderately successful, and Alice received $10,000 in mutual fund shares - the same amount as she had initially invested.

Alice had a problem. She wanted to donate the full $10,000 to the hospital fund, but if she sold the mutual fund she would have a big capital gain. One of the rules of flow-throughs is that the Adjusted Cost Base of the flow-through shares is zero. Should Alice sell her shares, she would be subject to capital gains tax on half her entire proceeds, or $5,000.

Her solution: she donated the mutual fund shares to the hospital fund! The hospital sold her mutual fund for proceeds of $10,000 and placed Alice's name on the plaque of Special Benefactors. She received a donation slip for $10,000, and the following April got a tax refund of $3,000 because of the donation tax credit.

Alice made a real difference to the hospital through her generosity, but her after-tax cost was only $2,000 - well within her annual budget for charitable donations!

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• TFSA: Tax Free Savings Account
• TFSA vs RRSP
• Sustainable Withdrawal Rate in Retirement
• Linking Your RRIF to Your TFSA
• RESP: Registered Education Savings Plan
• RESPs for Grandchildren
• RDSP: Registered Disability Savings Plan

TFSA: Tax Free Savings Account   ↑

TFSAs have been around since 2009. They are the greatest innovation for financial planning since the introduction of RRSPs. For some people, they may be more appropriate than RRSPs.

To summarize, a TFSA is an account in which you can invest after-tax dollars. In return, all growth, whether through interest, dividends, or capital gains, can be withdrawn without incurring any tax liability. Unused contribution room is carried forward indefinitely. The full amount of withdrawals can be put back into the TFSA in future years. Account holders need to be aware that re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.

The 2023 contribution limit is $6,500. If you haven’t made any contributions so far, the lifetime contribution limit is $88,000 in 2023, rising to $94,500 in 2024.

Here are some of the ways in which a TFSA might be useful:

• Saving for a Major Purchase - interest on funds in a TFSA savings account won't get taxed.
• Source of Emergency Funds - can withdraw money when needed without any tax, then replace the money the following year once the emergency is over.
• Retiree - required withdrawals from a RRIF that are in excess of the funds needed for living can be placed in the TFSA and not attract further taxation.
• Estate Planning - funds in a TFSA will not be part of the "final tax return" and can be passed to heirs tax-free.
• Income Splitting - TFSA is a way to get $6,500/yr into a low-income spouse's hands.
• High-income Individuals - while there is no tax deduction, the investments in the TFSA won't get hit by tax on the investment returns.
• High-income Individuals - investment gains are not included in calculation of OAS clawback.
• Low-income Individual - investment gains are not included in calculation of Guaranteed Income Supplement.
• Low-income Students - deposit any extra funds (or funds from parents) into a TFSA, then withdraw the money in higher-earning years for deposit into an RRSP.

TFSA vs RRSP   ↑

When the federal government introduced the Tax Free Savings Account in 2009, the stated goal was that 95% of Canadians would be able to invest their hard-earned money in tax-sheltered vehicles. Nowadays, that means for most of us we can choose between putting funds into an RRSP or a TFSA.

Which is better? The answer, of course, is it depends! Table 2 indicates a few of the features of the RRSP and the TFSA. I think the big issues are: need for liquidity, tax rate in retirement, and whether you will be subject to the OAS clawback in retirement.

RRSP versus TFSA
RRSP		TFSA
Contributions made with pre-tax money (100% deduction from earned income)	Contributions made with after-tax money (no tax deduction)
Earnings within the plan compound tax-free	Earnings within the plan compound tax-free
Withdrawals taxed as ordinary income. Could impact OAS clawback rules or low-income GIS.	No tax on withdrawals. No impact on income tested benefits.
Can get money into a spouse’s hands through a Spousal RRSP and get a personal tax deduction	Can get money into a spouse’s hands by contributing to spouse’s TFSA. Can also contribute to a child ‘s (18+) TFSA.
Must convert to a RRIF by the end of the year when the holder reaches 71. No further contributions allowed (except to spousal RRSP if spouse is younger).	No age limit on contributions
Withdrawals can’t be re-contributed	Can re-contribute withdrawals, generally in any subsequent year.
Designed for long-term retirement savings as an alternative to a pension plan	Highly flexible; could be used for long-term or short-term savings
RRSP/RRIF passes to spouse upon death without any tax consequences	TFSA passes to spouse upon death without any tax consequences. (NB: there is a difference between Successor and Beneficiary!)
Upon 2nd spousal death, value of RRSP is deemed withdrawn in full and taxed as ordinary income. Could result in a huge tax bill to the estate.	The rule should be that the value of the TFSA is deemed withdrawn, upon the death of the 2nd spouse, and since withdrawals are not taxed there should be no tax consequences. However, in reality the rules are more complicated than that.

Perhaps a good strategy would be to put enough money into your RRSP to get your earned income into the next-lower tax bracket, then maximize your TFSA contributions, then top up your RRSP with any extra money. Don’t overlook the potential of a spousal RRSP for income-splitting during retirement.

Sustainable Withdrawal Rate in Retirement   ↑

People are living longer. According to Statscan, I can expect to live until I’m 86, and Carmen can expect to live until 89. Odds are pretty good that one of us might be around to see the magic 100!

You (and your spouse) can likely expect similar longevity. Given this reality – that a couple aged 65 may need to have retirement income for another 35+ years – the financial plans that I prepare for seniors generally plan for no drawdown of capital for the expenses of ordinary living. This gives the plan the flexibility to deal with unexpected expenses, both good and bad, which inevitably eat into your nest egg.

History has shown that a balanced portfolio of stocks and bonds can support a 5% annual withdrawal rate without erosion of capital. (A 6% withdrawal rate used to be sustainable, but that was in an era of much higher interest rates on the bond portion of the portfolio). Chart 1 shows how a pension-style balanced portfolio consisting of 60% equities and 40% fixed income has performed since 1980, on an after-fees basis. The equity side is 40% Canadian equities and 20% US equities, and the portfolio always includes 10% short-term Canada Treasury bills.

Chart 1
Source: S&P/TSX 300 Index, S&P500 Index, DEX Canada Universe Bond Index, Bank of Canada 91-Day Treasury Bills

This Neutral Balanced Portfolio has had a 6.6% annualized return since inception in 1980. Its returns more recently have been lower than average: the last 10 years and 20 years have averaged only 4.3% (gold and red lines on Chart 1), and the last 5 years a miserable 2.6%. These recent returns reflect the recent ultra-low interest rates for the fixed income side of the portfolio, and the lagging performance of Toronto’s S&P/TSX Composite Index over the past decade, when Growth (ie Technology) grossly out-performed Value (Resources & Financials). The TSX is considered to be a Value-oriented index.The swing between Growth and Value is cyclical, and they tend to have similar returns over long time periods. For example, the S&P500 and the TSX300 had the same return over the 34 years from 1977 and 2011.

Let’s use the time period from 1980 to 2022 as a test of my hypothesis that a balanced fund can support a 5% withdrawal rate without ever running out of money. In Chart 2, we have assumed an annual 5% withdrawal rate from a Neutral Balanced Portfolio with an initial value of $1,000,000, starting on 1 January 1980. The annual withdrawal in 1980 was $50,000 (5% of $1M; shown as the red bars in Chart 2). If the portfolio value at the end of a year is greater than it was at the start of the year (including withdrawals as well as investment growth), then we can give ourselves a raise for the following year. The raise will never be more than 5% of the previous year’s withdrawal. You can see in Chart 2 that withdrawals increased steadily from 1980 to 2007, reaching a peak annual withdrawal of almost $130,000/yr in 2007 and 2008.

Chart 2
Source: S&P/TSX 300 Index, S&P500 Index, DEX Canada Universe Bond Index, Bank of Canada 91-Day Treasury Bills

What about hard times? I mentioned earlier that the Neutral Balanced Portfolio hasn’t made a 5% return over the past 20 years, so there must be erosion of capital. The model that we are using in this test uses the criterion that if, in any year, the portfolio value at yearend is less than the value at the start of the year, we will maintain the same withdrawal rate for the following year. However, if by doing so we are going to pull out more that 5% of the yearend capital in the following year, we need to reduce our withdrawals. We can see this in Chart 2, where starting in 2009 we swung between reducing withdrawals following a down year, and increasing withdrawals following a good year. The end result, though, is that withdrawals at the end of 2022 were still $125,000 per year … a little less than the $129,000 peak prior to the Great Financial Crisis of 2008, but a lot higher than the initial withdrawal of $50,000 way back in 1980.

In addition to being able to maintain a healthy rate of withdrawals, Chart 2 also shows that we were in no danger of running out of money. In fact, the portfolio value at the end of 2022 was $2,147,151 (blue area in Chart 2) despite cumulative withdrawals of $4,119,442 (yellow area).

I conclude from this test that we don’t have to worry about running out of money even during an decades-long period of poor equity returns. It shows that a 5% withdrawal rate is sustainable even over an extended time frame of sub-par equity returns.

Linking Your RRIF to Your TFSA   ↑

The previous section showed that you’re unlikely to ever run out of money in retirement as long as withdrawals are kept at 5% of the account value.

The problem is that Table 3 shows that once you hit 71 years, the required minimum withdrawal from a RRIF is greater than 5%!

RRIF Minimum Withdrawal Schedule
Age at Start of Year	Factor (% of Jan 1 value)
60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100	3.33 3.45 3.57 3.70 3.85 4.00 4.17 4.35 4.55 4.76 5.00 5.28 5.40 5.53 5.67 5.82 5.98 6.17 6.36 6.58 6.82 7.08 7.38 7.71 8.08 8.51 8.99 9.55 10.21 10.99 11.92 13.06 14.49 16.34 18.79 20.00 20.00 20.00 20.00 20.00 20.00
*Age is at start of year

The solution is to take that “excess” money that you are forced to withdraw, and deposit it into your TFSA. For example, suppose you are 80, and have a $1,000,000 RRIF. You are required to withdraw 6.82% of $1M, or $68,200. But the sustainable withdrawal would be only $50,000 (5% of $1M), so you’d contribute $18,200 into your TFSA (assuming you have the contribution room!)

One of the benefits of this strategy is that your TFSA now becomes the source of funds for those inevitable unexpected expenses. Money can be withdrawn from the TFSA without any tax consequences, and re-contributed when finances permit.

RESP: Registered Education Savings Plan   ↑

The Registered Education Savings Plan (RESP) is a savings account for parents who want to save for the child’s post-secondary education. Contributions to the RESP are not tax-deductible, but growth within the plan, whether interest, dividends or capital growth, accumulates on a tax-deferred basis until the funds are withdrawn. If the child attends university, college or trade school, the growth portion of the RESP’s value is taxable in the hands of the child while the contribution portion is not taxable. Under normal circumstances the child will have tuition, books and related expenses that more than offset any potential tax payable.

The big benefit of the RESP is the Canada Education Savings Grant (CESG). The federal government will contribute an additional 20% of all contributions into a RESP, up to a maximum of $500 each year, until the end of the year when the child turns 17. While there is no minimum or maximum annual contribution limit, it makes sense for parents to contribute $2500 per year to most efficiently take advantage of the CESG. If a parent has been unable to make an RESP contribution in a year, the maximum CESG catch-up is $1000. Therefore, parents should start their child’s RESP either in the year the child was born, or the year following.

Low-income parents may qualify for additional CESG and the Canada Learning Bond.

The maximum lifetime CESG is $7200; the maximum lifetime parental contribution is $50,000.

As with all government programs, the RESP is filled with all kinds of rules and regulations. This is particularly true if the child doesn’t continue their formal education after high school. Call me if you need more information about your specific circumstances.

RESPs for Grandchildren   ↑

Most grandparents want to help their grandchildren get off to a good start in life. In today’s world, post-secondary education - whether at a university, career-oriented college, or an apprenticeship - is a necessity.

A Registered Education Savings Plan (RESP) is an excellent way of saving money for a grandchild’s future education. The big benefit is that the federal government kicks in an additional 20% on top of your contribution, up to a maximum of $500/yr. You’ll maximize the fed’s contribution if you contribute $2,500/yr to the RESP.

If the parents and both sets of grandparents are all contributing to a child’s RESP, the cash outlay for each contributor only needs to be $69.44 per month to maximize the CESG grant. This should be affordable for most families.

While a child can be beneficiary of multiple RESPs, the federal maximum grant applies to the sum of all contributions to all the plans.

As grandparent, you can set up an RESP with you as subscriber and the grandchild as beneficiary, or you can have the parents set up a plan in which the parents are subscribers and you are a contributor.

We used the second method for Zoe’s and Avi’s RESPs. Kelly-Anne is the subscriber, and we contribute to both grandchildren's RESPs. The advantage is that Carmen and I, Kelly-Anne’s parents, and of course Kelly-Anne and David, all contribute to the same plan, and we can keep track of total annual contributions.

RDSP: Registered Disability Savings Plan   ↑

The Registered Disability Savings Plan (RDSP) is a federal program designed to help people with disabilities achieve some measure of financial independence. The federal government assists by providing matching Grants for contributions made by others into the plan. If family income is very low, the federal government also has a Bond that does not require a matching contribution.

A person with a disability should consider opening an RDSP if they are a Canadian resident, have a social insurance number, receive (or eligible for) the federal disability tax credit, are under age 60 (no minimum age limit), and desire to build up long term savings. The federal and Alberta governments fully exempt the income and assets of the RDSP when calculating eligibility for government financial assistance programs.

The annual Grant limit is $3500, and the lifetime maximum is $70,000. The federal government will contribute up to 3x the amount contributed by others into the beneficiary’s RDSP.

The Bond limit is $1000 per year, with a lifetime maximum of $20,000. Family income must be less than $25,500 in order to qualify for the full Bond; after that level the size of the Bond is pro-rated.

There is no annual contribution maximum. However, the lifetime maximum is $200,000. Earnings in the plan grow tax-free until withdrawn from the plan.

As always with government programs, there are a lot of rules and restrictions placed on the RDSP program. However, if you or a loved one qualify, the RDSP is a great way to build up personal savings that can be later used for any purpose whatsoever.

Please contact me at mikewise@wiseword.ca if you’d like further information.

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• RRSP Loan

RRSP Loan   ↑

Note: I only offer RRSP loans to those wanting to make substantial catch-up loans - a minimum of $25,000. Also, please read the section below for other cautions on the wisdom of an RRSP loan.

How big should your RRSP be? A rule of thumb that I developed quite some time ago is that annual withdrawals from a retirement plan should not exceed 5% of the capital. If we reverse this, and say that we need pre-tax retirement income of $50,000/yr) from our RRIF, then we'll need to have $1,000,000 in our RRSP upon retirement.

When saving for retirement, the two most important parameters are time and rate of return. The following chart indicates the monthly contribution necessary for someone to amass $1 million in savings. As is evident, the task is easiest when time is on your side!

One way of getting time on your side is through an RRSP loan. It's a quirk of human nature, but many people find it easier to make regular payments on a debt than to put money aside for savings.

An RRSP loan puts the investment to work now, while you pay off the loan later. An RRSP loan can cut the numbers shown in Table 1 down by as much as 1/3 as long as you use the tax refund to pay down the loan principal, and you pay off the entire loan within a year.

Here's the math. Suppose you take out a $50,000 RRSP catch-up loan in February, with the proceeds invested in accordance with your time horizon and risk tolerance. If you're in the 38% tax bracket, this will give you a $19,000 tax refund, which you'll use to pay down the loan principal.

You have chosen a 1-year amortization of the loan, at prime which is currently 6.7%, and have deferred payments until May. By that time you'll have received your tax refund and paid down the loan, so the outstanding principal is only $31,600 (this includes 2 months of accrued interest).. You make 10 monthly payments of $3,253.71 and you've retired the loan the following February.

Your invested amount is $50,000; your out-of-pocket cost (including interest) is $32,537.14.

But wait! There's more. In this example, you have become used to paying $3,253.71 per month. Why not continue the practice for the other 2 months when loan payments aren't required? That's another $6,507.43. per year. If also put into your RRSP, it will generate a further $2,472.82 in tax refund!

You can scale these numbers up or down, but as long as you repay the loan in a year you'll get that big boost to your RRSP savings.

An RRSP loan is not without its dangers, of course.

• It is another debt obligation. Can your cash flow support more debt?
• Will increasing your RRSP contributions result in a tax refund, or will the contribution only reduce the tax otherwise payable? The benefit of an RRSP loan depends strongly upon the first situation, and particularly on using the refund to reduce the loan principal.

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• Review Will
• Arms-Length Executor
• Institutional Portfolio Management

Review Will   ↑

Having a will is important. This is true even if you are quite young; the possibility always exists that you could be hit by a bus while minding your own business.

The will describes in detail how you want your assets to be distributed upon your death. It should be completed by a lawyer who has spent enough time with you to understand what you want. Unfortunately, in some cases the completed will ends up with language that doesn’t represent your wishes, or has an ambiguity within it that can create problems when you are no longer around to resolve them, or is simply out of date.

An arms-length executor (ie not someone who has a financial interest in the will’s contents) can review your will to make sure that the provisions are clear and what you want.

Arms-Length Executor   ↑

I will confess that I’ve never had the dubious honour of being named the executor of anyone’s estate. I have, however, been involved in helping executors finalize an estate and distribute the assets in accordance with the will. My conclusion is that naming a relative or friend as your executor is something that you shouldn’t do to even your worst enemy! The kids can sometimes be bad enough, but once the spouses of the children get involved all h**l breaks out all too often.

So I strongly recommend using the services of an arms-length executor, such as a trust company, to handle the duty. They have done it before, and know the ropes. Their fee is a bargain.

Carmen and I have chosen a lawyer at a mid-sized Calgary law firm as our executor. The firm is large enough so that should our lawyer leave the practice, another lawyer at the firm can take over the job. Although we don’t have a huge estate, we do have property in Canada, Nicaragua and Costa Rica. Our kids are in Ontario and California. We’ll let the executor sort it all out.

Institutional Portfolio Management   ↑

I’m finding that as clients get older, many want to simplify and consolidate their estate. I’ve had discussions with several trust companies, and can now offer you a comprehensive estate planning package that includes review of your will, corporate executor services, and institutional portfolio management of your estate, both before and after death. This includes management of any testamentary trusts that might be set up under the provisions of the will. This comprehensive service requires a minimum estate value of $2 million, but we can mix-and-match services from different suppliers for those with somewhat smaller estates.

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