Sadly, Tim’s dad just passed. Happily, he was a smart guy. “He bequeathed my mother, in her 70s, with his RRSP savings totaling almost $700,000,” says the son. “It’s growing rapidly and my frugal mother can’t take money out fast enough to touch the principal.”
So what’s the problem?
“When she passes on this RRSP money to her kids, the whole lump sum become instantly,” says Tim, “fully taxable (at the max possible rate). To avoid having the estate effectively cut in half we are looking for ways you can help “rescue” money from this ticking time bomb as quickly as possible. Are there ways of shifting RRSP money between non-spouse family members? Things other than the HBP which allow RRSP money to be extracted without penalty?
“No, this is not a greedy child counting his inheritance early. The whole family (Mother, son, daughter) just don’t want to see the government take half of my father’s hard-earned money in one foul swoop.”
I post Tim’s letter for a couple of reasons. Sure, it’s possible to move some of the money around and ‘rescue’ it from being fully taxed on mom’s demise – but the process is complicated and involves leverage. If mom borrows a big pile of cash, invests it, then takes RRIF income to pay the loan interest, over time capital will be moved from the shelter. (The RRSP income is taxable but the loan interest is tax-deductible.)
However, lenders aren’t keen on handing over big wads of leveraged cash to seventy-somethings with weensy incomes. So scratch that.
The real reason Tim is on this blog is to demonstrate the fallacy of RRSPs. They don’t eliminate tax. They defer it. Yet people come to think of all the money in a retirement plan as theirs. In this case the family – widowed spouse and kids – see the $700,000 pot as a family asset – their father’s ‘hard-earned money.’ But it’s not. It’s an illusion.
Dad got a tax break for putting money into the plan. He was allowed to grow it in a tax-free environment. He was even permitted to pass it on to his wife without being taxed. It was always intended to be withdrawn to pay for his or her retirement years, not to establish a tax-free legacy for hungry offspring. And a big whack of it was always the property of the government, which must be repaid.
It’s the covenant you make with the devil when you open an RRSP. In return for refunding the tax on your contributions now, you pledge to return it later, plus tax on the growth. You also agree to it being taxed as income (100%), not capital gains or dividends (50%). And if you die before this happens, the whole shebang is taxable – as if cashed in on the day of your passing.
This is the reality for every self-directed RRSP. Every group defined-contribution plan that your employer matches. Every registered pension plan. It’s all taxable. Same as money extracted from an RRSP for a condo down payment or to go back to school. In the end you’ve just kicked the tax can down the road. Better tell the kids now.
This is why TFSAs will come to be the retirement vehicle of choice. No, there’s not a tax refund when you contribute, but neither is there tax payable when you withdraw. All of the growth (like an RRSP) is not taxed. But that growth (unlike an RRSP) also flows into your hands in a taxless state. And TFSA money (on death) flows to a spouse or beneficiaries without triggering tax.
So, remember what I said yesterday about taxation on stupidity?
Here’s what I mean: these days only 15% of people make their full TFSA contribution – which would amount to a lousy hundred bucks a week. The participation rate has plunged dramatically since the thing was introduced back in 2009. That year two-thirds of people with a TFSA put in the max, but that was apparently because they just shifted their bank account into the next vehicle. Since then the savings rate has fallen off the map.
Worse (as I keep yelling ya) 60% of this money is in cash and another 20% is in GICs. People treat TFSAs like glorified savings accounts for Cuban holidays, new taps or liposuction. Even the government has produced ads telling you the tax-free account is a great way to finance a kitchen reno. (It’s in politicians’ interest to keep you stupid, by the way. The more growth a TFSA creates, the less tax that’s paid.)
No wonder the lefties are mobilizing to stop the doubling of the TFSA contribution limit. When 85% of the benefit is being squandered by the masses, they’re loath to see the rich (who all read this blog, of course) get even more of a break. Sure, they could participate. But it’s easier to buy a house they can’t afford, then moan about unfairness.
This is akin to thinking your father’s RRSP belongs to you, and asking Garth to rescue it.
What a waste that is.
206 comments ↓
Interesting. I hadn’t thought about that. Thanks for sharing this Mr. Turner.
Leslie
Must be a full moon today.
RIP personal responsibility.
thanks for the information garth about rrsp’s and tfsa’s
you wont find this easy to read/understand info anywhere but in this dog blog
Can someone explain how it is, that I can bequeath cash from my TSFA to; say my grandchildren, and they don’t have to report it as income?
Make them beneficiaries. — Garth
What would you recommend if your an american living in Canada? We are not allowed to own TFSA unless we want to spend adsorbent amount of time on tax professionals.
Absorbent tax professionals are my favourite kind. — Garth
From Tim’s dad story, another lesson should be learned. The hard and dark fact, that is death.
Yesterday is history and tomorrow is mystery. Live a happy and balanced life TODAY. Do not sacrifice your present, worrying about your future ( retirement ). Enjoy the money you earn, and of course save a bit for your future. But just like a balanced portfolio, do not put all your eggs in (retirement) basket.
Here is a great blog by Mark Goodfield, a CPA in Toronto:
http://www.thebluntbeancounter.com
I earn less than 40k a year and have my tfsa maxed out and invested,what the hell does everyone do with their money?
Oh that’s right they buy overpriced real estate ,silly me!
Ah, but there is a way (at least there used to be) to get the money tax free – I know of a Lawyer who did it. One must give up Canadian residency for two years and move to Ireland.
Yes, most are ignorant, but unfortunately policies have be skewed to the ignorant (i prefer less fortunate, or uneducated), else things get out of whack and class conflict ensues.
So, while I do max out my TFSA, I will continue to advocate for an improved public retirement system rather than individual benefits and breaks. Else we’ll just end up kicking a different can down the road and we’ll all pay for that later.
We’re ideologically opposed at a macro level, but Garth, I’m thankful for your individual advice.
And Garth, para 11 should be “there” not “their”, i think
How good is the real estate industry? They just put a fee on purchases for foreign buyers in Australia (10k on 1 million) because legally foreigners were only allowed to buy newly built homes or apartments. The fee is meant to fund compliance with this law.
Previously the real estate industry said changes and compliance regimes weren’t needed because foreign buyers were such a small segment of the market and everything was above board. So move along, there’s nothing to see.
After the announcement the real estate industry went bananas. They couldn’t believe it happened and were crying that it was counterproductive and it will shock the market.
Strange that a small fee and new compliance regime to continue to ensure everything was above board could shock the market!
One idiot, whose business lists to mainland China actually said “That’s going to make it difficult for foreign investors to buy anything other than new, off-the-plan, FIRB-approved properties.”
Yes, strangely that was the law.
Could the mother marry again before she dies and pass on the money tax free to her spouse?
Yes, but it’s still taxable in the gold digger’s hands. — Garth
Tim’s mother could gift money to family members or registered charities over the remainder of her life making the taxable pot left at probate much less. Of course, Tim’s mom could live 20 plus more years:) and need most of the money for living expenses and pay only a regular rate of tax on it.
Still taxable. — Garth
I always get confused when Garth claims that RRSP-held growth is taxed at the marginal rate when it is withdrawn, regardless if the growth is from capital gains and/or dividends. It’s my understanding that, assuming the same tax rate at withdrawal, the RRSP and the TFSA are EXACTLY the same.
There is no tax on TFSA withdrawals. — Garth
Not Jimmy and not first :(
RBC stock to TSX: “Recession? What recession.”
Is there any logic to initiate an RRSP meltdown strategy by borrowing funds @ market interest rates, off your own corporation for an “investment loan” so to cancel the RRSP withdrawal tax?
It will be disallowed. — Garth
Wasn’t it Harper who said, we will never tax income trusts? I wouldn’t count on the TFSA being tax free forever!
Count on it. Contributions are in after-tax income. — Garth
Pretty great pic today. I guess Tim’s mom’s best bet is to withdraw up to the cutoff to qualify for OAS (if the RRIF rules don’t require more) and just hope she lives long enough to liquidate the RRSP at a non-crazy rate.
BTW – yesterday’s “tawdry things like working” – hilarious!
Black Swan coming closer…..
“The Harper cabinet is actively and seriously considering whether Canada should join the U.S. and Britain in a military training mission….”
(Macleans, one hour ago)
Guess where?
CANADIAN BOOTS ON THE GROUND IN UKRAINE.
COMING SOON.
Harper needs this distraction. Canadians will certainly be among any casualties – why not – this will drag us in further. Britain is being very aggressive about major weapons as well.
We are on the path to a conflict which will undermine the entire economy.
Wonder how the deniers will spin this….
Garth, I know you feel frustrated sometimes trying to pound some sense into our thick skulls, but today’s and yesterday’s posts hit home with their excellent examples of what happens in a real life situation. thanks.
Reminds me of my restricted stock. The balance is similar, but half of it a illusion, at vesting date half is due to the taxman as this is of course normal income. I need to get me a private equity job. Carried interest baby!
Harper’s solution: Gut EI, take away OAS at 65, give income splitting and double TFSAs to the rich, and cut the GST. All this insures future governments will be so broke that further cuts to social programs will be necessary.
With the boomer tsunami building speed, it might be a good idea to offer some pointers on how to protect our aging population from losing everything to “gold diggers”, unscrupulous financial advisors, greedy relatives and con men and women who prey upon them. I have my own horror story of what happened to one relative and came to find out, it is a very common occurrence.
Another great blog Garth. RRSP is a ticking tax bomb. When my son turned 19 (age of majority in BC) I dragged him down to the bank to setup a self directed TFSA and had him buy some decent mutual funds (yeah I know you hate those).
I’ve already shown him a chart showing the power of compound interest over say 55 years so I’m hoping he will have a nice pile when he gets to my ripe old age.
I’m betting that if enough young people did the same the government would have to change the rules when they all retire and none of their TFSA drawing claw back the OAS. Oh yeah OAS will be a distant memory by then…nevermind.
Death and taxes…
Hate to do my own fowl swoop here, but is a “foul” swoop the unethical equivalent of a “fell swoop” or maybe it just belongs on this list
http://www.telegraph.co.uk/news/uknews/4799157/Damp-Squid-The-top-10-misquoted-phrases-in-Britain.html
If she listed her black lab as beneficiary would the cat still have to pay tax when it killed the dog in a terrible “Fetching” accident?
Just curious.
Best two consecutive articles yet Garth.
You shouldn’t be giving this stuff away for free. All those 99%er’s might get a clue and try and take all my money away.
Shame on you.
“……No wonder the lefties are mobilizing to stop the doubling of the TFSA contribution limit……..”
_________________________
Sooo……the Parliamentary Budget Officer is a leftie?
Who knew?
“Is there any logic to initiate an RRSP meltdown strategy by borrowing funds @ market interest rates, off your own corporation for an “investment loan” so to cancel the RRSP withdrawal tax?
It will be disallowed. — Garth”
So it’s OK to deduct interest paid to Banks for the purpose of investment loans but not towards other Corporations…interesting.
Wow!! Just opened a letter from CIBC stating that my LOC will be raised from prime +3.75% to prime + 6.25.% Perfect credit history etc…
The Banks are getting desperate..
Another weakness of conventional retirement investing is this.
Report out today outlines just how bad mutual fund fees are, setting back your retirement date by up to 11 years. Pension funds generally are much, much cheaper run.
http://www.policyalternatives.ca
#15 Greg
Yes that’s true. If you do the math, the total tax paid when investing in either RRSP or TFSA is basically the same assuming the marginal tax rate doesn’t change. The RRSP route makes sense if you are contributing while in a high tax bracket and will be in a lower tax bracket upon withdrawal.
Bill Cosby – “Your mother and I are rich, You have nothing!”
https://www.youtube.com/watch?v=gJ92MLZSMXM
Can’t wait for RRSP and Tax Season to be over.
So we can enjoy the RE spring season in Vancouver and Toronto.
Should be a barn burner
“RBC stock to TSX: “Recession? What recession.””
I wouldn’t make the mistake of thinking that the TSX actually represents the state of the Canadian economy. In fact, as RE prices continue to drop, I expect banks like RBC to do quite well for two main reasons:
a) RBC, by virtue of having residential loans covered by CMHC subprime mortgage insurance, stands to benefit from wider spreads without the fallout of defaults.
b) As housing prices continue their decline, Canadians will have to actually start investing in companies with proven track records of long-term growth. A stock bubble thus could be ignited as the RE bubble deflates. Remember the 1990s?
T L, I direct a warning to you when you said “improved” because I think you do not understand the bad outcome depending on the degree of “improved”.
quote:
#11 T L on 02.25.15 at 7:00 pm
So, while I do max out my TFSA, I will continue to advocate for an improved public retirement system rather than individual benefits and breaks.
——–
Savings must be directed through to corporations to create jobs. If all savings are directed to government then no jobs are created. That is communism, where all savings (or capital) is owned by the government. It results in low pay and high unemployment and low productivity.
If only a small segment of the economy saves/invests, whether through banks or directly in stocks and bonds, then that also creates imbalances, class envy, because those tiny investments will yield abnormally high returns because of low competition, low savings, low capital, high prices, low wages.
You might be creating the problem you say you oppose, depending on the size of your “improve”.
Another point is “unimproving” public retirement is beneficial to all of us who want to do something useful with our savings, like start a business.
http://www.vancouversun.com/business/Metro+Vancouver+monster+home+debate+springs+back+life/10840075/story.html#ixzz3Snmy6e4o
————————
For those who still want to resist the building of Monster Homes in Vancouver:
We still have a good selection of quality pitchforks for sale.
They are made of cast iron and are exact copies of the ones used in the Storming of the Bastille.
You’ve tried the rest now try the best.
RRSPs suck.
I hear you Garth!
But I’m not holding out for an increase to the TFSA limit. Given that herd has no collective financial intelligence, and will continue to go on dumping any money that they have (hard-earned or otherwise) into devaluing real estate, overpriced faucets and cheaply made furniture, the government will surely just raise the HBP limit instead.
So, given the high price of financial stupidity, what is the next course of action for the rest of us?
Should we turn our backs completely from the RRSP? I haven done the calculations, but at first glance it seems that for most middle income earners, topping up the TFSA and ploughing the rest into non-registered dividend-paying investments might be a better strategy given the more favourable tax treatment?
Looking forward to your take on it!
Another good story to illustrate it’s all about diversity.
Max out your TFSA (in growth assets), yes have RRSP’s but not having a mortgage to worry about when you retire is also a lofty goal, etc.
One thing mom can do here to minimize the tax bite is move her withdrawals up to a dollar below the next tax step and put the extra funds in a TFSA.
If they raise the TFSA limit, hoping to lure RRSP monies into this investment vehicle, the Canadian Government will merely be pulling the tax structure forward. If they manage to pull some RRSP monies over, then the tax income will increase helping to offset any fiscal problems. However, this will have an impact in the future, as there will be less taxable instruments out there for future governments to gain income from. It will also guarantee a rising income tax structure in future years to make up for the losses.
I love the idea of a higher TFSA limit, so bring it on!!!
Here’s another headline/article that may surprise you all:
Big banks boost condo financing even as unsold units in Toronto hit 21-year high
http://business.financialpost.com/2015/02/25/big-banks-boost-condo-financing-even-as-unsold-units-in-toronto-hit-21-year-high/
Garth, the 1% use trusts to transfer income assets to their kids. This is a strategy that can be used before you die and prevents squabbles.
Why didn’t you talk about that?
Actually what mom should probably do is consult somebody who can run the numbers and figure out the best way to convert the RRSP into a TFSA even if it moves her into the middle tax bracket. Right now most of that stuff is sitting at the top bracket.
[…] Source: http://www.greaterfool.ca/2015/02/25/the-illusion-2/ […]
#24 East van on 02.25.15 at 7:31 pm
_________________________
Agreed.
Harper promised to double the TFSA ‘after’ balancing the federal budget, something he as now delayed with clueless uncertainty. Now that we’ve gone from a one-trick economy to a no-trick economy, there’s a snowball’s chance of a balanced federal budget happening anytime soon.
Canadians who oppose TFSA increases that benefit mostly the wealthy, and income splitting that benefits mostly the wealthy aren’t ‘lefties’. They’re normal, informed Canadians who already know where Harper is going to hatchet to make up his revenue shortfalls.
The illusion?
Life is an I’llusion, may the best sells men win..
Looks like you were wrong , Janet Yellen said no interest rate increase this year as the economy is not strong enough .
She said nothing of the sort. The Fed will move this summer. — Garth
http://youtu.be/M2qARBRsHRk
The Kelowna way to make 20%
if you ask me the lefties ought not worry. I’m cynical (maybe wise?) enough to believe that this little ‘gift’ called TFSA will end up screwing us sideways later. So.. enjoy it while you can, I guess.
The Washington Post reports:
“For the first time in at least 50 years, a majority of U.S. public school students come from low-income families, according to a new analysis of 2013 federal data, a statistic that has profound implications for the nation.
The Southern Education Foundation reports that 51 percent of students in pre-kindergarten through 12th grade in the 2012-2013 school year were eligible for the federal program that provides free and reduced-price lunches. The lunch program is a rough proxy for poverty, but the explosion in the number of needy children in the nation’s public classrooms is a recent phenomenon that has been gaining attention among educators, public officials and researchers.”
http://www.washingtonpost.com/local/education/majority-of-us-public-school-students-are-in-poverty/2015/01/15/df7171d0-9ce9-11e4-a7ee-526210d665b4_story.html
I am sure that many people reading this will see it as proof the US is faking the economic recovery numbers. With so many people on food stamps and so many no longer seeking work, how can the economy be recovering? The government must be lying.
I think the truth is much worse. The economy really is recovering but a huge permanent underclass is being left out of it.
#GreatIllusions,Or… #Penn&TellerIntroduce… #NewTwistsOn… #
TaxationTheOldShellGame…http://youtu.be/oJhYySXzOq0
(CNSNews.com) – The homeownership rate in the United States dropped to a 20-year low of 64.5 percent in 2014, according to new data released by the Census Bureau.
The last time the annual homeownership rate was lower than 64.5 percent was in 1994, when it was 64.0%, according to Table 15 in the Census Bureau’s “Housing Vacancies and Homeownership” data.
http://cnsnews.com/news/article/terence-p-jeffrey/us-homeownership-rate-hits-20-year-low
By the Time You Read This, They’ve Slapped a Solar Panel on Your Roof – A new panel goes up in America every 150 seconds
http://www.bloomberg.com/news/articles/2015-02-25/in-the-time-it-takes-to-read-this-story-another-solar-project-will-go-up
Absorbent tax professionals are my favourite kind. — Garth
I prefer the adsorbent kind, e.g. “activated CPA”. They swell up less.
re: The case study — Would the best approach not be for mom to draw down the RSP in chunks every year.
She could take out:
$87,907 to stay at the 22% tier, (8 years) or
$136,270 to stay at the 26% tier.(5 years).
If she lives long enough to draw down the entire pot and pays tax along the way, then the inheritance of the balance doesn’t hit like an RSP tax bomb in one fell swoop, and no one pays in the 29% tier, which is income over $136,270
Moreover, money which grows outside the RSP pre-spend, or pre-inheritance, grows at a lower tax rate.
pulled the numbers from here.
http://en.wikipedia.org/wiki/Income_taxes_in_Canada
This is why RRSP’s make sense to a certain point only. Freedom 55 to 57 would work with a big RRSP and retire early.
A $1,000,000 RRSP over 25 to 30 years could easily be achieved and taxed at 15% to 17% total tax rates.
The first $11,600 of one’s income is taxed at 0% and then until $44,000, it is taxed at about a 24% tax rate.
This means a couple at 55, could take out $56,000 to $58,000 a year and pay about only $9,000 a year.
The key is to have no debts and expenses at this time. Many people will nit plan this properly and this is where they go wrong.
I missed to say high expenses at that time in my prior post above.
Query: mybmom is retired. She owns a home worth conservatively 800k that she rents out for 2500per month and tenants pay all the bills.
House has no mortgage on it.
Is it wise to borrow against it… Maybe 500k at 3% and invest it in dividend paying stocks? What would be the max benefit?
It’s in politicians’ interest to keep you stupid, by the way.
————-
Thank you for that. People need to remember that!
Don’t wanna throw too much light on this blog (strobelight honey, look it up), but maybe Tim can stop working for a bit and chew that rrsp now. Recalibrate, enjoy unadulterated time, so on. Takes a small amount of bravery, here’s some juice for you: “remember the time you worked?” “Remember the time you quit working and did …. And went …”
To LJ #43
The higher TFSA limits will bring less dependency on getting GIS and other federal, provincial, municipal governments.
This will save more money in the long run. If a couple has people have $750,000 in TFSA’s instead of owing being more in debt of buying a bigger house or other properties, this will help people in the long run too.
Irresponsible people and money moron decisions is the real problem not higher TFSA limits.
Andrew Woburn,I visit the U.S. 3 times a year and have relatives from my wife side are u.s citizens ,I can’t tell you what’s going to happen with the recovery of course but I can tell you that each year Americans put 2008 in their rear view mirror the confidence is slowly coming back and the ” good times” are returning.
There will always be people there that struggle ,refuse to work and are anti government but this will not be enough to stop middle class America from returning to have one of the highest living standards in the world.
There will be a few stumbles along the way but when isn’t there ,all par for the course .
It dosnt matter who wins the next U.S election enough people have learnt their lesson that you can’t put all your worth into one asset.
What would you recommend if your an american living in Canada? We are not allowed to own TFSA unless we want to spend adsorbent amount of time on tax professionals.
Absorbent tax professionals are my favourite kind. — Garth
===========
Sometimes both the question and the answer are just so, so perfect! Thanks again, Garth!
#33 Dominoes Lining Up on 02.25.15 at 7:50 pm
Do employer have fiduciary duty towards their employees pension plans in Canada?
Under the US code, ERISA, The Employee Retirement Income Security Act of 1974 is intended to protect employees by allowing employees to sue their employers for fiduciary breach. However, the issue of Mutual-funds fees weren’t considered until now.
The SCOTUS has accepted to take on the case in Tibble v. Edison International and it already look like the Justices are favouring the investors (plaintiffs):
http://www.scotusblog.com/case-files/cases/tibble-v-edison-international/
“Issue: Whether a claim that ERISA plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institution-class mutual funds were available, is barred by 29 U.S.C. § 1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed.”
“Query: mybmom is retired. She owns a home worth conservatively 800k that she rents out for 2500per month and tenants pay all the bills.”
Your mom probably should be looking at selling. If the house receives $2500/month in gross rent, subtracting maintenance/depreciation (1% of $800k = $8000/year), property taxes (figure $4k/year), insurance ($2k/year), and applying a typical 30% income tax rate, the house is only ‘earning’ her $11k/year. Which is an abysmal return for $800k invested.
A Garth-style balanced portfolio comprised of stocks, bonds, REITs, etc., would be far less stressful and would deliver a far greater total return with less risk than having all her money tied up in RE. $11k against $800k is a P/E ratio of 72, which is way of in la-la land.
IMHO, forget the leverage stuff as well, and all the risk that entails. Just sell the overpriced asset.
Could the mother marry again before she dies and pass on the money tax free to her spouse?
Yes, but it’s still taxable in the gold digger’s hands. — Garth
========
OK, I will shut up soon… but I have to say after a glass of wine I am really enjoying tonight’s Q&A! I can just envision, to CRA’s great dismay, a burgeoning business of deathbed shotgun weddings, all in an attempt to further defer taxes.. lol.
#65 For those about to flop…
That’s what you base your evidence on? Visiting the USA three times a year and having a few relatives live there?
Wow, I am just bowled over with all the evidence that you have marshaled.
I live in the USA. I have had the opportunity to see many many states and many many cities over the last couple of years. Some places are doing well (the Bay area, western Washinginton state, Boston, etc), some are sliding even further. In some places, manufacturing is making a comeback, in some places it is getting worse.
It is dangerous to generalize, but I find it hard to provide evidence for your claim that the US middle class is on the rise. They lost a tremendous amount of wealth in the housing bubble and stock bubble, and employment prospects for many college grads and existing workers have been made worse by globalization and automation.
Buy something tangible and gift it before you die and take just enough out of the RRIF not to trigger surtaxes each year. Hope to live about 15 years longer which is the average lifespan for a woman.
@TorSun #6, re: ” What would you recommend if your an american living in Canada? ”
Canadians living in Canada who are deemed by USA to be ‘US persons’, are advised NOT to hold TFSA’s. These are ‘foreign trusts’ in IRS speak, subject to all sorts of confusing annual paperwork, and in addition the IRS does not recognize these as tax free from a US perspective. Thus they are a liability to a Canadian resident in Canada who is also considered a ‘US person’ for tax purposes.
If a Canadian tainted with US personhood wants to be able to save and invest for the future like normal Canadians, the only way to do this is to renounce US citizenship which will cost almost 3K (Canadian dollars) for the renunciation fee; requires 5 years worth of past US tax compliancy; involves an exit tax on your net worth; and risks potential penalties if you have not been filing Foreign Bank Account Reports for your Canadian bank accounts to the Financial Crimes Enforcement Network every year.
“Irresponsible people and money moron decisions is the real problem not higher TFSA limits.”
Actually for the record, I think both TFSAs and RRSPs are horrible tax-policy wise because the investments that are eligible are so narrow, and are strictly defined by government. At the moment, the TFSA appears to be incentivizing people to actually not take any risk with their money — as most TFSA’s are used literally for “savings accounts”, ie: cash loans to banks, and not into long-term equity investments. But hypothetically, if people were taking risk in their TFSA’s, that’s less money available to investments that are not eligible for TFSA inclusion, such as small business, startups, etc. RRSPs and TFSAs are, at best, band-aids for a fundamentally broken tax system, not magic cure-all panaceas that people should be lobbying for their expansion.
The range of allowable investments is wide and extremely logical. — Garth
Good post.
When you hit 70, the RRSP all has to go to RRIF, no ?
Would it be wise, at that age, to take out a lot, say $150k/year & travel lots if still able, to minimize the tax effect over the long term, assuming you (& spouse) live to 90+ ?
“I think the truth is much worse. The economy really is recovering but a huge permanent underclass is being left out of it.”
It’s not your garden variety “recovery”. Perhaps another can being kicked down the road?
#65 For those about to flop… on 02.25.15 at 9:14 pm –
There will always be people there that struggle ,refuse to work and are anti government but this will not be enough to stop middle class America from returning to have one of the highest living standards in the world. –
========================
Couldn’t agree more. It’s just that the number of middle class people enjoying that high standard will keep shrinking.
“The range of allowable investments is wide and extremely logical. — Garth”
No its not. You can’t use your registered money to invest in a house without deregistration (obviously wouldn’t want to at the moment with the nosebleed prices, but if prices collapsed, it would make a lot of investment sense). You can’t invest in small business in a registered account without wildly enriching securities lawyers. You can’t invest your registered account in mortgages without going through a lot of expensive hoops. Can’t invest your RRSP/TFSA into credit card debt repayment without deregistration. There are a large number of investments which have ROI greater than that which may be found in the list of ‘eligible’ RRSP/TFSA/RESP investments. It is illogical that the government would effectively bar individuals in this program from using their savings in such a manner that would achieve the highest possible risk-adjusted ROI. Additionally, trustees make a fortune from the registered accounts administering them, and banks enjoy access to unusually low costs of capital as people reduce their return expectations for fixed income investments on account of ostensible short-term tax avoidance.
If the government’s goal in regulating registered account investments was to prevent people from taking risk, then we need to ask why are options and junior mining stocks allowed? The whole system makes no logical sense, and appears to be rigged against Canadians.
You are off base. People should not invest in their own houses since that only consolidates personal risk. Small business has a 90% failure rate. Bad idea. Paying off credit card debt? Seriously? The government should not be refunding people taxes to engage in any of these activities. — Garth
James at 65 did you even read Andrew Woburns post at #53 about the U.S government lying about the recovery ?
I was simply stating that I have witnessed a slow recovery in confidence in the population and that I have cousins that are happy with renting and not so obsessed with real estate,however I have cousin in
Vancouver who just overpayed for a SFH Richmond.
Go figure.
James ,I forgot to mention that I am going to Florida in two weeks and might write something about what I see just like I did when I got back from San Diego at Xmas time.
You won’t read it though.
#32
FWIW CIBC just called and offered me prime +3. They call every 6 months. I’ve got next to no $$$ with them. Have prime +0 elsewhere.
Anywone ditching RRSP for non-registred account is an idiots.
Hold on 700k at 70 in his RRSP? First off sounds like idiot to me. No Offence.
The first plan of attack in your withdrawal plan on retirement should be your RRSP, shouldn’t it? And I thought the resent posts by you explain that they tax the stupid?
Sounds like this family falls into the “tax the dumb” category.
Best back to back posts. Had a few people read them. My accountant is next. He thinks of me as the guy who doesn’t believe in rrsp’s. Apparently I’m weird.
#56 Andrew Woburn – I think the industry will do better than the article assumes. The new marginal barrel as I like to say.
And when Garth’s fair island is powered by tidal we will all know that hydrocarbons will soon be extinct. The sooner the better I say.
I love Alberta but seriously folks. You are squeezing sand and burning the liquid while destroying the environment. It feels a little shameful.
Think of the beauty and simplicity of endless clean energy.
So now you know why, bit by bit, I’ve been deregistering my RRSPs now that my income is lower because I’m semi retired. So what do I do with all this new found money? Some of it goes to funding my retirement, recently I returned from a great trip to sunny Thailand with a short side trip over to Cambodia. What do I do with the rest? I put it into TFSAs of course! Now where do you suppose I got that bright idea?
It’s too bad that I can’t invest in my CCPC through TFSA, that would be awesome.
Bring on the doubling of TFSA limit, looking forward to top up $10,000 a year.
#242 Mark on 02.25.15 at 6:05 pm
RBC fees the crap out of you for everything. This is why we left RBC and went to CIBC. Fees are where banks are stealing their money from you.
High fees are just a way that RBC (and other banks) tell customers they really don’t want your business. And really, do you think RBC or any bank for that matter makes money on low-value stuff like tellers, handling $20 deposits from kids, etc.? Of course not. Its mortgages, investment banking, and mutual funds where the real money is. Not collecting nickels and dimes on service fees.
——-
As usual Mark your analysis is cro magnon like. I can certainly see how computer generated fees that humans never touch amounting to 300 million dollars a year in pretty much free money for RBC is just a rounding error of profits. ITS RBC……not JP Morgan Chase or HSBC. 300 million in free money profits stolen from customers is not a drop in the bucket.
#76 Andrew Woburn on 02.25.15 at 9:34 pm
#65 For those about to flop… on 02.25.15 at 9:14 pm –
There will always be people there that struggle ,refuse to work and are anti government but this will not be enough to stop middle class America from returning to have one of the highest living standards in the world. –
========================
Couldn’t agree more. It’s just that the number of middle class people enjoying that high standard will keep shrinking.
-~~~~<<~~~~~~~~~~~~~~~~~~~~~~~~~
Andrew I get what your saying and agree that the gap is widening I just want to say that I just don't stay in hotels I have a campervan and I spend part of the summer in small town America.
I bring this up because I do believe small town America is in decline and the only way a lot of young Americans will thrive is to relocate to metro areas.
I do not care what the U.S government says is happening I just wanted you to know that like James said its not a 50 state recovery but that there is pockets of positivity and Americans are to proud a people to wallow in self pity.
Two steps forward ,one step back but that is still progress.Albeit painful.
Mutual funds are a fine place to start if you’re also taking into account commissions, minimum balance fees, minimum activity requirements, or any other fee that a brokerage might dream up. Just because he starts with mutual funds doesn’t mean he’ll stay there forever; the important thing is that he’s investing early.
That last point was for #26 Mike in the Okanagan on 02.25.15 at 7:35 pm
Here’s a story on the American “recovery”:
http://www.paulcraigroberts.org/2015/02/23/whatever-became-economists-american-economy-paul-craig-roberts/
“Globalism, like neoliberal economics, is an instrument of economic imperialism. Labor is exploited, while peoples, cultures, and environments are destroyed. Yet the propaganda is so powerful that people partake of their own destruction.”
Yes, Mom and Dad looked after themselves. Nothing wrong with that.
On a similar but a little different note:
I am hearing an increasing number of Boomers who are getting crucified with hate speech by the rampant ageism from the younger generations filled with self pity, envy, and jealousy against them, who are cutting off the entitled ingrates.
If you guys don’t know how to invest please contact “lala inc”, we charge less then Mr. Turner. “Double or nothing” lAlA inc. Kidding aside, if you like gambling or have no patience hire an advisor, you will sleep better at nights.
A proper comparison of RRSP vs TFSA requires you to take the tax deduction from the RRSP contribution and also invest that in the RRSP. That will compound over the years, so it’s not clear whether you would be further ahead contributing to a TFSA. Garth’s analysis might be too simplistic.
The Illiterate of the next 100 years will not be those who can read or write. It will be those that can’t unlearn, and relearn.
59 Ray – I’ve set up our RRSPs equally so we can total about $70k in withdrawls and pay only $10k tax. Not sure what the rules are for splitting pension/RRSP income.
Hmmm? NHL trade deadline and RRSP contribution deadline are both next Monday. TFSA? RRSP? UFA?
I have been concussed too often to make the right decision. Think I will go with the stud D-Man.
I will pay $5500 bucks for Phaneuf. His salary is a tax deduction.
http://www.financialpost.com/m/wp/news/blog.html?b=business.financialpost.com/2015/02/25/why-you-shouldnt-fear-fed-rate-hikes-2&pubdate=2015-02-25
It may not happen as soon as many expect, and the timing is naturally very data dependent, but all signs point to an interest rate hike from the U.S. Federal Reserve some time this year.
Fed Funds futures imply a 50% likelihood that a hike will happen in June, and there is nearly a 100% probability that rates will be higher by October.
The good news is that stocks tend to do pretty well at the beginning of rate hike cycles.
If you’re at the highest marginal rate now, have a maxed out TFSA and don’t think there’s any chance you will be employed age 60 (because you don’t want to be), it’s a no-brainer to max out your RRSP now.
12 months before your first mortgage payment in MTL – is this even legal?
http://www.habitationstrigone.com/en/current-promotions/?utm_source=Youtube&utm_medium=In-Stream-EN&utm_content=Video&utm_campaign=PubInteractive-Q1-Q2-2015
So Funny Garth,
My Uncle was told to keep plowing his money int RRSP’s by some advisor even though he worked for OPG (gold plated pension) and was constantly on the Sunshine List
Retired for 10 years and hasn’t withdrawn any money. Apparently he can manage on his $85,000 or pension.
He’s not looking forward to 71 let me tell you….
Question: With Canadians living longer, the RRIF rules have never been changed. Would you support slowly raising the age to say 75?
Actually I think the feds will lower it, eventually to 67. — Garth
Transfer the RRSP into your TFSA with a pair of 3x etf’s. You will pay, but not 43%.
93 missisagua – not sure if you are describing it right – what you want to do is contribute to RRSP with before tax dollars and take tax deduction at source.
#96 Washed Up Lawyer on 02.25.15 at 10:37 pm
Hmmm? NHL trade deadline and RRSP contribution deadline are both next Monday. TFSA? RRSP? UFA?
I have been concussed too often to make the right decision. Think I will go with the stud D-Man.
I will pay $5500 bucks for Phaneuf. His salary is a tax deduction.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Hey Washed Up,I wouldnt mind Phaneuf putting 18% of his salary into my RRSP .Party time!
Or if that hardrock blueliner, Smoking Man, can still throw the dukes, I will sign him as a free agent.
Signed,
Harold Ballard
If a high earner one working spouse contributed to a RRSP he/she would contribute at a high personal tax rate. They wold get a significant tax benefit. But RRIF withdrawls for income tax purposes would be split between the couple so tax should be significantly less than if one paid all the tax on the withdrawals . Withdrawals can be at a better tax rate.
“Question: With Canadians living longer, the RRIF rules have never been changed. Would you support slowly raising the age to say 75?”
I would support elongating the tables closer to end of life to reflect the fact that there are a group of people who have dramatically above-average longevity. But in reality, I don’t think it all matters a lot — very few Canadians actually have enough in RRSPs for minimum withdrawals to be an issue.
In fact, going with the theme of my earlier posts, the less rules, IMHO, the better. If someone wants to be ‘dumb’ and defer the drawing on a RRSP/RRIF until death, let them. Nearly all of it would get taxed at the highest marginal rate. Very few retirees, in practice, have the luxury of even considering such though. And just because there are minimum withdrawals does not preclude beneficiaries from investing their minimum withdrawals in TFSA’s or taxable investments. The debate around minimum withdrawals is often framed in such a way that it is implied that beneficiaries are prohibited from investing their minimum withdrawals (ie: they must spend them) which simply isn’t true.
I should point out that the rules that apply to your TFSA should you shuffle off this mortal coil are:
i. you can appoint your spouse or common law spouse as a successor to your TFSA. This means that the account just gets transferred over to their name and retains the tax free status.
ii. Anybody else can be named as a beneficiary, meaning that the account gets de-registered and the beneficiary gets a cheque for the cash value.
If I would have gone through my parents finances few years earlier, I would have made them spend more. Now it is too late.
“Garth’s analysis might be too simplistic.”
Garths’ analysis appears to largely turn on a prediction of higher future tax rates. Which intuitively makes sense given the enormity of debt Canada is in, and the probable necessity of expanding healthcare to satiate the basic needs of the boomer bulge and the high dependency ratios such will create in the labour market.
I do wonder how sustainable it is for the elderly population of any country to be the wealthiest segment of society, while the young toil. Especially with the labour market gradually and increasingly tilting in favour of the young. And if the elderly wealth in Canada is reduced by economic forces, I’m not sure of the exact method in which this will occur, but a couple decades of poor fixed income / RE returns would be my guess. As the elderly cohort tends to be overweight fixed income /real estate as an asset class and interest rates and inflation is likely to experience significant increases over the next 20-30 years.
“Actually I think the feds will lower it, eventually to 67. — Garth”
But with they change the withdraw requirements?
#79 For those about to flop…
I was simply stating that I have witnessed a slow recovery in confidence in the US population
——————————
Same here – I have 270 colleagues from across the US that I see once a year. We all own small businesses offering a fully discretionary service to consumers.
The story has been the same year after year – things are getting better – in some areas actually better than pre 2007, and some areas like Michigan and Ohio not so good. or just spend a week in Vegas – the place is on fire.
But the US recovery at the grass roots continues.
Not really what those with a closet full of gold coins and canned tuna want to hear.
#96 WUL.
Please take him back. Maybe kessel wants to hitch a ride too. Our fate in yyz rests on the mcdavid sweepstakes. There is no plan b.
You won’t get him though. We only trade the guys that work hard. Goodbye winnik.
Good win for the flames tonight.
Magna stock is splitting. Up 7%.
Stock markets works for you. It’s wonderful.
Everyone here go to Zillow and take a look at houses in the range of 550-650k around Orlando. Houses with indoor pools. At work a few of us looked at listings together, laughing, crying, in awe, jaws hanging, saliva dropping.
#111 omg the original on 02.25.15 at 11:31 pm
#79 For those about to flop…
I was simply stating that I have witnessed a slow recovery in confidence in the US population
——————————
Same here – I have 270 colleagues from across the US that I see once a year. We all own small businesses offering a fully discretionary service to consumers.
The story has been the same year after year – things are getting better – in some areas actually better than pre 2007, and some areas like Michigan and Ohio not so good. or just spend a week in Vegas – the place is on fire.
But the US recovery at the grass roots continues.
Not really what those with a closet full of gold coins and canned tuna want to hear.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
You got it ,it’s a regional thing.
Does anyone really think that all 50 states were having a good time in 2005/2006 .No way .Bubbles mask problems.
As I was saying to Andrew Woburn I don’t watch the news or read the paper when I’m in the states I just talk to people ,relatives ,visitors from other states ,heck I’ll talk to a stranger on the bus I don’t mind .
At least I feel connected as opposed to being spoon fed the news.
Well awe are back from our “defrost cycle” in Florida!
Even they can get cold weather but their 40’s-50’s seem pleasurable when you have been used to zero degree crud for a few months. Interesting to watch the southerners drive on ice / snow they are clueless, as they see so little of it. Perhaps if they slowed down a bit they might regain control, but those 70 mph drivers……good luck with that!
Tonight’s post could perhaps be mitigated by shifting money from an RRSP to a TFSA after retirement (paying what would presumably be a lower tax rate in retirement) before one assumes room temperature.
We are doing something like that, moving taxable 401K money to a ROTH now, before the mandated withdrawal age of 70 and paying the lower 15% Fed Tax. We can only move so much per year and still remain in the lower tax bracket, but it seems a worth while strategy – all future growth will be at ZERO tax rates – a rate I am more than happy to pay!
So….don’t wait until your dead before you start withdrawing money from your RRSP..do it while your income is lower. The fallacy is that Canadians have about savings is that they’re prepared to eat cat food before they ever touch the holy principal.
Meantime…Poloz is feeling the heat of tens of thousands of angry letters and comments flooding government offices. Keep it up gang…we’ll get rid of this bozo by keeping up the demands that Harper fires this kook.
http://www.calgaryherald.com/business/Canadian+dollar+sharply+second+rising+doubts+about+rate/10841471/story.html
#190 Mike L on 02.25.15 at 10:49 am
I like paying taxes and I’m in the highest tax bracket.
Why? Because it helps our society, it raises our standard of living, it’s for the greater good. It’s makes Canada a better place to live.
Sure, Gov’t spending is inefficient and by making it better it helps even more = less taxes needed.
Sure, everyone would love to pay little to no tax, but then you don’t want to live in South Sudan either with a $15k automatic rifle and a few thousand rounds as your friends.
____________
wow! wow! wow!
This is why this country is going to hell sooner or later. These people actually vote. The propaganda works here twice as good as USA, where morons like this are hard to find. Here they are dime a dozen. Now let’s talk about Cayman Islands/Monaco/Andorra or even some not so tax free places as Switzerland or Uruguay. I forgot Swiss have lots of guns and low taxes, so really they are like Sudan.
Hey #2 Turner Nation
We’re no where near a full moon. Its a week or more away. No, I’m not an astrologer/astronomer or one who associates sky phenomena with economic or real estate activity. But if you are going to pull up these allusions, please be accurate with your celestial observations and claims.
Yes RRSPs suck compared to the tfsa but if you and your spouse have maxed out tfsa is it better to put your extra money into your rrsp or keep it unregistered?
I hope they double the tfsa limit!
# 107 JMS
I don’t think your second point is accurate. I maxed out my mothers TFSA before I maxed mine. I am the beneficiary. Once she passes, 100% of her account is transfered into my TFSA without penalty. No need to de-register and pick up a cheque for the value.
Also, it is my understanding that there is also no need to wait for probate to finish. When setting up her account with her POA, I filled in my info as her beneficiary…
M
And to think Socchi was only one year ago!
http://www.cbc.ca/news/world/sanctions-economic-woes-hammer-russia-s-oil-heartland-1.2969409
Lord Garth, can u clarify the following statment? “And TFSA money (on death) flows to a spouse or beneficiaries without triggering tax..”
That this mean once i run out of room in my tfsa account, i can ask my parents to open up a tfsa account, give 37k to my parents and then transfer that money to their tfsa account. If they unexpectedly die, as long as i am a beneficiary on the account, the 37k plus any gains will flow back to me without any tax penalties?
@#6 – my, uh, “adsorbent”? tax professional said that that’s outdated info and that TFSAs are fine for dual citizens. You’ll pay tax on interest/dividends/capital gains as if it was a non-registered account. In my case, that works better than deferring it in an RRSP as my income is all Canadian and thus I don’t have the us$10k in income necessary to get past the standard deduction.
That said, if you’re a dual US/Canadian citizen living here in Canada, regardless of your investments, you should really get a good tax professional. The US changes its reporting requirements constantly and keeping up on that is a full time job in itself. Lots of good, reasonably affordable cross-border accountants out there to help keep you right with both governments.
Open Houses
http://www.nationalreview.com/article/414398/wesleyan-now-offering-lgbttqqfagpbdsm-housing-not-typo-katherine-timpf
Can anyone recommend a good European ETF with some exposure to European banks?
It is VERY EASY for the mother to transfer her $700,000 to her son ‘Tim’, let me explain to you how it will go:
Tim goes out and buys a $200,000 starter home, with only $20,000 down (10% down), something that his mother gives him the down payment for. A year later he places it up for sale using a ‘Sale By Owner’ company, and he sells this house to his mother for $900,000. Because ‘HE’ is the real estate agent in the deal he controls everything, and he can sell who ever he wants to sell to, so he sells to the highest bidder, that happening to be his mother.
Now his mother pays him cash, and he uses this to pay off the $200,000 mortgage and other government fees.
A principal residence is exempt from capital gains taxes if he holds it long enough, so it might have to be 2 or more years before he can sell it to his mother.
This is the easy way to transfer assets between family members.
You have got to be kidding. It’s still taxable. — Garth
How come there is no mention of life insurance as a strategy to help pay most if not all of the tax bite so that the full account can pass to the beneficiaries?
The OP didn’t mention any policy and maybe her health wouldn’t have made it possible but with some foresight and careful planning, a life insurance policy could have made all this a non-issue.
Definitely the cost of a policy equal to the tax bite would be less that the total amount of tax due? Sure it is an upfront cost but it is a strategy used by many people.
Four days left to get T-4’s in. Wealth allocation is fine & even fun on this blog. But first you have to get there. Superstars climb the corporate ladder. The rest run their own little show. Always do your own taxes, learn payroll;start with sole proprietorship till your over $100,000, then maybe incorporate.;push that envelope hard every year,don’t get lazy, add the totals. Fill in the boxes & then pay the CA to check it over. If he doesn’t give you the hairy eyeball, push harder. get everything in on time. Learn what will red flag CRA in your business. You will be amazed how innovating you can become with an adding machine,pencil & paper. Remember as the waves of greed & fear present themselves; you have to live with that box of papers up on the top shelf for 7 years.
Great post and food for thought. It seems we should continue to max out our TFSA accounts but take more than the minimum out of our RIF accounts to spend on ourselves and the kids now. Of course the tax man will get his cut but it won’t be cut of a lump sum inheritance which has to be more.
#34 John
Unless of course your RRSP is too large, and you’re back in top income bracket when you’re forced to withdraw it from your RRIF.
And then, there’s still no way to know what income tax rates will look like in the future (probably higher), or whether we’ll want to eat the rich (hello 80% top marginal tax rate), or what the brackets will look like (they’re sort of inflation indexed right now).
Hi Garth,
What would be the tax rate on $700K if she decided to withdraw all that money today and invest it in a brokerage account, assuming that she has no job and no other revenue?
#117 souvereigninternational
Wow, $15k automatic rifles… 15k what? Club Z points? $500 will get you a nice used one.
I think it’s funny when the only and sole alternative to high and higher taxes are lawless 3rd world countries like Sudan. Reminds me of every health care debate ever: it’s always a choice of either Canadian system (and keeping it at all costs) or American system. Apparently, looking at the over a dozen countries that have health care systems rated higher than Canada’s is just totally out of the question.
Get out of here with your facts and stuff!
#114 For those about to flop…you should start your own reality show. Talking to people is a gift and you have it.
Totally loving tonight’s post!
I find myself in a similar predicament being an only child and sole beneficiary of my mom’s estate, but here’s the million dollar question;
Since TFSA’s have a maximum contribution limit, and since mom is well off and already maxed out on TFSA’s (as am I), what can she do with the bulk of her investments (stocks) to minimize tax on death? Joint ownership seems like the only way.
My family got caught in that RRSP trap, lost almost half of it when my mother passed.
Tim should sit down with his mother and show her the tax hit of converting all that $700k to fully taxable income in one day if/when she dies. The vast majority of that 700k gets taxed at 40%.
Then they work out how much she should withdraw every year, so as to avoid hitting the next marginal tax rate ( 22 – 26 – 29 % ).
The tax savings alone would offset any poor returns, even if Mom took the money and stuck it in a savings account.
However, they need to start solving the problem now, the clock is ticking.
My parents got the tax advantage of the RRSPs, but in the end, I wound up paying for it. That 700k might wind up being 500k if they act now, under 400k if they don’t.
RRSPs are not all they are cracked up to be.
#33 Dominoes Lining Up –
”Report out today outlines just how bad mutual fund fees are, setting back your retirement date by up to 11 years.”
———————————————————
Not all mutual funds are created equal. Check these out. One of the lowest MER’s in the industry and you have access to advisor at no cost. No front or rear end loads. No cost to switch between funds. Some of the best bond managers in the industry.
https://www.phn.com/Default.aspx?tabid=112
No HAM in Vancouver Garth?
Haha. Nice one.
My buddy just opened a chain of Canadian real estate buying offices in Indian cities.
But its just a myth. ;)
I want to warn all the baby boomers here that public healthcare may not be around for much longer.
Here are the cures that exists today.
1) Hep C. Costs $100,000
2) Cancer. Yes. cancer. There is a medication called Imbruvica. Google it. The pills costs $100,000 USD and if you take them, then there is no need for chemotherapy.
The cancer drug is currently being marketed to the highest bidder. The current high bid is $22 Billion. And the bidding has only started.
There are many more cures in the pipeline but they won’t be free.
Just a warning to the baby boomers.
Hey Garth, love what you preach. Do you think they will ever find a way to tax the TFSA? I plan on using mine as retirement savings. KCCO.
@ calgaryPhantom #7
“From Tim’s dad story, another lesson should be learned. The hard and dark fact, that is death.
Yesterday is history and tomorrow is mystery. Live a happy and balanced life TODAY. Do not sacrifice your present, worrying about your future ( retirement ). Enjoy the money you earn, and of course save a bit for your future. But just like a balanced portfolio, do not put all your eggs in (retirement) basket.”
********************************************
Nicely put and oh so true.
Dead at age 57. Hepatitis C from a tainted blood transfusion in Calgary during the 70s. My best friend. It didn’t matter how many diamonds or how much money I threw at her coffin. She hasn’t made it back yet.
@ MD UBC –
“I want to warn all the baby boomers here that public healthcare may not be around for much longer.
Here are the cures that exists today. ….
2) Cancer. Yes. cancer. There is a medication called Imbruvica. Google it. The pills costs $100,000 USD and if you take them, then there is no need for chemotherapy. ”
**************************************
I took your medical advice and googled Imbruvica:
“The FDA based its approval of Imbruvica for WM on a clinical study of 63 previously treated participants. All study participants received a daily 420 milligram orally administered dose of the medication until disease progression or side effects became intolerable. Results showed 62 percent of participants had their cancer shrink after treatment…”
http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm432123.htm
The gruesome side effects (and odd that this drug shows up on a chemotherapy site as you are classifying it as NON CHEMO ) :
http://chemocare.com/chemotherapy/drug-info/imbruvica.aspx#.VO8GLSzSMSU
What in the name of Hell are they teaching at UBC these days that a doctor would call a cancer treatment a CURE ?
With the notable exception of some very advanced and effective surgeries… please peddle your snake oil “cures” somewhere else.
I’m a boomer and not worried in the slightest about our vanishing health care. It was pretty much never there in the first place. What we do have is very expensive dying. Not health care.
58 Danforth, you have the right idea, however the wikipedia page shows federal tax only. You have to also take into consideration provincial taxes. The attached will give you the totals for each province:
http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2014-Personal-Tax
So what mom needs to do is work out a withdrawal amount that yields a tax rate she can live with and get the money out of the RRSP. So if she lives in Ontario she could take out $75k per year and the tax rate on this would be 22.08%. With growth of the portfolio there could still be some left in the RRSP after 10 years, but it will be much smaller. Mom continues to do this until the RRSP is gone. It sounds like mom needs less than $75k to live on, so with the leftover cash she could max out her TFSA for each of the 10+ years and put the rest into a portfolio of dividend paying stocks.
Finally, mom could take out a term insurance policy that is large enough to cover the tax bit until the RRSP is used up. At her age it will be expensive I guess so she will have to run the numbers and decide if it’s worth it.
Lots of bewildered arithmetic Ph.D.s in cumulative percentages, and a lot of holders of The True Solutions are getting awaken by these posts. Most enlightening, it makes one wonder if maybe you can have profits without inflation after all. Or maybe even gold can be loaned at a profit without increasing the supply. Maybe you can even have profits without loaning gold with interest, or different variations. Maybe math is wrong after all, and it’s all a lizard’s plot.
GT – yesterday’s column spoke much about the retirement pogey, and how CPP, OAS and the GIS are all calculated based on *taxable income*.
Q: There is no crystal ball, but do you see this changing – that retirement pogey will be based on *net worth*, or another measure which identifies how well a person can live off their own monies?
Part of the driver behind all this TFSA vs RSP vs UnRegistered investing conversation is about tax optimization. And the subplot is not sabotaging the government handout.
rescue the money.. ya right.
The mentality of some people. sure you have a ridiculous debit balance of cash but wakey, wakey pal; it comes with a large credit amount of taxes payable. Greedy prick. wants to eat ALL the cake but the old fogies never owned it all; a large part of it is borrowed from the gov’t payable on exit.
10 Larry1 –
I have never heard of this and it sound a bit dodgy however you are not completely off the mark. Another strategy which mom could use, particularly if she already has a large income and can’t draw down the RRSP at a low tax rate, is to emigrate. Sounds drastic, but if she emigrates and makes a lump sum withdrawal the withholding tax rate is 25%.
So, as you can see this tax rate is even higher than withdrawing 75k each year and paying 22.08%, but its still a lot better than the 45.70% tax rate she would pay to make a lump sum withdrawal of the entire amount while in Ontario.
Emigrate? Seriously? Why not just pay the tax that’s owing and stop trying to game the system. — Garth
I love you TD and CIBC!
Dividend increases: TD +8.5 pct; CIBC +3 pct
I continue to max both TFSA and RSP. My thought process is that I will probably be laid off at some point in my career or maybe near the end of my career (assuming I want to retire at 65 or so) and will be able to start drawing down on the RSP when my income is much lower than it is today. Still pay taxes, but hoping that I can pull out and pay at a lower tax rate.
Tim’s mom probably should have been making larger withdrawls from her RRSP for several years. But a lot of seniors are reluctant to do so because it will reduce the amount of GIS which they receive. So, basically we’ve got a bunch of penny pinching millionaires out there that won’t withdraw any RRSP money in order to maximize their dole payments. The sad thing is that the kids will get the money and blow through it like there’s no tomorrow. There’s a time to be frugal and a time to spend like there’s no tomorrow. If you’re 70 and sitting on a pile of cash, it’s party time! Let the kids fend for themselves.
#126 MGTOW
Better yet, set up a shell company, have your mother invest in it with her RRSP, then have the shell company subcontract IT services to your service provider in the Caymans.
The Cayman company fails to deliver, your domestic company declares bankruptcy, the RRSP is gone and the money’s waiting in your offshore account for when you get out of prison!
#124 LGBTTQQFAGPBDSM
What’s wrong with on-campus housing for Welsh people? The British foreign exchange students are probably calling them Taffys and throwing rocks at them.
Hi Garth,
Great article.
It’s never mentioned in investing circles, but rather than converting RRSP to a RRIF when you have to, isn’t it much better to immediately begin withdrawing from your RRSP as soon as you:
1. Have a year you aren’t working due to job loss, going back to school, etc.
2. Stop working full-time and are retiring. (ie. if you retire at 55, you should immediately begin withdrawing, to try to collapse the RRSP over as many years as possible).
Seams, stats coming out of USA stats depot, don’t measure up to the same bullishness of yapping Yellen.
Garth you still going for a USA rate hike this year?
“but if she emigrates and makes a lump sum withdrawal the withholding tax rate is 25%.”
But say good bye to Canadian health care, Canadian OAS, etc. Which over time, certainly would add up to a heck of a lot more than the tax “saved”. Not even sure if a non-Canadian citizen gets to keep their CPP. So doubtful that she’d be ahead.
For those of you discussing beneficiaries, taxes, and probate, keep in mind that there are subtle differences between provinces. I remember the issue of beneficiaries was a total gong show when TFSA’s first launched. I couldn’t get a hold of somebody at the brokerage who knew for sure what was going on. It’s much better now…for now, at least.
#126 MGTOW on 02.26.15 at 1:03 am
You know you’re chugging the haterade too hard when you missed the part where she gets taxed at step 1: take money out of RRSP.
#153 Smoking Man on 02.26.15 at 10:02 am
Seams, stats coming out of USA stats depot, don’t measure up to the same bullishness of yapping Yellen.
Garth you still going for a USA rate hike this year?
_____________________________________________
Have to definitely stop reading your posts Smoking Man. Holy shit you are the absolute worst speller in the world. You bastardize the English language more than anyone I have ever seen. How in the world do you actually earn a living? It can not be through written communication. You must deal only with people through phone calls.
Jesus Christ man at least use a spell checker on your phone, you do have one you know? Use it for gods sake, you posts are always cryptic and subjective as we have to guess or anticipate what you are trying to convey. Don’t tell me any of that shit about cutting your own path, being creative and going against the schooling system, that’s just an excuse for a lazy person.
SHIFT happens
every seven to ten years
SHIFT happens
It’s the cyclical nature of our universe.
It’s cleansing. It’s a good thing.
SHIFT happens.
If she’s in her 70s, odds are she’s over 71 and the “RRSP” should be a RRIF … something funny about this post. And what’s the problem (apart from the tax owed) with just withdrawing say $70K per year, spend what she needs, and banking the rest … for the “kids”.
oil at 49.5 – looks like a breakdown imminent.
a drop below 48.75 could be the trigger for some new lows
forget 60-70 for a long time (2+yrs)
#153 Smoking Man on 02.26.15 at 10:02 am
Seams, stats coming out of USA stats depot, don’t measure up to the same bullishness of yapping Yellen.
Garth you still going for a USA rate hike this year?
________________________________________
oh come on SM, you already know his answer to that…
Vancouver’s real estate market appears to be heating up again, but this time real estate agents say the bidding wars are spreading to the suburbs as well.
Real estate agent Nicola Campbell, who specializes in home sales on the North Shore, said this year’s market is the busiest she’s ever seen.
(cbc)
Last month, there were 50 listings in North Vancouver for under $1.2 million. Of those, 44 sold, and most within eight days, she noted.
Campbell said its a complete turn around compared to a year ago, when there were more than twice as many listings, but fewer sales.
“I haven’t seen anything like this in North Vancouver,” said Campbell.
In January 2014, there were 113 listings in the same price range but only 32 sold.
“It’s very atypical for the markets. So normally what we see is a slowdown in December and then a slow ramp up in in January,” she said.
——————————–
604 remains hot hot hot.
http://business.financialpost.com/2015/02/26/toronto-dominion-bank-raises-dividend-as-profit-climbs-0-9/
Looks like the banks are actually doing well despite the oil price.
Emigrate? Seriously? Why not just pay the tax that’s owing and stop trying to game the system. — Garth
Well, I did say it was drastic. But if her/her children’s objective is to minimise tax, it’s a legitimate solution and its not “gaming the system”. It’s totally legal, but only makes sense if her income is already so high that she is in a very high tax bracket. Otherwise, I would recommend she take out 75k at a time over the next 10+ years, pay tax of 22% on it and invest what she doesn’t need, which is what I said in post 142.
Emigration is perfectly reasonable for some readers and I don’t think you should dismiss it out of hand as “gaming the system”.
#154 Mark on 02.26.15 at 10:25 am
But say good bye to Canadian health care, Canadian OAS, etc. Which over time, certainly would add up to a heck of a lot more than the tax “saved”. Not even sure if a non-Canadian citizen gets to keep their CPP. So doubtful that she’d be ahead.
****
First of all, Canadian health care is overrated. Ummm, have you ever lived anywhere else?? Second, with her level of income she will not be collecting OAS. And yes of course she will still be collecting her CPP!!! You do not lose that by moving abroad.
She would also not lose her citizenship. There is no need to renounce Canadian citizenship when you move to another country. Really Mark, I expect better from you.
If this were me, and I was diagnosed with something terminal and knew I would not be able to spend the RRSP over 10+ years and that it would be taxed at 45.7%, I would be on the first flight to wherever, but that’s just me.
In La Belle Province, you can not declare a beneficiary directly on a TFSA application. It needs to be done through a will.
@Mark #154 Yes even as a non resident you get both CPP and OAS. CPP is based on how much/long you paid in. OAS is reduced by 1/40 for every year not worked in Canada. Wife and I both put 20 years in Canada and will get together about 2000 CDN a month.
#118 Will
Please dont confuse astrology with astronomy….Astronomy is what allowed Neil Armstrong to use star navigation to get to the moon. Astrology is all the made up BS papers print to fill column space.
Neither of which affect economic or personal fate…
What exactly is the problem, convert to a RRIF, pay the taxes and then invest it outside. Mrs. 70+ widow wouldn’t be in the highest tax bracket. I’m tired of hearing about how to avoid paying taxes and hand off the dough to your kids. How about just donate the thing to charity, you get a nice tax deduction to offset your taxes – charity, quelle horreur, what is that.
My neighbour is now in the hospital after falling on an icy patch. He will burn through over 100K in “free” taxpayer funded healthcare dollars up to the point of rehabilitation, if he ever gets rehabilitated, otherwise it’s another 45K a year in taxpayer dough for the rest of his life.
I’m sick of the selfishness of families. Screw the taxpayers, it’s all about me-me and my kids’ “entitlements”. Time to bring in some inheritance taxes.
TFSAs and RRSPs are not that difficult of concepts. I really don’t see the source of the apparent confusion in a lot of comments above. Nor do I see why Tim thinks there should, or might, be a way to avoid tax on the RRSP.
THE MONEY HAS NOT YET BEEN TAXED! Neither the original income, nor the subsequent growth. So why should there be a way for Tim’s dad to save and grow 18% of his income (the RRSP maximum contribution) at 0% tax rates?
Just pay your taxes fairly like everyone else. If we’re gonna lower taxes, sign me up, but until then, the rules are the rules.
#149 Mr. Frugal on 02.26.15 at 9:48 am
Tim’s mom probably should have been making larger withdrawls from her RRSP for several years. But a lot of seniors are reluctant to do so because it will reduce the amount of GIS which they receive. So, basically we’ve got a bunch of penny pinching millionaires out there that won’t withdraw any RRSP money in order to maximize their dole payments. The sad thing is that the kids will get the money and blow through it like there’s no tomorrow. There’s a time to be frugal and a time to spend like there’s no tomorrow. If you’re 70 and sitting on a pile of cash, it’s party time! Let the kids fend for themselves.
With this approach I should think the giant tax bite at the end probably pays the government back for all the pogey collected by the penny pinching millionaires. If I feared outliving my cash I suppose I’d also take the government freebies in case I made it to 110. If I kick off much earlier, the tax hit is huge, but hey, I won’t be around to feel it!
Garth sounds a bit exasperated but I’m amused, reading the various harebrained schemes to “rescue” the $700k RRSP from tax. Avoid extremes, plan to pay a reasonable amount of tax on the pot of money, and be pleased for whatever tax shifting you’ve managed to accomplish. You’re blessed if you’re rich enough to have enough assets to worry about this kind of stuff, and as the post says, that RRSP was never entirely yours to begin with.
#134 Love My Kia –
”Since TFSA’s have a maximum contribution limit, and since mom is well off and already maxed out on TFSA’s (as am I), what can she do with the bulk of her investments (stocks) to minimize tax on death”
Donate it to charity.
#133 Entrepreneur on 02.26.15 at 2:13 am
#114 For those about to flop…you should start your own reality show. Talking to people is a gift and you have it.
~~~<~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Thankyou for not saying I don't know what I am talking about and that I should shut up!
As I have stated on this blog before I have had the fortune of travelling to 35 countries and have built up my own profile of countries and not the stereotype profile.
I once went to Syria in 2000 and the people there were so friendly and hospitable ,so I don't like it when people say that they are all "bad guys".
The 6 o'clock news is good for catching up on the drama of the day ,but they only tell you want they want to know.
Self education is the way to go.
#135 Big M –
”My parents got the tax advantage of the RRSPs, but in the end, I wound up paying for it.”
Oh really? It wasn’t your money to begin with. Refer to Garth’s comment above,
”This is akin to thinking your father’s RRSP belongs to you,”
Question: With Canadians living longer, the RRIF rules have never been changed. Would you support slowly raising the age to say 75?
Actually I think the feds will lower it, eventually to 67. — Garth
++++++++++++++++++++++++++++++++
Actually RRIF’s have been changed once from 69 to 71.
#149 Mr. Frugal – I totally agree.
#152 D –
”2. Stop working full-time and are retiring. (ie. if you retire at 55, you should immediately begin withdrawing, to try to collapse the RRSP over as many years as possible).”
I did at 54. Contributed the maximum each year for many years when at the highest tax bracket. A good strategy for RRSP’s as long as you have a sufficient pension at 65. Recommend it for anyone who can.
Math versus Myth
(I interrupt my self imposed hiatus for one comment today)
From the editorial:
And a big whack of it [the RRSP] was always the property of the government, which must be repaid. –
My comment: yes true, the refund funded about 40% of the RRSP and the government always owned about 40% of whatever it grows to. The net 60% cost to the contributor and the growth thereof is NEVER taxed assuming 40% marginal tax rate at withdrawal.
Greg at 15 – It’s my understanding that, assuming the same tax rate at withdrawal, the RRSP and the TFSA are EXACTLY the same. –
Comment: 100% true if one considers the net cost to contribute to an RRSP is lowered by the refund
Another comment: People, man up and pay your taxes on RRSP with drawal or in the estate. THAT was the deal. It was a great deal also. STOP WHINING
“Wow!! Just opened a letter from CIBC stating that my LOC will be raised from prime +3.75% to prime + 6.25.% Perfect credit history etc…
The Banks are getting desperate..”
People transfer their bigger LOCs to HELOCs
For the time being the HELOCs seem to have better rates …
This guy has the easiest to understand description of some of the myths that surround RRSP’s and TFSA’s, including pretty pictures..!
E.G. You lose out on the tax advantages of capital gains/dividends if you stick them inside a registered account……
Err….No you don’t.
http://www.michaeljamesonmoney.com/2014/03/debunking-rrsp-myths-with-pictures.html
Tim’s mother should cash out everything ASAP, take a trip to Las Vegas with Smoking Man and put it all on 7’s. Boy oh boy Smoking Man would have something to write about on that trip.
The 60% in my example above was paid with after tax dollars so was taxed once, but none of the growth on your 60% share of the RRSP is taxed. The apparent 40% tax is just repayment of the 40% share of the RRSP funded by the refund.
gold digger?
gold plated pensions?
I thought gold was useless rock.
It is pretty funny to see what some people are willing to contemplate doing to avoid tax.
Flow through shares, labour sponsored funds, an accountant’s opinion that you can get a $5,000 tax credit for a $1,000 donation… There’s just no end to the ways people have lost money trying to outsmart the taxman.
Anyway, and as a few others have pointed out, the way to minimize (but not completely avoid) tax on that RRSP is simple. First, figure out exactly how many years your mother has left to live…
It’s just maddening that you see that whole balance in the account and, like the monkey trap, can’t get it all out of the jar. And that even guessing at a somewhat optimal approach involves paying tax sooner.
http://4thebetter.co/wp-content/uploads/2014/06/monkey-trap.jpg
The in-laws in later years used to gloat at tax time about not “having to pay” while they had thousands in RRSP’s that they refused to cash out. They paid in the end.
The accountant who did the final tax return shared that RRSP’s are financial mine fields for all estates, but especially those in which the final partner dies late in the year after collecting a full year of pension cheques and investment income.
#138 Md ubc
Like the contribution.
Knew the first one through investing. Took many cracks at that stock. Never filled. Price is coming down rapidly for the drug.
Know the second one because of family.
You’ve got an investing leg up on most from the knowledge that’s available to you.
Medicine seems to be transforming itself right before our eyes. The tools to help will only get better.
Global Stocks Climb to Record High as Rally Broadens on Stimulus
http://www.bloomberg.com/news/articles/2015-02-26/global-stocks-climb-to-record-high-as-rally-broadens-on-stimulus
Love these posts Garth. I’ve known this for awhile now. I still remember some 15 years ago when the mutual fund salesperson came to see my dad (I was in high school). The pitch was to borrow 10K to put into the RRSP, buy their 2.5%+ MER mutual fund, and use the refund to pay off the loan.
NO!!!
47.99 wti
that was fast.
more downside yet.
I did at 54. Contributed the maximum each year for many years when at the highest tax bracket. A good strategy for RRSP’s as long as you have a sufficient pension///or other assets/// at 65. Recommend it for anyone who can.
and
Another comment: People, man up and pay your taxes on RRSP with drawal or in the estate. THAT was the deal. It was a great deal also. STOP WHINING
——————————–
no whining here, plan to do like the first guy, burn most of it out 55-67.
2x25k/yr=600k removed at very low rates, before 67
seems to good to be true
the big f-you to putin is yet to come.
oil will drop to around 30 to punish russian economy further. russian production will be destabilized.
Hi Garth, I have been reading your blog for years!
…very informative, but think you are playing around
the fringes….another words…politically correct attitude
that got you elected never dies!
For Canada`s large cities to have a correction that would beneficial to younger Canadians….we need restrictions on foreign ownership similar to Hong Kong and Australia.
Walls never work. Such old thinking. — Garth
#178 Shawn Allen
Correct….if contribution tax rate = withdrawal tax rate the next effect is an RRSP is the same as TFSA.
I keep harping on about this. Garth is giving RRSPs a bad rap. The only time you lose out is if your withrawal tax rate is greater than the contribution tax rate.
Folks you are just paying back the tax refund you got (which you hopefully didnt blow).
Key point, some of your RRSP is really a CRA loan which you pay back when you withdraw. Your own contribution and growth can be withdrawn tax free. And you actually get to keep some of the CRA loan as well if your withdrawal tax is less than your originial contribution tax rate.
Sure you get hit with a captial gains hit on inheritance, but so you would if you inherited a parents house.
Wow record bank profits and dividends and for Canadian Tire and Magna and Loblaws.
Goldbugs, when is the Great Reset coming to our fiat based economic engine?
Garth what has your dog been eating? His pee is all over the walkway!
#184 Ralph Cramdown on 02.26.15 at 2:10 pm
It is pretty funny to see what some people are willing to contemplate doing to avoid tax.
_____________________________________________
Why not take advantage of all the legal avenues as the taxman doesn’t give two $hits about how they acquire your wealth, legal or illegal. Its all a Grand Illusion anyway.
https://www.youtube.com/watch?v=ZW8TlrYhBxk
Smoking Man your days are numbered. Better start digging that bomb shelter.
http://www.zerohedge.com/news/2015-02-26/fcc-votes-favor-obamas-net-neutrality-has-slippery-slope-web-censorship-begun
Paul Farrell writes, It’s time to start the countdown to the crash of 2016. No, this is not a prediction of a minor correction. Plan on a 50% crash. ……………………
Minor correction, holy crap!
The guy must have a book to sell. — Garth
#32 CREIT on 02.25.15 at 7:43 pm
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They typically do this to people that don’t use their lines of credit. So if you carry a zero balance, they are not making any money off you. So by upping your interest rate, it ensures that if you fall on hard times they will indeed make money off you. It may also protect them in the event of another prime rate drop.
Garth:
I know the hockey blog is down the hall but with my concussion history and early onset, I am not much of a navigator. Allow me one more NHL trade deadline comment with a taxation point.
#112 Obvious Truth
“Please take him back. Maybe kessel wants to hitch a ride too.”
Throw in the great Davey Keon with Phaneuf and we will send back Gary Leeman and Matt Stajan. Done?
Now for the taxation tip. Years ago Calgary had a very prominent Crown Prosecutor. A convicted and sentenced criminal was being taken out of the courtroom to be taken to the pen when he shouted at the prosecutor that he would kill him upon release.
The prosecutor replied “Until then, I will just continue to pay my taxes.”
“They typically do this to people that don’t use their lines of credit. So if you carry a zero balance, they are not making any money off you. So by upping your interest rate, it ensures that if you fall on hard times they will indeed make money off you. It may also protect them in the event of another prime rate drop.”
In the business world, “standby” fees for undrawn bank LOCs are very common.
Coutts’ Swiss operation faces German investigation over tax evasion claims
bricks of cash
“cache and is a symbol of wealth. Customers are promised “the provision of exceptional wealth advice”.
http://www.theguardian.com/business/2015/feb/26/coutts-swiss-operation-german-investigation-tax-evasion-claims
WUL
I’ve had a few knocks to the head playing myself. But as I recall only one of the players mentioned has won a conn smythe trophy. And came close to outlasting the great number 9.
And as much as I like Calgary im thinking cliff fletcher used a similar strategy to yours in order get Doug gilmour to Toronto.
We will have let this deal go for now. But I think you guys out there should just let that young team play.
As an aside I’ve had the pleasure of being on the ice with most of those players we have mentioned. All of them great individual people. I’ll take anyone of them to help out my old timers team tonight.
From the front page of the Financial Post. Bacon has increased in price by 25.2% in one year. Should have bought pork bellies.
I very much prefer TFSA since they come with no (hardly) strings attached. The money can be used when I want and be replaced when I want. From an financial point of view TFSA are better then RRSPs. This is especially the case when you contribute early (at a young age) and if your gains are good. Try math, calculate 10% interest on your 30 000 TFSA over 15 years (95,317.45)…all this is tax free income. The same money will be fully taxable if it was withdrawn from a RRSP. who’s the winner? Second you don’t have to worry about your income level to avoid taxes…I say 100% TFSA before any RRSP, pay taxes now, benefit later!
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