Entries from February 2017 ↓

Last call

Try to stay awake. This post is about RRSPs. And this week is your last chance.

Hopefully you already know a contribution has to be made by Wednesday to apply to your 2016 taxes. Up to 18% of what you earned, to a max of $25,370, can be chunked in then deducted from taxable income. The more you earn, the more an RRSP benefits you. Don’t tell Justin.

So RRSPs have dropped in popularity recently for two reasons. The TFSA is apparently sexier since all withdrawals are taxless. And (mostly) real estate has sucked off so much family cash flow that saving for retirement has taken a back seat to the conspicuous display of wealth called a house. Lots of people will regret this, but life’s all about choices.

Well RRSPs are still cool, shifting taxes around during your life as well saving for the future in a far more aggressive way than with a TFSA. Just make sure you put the right stuff inside – a nice collection of ETFs plus the fixed-income portion of your balanced portfolio.

Here are four of this pathetic blog’s fav ways to use the registered retirement savings plan.

Move assets and flip the refund

Actual money is not required to contribute to an RRSP or to reduce your tax bill. The rules allow almost any financial asset you might already own to be used for a ‘contribution in kind.’ That could be anything from a GIC to a junior gold mining stock. So if you already have some non-registered investments, move them into your RRSP and the government will send you money for selling yourself stuff you already owned. Take that refund and put it into your TFSA. Rub tummy.

How to profit from having a baby

Seriously. You might as well get some value out of the kid right off the bat, like reducing the overall family tax bill through income-splitting. If you and your squeeze earn different levels of income, then a spousal plan’s probably for you. Contribute to your partner’s plan up to your own limit and still claim it all as a deduction from your income. If the money’s left untouched in the spousal plan for three years it becomes the property of the other person who’s in the lower tax bracket. So now you know when to get pregnant! Take the money out of the spousal plan during a maternity leave and it’ll finance that year with the kid at little or no tax – while the contributing partner already got the big deduction. You can name him Dodger.

Save that room for the big event

Regular readers will know why it makes sense to commute a pension if you get the chance. By taking a lump sum payment instead of monthly cheques you gain control of your own retirement capital, reducing the risk of your plan going bust or squeezing benefits when you’re a geezer. You can probably pay less tax by controlling your annual income. There’s a good chance you can achieve better returns than the guys running the pension. And if you croak (happens) your family, spouse, girlfriend (or both) can get the money instead of having it fall back into the plan. Typically a commuted pension comes in an amount that’s protected inside a shelter and a hunk that’s added to your taxable income in the year you receive it. Bummer. But if you save up RRSP room for a few years prior to the big event, it can be used to effectively offset Ottawa’s hit on the cash portion.

Refunds are for losers. Do this instead.

So you make an RRSP contribution for 2016 by Wednesday, then receive a big refund cheque in April or May for having done so. You feel brilliant. But you’re not. It means you overpaid on your taxes and the government got to use your money for a full year. So, there’s a better way. Contribute monthly, and get a refund on every paycheque. It’s simple – arrange to make those regular contributions through your bank or advisor, then go to the CRA website and download Form T1213. Fill it out, attach a copy of the RRSP contribution document and send it to the Client Service Division of the local tax office. The CRA dudes will review it, send you a response and notify your employer of the amount your taxes can be reduced on each paycheque. If you live in Quebec, where everything takes longer, you also need to tell the Ministère du Revenu. The extra money you get as income can be used to top up your TFSA or, of course, buy dog food.

Or, you can just pay all your taxes, and feel good that you made up for Kevin O’Leary.


DOUG By Guest Blogger Doug Rowat

ETFs are wonderful. There’s a reason why we use them in all our client portfolios. However, it’s not like we’ve discovered a well-kept secret: ETFs are now more than a $100 billion industry in Canada, which has been growing almost 20% annually over the past decade. It’s obvious why: ETFs provide more transparency, tax efficiency and, particularly, lower costs than mutual funds.

However, they’re not perfect.

Below are my concerns, which also highlight the pitfalls to avoid when investing with ETFs.

1. Take the market-mastery sales pitches of smart beta and actively managed ETF providers with a grain of salt. Because plain-vanilla ETFs are now so low cost that they’re, for all intents and purposes, free (a 5 basis point fee for an ETF amounts to a cost of only 50 cents per $1,000 invested), ETF providers have issued more and more higher-cost ETFs with an ‘active’ overlay to juice their margins. The Canadian ETF space is now about 1/3 actively managed and this area continues to grow. The average fee for actively managed ETFs is 0.85% vs. passive ETFs at 0.57%—an almost 50% premium. Certainly some of these ETFs have merit, but investors must be aware that a ‘strategy’ is being applied to the ETF and that this strategy will, at times, fail. Also, investors must ask themselves if the active management is necessary. For instance, why pay for a pricey ‘low volatility’ ETF when portfolio volatility can be controlled simply by adjusting bond weightings in the asset allocation.

2. ETFs have become highly specialized. With more than 6,000 exchange trade products listed globally it stands to reason that there will be many that are narrowly focused. On the market currently are ETFs that specialize in robotics, cyber security, livestock and beef futures, Catholic values (no pornography amongst other sinful businesses) and Nashville (yes, as in the home of the Grand Ole Opry). The ETF market is becoming very…what’s the word? Granular. Investors must be honest and ask themselves if they truly understand the highly specific areas that they’re investing in. Keep this in mind as you eagerly await the first medical marijuana ETF (it’s coming; Horizons just filed its prospectus).

3. Timing of new ETF issuance is not always advantageous for investors. ETF providers are in the business of sales. Fair enough, but just as a company typically only launches an IPO when its industry is red hot (read: expensive), so too do ETF providers with their product launches. For example, a new Bitcoin ETF is seeking approval from the Securities and Exchange Commission and may be released shortly. I’m not going to argue the merits of Bitcoin, but it should come as no surprise that Bitcoin relative to the US dollar is challenging its all-time highs (see chart). Also, the potential volatility of many new ETFs is not always clearly disclosed. It might surprise some investors, for instance, to learn that Bitcoin has been roughly 20x more volatile than the S&P 500 over the past five years.

Bitcoin ETF may be released near all-time highs

Deviation: Bitcoin 20x more volatile than S&P 500

Source: Turner Investments, Bloomberg. Standard deviation measures the amount of variation or dispersion for a particular index or security. In other words, it measures the risk of owning that index or security.


5. Leveraged and derivative-based ETFs, even now, aren’t fully understood by investors. This is not entirely the fault of the ETF as it is only doing what it was designed to do, but many investors are still unaware of the downside of these derivative-based products even after all the media coverage of ‘daily rolling contracts’ and ‘volatility drag’. For example, we have new clients arrive all the time holding VIX (volatility) ETFs that have sat in their portfolios for years. A VIX ETF is meant to be tactically traded (a virtually impossible task, by the way) not bought and held. The most popular VIX instrument, the iPATH S&P 500 VIX Short-Term Futures (VXX), held over five years has lost 99% of its value! So, ensure that you fully understand how an ETF should be used before buying. Derivative-based/leveraged ETFs also aren’t cheap having an average MER of almost 1.5%—more than double the industry average.

ETFs are wonderful products and have driven costs down across the entire investment industry, but they come with their own baggage and complexities. There are now more than 15 ETF providers in Canada. Fifteen years ago there was essentially one. And mutual fund companies are getting more involved in the space: AGF, Dynamic and Manulife are just a few of the fund companies launching ETFs this year. So, ETFs are only going to get more complex with more providers promising that they’ve built a better mouse trap.

Take care that you don’t get your fingers caught. Or find a financial advisor who’s learned better and safer ways to get the cheese.

Doug Rowat,FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.