Entries from September 2019 ↓

Money for nothing

The tsunami continues. Atop the universal tax cut, the goosed-up shared-equity mortgage, the guaranteed income for new moms, the fatter kiddie cheques, swelled RESP grants, the free startup money and the flood of new child care spaces comes more wrinklie pogey. The latest big promise from Mr. Socks is a 10% boost to OAS payments for the 75+ set, and a huge 25% bump in CPP for old people who lose their spouses. The cost of this: about $3 billion more a year.

The spending is breathtaking. Especially in a nation where there’s no extra money to spend. It’s all borrowed. And today’s deficits are tomorrow’s taxes. Surprise, kids!

Well, let’s deep dive into elderly welfare for a minute.

Nobody pays directly into OAS. Unlike the Canada Pension, which is funded by employers (mostly) and employees, the Old Age Security behemoth comes right out of general government revenues. It is monstrous, and growing all on its own – thanks to demographics. This year OAS will cost more than $51 billion (more than twice what the child cheques total), and it’s growing at the rate of 6% a year – far faster than the economy or government revenues.

How do you earn OAS?

No work is required. No job. No contributions. You just need to live in Canada. Ten years of residency starts to qualify you. After 40 years of living here, you get the max, currently $607 a month. That’s $7,200 a year, or $14,500 for a couple.

Payments start at age 65, but you can roll the dice and delay them until age 70, when payments grow by 36% (unless the rules change). OAS is clawed back, or subject to a “recovery tax”, at an income of $76,000. It disappears completely at $121,000.

Now that life expectancy in Canada has soared past 82 years, we have a problem. Today 15% of the population qualifies for OAS. In a dozen years it jumps to 23%. That equals a 53% increase in pogey going to this cohort. So if you lament the size of the government deficit today, just wait. And imagine what marginal tax rates will be in 2030.

This is why the Harper Cons pushed out the age for collecting OAS – a move which was reversed by the Libs. And now this. Finally, as we all know, a social program can never be ended, reduced, eliminated or diddled with.

So here’s the question: should people receive money just because they get old? Or because they have a kid? Both OAS and the Child Benefit are non-contributory programs. Nobody pays into them – unlike CPP or EI.  As more and more people are removed from the tax rolls by politicians looking for votes (Andrew Scheer just proposed the same), the revenue base narrows. More spending. Fewer taxpayers. Higher rates. And endless deficits.

What does this tell us?

Nothing good. This election isn’t about big ideas – trade policy, tax fairness, climate change, economic growth, national destiny, demographics or democratic reform. Instead the government is wiggling in people’s mortgages and buying them Huggies and Depends. Leaders aren’t inspiring or visionary. They want you to be myopic and selfish. Canada can wait.

In that spirit, remember to top up your TFSA and keep it brimming and fully invested. This vehicle can throw off lots of income in the future, none of which is counted on your tax return. That means a lower reported income and more old people’s pogey in your pocket. Of course utilize the RRSP fully. Its greatest benefit is to high income-earners, allowing taxes to be deferred and shifted. You can loan your spouse money to invest at a ridiculously low (and deductible) interest rate with none of the gains attributed back. You can split pensions or CPP with your squeeze to lower overall taxes. Or use a spousal RRSP to put money in the lands of a less-taxed partner while still reaping the credit. Plus, investment portfolios in retirement turning out dividends and capital gains have a huge advantage over the tax treatment of working schmucks.

If everyone’s in it for themselves, you might as well join. And isn’t that a disappointing thing to read?

Dr. Garth

The Doctor is IN. Nurse, please restrain and drag in the first patient.

Garth, I was wondering if you think it’d be a better idea to go with a 5 year fixed mortgage at 2.59% on a 30 year amortization or a 10 year fixed mortgage at 2.99% on a 30 year amortization? I got TD to offer me 2.59 on a 5 year, but HSBC is offering 2.99 on a 10 year (without negotiating). Thanks for your help, I’m curious on what you think!

First, understand that a 10-year mortgage comes open after five years. That’s the law. If interest rates are lower in half a decade, you can walk away, find a better deal and pay TD off. No penalty. But if rates are higher, the bank has to honour the 2.99% deal for another five.

That suggests it’s a no-brainer to go for the ten because of upside insurance. But, it comes at a price. Taking a decade-long term means paying a premium in the first five (2.99% vs 2.59%), so you shell out $141,819 in payments as opposed to $135,738 on a half-million loan. The cost of the insuring against rates possibly being higher in five years in that instance is $6,081.

Is it worth six grand? The money is real. The threat is nebulous. And this is why I could never sell insurance.

Next!

I met you at a talk you gave in Vancouver and my husband has been following your blog for a good portion of the last decade. I have a question to ask. What would you do in the following situation:

My dad died 6 years ago and I am about to get part of my inheritance (just sold a commercial piece of real estate at a capital loss). I am about to get about 250K for my third share of the deal (gold-digger widow gets 1, half sister gets 1 and I get 1 share).

We have a mortgage of 267,000, 20,000 in credit card debt and 4 young children with some RESP but not a lot. No TFSAs and very little in RRSPs. My husband still has student loans. So…no brainer, we will pay off the debts, but would you pay off the mortgage, or max out both our TFSAs? I am 33, my husband is 42. I am a lawyer; he does privacy and records. He wants to pay down the mortgage given the recession that is coming. Please let me know what you would do, as I won’t have this kind of money handed to me again and it could make a big difference for our family.

He’s wrong. Given current rates, the mortgage is probably cheap. Returns on investment portfolios have been far greater, and are likely to continue. Paying off your mortgage won’t help your retirement savings (lawyers usually have no pension) or finance the kids’ education. A recession (don’t count on one anytime soon) won’t make one iota of difference to your real estate debt. Hubs is just being a typically emotionally fragile male. Tell him to woman up and understand what his priorities are – to care for spouse and family.

Pay off the debts. Fill up the TFSAs. Top up the RESPs and apply for missed grant money. Put funds into the RRSP of the most-taxed spouse. And ignore the damn mortgage.

Next!

I really want to thank you for everything you do it has really helped us.  My question however is about my mom in her early 70s, she has always had her money invested with financial companies but not banks but I did some research on them and not only are the MER’s extremely high but they’ve probably switched company names 5 times in the last 15 years or so. She’s managed to save up a sizeable portfolio with them (close to 500k) but now she’s just sold the family home and has downsized to an apartment (rental) and has pocketed 1.2 million. I don’t want her nest egg to be eaten up by fees etc so I’m looking to you for advice.

Do I get involved and try to get her invested in low cost ETF’s do I stay out of everything? Let her stick with her current financial guys and their high fees?  I even went along with her to a credit union and the lady didn’t even know what ETF meant? Seriously. Would appreciate some insight on the matter thanks so much.

Of course you should get involved. Start by sending her this: Dear Mom, because I love you and happen to be awesome, let me help with your money. The financial dudes have been ripping you off and [email protected] is a thirsty vampiress. Now that you’ve got almost two million let’s get professional help to manage the cash, give you a steady income, keep taxes low, wipe away the stress and protect what you’ve got.

Use the words “save tax” and “preserve capital” a lot. Wrinklies love that. Try to keep her from stashing this all in a low-return, high-taxed GIC or worrying about losing part of her OAS payment. That amount of money should be giving her an income of ten grand a month – so who needs government pogey? Get an advisor who doesn’t sell anything, flip stocks or have facial hair.  And obviously she needs a will and POA in place. Mom looked after you during the vulnerable years. Pay it back.

        Election update         

Throughout the last four years of economic growth the feds have been unable to balance the books. We are tens of billions more in debt as a result, and a slowdown is inevitable.

The political response? Spend more and reduce taxes!

New evidence shows the Conservatives ‘universal tax cut’ will cost the federal government at least $6 billion a year in lost revenue.  Now the Liberals have announced a $1 billion increase in the Canada Child Benefit, which already costs $24 billion a year. In addition, employers will have to give adoptee parents the same parental leave as birth parents receive, plus we’ll have a Guaranteed Paid Family Leave program in place.

Pooched.