Entries from February 2021 ↓

The epiphany

Just a few days remain to contribute to your retirement plan in order to deduct it from the 2020 tax bill. Wow. Up to $27,230, plus any amount missed in the past. And money’s not required, of course. Assets already owned can be shifted over and counted as a contribution. (Watch for tax that might be triggered.) Or you can borrow the cash from the bank or CU and use the refund to pay down the loan. It’s an easy way to buck up net worth.

But, wait. We have a problem.

The slimy little pathogen has hugely increased personal savings (thanks to Trudeau Covid cash and WFH), but it’s also dashed confidence. RRSP contributions, says a new bank survey, will be far lower this year – meaning a lot of people will pay more tax. And here’s all the evidence you need that most people have never (and will never) read this pathetic blog: half the nation has no idea what can go into an RRSP (like exchange-traded funds). When it comes to women, only 40% get it.

Yup. Our enemy is financial illiteracy. It’s why most people are perfectly okay over-paying for a house with 20x leverage using a loan with a 100% chance of resetting at a higher rate, but they have no liquid assets. Or not enough for the future. It’s weird, cultural, dangerous and apparently sexist.

You have seven more sleeps to fix this. Given what Chrystia the Impaler is likely to do in her maiden budget next month (or soon thereafter) tax avoidance is a big deal. And maxing your RRSP is one of the best strategies possible since it allows tax to be shifted, and reduced. So do it.

Now, there’s also another method of revenge. That’s the tax-free account. And blog dog Nick just had a TFSA epiphany…

A non-financial world friend of mine said his accountant let him know about a loophole in the rules. The idea is that if you hit a grand slam in your TFSA, withdraw the profits, you have then just created new contribution room for yourself over and above the annual contribution limits. Example: I contribute $10k today. Somehow it becomes $100k by December. I then withdraw all of it before the calendar turns over to 2022, and then on Jan 1 I’ve created $100k of contribution room, plus the new annual contribution amount. Sounds too good to be true, right? But it seems like this might actually be allowed.

Being someone who has worked in the industry for years, I feel like I would have known if this was possible. I just assumed any added-back contribution room from withdrawals would be equal to whatever your lifetime contribution amount is, plus any new annual amounts. I never thought you’d be able to “earn” more room because you did extraordinarily well in the markets. Hoping you can clear this up in your classic Garth way in a future blog post.

Oh, Nick. You’re so cute and naïve. This is why the TFSA is the gift that just keeps on giving.

Your pal is correct. In theory there’s no limit to the amount that can be put into a tax-free account. Yes, the annual contribution limits are carved in stone – so everybody in 2021, for example, gets to dump six grand into their plan (though most will not). But assets which have been sitting in a TFSA and grown in value can be removed, opening up new contribution room. That is not a taxable event, so the TFSA did its job in allowing that expansion and ensuring you get to keep 100% of it.

(Of course assets that lose value in a TFSA drag you down. And the losses are not deductible from gains, as in a non-registered account. So stop reading r/wallstreetbets.)

Here’s exactly what the CRA allows you to put into the tax-free account: (a) the annual contribution room created automatically each January 1st, plus (b) any unused room from previous years, plus (c) an amount equal to whatever was taken out of the TFSA in the past. Thus there’s no upper limit to what a TFSA can hold. If you’re a genius at growing assets inside the plan, they can be removed, used to buy a Porsche or a golden retriever, then the tax-free account room filled up with new cash.

Also recall that when you retire a fat TFSA stuffed with growthy things can provide steady cash flow which will not be reported to the CRA. No impact on government pogey like CPP, GIS or OAS. This is in stark contrast to the RRSP (which must eventually become a RRIF), since every dollar flowing from there is added to annual taxable income. Sadly that could push your marginal rate higher.

What to do?

Fill your RRSP this week. Find the room on your NOA. Use the refund for the TFSA. Buy growth ETFs. No GICs. No HISAs. No advice from [email protected] And do it PDQ.


About the picture: Ranger, Grim, Chase, and Tracker were stars of last year’s K9 squad calendar, created by the Waterloo Police Service. Notable fund-raising dog-cop calendars are put out by several forces now, including the OPP in Ontario, Winnipeg and the granddaddy of canine beefcake publishers, the Vancouver Police.

Brain bug

Pandemic puppies. Since Covid changed everything, 12.1 million dogs have been adopted in the US. Historic. Off the charts. In Canada the CKC says inquiries about breeders are up 40% year/year. Dogs selling for $1,500 a year ago are now fetching four grand. Backyard Kijiji breeding has exploded. Sadly.

The scammers have emerged. Like “James Brooke” ([email protected]), who places online ads in local publications nationally – Montreal to Edmonton, Red Deer, Vancouver and the GTA selling pups, from Poms to Beagles to Huskies. But there are no dogs. Just pictures, and an upfront demand for a fat deposit to cover transportation costs.

MJ says she was roped in by this crew after being told to send money to a dog-shipper. “It was a service located in Manitoba that is scamming service advising they will ship your dog for a flat fee and then add additional charges along the way till you realize it’s a scam.”

So if you see something like this, ignore it.

Well, here’s the point today: the shelters are empty. The animal rescue groups have no dogs. Breeders are taking names for litters in 2022. Prices have quadrupled. TikTok and Insta teem with puppy messages asking, ‘how could you get through this year without one of these?” Puppy inventory has collapsed. Canine costs have exploded. Sellers (legit or otherwise) can ask for whatever they want. Buyers continue to line up. FOMO and YOLO, brought on by an endless pandemic, have created a seller’s market in which valuations are rising by the month.

Sound familiar?

You bet. Now let’s flip over to a comment made recently by Cathy & Tanya Rocca, sis realtors in the steamy GTA burb of Burlington.

The results for January can only be described as stupefying. The average price paid for a freehold property during the month of January was $1,315,069 as compared to $1,006,343 in January 2020 The logical expectation with that kind of increase is that sales would be down significantly but they were not. In fact, during the month of January, we saw 3% more sales then we did in January 2020.

It’s everywhere, of course. A questionable bung in Hamilton listed for $599,000 sold for $801,000. Same experience in Kelowna, where the typical property is nearing $900,000, up a third. Listings in Toronto will pass the seven-figure mark, on average, in a month or two. Halifax and Victoria are nuts.

The sisterly advice to buyers:

Don’t despair – adjust. The new reality is that you will almost certainly not be the only buyer vying for a property. There will be competition. Be prepared, know your limitations and use the most recent sales as your guide. No point in looking at what happened 30 days ago – that’s old news. As to waiting this out – the likelihood is that 6 months from now, prices will be up another 6-15% (depending on who you listen to) and you will be kicking yourself for not being more aggressive.

Covid has infected brains everywhere. Puppies and houses epitomize it. Nesting, fear of the outside world, WFH, immense social change, isolation and a destruction of routines have over the course of 12 months bent personal priorities in ways we’ll marvel at in future. We started off hoarding toilet paper. We ended up desperately buying real estate over FaceTime for hundreds of thousands more than buyers asked. Because of a pandemic we all knew would be temporary, we agreed to decades of debt.

Well, puppies grow. Wildly. They eat mountains of chow and rack up the vet bills. Some shelters have started to report five-pound bundles of joy that turned into 65-pound obligations are showing up at their doors. There will be more. The American Kennel Club figures a million canines could be looking for rehoming as the vaccines defeat the virus and, yes, people go back to work.

How will inoculation and reopening the workplaces affect housing? Is the Rocca Sisters advice – to be aggressive and not delay – wise, or suicidal?

Panic buying can end in remorse. Or tears. The outcome rarely meets the expectation. Real estate is a huge commitment involving big leverage so grabbing some in a bidding war without conditions, a home inspection or even (increasingly) a walk-through, is a leap of faith. Yet scores of people are doing just this. The stats are incredible – prices and sales in the middle of winter, in the midst of a recession and pandemic, now at historic highs.

There will be buyer’s regret. Some will be punished for not having done due diligence on the properties they selected. Others will be surprised when their 1.5% mortgage rates eventually double while their incomes do not. Many who moved to the sticks will be forced to choose between commuting or selling when the boss calls them back to work.

Inventories of houses, like dogs, will only rise from here, not fall further. The bidding wars will end. Days-on-market will increase. In time, a seller’s market will turn into one favouring buyers since high prices have drastically reduced the universe of potential purchasers. Already, in most cities, average families cannot qualify to buy average houses, even at historically-low loan rates. So where are all the future sales flow from?

If you don’t need to buy, well, don’t. If you’ve been thinking about selling, this is your moment. If you got a pandemic puppy, stare into her eyes. It’s a life. Remorse is not an option.