Canadian Investment and Tax Journey

A New Thought on RESP

2009-10-20T16:55:00.000-07:00

Last year, I put $500 on a TD 5-year stepper GIC. These $500 can get $200 grant. Since only GIC can get full $200 grant and mutual fund can't, that is the reason why I do not put all the money on mutual fund. But I do want to do so. As a result, this year, I will put $500 in a one year GIC, which can get $200 grant. After one year, I can use the money to switch to the mutual fund to get higher return.

Thoughts on TFSA account

2009-02-18T14:22:00.000-08:00

I am currently working on opening TFSA account at Questrade.

Starting from 2009, every Canadian can contribute $5000 into Tax Free Saving Account. When you earn, you do not pay any tax. Also the money in TFSA will not affect for OAS, which is nicer than RRSP.

As my current understanding, TFSA might be the first place you put money in than RRSP, RESP though different account has their own purpose. The main disadvantage for RRSP and RESP is that you cannot have too much money in it, say one million, because they defer the tax and when you get them out, you might pay the highest tax rate if you have millions in the account.

But for TFSA, you can have millions. No problem. So I am thinking to use the most aggressive method to accumulate wealth in this account through day trading.

Questrade charge $5-$10 for each trade and $5 US trasaction fee per day, which I think it is the lowest for a $5000 account. When it grows to $30,000, I may consider CIBC investor edge for lower commission.

I still involved in opening account stage with Questrade. I have to admit that Questrade's service is not so good. I still didn't get money in the account after one month. I will update later days on my TFSA account.

Update on my RESP account for TD e-series fund

2009-02-18T14:06:00.000-08:00

As I received so many comments on my last post on RESP account, I think it is time to update since I get the government grant recently around 2 month later.

First, I buy the fund in December, and in several days, but I received the grant in a single transaction. So I am not sure if government process that grant at the end of the year once or they just process it as a batch work for several days.

I bought $500 TD 5 year stepper GIC, it has the highest interest in all TD's GIC product. And I get $200 grant for this part, which is also into the GIC account.

Then I bought $2000 for e-series fund, (4 funds, bond, canadian index, US index, international index, each for $500 through several days), and another $100 for money market fund to test if I can get additional grant for the carry forward part of previous years. I totally get $420 grant which goes to resource fund I assigned when I opened the account. (It is not allowed to assign to e-series fund due to system limitation as my understanding, but I think we may switch the resource fund to e-series fund after 90 days, I guess, which 90 days is the requirement for no penalty to switch, but I leave that part anyway for asset allocation since there is no e-series resource fund).

So far, everything is perfect and goes as what I thought. Just planning to buy $4000 this year. $2500 is this years quota and $1500 use previous years carry forward quota.

RESP on TD e-series mutual fund

2008-12-05T09:02:00.000-08:00

I just setup a RESP account for my child. After reading several blogs, which you can find the link below, my RESP strategy is follows:

1) Why choose TD e-series mutual fund?
I have thought about self-directed brokerage account. But the problem is the high commission. It is $4.95/trade at Questrade, which is the lowest in Canada. But it is still too high because you cannot contribute RESP too much. I estimate that the maximum total RESP you could have is around $100K. If you have more than that figure, you will face some kind of penalty. Read my other blogs for details.
While mutual fund is good because they do not have commissions. And TD's e-series fund has the lowest MERs because you can only deal with them online. No telephone, branch or mail sort of things are allowed. Read more blogs below to find more information.

2) About CESG and additional CESG.
For TD mutual fund account, no additional CESG is allowed. So I decide to open an GIC account to get those additional CESG. And the regular CESG grant cannot purchase e-series fund. So I decide to purchase resource or energy fund with the grant part since it is not offered in e-series and that can diversify my portfolio.

3) My final portfolio
$500 for 5-year GIC, which can get CESG and additional CESG for $200.
$2000 e-series mutual fund which buy canadian index, us index and international index
the $2000 CESG grant ($400) will buy resource or energy fund.

More links:
Investing in TD e-Series Funds for Your RESP
http://www.milliondollarjourney.com/how-to-open-a-td-e-series-e-funds-resp-account-not-complete.htm
http://www.four-pillars.ca/2007/11/23/resp-how-to-get-started/

Rebalancing Can Be Hazardous to Your Portfolio

2008-11-04T15:08:00.000-08:00

An excerpt from the new book Yes, You Can Supercharge Your Portfolio - reprinted with permission of authors Ben Stein & Philip DeMuth and publisher:

• • •

Yes, You Can Supercharge Your Portfolio

Portfolio Rebalancing

The financial services industry loves to tout portfolio rebalancing as a value-adding strategy. The idea is that every year we should sell a little of that 12 months’ winners and use them to buy the current losers so that we bring our portfolios back into alignment with their original specs. Thus, if we had a portfolio of 60 percent stocks and 40 percent bonds initially, and at the end of the year find ourselves with 62 percent stocks and 38 percent bonds, we’d sell the extra 2 percent of from the stock side and add it to the bond side. Although it can incur tax and transaction costs, rebalancing is promoted on the idea that it gets us into a righteous “sell high, buy low” discipline.

Most of the studies we’ve read on the topic are either theory-based or derived from simple 60/40 stock/bond portfolios drawn from the historical record. This greatly oversimplifies an important question. We looked at 10,000 Monte Carlo simulations involving complex, seven-asset-class portfolios. We experimented with several calendar-based strategies, rebalancing the portfolios monthly, annually, or never. We also looked at tolerance-based rebalancing approaches: rebalancing when the portfolio wandered 10, 15, and 20 percent from its original allocations. (Your authors are grateful to Chartered Financial Analyst Bill Swerbenski for modifying his Portfolio Survival Simulator to enable us to make these calculations.) The results of these different approaches are all shown in the graph below.

Each triangle in the graph represents a specific rebalancing strategy and its effects on the 10,000 portfolios’ returns and risks. Note especially the “line of best fit” that indicates the average trade-off between risk and return of all these approaches.

The first thing that stands out is that the more frequently we rebalance, the worse our returns. The next obvious point is that, as is commonly observed, rebalancing cuts our risks. What we’d hasten to add, however, is that it doesn’t cut our risks efficiently. Specifically, the most frequently recommended ritual—annual rebalancing—puts our portfolio’s returns-to-risk profile below the efficient frontier.

Tolerance-based approaches, on the other hand, seem to have more merit: Those portfolios that were allowed some leeway to roam before being rebalanced had better risk-adjusted returns (above the line) than those adjusted according to the calendar (below the line).

This shouldn’t be surprising. When we go through this procedure frequently, it just shuffles short-term market noise into our portfolios. But rebalancing only when market action has had a chance to push our portfolios significantly out of alignment allows us to take advantage of market momentum misvaluation effects that aren’t otherwise captured by asset-allocation strategies.

When the obvious costs of rebalancing are pointed out, advocates quickly shift their ground to argue that it’s really being done to control risk. This may be true, if the only risk we’re talking about is standard deviation. But what about the risk of running out of money? The figure below shows how, starting with $1,000 invested across seven asset classes, the worst 5th percentile portfolio out of 10,000 grew after 25 years in the markets when following each of these rebalancing strategies.

Even in this bad-case scenario, overactive realignment costs us money if we’re long-term investors. In sum, one way we can supercharge our long-term returns is by not rebalancing our holdings too often.

Should we put money in RESP or in-trust account?

2008-07-02T00:42:00.000-07:00

After reading my material, I have my conclusion as follows:

1. RESP can give you some tax benefit, but you have to plan well.
2. You don't have to pay tax when it is still in the account. But when you take it out, you have to pay the tax on growth. The bad thing is that the growth is taxed at your marginal tax rate. If your investment growth is from capital gain, you pay double tax than out of RESP. What is worse, you have to pay additional 20% special tax. The good thing is if you do not take money from RESP, but use it for your child's education, since you child is in low tax bracket, you will not pay tax.
3. Due to the tax regulation, I think it is not a good idea to pass $100,000 limit on your RESP. Note that this is not the contribution, but the contribution plus all the growth and government benefits. If you have more than $100,000 and your child is in 4 year undergraduate education, your child can take out about $25,000 each year. If you have more money, you child still pay some tax, and the more money take out, the more tax you pay. And do not forget if you child is not going to university, the penalty is huge when the account is more than $100,000.
4. As a result, if you have strong ability in invest, especially > 20% gain per year, you should contribute little and let the money grow.
5. When the money exceeds the $100,000 limit, change it to GIC. Think it as your secure part of the portfolio and you have more room to invest more risky outside of RESP.
6. Let's say if your growth is $50000 in the account, you can see that you do not save much money on tax, especially the gain is spread in 17 years. (The best case is you save $12500 tax for the capital gain if that gain comes out of RESP)
7. Your child take out that money out of RESP after year 17. So before the age of 17, it is a good idea to establish the in-trust account to get some tax benefit too. So my point is you can establish both account.

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You can see some source from the internet below

Everyone loves his/her children. But before you buy RESP for them, please read this article.

RESP & CESG vs. in Trust Accounts - Which is Best?

Which tell us a different story and the conclusion is that you should not buy RESP.

Also you could read this article

An educational RESP for rising costs - Which do you choose?

Please note that some part of the article is outdated and you should look at CRA's
website for newest update and consider your own situation.

Also, here is another article how to split some investment income to child.

Quick Tip: Invest CCTB or UCB payments in your child’s name
http://www.redflagdeals.com/forums/showthread.php?t=387941&highlight=jande9

Brief RESP fact:

Maximum contribution: $50000

Canada Education Savings Grant: 20% of $2500 annually, that is maximum $500/year. In your income is low, it could be up to $600/year.

Withdraw and tax:
Before you withdraw the money, you do not have to pay any tax.

When the money is withdraw for education purpose by your child, it will taxed on the child,
normally no tax since they have no income. There is no limit on withdraw after 13-weeks
study. It is a good news if you have a lot of money in RESP. Withdraw as much as money
possible in a low tax bracket and you could leave some money less than the money you
put in after child finish the study since that part is not taxed.

If you have some money left, either your child didn't use all the RESP or did not attend
secondary education, then

1. You don't need to pay the tax on the money that is equivalent to the contribution amount (the money you put in).

2. Remaing money could be transferred to parent's RRSP, up to $50000, if parents have that RRSP room.

3. Then, the unfortunate part comes. All the remaining money is taxed as parent's income at the marginal tax rate plus 20% additional tax.

Don't forget that if you have a lot of capital gain, if it is outside RESP, it will only be taxed on half tax.

Normally, when you give your child money and he or she invests it and it earns interest or dividends, this investment income is taxed as if you had received the income. It is "attributed" back to you. While capital gains are taxed in the hands of the child.

For In-trust account,

Interest and dividend income is taxable in the hands of the donor
capital gains are taxed in the hands of the child.
Interest earned on interest is taxed in the hands of the child (the same goes for dividends).
Any income(interest, dividend, capital gain) earned from Child Tax Benefit contributions is taxable in the child's hands.

Since your child is in low tax bracket, you actually pay little tax on it.

Also since the account is an informal trust (there isn't a formal trust deed) Revenue Canada could consider the arrangement a revocable trust and attribute any capital gains to t! he donor rather than the child. To protect from this a prior Revenue Canada opinion may be required or donors could use the format of irrevocable gifts from one person to another to be held in trust for the child so there is a clear separation between donor and child by the intermediary person acting as trustee.

Put capital gain in RRSP? Yes!

2008-06-30T23:12:00.000-07:00

I have read several articles on RRSP. Here is my conclusion, but you can
get all the detailed information below.

1. In short, you should contribute to RRSP for some tax benefits. But do NOT put too much money in RRSP. You should always put a small amount money to RRSP when you are in a high tax bracket. Then let the account growth. It is better to calculate how much you will withdraw from RRSP. For example, $30000/Year after retirement. Then get the number how much you required in your account when you retired. Calculate how much you should contribute today to your RRSP account.

2. Also contribute as many as to Tax Free Saving Account starting from 2009. You do not pay any tax for growth in TFSA. Also it will not affect your income-tested benefit from government no matter how much money you withdraw.

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I had a question that captial gain is half taxed while RRSP withdraw is 100% taxed. Does that mean we should put capital gain outside RRSP?

I read with this article:

How Investing Taxes Work - Capital Gains Tax
which talks to put capital gain investment outside RRSP.

Later I read this article,

Is an RRSP contribution better than a non-registered investment or a mortgage payment?
which said,
You pay income tax in both cases, but outside the RRSP you also pay the capital gains tax. The non-RRSP version is subject to double taxation. Let's calculate it: RRSP:
$1000 pre-tax to invest becomes a $1000 RRSP contribution.
Over 15 years it grows to 1.1^15 * $1000 = $4177.
Income tax on withdrawl is $4177 * 36% = $1503.81
You have $2673.44 to spend.

Non-Registered:
$1000 pre-tax income incurs $1000 * 36% = $360 in income tax.
$640 to invest for 15 years = $740 * 1.1^15 = $2673.44
Pay capital gains tax of ($2673.44 - $640)/2 * .36 = 366.02
You have $2307.42 to spend.
Notice that in both cases you had $2673.44 after income tax and compounding, but in the non-RRSP case you also had to pay the capital gains tax. It was the capital gains tax, the double taxaction, that caused the non-RRSP investment to lose to the RRSP. Almost everyone who argues that the non-RRSP is better ignores the fact that the non-RRSP payment was made with after tax dollars, in other words, they ignore the double taxation.

So we do need to put capital gain inside RRSP.

How about dividend credit? Read the following from the same article,

Case 2: RRSP versus High Yield Canadian Dividend Stock

Dividends from Canadian corporations are very favourably taxed. Someone with a $50k/year employment income would ordinarily pay only about 8% tax on dividend payments versus a 36% marginal tax rate, due to the very favourable Federal dividend tax credit. When you invest in an RRSP the money you withdraw is taxed at your marginal tax rate in retirement--you don't benefit from the dividend tax credit. Wouldn't it be better to invest outside an RRSP to gain access to the dividend tax credit?

No!

Once again, you pay the income tax either way. The dividend tax, as small as it may be, represents double taxation. The RRSP will beat the non-RRSP investment by the 8% (or whatever) dividend tax you pay. Let's calculate it, for an equity that returns all of its revenue as a 10% dividend (it might be a preferred share), assuming the dividends are re-invested: RRSP:
$1000 pre-tax to invest becomes a $1000 RRSP contribution.
Over 15 years it grows to 1.1^15 * $1000 = $4177.
You withdraw it and pay $4177 * 36% = $1503.81 in tax.
You have $2673.44 to spend.

Non-Registered:
$1000 pre-tax income incurs $1000 * 36% = $360 in income tax.
The after tax yield on the 10% dividend taxed at 8% is 9.2%
Your investment grows to $640 * 1.092^15 =$2396.18
You have $2396.18 to spend
So for Canadian dividend company, we also need to put them in RRSP.

In a short, RRSP is better.

It seems that you should not contribute RRSP when you are in a lower tax bracket when you expect you have a higher tax bracket when you retired.

In addition, too much RRSP will reduce the Old Age Security and Guaranteed Income Supplement.

Canada's retirement income system

2008-06-30T15:00:00.000-07:00

Canada's retirement income system has three levels: Old Age Security ( OAS), the Canada Pension Plan (CPP) and private pensions and savings.

Old Age Security (OAS) Program

The Old Age Security program, the cornerstone of Canada's retirement income system, provides you with a modest pension at age 65 if you have lived in Canada for at least 10 years. If you are a low-income senior, you may be eligible for other benefits as early as age 60.

Guaranteed Income Supplement

The Guaranteed Income Supplement is a monthly benefit paid to residents of Canada who receive a basic, full or partial Old Age Security pension and who have little or no other income.

Unlike the basic Old Age Security pension, the Guaranteed Income Supplement is not subject to income tax.

Allowance and Allowance for the survivor

The Allowance, which also includes an allowance for persons whose spouse or common-law partner has died, is paid monthly. It is designed to recognize the difficult circumstances faced by many surviving persons and by couples living on the pension of only one spouse or common-law partner. These benefits are not considered as income for income tax purposes. To qualify, an applicant must be between the ages of 60 and 64. The Allowance stops when the recipient becomes eligible for an Old Age Security pension at age 65. The Allowance is an income-tested benefit. The maximum amount payable to the spouse or common-law partner of a pensioner is equal to the combined full Old Age Security pension and the maximum Guaranteed Income Supplement at the married rate.

In short, the OAS pension is paid monthly to persons aged 65 or over who meet the residence requirements specified in the OAS Act. The GIS is a monthly income supplement paid to OAS pension recipients who reside in Canada and have low income as specified under the program. The Allowance is an income supplement for persons aged 60 to 64 paid to spouses and common-law partners of GIS recipients as well as widow(er)s who have low income as set out under the program.

Note - Pensioners with an individual net income above $64,718 must repay part or all of the maximum Old Age Security pension amount. The repayment amounts are normally deducted from their monthly payments before they are issued. The full OAS pension is eliminated when a pensioner's net income is $105,043 or above. Your repayment calculation is based on the difference between your income and the threshold amount for the year. The first step is to figure out how much higher your income is than the threshold. Your repayment amount is 15 percent of that amount.

Old Age Security Payment Rates

As the second tier of Canada's retirement income system, the CPP provides a retirement pension, disability benefits, benefits for survivors, children's benefits and a death benefit.

Canada Pension Plan payments are taxable income.

You qualify for a CPP retirement pension if you have made at least one valid contribution (payment) to the Plan. The pension is designed to replace about 25 percent of the earnings on which a person's contributions were based.