Takin’ it

Every Canadian with a legit job has a DB pension. Yes, the golden kind. Guaranteed moolah for life, indexed to inflation with payments that are risk-free and will never fade or disappear. It’s called the CPP.

Now, two things to remember about the public pension system. First, it’s not managed by the government, so relax. There’s a CPP Investment Board (operating as CPP Investments) run by a bevy of Bay Street smarties with $500 billion under management. The plan is to grow the CPP pot to $1.7 trillion by 2040. The return on global investments last year was 20.4%. Sweet. Those fears of a decade ago that the plan would be crushed by lousy demographics are kaput.

Second, (however) the plan pays out peanuts. The CPP was never intended to be a primary source of retirement income for all us little beavs. In fact, the deal was for it to be just one leg on the after-work stool – along with a corporate plan and personal savings. These days one of those supports (company pension) has disappeared for 70% of the working population, so never before have RRSPs, non-registered investment accounts and TFSAs been so critical.

Remember, the current average CPP monthly payment is just $619.44. That’s $7,400 a year. Grocery money. Add in the old age pogey (OAS) of $626 a month, and the average retiree in Canada is collecting less than $15,000 annually. Nobody can live on that. Even a couple doubling that amount will be scratching out a penurious existence. It amounts to financial failure after spending six or seven decades on this planet.

By the way, the maximum CPP payout is $1,203 a month, but few achieve that, since it takes almost 40 years of continuous contributions between the age of 18 and 65. These days a lot of people are not beginning their careers until late in their 20s – one reason everybody’s premiums went up in 2021, so that a little more money can be paid in retirement to people now in their teens.

Well, now to Rob. And let’s revisit the No. 1 question that a certain pathetic financial-and-canine blog is routinely asked:

Next year I turn 60 and I was planning to start taking my CPP. My plan is to deposit it directly to my TFSA every month where I hold ETFs. When my contribution limit is reached then I would continue and contribute into my wife’s TFSA.

Our financial planner (I am self-directed but my wife likes the penguin) at the bank is against this and recommends waiting at least to 65 and even up to 70 before taking my CPP!

I know you always say if the government is giving you money….take it. We are financially solid and don’t “need” the money but… I do trust your advice and would love to know your thoughts on this.

TPTB want to discourage people taking CPP at age 60 for obvious reasons. You will stop collecting from the fund when you die, so the closer you get to exiting, the better. This is why those who wait get more, but for a shorter time. The reduction in benefits for early payout is 0.6% for each month prior to your 65th birthday. That’s about 7% a year, or a total of 36% less for collecting at 60 as opposed to 65. In general this means if you plan on living to 85 and want to max the total amount received, then delay collecting until 69. This is what the number-crunchers, actuaries and stubble-less young bank advisors will tell you.

But wait. What if you croak at 74? That would blow.

Anyway, this is not the essence of Rob’s question. The point is he doesn’t need the money to finance his retirement (which is one of the only valid reasons for delaying, especially if you’re a woman). And in his case, the advice is simple. Stick your hand out. Take the cash.

Reasons abound for doing this. First, (as stated above) you have no idea what your death date will be. So why gamble for the sake a relatively small gain later? When the government offers to give you back some tax money, take it. After all, 60 monthly payments of, says $800, is almost fifty grand. Put into a TFSA in growthy ETFs will boost that further. Voila at age 65 – a new Mercedes E-class sedan! Thanks, Chrystia!

More fundamentally is the aging process. Sixty, as you know, is the new 50 and most people feel frisky and alive. Not so much at 70. Definitely not at 85. So if you can collect and enjoy a guaranteed government pension when you’re young and vital enough to spend it on new experiences, why not? It seems like a really dumb choice to have an extra two hundred bucks a month coming in during your eighties when you could have been enjoying the cash for a decade.

Time is your most precious asset. Do not waste it, waiting.

About the picture: “This is Sugar x 4. She doesn’t worry about cats or anything other than people and food,” writes Brian. “Perhaps it’s food and peeps. Either way, she’s a doll and we love her to bits. I have a comment about the comments section. I’ve been a police officer for 23 years. I used to read comments on police related reporting and started to feel the world was against me. Quite seriously. I know it wasn’t though. It was that fringe group of folks who are so disconnected and permanently pissed off that by taking the time to spread their venom they seems to think it will change things. It won’t. I’d suggest you just shut down the comments for a month or two and perhaps even permanently. When YOU comment about their comments – you make them relevant. They aren’t. You’d lose some fodder but maintain your sanity. Just a thought ….”

The assault

After the election comes a Throne Speech. Late in October, maybe. They’re always packed with vagueness, fluff and unicorns. Normally we’d get an economic statement of some kind, but this year the pre-Christmas session of Parliament will be too short.

So the real news will be in the budget, earlier than usual. March. Maybe even February, from Chrystia our non-financial Finance Minister. Gulp. Remember the Libs’ campaign slogan? “Forward. For Everyone.” Except if you have wealth.

The Street’s anticipating changes coming for the capital gains inclusion rate. That means profits selling rental properties, gold wafers, a cottage, stocks, ETFs and a mess of other stuff will be hit. Currently you get a deal. Half the gain on a sale is tax-free. The other half is included in annual income.

On an income of $90,000 the average tax rate is 26% and marginal rate of 31% (each dollar above 90k taxed at that level), so small capital gains would still leave you with 85% of the proceeds. Not bad.

Larger gains push annual incomes and tax rates higher. Those in the top tier (incomes over $230,000) have a marginal rate in provinces like Ontario of 53.3%. That means 73% of the capital gain are retained, while the rest is sucked off by the deities on Parliament Hill. Compared with the Hoovering earned incomes received, this is not such a bad deal.

Ironically, it was Liberals who dropped the inclusion rate to 50%. Paul Martin did that, erasing the previous 75% level as part of a $58 billion tax cut in his 2000 budget. Yes, tax cut. From Liberals. The same guys who trashed the deficit. But the Libs of two decades ago were radically different dudes from the tax-and-speed gang currently in control of the nation. Now we have red ink washing over the gunwales with a government hooked on spending and starved for more revenue while it has zero plans to ever balance the books.

Now, before we go further, let’s address this question: why are capital gains taxed less than income from employment, rent from your tenants or interest on a GIC?

A few reasons. First, by offering a lower tax rate on capital gains from investing corporate shares (or funds holding them), for example, the tax code acknowledges risk-taking. You might gain. You might lose. But the activity of putting money into jobs-creating and goods-producing enterprises is beneficial for everyone, since this grows the economy. Collecting interest from a GIC or getting paid to show up at work do not constitute the same risk.

Second, a lower cap gains rate recognizes investors are being whacked by inflation on the assets being sold. The tax applies to their inflated nominal value, so not only do investors pay a levy on the real return, but also on the inflation which has been created by central banks. Not the case for employment interest or collected rents, which is paid and taxed in current dollars.

Third, capital gains taxes are paid on money which has already been taxed. The same dollar was hit by income tax, sales taxes and payroll taxes. If invested in equities or funds, the money was taxed again in the hands of corporations, then taxed once more when shares or units were sold, generating a capital gain. Enough already. And not the case with your salary, which is taxed just once.

Fourth, capital gains tax future consumption because savings are reduced, while present consumption is untaxed. The net effect is to discourage investing and saving, and to favour spending. Not good for society as this reduces future available capital and has a negative impact on long-term economic growth. Buying a house with 20x leverage, in other words, borrows against the future. Investing in corporate assets, in contrast, puts money away for future use. Liberals used to understand that.

Okay, so now what? If the Street’s right and Chrystia drops the hammer, what avenues are available to thwart her?

Well, gains can be triggered now, of course, at the 50% inclusion rate. You can also sell off losers to claim against profits. But only sell if you planned on dumping these assets within the next few months anyway, since long-term investment goals should not be irrevocably altered by potential tax changes.

Make non-registered assets into registered ones. Contributions in kind can shift things into a TFSA or RRSP (if you have the room) from a non-reg account. Of course capital gains tax will be triggered, but you can escape transaction charges.

Obviously making full use of tax-free and retirement savings accounts becomes even more of a no-brainer if the inclusion rate jumps. Remember that the TFSA limit is $75,500 (rising to almost $82,000 next year, or over $150,000 for a couple. RRSPs are unlimited but based on earned income – up to over $28,000 this year. Nine in 10 Canadians have not maxed either, and the amount of unused room grows dramatically every year (because the masses are blowing their brains on real estate). Add in other shelters like RESPs for your kids or maybe the new FHSA for the thing in your basement, and there’s much opportunity to grow money and pay no tax. Among these the TFSA stands uniquely. Max it.

The election’s over. The people have spoken. Take cover.

About the picture: “I’ve read your blog since it started,” writes Dean. “I even went to one of your “Live Performances “ in Edmonton about years ago! This is Fitz our 6 year old Doberman-Boxer-Bulldog cross. He is a very happy and sleepy boy. He has his own instagram page too! My wife loves him more than me! Dog_with_the_lips_of_a_man. Thanks for all your good advice!”

Note to Viewers: A mysterious glitch eliminated all comments to the post which were published on September 26th. The webmaster team has attempted recovery, but thus far without success. If you stole these comments and now repent, you may leave them in a plain box at the east gate, by the moat. – Garth