November 2013
The last quarter stretch.




As we slowly move through the last quarter of the year, now would be the perfect time to give us a call and schedule a portfolio review to ensure your financial goals are on track. To help you prepare for the end of year review, we have gathered a few refresher articles on some of the savings vehicles that we offer.


Be well.



Peter, Richard, Claudio and Joanna

RRSPs are not short term investments

by Scott Wallace - October 2013,


This week, I received a phone call from a client. He asked how much he could take out of his RRSP. I explained the withholding tax on ad hoc withdrawals and the negative effect it will have on his overall Financial Plan. His response was "If I can't get financing from the bank I am going to take money out of my RRSP to buy a quad for hunting season." My first thought was if you can't get financing for a quad, you can't afford the quad. So, I thought today I would write about RRSPs and why you shouldn't be using them as a short term savings vehicle.


How much can you contribute to your RRSPs?

RRSPs were introduced to Canadians in the late 50s to help them save for their retirements. With RRSPs you get immediate tax deduction, tax sheltering on the growth and a tax deferral until you start to withdraw money in retirement.


A person can put up to 18% of their earned income into a RRSP every year to a maximum of $23,820 (2013). The contribution limit will be indexed for 2014 and beyond. For example, a person that makes 60,000 per year can contribute 10,800 to their RRSP. Someone making 132,333 or more can contribute 23,820.


RRSP are for retirement.

RRSPs are one of the few vehicles that allow Canadians to save in a favourable way for retirement. Most Canadian's income in retirement will come from RRSPs, TFSAs, and Pension Plans. Those with higher incomes or strong savers may have more diverse portfolios but my 20 years in this profession says that the average Canadian will have RRSPs and not much else. RRSP savings statistics suggest that most Canadians won't even have an RRSP but that is for another discussion.


With that in mind, when a person saves for retirement they need to have a 30 or 40 year time horizon on that investment. Sadly, it seems that "long term investing" is now about a 5 year time horizon. Saving for retirement is hard. It requires sacrifice, long term vision and discipline. Short term gratification may be the 'Achilles Heel' for anyone's RRSP portfolio.


Withdrawals from your RRSP.

Let's be honest, stuff happens in life that we are unprepared for and sometimes there is no other way than taking money from your RRSP to meet that challenge. I am not talking about those situations. I am talking about the person who uses their RRSPs to go on holidays, buy a quad or pay off a debt. When a withdrawal is done withholding tax is taken off the sum of money withdrawn. 10% on the first 5000, 20% on 5001 to 15,000 and 30% on 15,001 and above.  You can see that to get 5000 net you will take a 20% hit. Depending on what the redeemer is using the money for they are probably buying an asset that will decrease in value and have no positive effect on their future income in retirement.


We are in a society of instant gratification, "I want it now, and I don't want to wait."  Money is cheap with low interest rates. Spend, Spend, And Spend. Retirement is a long way out and I will have time to catch up. Time passes by quickly and any ad hoc withdrawal from a RRSP to meet a gratification, a want not a need, will have a detrimental effect on a person's retirement plan. Before you know it, you will be 60-65 and will not have enough money to retire and more than likely not have whatever it was that you purchased with that withdrawal many years before.


Saving money is hard. It requires discipline and vision and yes a saver may have to forgo some short term spontaneous purchases. Save for your fun in a non registered savings account or a product like a TFSA. Your future income in your senior years should be left in your RRSPs. You can do both, it is a choice.


View original article here.

TFSA confusion - Contribution Limits, Withdrawals, and Re-Contributions

by Mark Goodfield - September 2013,


John Heinzl of the Globe and Mail has an annual Investor Clinic Quiz. He stated that the quiz question he received the most emails and inquires about was a question he had on TFSA contribution limits. His readers' confusion with this question reflects the continuing misunderstanding that exists in relation to TFSA contribution limits, withdrawals and re-contributions.

Thus, today I will revisit his question and add a variation on the question to try and further promote TFSA literacy. Finally, I have a quick comment on how many people still pay no attention to their investment strategy in their TFSA.

Question #1 - TFSA Contribution Limits
John's question was as follows:
Dorothy is 25 years old and has contributed $3,000 to her tax-free savings account. Her TFSA is now worth $3,800. As of January 1, 2014, the maximum she could contribute would be:


Please note your answer now, before you continue reading. John states that only 40% of the respondents chose the correct answer.

Question #2 - TFSA Withdrawal and Re-contribution Limits
I am going to ask a second question, before I reveal the answer to the first question.

If Dorothy withdrew her initial $3,000 contribution in 2013: (1) what would be the maximum she could contribute in the remainder of 2013 if she suddenly came into an inheritance and (2) what would her maximum contribution room be on January 1, 2014 if she decided against using her inheritance to contribute to her TFSA in 2013?

You can try and answer this question now if you are confident you got the first question correct, or wait until I reveal the correct answer to question #1 before attempting this question.

Answer to Question #1
As John notes in his discussion of this question, the $3,800 value of the TFSA is a red herring for purposes of this question. The contribution limit when TFSAs were launched in 2009 was $5,000 a year. The limit was increased to $5,500 effective January 1, 2013. It is very important to note that TFSA contribution limits are cumulative.

Therefore, Dorothy could have made full TFSA contributions of $20,000 ($5,000 a year for 4 years)+ $11,000 ($5,500 for each of 2013 & 2014)=$31,000. As she has made $3,000 in actual contributions, her maximum contribution room is $28,000 as of January 1, 2014.

Answer to Question #2
Question #2 reflects the most common error made by Canadians each year with respect to TFSA's - the withdrawal and re-contribution rules. According to this article in Maclean's, last year 76,000 Canadians were issued TFSA letters by the CRA for over-contribution penalties. I would suggest most of the letters relate to TFSA re-contributions. 

As described in this CRA document, TFSA withdrawals can only be returned to your TFSA at earliest, on the first day of the next year after you  made a TFSA withdrawal. This is because the contribution room formula increases your TFSA room for any withdrawals made only in the previous year, not the current year.

For example. If you take out $5,000 from your TFSA in 2013, the $5,000 is not added to your contribution room until January 1, 2014. You cannot re-contribute the $5,000 in 2013 unless you have not made full TFSA contributions in prior years and have additional contribution room totally unrelated to the withdrawal.

Okay, back to the answer. If Dorothy received a large inheritance and decided to put the maximum amount into her TFSA in 2013, her contribution room would be $22,500 calculated as follows:

Dorothy could have made full TFSA contributions of $20,000 ($5,000 a year for 4 years)+ $5,500 (2013) less her $3,000 actual contribution (the $3,000 she took out in 2013, is not added back to her contribution room until January 1, 2014).

If Dorothy decided to wait until 2014 to use her inheritance to make her TFSA catch-up contribution, her maximum contribution limit on January 1, 2014 would be $31,000. This is the total of $28,000 as per question #1, plus the $3,000 she withdrew in 2013 that is added back to her contribution limit on January 1, 2014.

It should be noted that if Dorothy had withdrawn the entire $3,800 in her TFSA in 2013, her January 1, 2014 contribution limit would be $31,800.

Pretty easy to see why 76,000 people received TFSA over-contribution letters.

Savings Account vs Alternative Retirement Fund
TFSAs have different uses for different people. For some people it is used a rainy day fund, for others it is just a fancy savings account and for others, it is an alternative retirement fund they don't plan to access until retirement.

The problem I see on a daily basis is that even though people as of 2013 could have contributed as much as $25,500, they still in general treat their TFSA as a daily savings account; at best they put their money in a GIC and at worst, just leave it in the account. If you look at your TFSA as a retirement account, you need to consider investing as if it were your RRSP and fully diversify your investments and maximize the tax-free aspect of the account.

As an accountant I cannot provide specific investment advice, but you need to consider whether you diversify your TFSA of its own accord, or look at the account as part of your overall diversified portfolio. For example, say you have a total portfolio of $300,000, made up of a $30,000 TFSA, $70,000 in investments and a $200,000 RRSP and your investment mandate is 10% foreign, 10% real estate, 40% equity and 40% bonds. Do you allocate your $30,000 TFSA in the 10/10/40/40 ratio, which may be impractical, or do you just have the real estate holdings in your TFSA ($300,000 x10%=$30,000).

Either way, don't let the funds sit there and gather dust. 


View original article here.

RRSP Contribution or Mortgage Pay Down

by Marie Engen - October 2013,


One question I was often asked when I worked in banking was, "Should I pay down my mortgage or maximize my RRSP contributions?"


Being a good employee concerned with the (you know who's) bottom line, the simple answer was usually, "Maximize your RRSP contribution, then use your (considerable) tax refund to make a lump sum mortgage payment."


You've heard this many times before.


What if you wanted a more detailed answer from your banker?


Maybe you've had the same experience as this couple:


Banker (reaching for his calculator):  Okay, say you put $5,000 down on your mortgage and keep the payment the same, you will reduce your balance and pay it off in about 11 years.  Then if you make the same payment to your RRSP, at a rate of 5%, in 2 years you will have $23,966, but this is before tax.  Let's say you're in the 40% tax bracket, you'll have $14,380.  But this ignores the tax refund, which you could also invest which would amount to $39,920 or $23,592 after tax.  Now on the other hand, if you contribute the $5,000 to your RRSP today you will accumulate.., blah, blah, blah....


Eyes glazed after hearing too much detail, the couple leaves the bank, still not knowing which strategy to use.


If you were to ask me that question today, the answer would be - it depends.


You could consider how the rate of return on your investments, interest rate on your debt, tax rates and time horizon can impact your decision.


But, instead of doing mathematical gymnastics and trying to predict the future, consider these suggestions:


When you should pay down your mortgage - or other debt

It makes no financial sense to pay 18 - 29.9% interest on credit card balances. Pay these down first, then any loans and lines of credit you may have, then your mortgage.


If you have a large mortgage payment that could become onerous if the interest rate increases on renewal, pay extra on your mortgage.  On a $400,000 mortgage, after 5 years, the monthly payment will increase almost $200 if the interest rate rises by 1%, and about $350 if the rate goes up 2%.  Paying extra could smooth out your payments down the road.


If you are over 50 years old, pay down your mortgage.  If you are still in debt when you retire, you will be paying out valuable resources that could be used for a better quality of life, instead.  Also, if you want to downsize in the future, or participate ina reverse mortgage plan, you'll have more equity in your home to work with.


Contribute to your RRSP

If your mortgage balance is moderate and/or you are paying an exceedingly low interest rate, put the money into your RRSP.


People who are not enrolled in any type of employer-sponsored pension plan or group RRSP will probably find themselves in a significantly lower tax bracket on retirement.  Funding the RRSP, as much and as early as possible, can make a big difference in income.


If you earn a high salary and an RRSP contribution will bring your taxable income down to a lower tax bracket, you should take advantage and receive the larger tax refund.



Psychologically, paying down debt just feels right.  On the other hand, contributions to an RRSP benefit from compounding and tax deferment, as well as giving you access to cash in the event you lose your employment income (which keeps you from losing your house).


In any event, whether you have a lump sum amount, or an extra couple of hundred dollars a month to work with, you are still ultimately saving for the future with either approach.


And you can still make a lump sum mortgage payment with your tax refund.


View original article here.

Issue: 35
Financial Markets
In This Issue
RRSPs are not short term investments
TFSA confusion - Contribution Limits, Withdrawals, and Re-Contributions
RRSP Contribution or Mortgage Pay Down

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Peter Bailey
Wealth Advisor
Worldsource Financial Management Inc.
272 Lawrence Avenue West, Suite 203
Toronto, Ontario M5M 4M1 

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