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Displaying All Questions and Answers for 2009.

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How many TFSAs?

Now that Tax-Free Savings Accounts are here, I would like to know if I have more than one TFSA as long as the total contribution to all of them does not exceed $5,000? - Oscar G.

You can open as many TFSAs as you want, just as you can with RRSPs. However, be sure you really need more than one because each account means more paperwork and makes keeping track of the investments more complicated. Also, ask about fees before opening a plan. Some financial institutions are waiving all TFSA fees, at least initially. A no-fee plan will add to your return. - G.P.

Transferring funds

Is it possible to transfer front and back end load mutual funds from a portfolio managed by a mutual fund financial planner to a self-administered registered and non-registered portfolio? What steps are required and will this procedure reduce or stop continuing commissions and trailer fees to the fund salesman? Also, is it possible to change the existing load funds to a no load status? - Dennis M.

Fund transfers are routine and are done all the time. However, the paperwork may take longer at busy times of the year, such as RRSP season. There are specific forms to complete and you can obtain them from the company that will handle the new self-directed plan. Your existing advisor will lose all trailer fees if the funds are no longer in a portfolio with him.

As for changing the load status of a fund, any switch from one that was purchased on a deferred sales charge (back-end load) basis will trigger a commission. A switch from a front-end load fund should not be a problem since you have already paid the commission. - G.P.

Delaying TFSAs

I have two sons in university. I have their upcoming tuition covered with RESPs and in-trust accounts. At this time they pay no tax because of their tuition deductions, so any money they receive interest on is tax free. Is it okay to wait and allow them to add to their TFSAs once they are employed (I hope), i.e. can they deposit the $5,000 "retroactively" when they have the money themselves in future years or do they lose the ability to deposit the $5,000 if they do not do it in the year it is eligible? - Ross P.

TFSAs have the same carry-forward privileges as RRSPs. It is not a "use it or lose it" situation; if contribution room is not used in a given year it is added to the next year's limit. So your sons can wait until they have their own cash to open accounts. However they will lose out on the years of tax-free compounding until then. - G.P.

TFSA accounts

I would have liked to have used ING Direct for my TFSA but they only offer a savings account. Is there another institution that offers a mixture of GICs, index funds, and other vehicles to allow a better return? How does HSBC rate? I'd like to steer away from those that charge an administration fee. Thank you for your assistance. - Janis M.

There are many types of TFSAs out there so it pays to shop around. The Bank of Nova Scotia, to cite one example, has a plan that allows you to invest in mutual funds, GICs, or a savings account. Right now there are no administration fees, although that could change in the future.

You asked about HSBC. They offer six different types of TFSAs, ranging from simple savings plans to self-directed plans that enable you to buy any type of security offered by HSBC DirectInvest. You can find more details at https://www.hsbc.ca/1/2/en/personal/chequing-savings/savings-accounts/tax-free-savings-account however there is no information about the fees that may be associated with the various plans so ask first.

As the HSBC example shows, there is a lot of choice available even though TFSAs are only a few days old. Be sure to understand all the terms and conditions of the plan you're considering before signing up. - G.P.

Why are mortgage funds doing well?

I have a question about mortgage funds. Mortgage funds appear to be doing very well this year, for example the National Bank Mortgage Fund reports a 4.95% total return year-to-date (Dec. 15) and Scotia Mortgage Income Fund reports 5.61%. These returns seem contrary to what is happening in the economy: mortgage rates are falling and defaults rising. What explains the relatively good performance of these funds during the present economic climate? Thanks. - Doug L., Edmonton

To begin with, Canadian mortgage funds are in a different position from those in the U.S. They hold better quality mortgages, since our lending standards were never as lax as those in the States. For example, the Scotia fund will only invest in mortgages that are "i) insured or guaranteed by Canadian federal or provincial governments, or their agencies, or ii) conventional first mortgages with loan-to-value ratios of no more than 75%, unless the excess is insured by an insurance company registered or licensed under federal or provincial legislation". That means the risk of defaults is extremely low.

With stock markets tumbling, investors have been scrambling to move cash into lower-risk securities. High-quality and insured mortgages fall into that category. So, as with government bonds, people have been snapping them up, driving yields lower and prices higher. That has resulted in some modest capital gains, which have added to the interest returns to produce the results you cite. - G.P.

Changing advisors

My husband and I have been investing in mutual funds for about twenty years. Our financial advisor recently advised that he has sold his firm and will be retiring. He speaks highly of the individual who purchased his firm and suggests we should consider using the new owner. Prior to the recent economic events our portfolio was approximately $800,000. We're just sitting on that right now and do not intend to take any drastic action while the markets are volatile.
Can you recommend a solid investment firm and/or some good investment advisors we could consider? We expect to be moving to Ontario or Atlantic Canada in the next year or so. Our advisor does not have to be a local person. - Jane P.   

I normally do not recommend financial advisors because in the end it comes down to personal relationships and mutual trust and those are determinations each individual has to make. Before you make any decision to switch, I suggest you have a discussion with the person who is taking over the practice of your retiring advisor. See if you feel an empathy with him and how he responds to your questions and your investment goals. If you are uncomfortable after that interview, then it will be time to launch a search for someone new. - G.P.

"Maturing" RRSP

What does it mean when a RRSP matures? And what are the options? It is locked in. - Kim N.

There are two possible interpretations. The first relates to the date by which an RRSP must be closed, which is Dec. 31 of the year in which you turn 71. At that point, the plan is said to have matured. Since it is a locked-in plan, your options are to move the assets into a life income fund (LIF) or to purchase a life annuity. Under certain circumstances and depending on your province of residence, you may also be able to make a cash withdrawal (taxable) of some of the money.

Another possibility is that the RRSP is invested in a guaranteed investment certificate (GIC) which is coming close to the end of its term, or "maturing". In this case, it is not the plan itself that is maturing, only the security that is held inside it. - G.P.

TFSA information

I have your TFSA book and it is helpful. However, there are two things I wish it had included.
1. Charges. I hear $75 per year unless you have $100,000 in another account. This takes away a large part of the advantage. Comment?
2. Different types of accounts: bank account, discount broker, full service broker. What investments can you put in each kind? - Mary H., Halifax

It was not possible to include specific information on accounts or fees since none of this was available at the time the book was finished in October. Moreover, both are still moving targets. Some companies are waiving fees entirely, at least initially, to encourage people to sign up.

As far as different types of plans are concerned, new ones are appearing all the time, each with its own investment parameters. For example, HSBC offers half-a-dozen different types of TFSAs, each designed for a specific investment approach. RBC Dominion Securities has a fee-based plan (1% annually) that is designed to hold stocks and F-class mutual funds.

At this point, it's a case of shopping around and asking a lot of questions before opening an account. - G.P.

Getting conflicting advice

I'm an investment professional and I am using the TFSA right now to mitigate investor risk in a structured financing offer. It is an amazing tool and I'm so thankful to have it.

I called CRA a month ago and was told TFSA swaps would be allowed in the same manner as it is with RRSPs. Just having received your book via courier, I notice you state the opposite. Please confirm your information.

Also please note that many firms are quoting a fee for TFSA swaps.  Philip S.

Since these plans are so new, it is not surprising that there is conflicting advice on some of the more sophisticated ways to use them. Regarding swaps (exchanging a security outside the plan for one inside or for cash), I originally assumed that the same rules would apply as with RRSPs. However, for certainty I put the question to the Department of Finance. They came back with the response that, in fact, TFSA swaps are treated differently.

Any security or cash taken out of a TFSA is treated as a withdrawal, period. The value of that withdrawal will be added back to your contribution entitlement but not until the following year. So if anyone tries to engineer a swap, the end result would be an overcontribution in the current year. Since no new contribution room is immediately created, the asset transferred into the plan would be treated as a new contribution. To the extent it exceeds the $5,000 annual limit an overcontribution (with corresponding penalties) would result. - G.P.

Future tax rates

I saw your response about the scenarios of which choice would be better between contributing toward an RRSP and a TFSA. To recap:

1. If the tax rate after retirement is expected to be the same as it is now, TFSAs and RRSPs will produce the same net after-tax result.

2. If the tax rate after retirement is expected to be less than it is now, it is better top up an RRSP before opening a TFSA.

3. If the tax rate after retirement is likely to be higher than it is now, saving in a TFSA will produce a better return than making an RRSP contribution.
Now the million dollar question is: where do you feel tax rates will be 10 years in the future compared to present? - Dietmar S.

Talk about crystal ball gazing! The obvious answer is: who knows? However, most governments in recent years have recognized that lower tax rates encourage higher employment and greater economic activity. So my guess is that we will continue to see a gradual reduction in taxes for lower and middle-income wage earners. Upper-income earners probably won't be as fortunate, at least not to the same extent. - G.P.


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Preferred share rates

Thank you for all of your good advice; if only I had followed it and not trusted management of my RRSP money with a large institutional Private Client Group. This was to have allowed me to focus on everyday issues and let them look after my hard-earned dollars for future retirement in the next few years. Well, the accounts have dropped about 30% to 50% in value and I have paid them significant fees for this. The manager was advised in writing that buying shares at the top of the market in a deteriorating environment was not prudent but they though this was a good idea even when they were reminded of a two-year time frame to retirement. They are no longer managing my money and no one will be given this opportunity again. I could dwell on this negative experience for a long time but will address it through regulators and possibly legal channels.

It is now time to take things in hand and move on in a positive mode to try and recover somewhat and look after my RRSP in a prudent and responsible manner. This brings me to a question for you on an investment approach that seems too good to be true: Buy preferred shares rather than GICs, which the bank's local branch is pushing. For me, it appears that a preferred share will provide you with a guaranteed return of say 6.6% for the new National Bank issue until 2014. The rate is reset at that time which still appears to be favourable. If the bank calls the shares you get your initial investment back and whatever interest it has earned.

If preferred shares are below the purchase price this would appear to be even more attractive. Is this too good to be true? - Charles S.

Sorry to hear about your losses but as I am sure you know, you are not alone. Since you are now taking over the responsibility of managing your own money, you obviously plan to take a more conservative approach.

Regarding your specific question, most of the banks have all been coming out with new issues of preferreds to raise capital and so far each new issue has had a slightly higher dividend rate than the one before. How long this will last is anyone's guess. However, one of the effects has been to depress the prices of existing preferreds because they pay lower rates.

The National Bank's rate of 6.6% certainly on the high side (a recent Royal Bank issue paid 6.25%). That's because National Bank is smaller and deemed to be somewhat higher risk. However, it is unlikely that any Canadian bank will miss a preferred share payment unless we plunge into a deep and long depression.

Remember that if you put preferred shares in an RRSP, you lose the dividend tax credit. It is better to hold them outside a registered plan. - G.P.

What to do about mom?

I own my own company and have had my mother, who is 50+, work for me in the past, just to help her out financially as she has no savings, no house, nothing to her name. A few years back she developed a bad neck and has planter fasciitis (feet problems) so can't work. Now I have just been giving her money here and there.

I let her stay with me and my family for months at a time and then she will go to my sisters. I need to know what I can do for her money-wise, as in maybe some kind of  RRSP, GIC, or some sort of fast-growing savings account so that she may have a bit of money before she dies. I want to know how or if I can at least use her as a tax write-off or the money I am giving her as a tax write off? - Lorena

This is a rather complicated situation. You might be able to claim your mother as an "infirm dependant" at line 306 of the income tax return but it is not clear from the information you provided whether she (or you) would qualify. Check the 2008 General Income Tax Guide and if you are still unsure consult a tax specialist.

You cannot set up an RRSP for your mother (or anyone else) and she would need to have earned income to create her own plan. You can give her any amount of money you want but you cannot claim a deduction for doing so, nor is it taxable to her.

You say you own your own company. Is there no work your mother could perform for it in spite of her health problems? Try being a little creative. If you could find something she could contribute, you could pay her a reasonable salary which would be deductible to the company. - G.P.

TFSAs as collateral

Can I use my TFSA as collateral? - George N.

Yes. This is one of the major differences between Tax-Free Savings Accounts and RRSPs. The assets within a TFSA may be pledged as collateral against a loan. However, by doing so you may find that you will be prohibited from making withdrawals as long as the loan is outstanding. - G.P.

Where to invest?

I am a fifty year old single male. I will have $100,000 to invest. How would you invest it? - Peter D.

Very carefully. These are treacherous markets and you don't want to blow it. If you don't own a home, you might seriously consider using the money to acquire one now that housing prices are down. Otherwise, put it in low-risk securities - we like high-quality corporate bonds, preferred shares, GICs, and some blue-chip dividend stocks at present. Make use of any RRSP contribution room you have and set up a Tax-Free Savings Account to shelter any profits.

My book Sleep-Easy Investing may be helpful in deciding how you want to proceed. You can order it at http://astore.amazon.ca/buildicaquizm-20  - G.P.

Where are the yields?

I have about $80,000 from a former employee to transfer to a LIRA this week. I’m already heavily invested in equities; looking for something with less risk, such as GICs. No plan to withdraw the money for another 15 years+.  Do you have any recommendations on obtaining the highest yields? - Karen G.

Smaller financial institutions such as credit unions and foreign banks usually offer the best GIC yields. According to reportonbusiness.com, the higher rate on a five-year GIC right now is 4.6% from Outlook Financial, a division of the Manitoba-based Assiniboine Credit Union (www.outlookfinancial.com).

Among the more popular companies, ING Direct is paying 3.7% for five year certificates. The major banks are way down on the scale at around 2.5% to 2.6% although some offer special deals on occasion.

Be sure to check the deposit insurance coverage offered by the financial institution you are considering. - G.P.

ING clarification

Comment: We had a client bring to our attention a question that was posed on your Q&A. Janis M. is under the impression we only offer a Tax-Free Investment Savings Account. We also offer a Tax-Free Guaranteed Investment and a Tax-Free Mutual Fund. Is there any chance you could let Janis know we do have these additional options for her Tax-Free savings? - Mark Nicholson, ING Direct



Response: Assuming Janis is reading this week's column, consider it done. - G.P.

Successor account holders

I am having an incredibly confusing time with TD Waterhouse re designating my husband and I as "successor account holders" for each other's newly opened Tax Free Savings Accounts.

I have spoken to at least six people both at Direct Investing and at the branch level, all of whom declare that the "successor account holder"/beneficiary is governed by the individual Provinces and Ontario has not yet brought in the necessary changes. Everything, we have read to date seems to clearly state (as does your new book which I was just able to get today) that the "successor account holder" can be placed now, but the beneficiary designation is still under consideration.

TD Waterhouse still refuses to allow the "successor" designation to be placed on our accounts. We would greatly appreciate a reply from you clarifying exactly what it is that we can do. – Allan and Rose B.

Succession laws are provincial responsibilities so although the federal rules clearly allow for a "successor account holder" the provinces each have to pass legislation to actually make it work. To date, British Columbia, Alberta, and PEI have done so.

This legal tangle had led to different policies from one company to another.  Some, like TD and Scotia, are waiting for enabling provincial legislation before they will allow TFSA planholders to designate a successor account holder. Others, like Mackenzie Financial, have a place on their forms to name a successor account holder now, however the fine print says that the designation won't take effect until the appropriate provincial law is passed.

It's the old problem of competing jurisdictions and legal caution. As soon as Ontario acts, TD, Scotiabank, and the others will issue addendums to their forms. Until then, the only way to be absolutely certain that the TFSA will be dealt with appropriate if you die is to add a clause to your will. – G.P.

TFSA carry-forwards

My mom went to a seminar and was told that the contribution room only begins to accumulate AFTER you open a TFSA. That is, if you don’t open an account until 2011, you will only be allowed to deposit $5,000, because you didn’t earn the $10,000 in contribution room in 2009 and 2010. I am wondering if she is correct (although I will be opening a TFSA in the near future just to be on the safe side). – Margaret B.

The information she received is incorrect. You don't have to open an account to accumulate contribution room. As long as you file an income tax return every year, your TFSA contribution room will be credited to you. If you don't use it, the $5,000 will be added to the next year's contribution limit. There will be a report telling you how much contribution room you have on each notice of assessment you receive, starting in 2010, in the same way as the Canada Revenue Agency advises people about available RRSP room. – G.P.

Spousal TFSAs?

I just read your book on Tax-Free Savings Accounts (TFSAs) and I am still not clear about one thing. Since the income-splitting rules do not apply why does the spousal plan exist? As there are no restrictions, why wouldn't the spouse with funds simply give funds to other to set up a plan in their own name? – Paul C., Bowen Island BC

Actually, there is no such thing as a "spousal TFSA", unlike the situation with RRSPs. Neither are there joint plans. Each person's TFSA is their own. So you are correct – one spouse can simply give money to the other to open his or her own plan since the income attribution rules don't apply to TFSA contributions.

It has been suggested that this creates a way to shift significant assets from one spouse to another over time. For example, a husband might give his wife $5,000 to open a plan this year. In December, she withdraws the $5,000 which is then added to her 2010 contribution limit, making it $10,000. He then gives her $10,000 to contribute and the process is repeated annually. On the surface, this would enable her to build a large non-registered investment account as well as a TFSA.

However, it seems the government anticipated this loophole by adding a line that says the attribution rules "will not apply to income earned in a TFSA that is derived from such contributions". Note the phrase: "in a TFSA" which suggests that if the money is withdrawn by the spouse and then reinvested the attribution rules will kick in. At some point in time, we may see a court challenge on this one. – G.P.

Safety of iShares

I am starting to accumulate iShares ETFs issued by Barclays in my portfolio. If Barclays were to get into financial trouble would my money be safe and would I get all of my money back? – Graeme O.

It depends what you mean by "safe". ETFs are not guaranteed securities and are not covered by deposit insurance. They can gain or lose value, just like stocks or mutual funds. So there is no assurance you will get all of your money back.

However, I think you are asking whether the assets in an ETF could be seized by creditors if Barclays went under. The answer is no. As with mutual funds, the assets are held in trust and are not owned by Barclays. Since they do not form part of the company's assets, they would not be at risk in a bankruptcy situation. – G.P.

Using RESPs

Is there a reliable source where one can compare the various savings strategies for education savings for a grandchild, i.e. RESPs versus all others? – Alex S., Richmond Hill, ON

You'll find a lot of valuable information on the website of the Investor Education Fund by going to http://www.investored.ca/en/investoranswers/Pages/topic-resp.aspx

There is also a chapter on this topic in my new book Tax-Free Savings Accounts: A Guide to TFSAs and How They Can Make You Rich. It's available in bookstores or on-line at http://astore.amazon.ca/buildicaquizm-20  - G.P.

Will TFSA dividends be taxed?

I just finished reading your book that I bought at Chapters and I have one question: Assume I invest the maximum allowable $5,000 in 2009 by buying a bank stock with a good dividend yields. If the stock value is unchanged at year-end but I received some dividend payments giving me a total value in my TFSA account at Dec. 30, 2009 of, say, $5,200 will I be penalized? I know that if the stock value increases we are okay but do I have to allow for dividend or interest or distribution payments when calculating my maximum? – Steve S.M., Newfoundland and Labrador

No worries. All profits earned inside a Tax-Free Savings Account are tax-free, regardless of their source – capital gains, dividends, or interest. The only way you risk putting yourself in an overcontribution situation is if you deposit more than $5,000 a year into the plan. – G.P.

GIC rates

I opened up a TFSA by phone with the Royal Bank. I put the maximum $5,000 into a non-refundable two-year GIC at 3.25%. Yet the man I spoke to said the issuing rate was 1.6% but in a few days would be changed to the higher rate. I'm not sure why there is a difference in the rates quoted and should I trust that the transaction will be switched to the higher rate in a timely fashion? – Debra A.

There is probably no problem but my advice in situations like this is to get confirmation in writing before making a commitment. There would have been nothing wrong with leaving the money in cash until the higher rate kicks in. I hope you got the name of the person you spoke to. If so, I suggest you call back and get clarification. – G.P.

Interest rates

Although it is impossible to predict the direction of interest rates, I am hoping you can comment on how the possibility of rising interest rates will affect returns on fixed-income products. My concern is that bonds and bond funds may have the risk of losing capital in a rising rates environment. – Mike D., New Brunswick

You are right to be concerned. Bond prices normally move inversely to interest rates, i.e. when rates rise, prices fall. Government bonds are usually affected more than corporate bonds and the longer the term to maturity, the greater the impact.

Of course, a higher interest rate environment is nowhere on the horizon right now and it is probably something we don't have to worry about during the first half of 2009. But going forward, as the economy turns back up, so will rates. That is simply the way of the world.

The best way to protect yourself in that situation is to stay short. Keep your fixed-income money in short-term bonds (or funds) and Treasury bills. – G.P.

Preferred shares

I always enjoy your insight. I am interested in the recent preferred shares offered by Canadian banks, paying 6.5%+ in dividends. What has been the history of the value of bank preferred shares five years and ten years down the road? I understand I can't just cash these in. If I need my capital in five years, I have to sell them on the open market.  

If I make 6.5% (plus a dividend tax credit), that's a great return, but if my $100,000 is only worth $80,000, maybe it's not so great. Is this something I should buy with the idea of keeping them forever? – Ronan O.

Nothing is forever in the world of investing. And yes, even bank preferreds carry some risk. For example, we keep being told how sound our banks in Canada are but if one should go under, their preferred shares would probably be worthless.

The more likely danger, however, is rising interest rates or changing market conditions that result in the issuing of new preferreds in future years that offer even higher returns. That would depress the market for older, lower-yielding preferreds, driving down their market value – which is exactly what happened in 2008. – G.P.

Pension money

I would like your thoughts on the pros and cons of transferring 25% of my money from the OMERS locked-in pension in Ontario into an RRSP. It seems to be that the money would be more accessible although in this volatile market I am not sure that is such a good thing.

This was proposed by my broker as an option. I am 55 years old, single, and have very few assets to my name. I am salaried at the highest tax bracket.

With thanks for any assistance you can give as I must make a decision shortly. – Karen

Your broker may have a conflict of interest here because transferring money to an RRSP means it would then be invested in a way that would generate commissions for him. So keep that in mind.

No pension plan (except perhaps the CPP) can be said to be 100% "safe" these days but OMERS (Ontario Municipal Employees Retirement System) comes close. At your salary level, you will probably be entitled to a pretty generous income when you retire. So why, I wonder, would you want to risk 25% of that so you can put it into a locked-in RRSP and trust the money to the vagaries of the markets. If I were in your position, I'd be delighted to be assured of a decent retirement income and I certainly would do nothing to jeopardize even a quarter of it. – G.P. 

Gordon Pape's new book is Tax-Free Savings Accounts: A Guide to TFSAs and How They Can Make You Rich. It's available in bookstores or on-line at 27% off the suggested retail price at http://astore.amazon.ca/buildicaquizm-20 



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Go into debt, says advisor

My wife and I are both teachers, paying into a pension plan. We both pay into a government pension plan and we have our master's degrees which provides us with higher income now and a higher pension when we retire. We're both 32, with about 23 years of teaching left.

Our advisor has told us RRSPs are not for us because our combined pension income when we retire will be high enough to cause us to lose a lot of RRSP value due to tax clawbacks. Our pension income should be quite enough to live on, but we'd like a little nest egg to help our kids and enjoy ourselves (travel, etc). Our advisor decided on an investment loan, starting at about $20,000 with a tax deductible monthly interest payment. What do you think? - Andrew and Jennifer R.

Let me get this straight. Your financial advisor is suggesting that you avoid RRSPs but rather go into debt? Seriously? In this market? Leveraging, as this strategy is called, is risky at any time. It's especially so now. No one knows how long this downturn will continue or how deep it will be. Many people are scrambling to pay off the debt they've accumulated over the years to ease the financial burden on themselves. Why would you want to be going in the other direction?

Your advisor may be well-intentioned but you need to recognize there is an inherent conflict of interest here. He will earn commissions and fees from the borrowed money you invest. His profit is guaranteed. Yours isn't.

He has a point about potentially high taxes on RRSP withdrawals on top of your pension income. So why don't you each start building a Tax-Free Savings Account instead? If you each invest $5,000 a year and the plans grow at an average rate of 6% annually (very achievable with low-risk securities) you will have accumulated more than $400,000 between you after 20 years, all tax-free. That makes a pretty nice nest egg, and you can achieve it without debt. – G.P.

RRIF withdrawals

I have been researching literature on RRIFs and I could not arrive at an answer to this question: What is the amount one can withdraw from the RRIF at age 70 or 71 and what are the consequences of doing so? Thank you. – Cy C.

There is no maximum figure on RRIF withdrawals. There is a minimum amount that must be taken out annually, however. At age 70, it is 5% of the value of the plan on Jan. 1 of that year. At 71, it jumps to 7.38% and continues to rise each year after that. All RRIF withdrawals are taxed as ordinary income. – G.P.

Should they worry?

My wife and I are in our seventies and own our home (mortgage free). We have income from government and private pensions. We have both Canada Health Care and extended health care benefits from a former employer. We hold a few modest GICs ( but no stocks or bonds) and are virtually debt free. Our credit rating is very good and we drive a recent model Buick car. We manage to save money monthly. Other than increased inflation (which is not happening today) should we have any concerns about our financial welfare, in these current recessionary times? - G.F.B., Cranbrook BC

You're very fortunate. The situation you describe makes you almost immune to the effects of the current downturn. The only thing you might want to check is the financial health of your employer pension plan. Many plans took a big hit in the market dive and some are having solvency problems. If yours isn't among them, you're just fine. – G.P.

Home renovation tax credit

Can you kindly direct me to where the forms for the home renovation tax credit from our recent budget can be found? Thanks for being such a help to so many people. - Sil D., Windsor ON

There won't be any special forms. All qualifying expenses up to the end of January 2010 can be claimed on your 2009 tax return.

There is one important point in this plan that has been overlooked in some of the media reports. The budget papers state: "The credit will...not be available in respect of expenditures for work performed or goods acquired...if the expenditure is made pursuant to an agreement entered into before January 28, 2009". So if you've already started a renovation project or have signed a contract to do so, you're out of luck. – G.P.

Mortgage or RRSPs?

Last fall my wife and I found ourselves in the position of being able to invest about $2,000 per month and took our banker's advice to pay down the mortgage (it will take two years) vs. investing in an unstable market. I'm questioning that now as we have a variable mortgage which has had a very low interest rate lately. Together we have about $30,000 in back contributions available in the RRSP accounts. Given the low mortgage rate, would our money do more for us in the RRSPs? We are 45 years old and will both receive a decent government indexed pension in retirement but need the RRSPs to supplement as they will only be partial pensions (we started our careers late).

Thanks for the peace of mind your newsletters provide. I always look forward to reading them. - J.M., London ON

The standard test for deciding between an RRSP contribution and a mortgage pay down is the after-tax return each will generate. Let's assume the interest rate on the mortgage is now 3% and that you expect your marginal tax rate in retirement will be 30% (it could be higher because of your pensions so make adjustments if need be). In order to earn the equivalent after tax return in the RRSP, you will need an average annual gain of 4.3% in the plan. If you feel that is achievable (and it should be) then top up the RRSP.

Of course if you make a big RRSP contribution you can use some or all of the refund to reduce the principal on the mortgage. – G.P.


TFSA eligibility

Thank you for writing the book Tax-Free Savings Accounts which I have recently read from cover to cover! There is a question I have with regard to eligibility. Our son is a full-time medical student, age 23, a Canadian citizen and a Canadian resident, has a Social Insurance Number, and has filed income tax returns since he was 18 years old. We wish to open TFSAs for our entire family of four, but were recently told by our financial advisor that our son is not eligible as he is "not a permanent resident" of Canada as he is currently studying in the United States. Please advise! Is he ineligible just because he is temporarily studying in the U.S.?  - Luciana K.

Residency status can be somewhat tricky. However, if your son files Canadian tax returns, does not own property in the U.S., and returns to Canada during summer breaks, there is a strong case to be made that he is in fact a Canadian resident. A fact sheet on TFSAs from the Canada Revenue Agency states as follows:

"Even if you do not live in Canada, you may have residential ties which deem you to be a resident of Canada. These ties include where your home and personal property are, and where your spouse or common-law partner or dependants reside. Other ties that may be relevant include social ties, a driver's licence, bank accounts or credit cards, and provincial or territorial hospitalization insurance."

The CGA says that additional information can be found in Interpretation Bulletin IT-221R, Determination of an Individual's Residence Status. - G.P.

Using RRSP for mortgage pay-down

My husband and I are considering using our RRSP to pay off our mortgage. Is this a good idea as my husband retires this year? - Jackie

You need to take a close look at the tax rate that will apply when the money comes out of the RRSP. If your husband is about to retire, he may be in a lower tax bracket next year, so you'd have more money available after-tax to apply against the mortgage loan if you decide to go that route. But before you do, make sure that you won't need that money to maintain your lifestyle after he retires. - G.P.

Lost 30% on investments

I am 63 and I wanted to retire at 65. I have lost 30% of my mutual funds. How can I protect my investment? I do not feel there is time on my side to regain this back by my retirement date. - Richard

It depends how much risk you are prepared to take. Historically, when stock markets emerge from a bear phase the rebound is fast and dramatic. In 2003, for example, the TSX shot up 24.3%. But as I said in response to an earlier question, we don't know when that will happen. If your priority is to protect what you have left, consider safe securities like guaranteed investment certificates and Canada Savings Bonds. You won't earn much interest but you won't lose any more of your principal either. - G.P.


Can I transfer funds from my RRSP to a TFSA? - Sam B.

This question came up a couple of times. The answer is no and if you think about it a moment the reason is obvious. RRSP contributions generate a tax deduction. The offset is that you pay tax when the money comes out of the plan. TFSA withdrawals are tax-free. So if you were allowed to shift money from an RRSP to a TFSA, you would end up having a deduction going in but paying no tax coming out. The government is in a generous mood these days, but not that generous. - G.P.

Where to go for money

My husband and I are both retired and currently living on his pension and drawing from our non-registered plan to make up the shortfall. He will be 59 and I will be 57 this year. We have approximately 1/4 of our savings in registered investments and 3/4 in non-registered investments.

Would we be better off to be drawing from our registered investments now before we start collecting CPP and OAS to avoid the tax hit we will have later? - Sharon R.

You should probably leave the RRSP money alone. As a general rule, it is better to leave tax-sheltered investments in place for as long as possible to maximize the benefit. If you start withdrawing now, you will pay tax years before you need to and lose the tax-free compounding the money would earn in the plan. Use the non-registered assets now as they are already tax-paid in terms of the principal. Of course, if you have any capital gains they will be triggered and taxable when you sell. - G.P.

Gordon Pape's new book is Tax-Free Savings Accounts: A Guide to TFSAs and How They Can Make You Rich. Copies can be ordered at 27% off the suggested retail price at http://astore.amazon.ca/buildicaquizm-20

TFSAs and GICs

I have recently read your book on TFSAs. On page 42 you state:  "Avoid GICs or any other security that locks you in for long time."  On Feb. 19 I had a GIC that became redeemable. I saw my investment advisor at Scotiabank and asked that this GIC be transferred into a TFSA. She advised me not to do this but rather to re-invest back into the same GIC so that I would not have to pay the interest. Somewhere in your book you advise to transfer your GICs, pay the interest, and deposit to a TFSA. I would appreciate your comments as to which is the best solution. – Eva T.

For the benefit of those who have not yet read the book, the advice about not putting a GIC into a Tax-Free Savings Account is part of a chapter on using a TFSA as an emergency source of cash, a "rainy-day fund" if you like. Holding a GIC in such a situation means you cannot get at the money if it is needed, so the whole emergency fund idea is defeated.

It is perfectly all right to invest in a GIC inside a TFSA as long as you understand that the money is locked in until maturity. So for conservative, long-term investors a GIC is an option to consider.

Regarding your GIC that recently matured, I do not see what the problem is. The interest you earned is taxable, that's clear. You can now take the cash from the redeemed GIC (up to $5,000), deposit it into your TFSA, and invest in a new GIC inside the plan if that is your wish. The interest earned on the new GIC will be tax-sheltered within the TFSA. – G.P.

RRSP limits

Over the last 20 plus years I have purchased RRSPs and also I have withdrawn money from them. Please tell me the total amount that I can contribute to my RRSPs in a lifetime. I am in the 30% - 40% tax bracket and I am 53 years old. – Terry D.

There is no lifetime maximum amount for RRSP contributions. It depends entirely on your earned income. Your basic annual RRSP limit is 18% of the previous year's earned income, less adjustments if you are a pension plan member. Unused contribution room can be carried forward but you get no additional room when money is withdrawn from a plan. To find out your current RRSP contribution room, check the latest Notice of Assessment that you received from the Canada Revenue Agency. There is a special section on the form that deals with RRSPs. – G.P.

Beating deflation

We are hearing more about deflation lately. Can you advise how deflation might impact investments and suggest areas for investments in a deflating economy? I am particularly concerned for capital and income protection as I am on a defined pension plus income from my personal investments. – Dan Y., Burlington ON

Deflation is certainly a possibility. The January numbers from Statistics Canada show that the inflation rate is down to 1.1% and that we have experienced four consecutive months of price declines, the first time that has happened since the 1930s. In some ways, deflation works in favour of pensioners because it means the cost of living actually declines. So people who are on a fixed income can buy more with the same amount of money.

As for investments, cash is king during deflationary periods. Government bonds also tend to do well in that situation, as we saw in 2008. Stocks and real estate are about the worst places to be. – G.P. 

GICs or mutual funds?

Generally speaking, given the fact that GICs are presently outperforming mutual funds, is it advisable to switch from mutual funds to GICs and then switch back to mutual funds when the markets improve? I can understand not touching money inside my RRSP because of taxes, but what about the money outside of the RRSP? It hurts to watch my future pension money dwindle away like water from a leaky bucket. It seems to me that this would help lessen the losses. My financial planner still believes in 'buy and hold' and I am looking for your opinion. – Steve L.

GICs guarantee a specific rate of return and they are covered by federal deposit insurance up to $100,000 (more in the case of some provincial deposit insurance plans). Some financial institutions are offering five-year rates at 4.5%, which looks pretty good in these conditions.

But here's the problem. Three years from now, a 4% return may look pretty skimpy and you may regret having locked in for so long. Many economists are already warning that inflation may come roaring back sooner rather than later, fed by the trillions of dollars of government stimulus that is being poured into the world economy and the rapid increase in the money supply in an effort to restore liquidity to the financial sector. Unless the central banks are extraordinarily dextrous in walking the tightrope, we could see inflation back in the 3%+ range within a year.

Your question is phrased in a way that makes it appear you regard GICs and mutual funds as an either/or decision. In fact, both could be held in a portfolio if desired. Moreover, you seem to equate mutual funds with the stock market. There are several types of mutual funds that don't invest in equities at all (e.g. bond funds, money market funds) and others that limit their equity exposure (e.g. balanced funds). So it would be possible to reduce or eliminate stock market risk simply by shifting some of your assets into different funds. – G.P.

Understanding dividends

Could you confirm my understanding of dividends? Using TransCanada Corp. (TSX, NYSE: TRP) as an example, if the dividend yield is 1.52 that means $1.52 is paid annually for each common share (38c quarterly). So if 100 shares of TRP are purchased for $30 per share, a total of $152 would be paid annually in dividends and that would be approximately 5% of the original share purchase price (the numbers would vary if the dividend and/or share price changed). Is that like saying you would be obtaining 5% yearly interest on an investment of $3,000? It seems like a no-brainer for a fairly safe way to grow an investment over a long term, as long as the dividend does not drop significantly and/or the share price plummet. – Scott W.

Your last line says it all: "...as long as the dividend does not drop significantly and/or the share price plummets". Unfortunately, we have seen both happen all too frequently in the past few months. Several companies have cut their dividends and stocks that were thought to be extremely safe have dropped dramatically in price. So this is not a no-brainer by any stretch of the imagination. There is risk involved and you need to assess it carefully before investing.

To use the example you cited, the dividends of TransCanada appear safe for now but there was a point several years ago when the company was forced to cut its payout. So dividends should never be taken for granted.

One big advantage in receiving dividends is that they get better tax treatment than interest income thanks to the dividend tax credit. But that only applies if the stock is held outside a registered plan.

One small correction: TRP's annual payout of $1.52 a share is not called the "yield". That is calculated by dividing the dividend by the share price. As of the close of trading on Feb. 20, the yield on TRP was 4.75% ($1.52/$31.97). – G.P.


Contribute now?

My husband has recently retired and has an RRSP contribution limit for 2008 in the amount of $20,000. He will no longer have any earned income so this will be the last amount he will be able to contribute. He only needs to contribute about $11,500.00 before March 1 in order to reduce his income tax owing for 2008 to zero. Should he contribute the full amount even if it can't be all used this year? - Sharon R.

As long as he is under 71 and can have an RRSP, he can carry forward any unused RRSP contribution room and use it whenever he wishes. The fact he will have no more earned income simply means he will not accumulate any more contribution room.

If the money is available, he can put the full $20,000 in the plan now and claim a deduction for part or all of it in future years. The advantage of this is that it puts the money to work in a tax-sheltered plan immediately. - G.P.

Switching TFSAs

I have $5,000 in ING's Tax-Free Savings Account (TFSA) but I would now like to switch from a high interest savings account to having some U.S. dividend paying stocks in the account. Is it as simple as closing/withdrawing the ING funds and setting up another TFSA or are there special rules/penalties surrounding this sort of change? – Evan M., Victoria BC

You need to be careful here. You have already made your maximum TFSA contribution for this year. If you withdraw the money from the ING account, you will not be able to recontribute it until Jan. 1 2010. At that time, the $5,000 withdrawal will be added to your 2010 contribution allowance of $5,000, giving you a $10,000 limit.

You could try switching the money into a different type of TFSA, however ING does not offer a self-directed plan that would allow you to invest directly in U.S. stocks. You would need to set up a plan with a brokerage firm and arrange to have the ING assets transferred directly to it. You will need to talk to ING about any fee that might be involved.

But here's the big question: are you sure you really want to do this? Gena Katz, Executive Director, Taxation at the accounting firm of Ernst & Young, says that the U.S. does not recognize TFSAs as registered plans when it comes to withholding tax on dividends. That means that 15% of all U.S. stock dividends paid into a TFSA will be withheld at source. (RRSPs and RRIFs are exempted from this withholding under the Canada-U.S. Tax Treaty).

Maybe you should think this through again. – G.P.

Pension splitting

I'm in the process of preparing our 2008 tax return. My husband has a small income from a life income fund (LIF) of about $5,500 a year. We were told that this could be split as pension even though neither one of us is yet 65. I'm having a hard time getting the QuickTax program to recognize it as LIF income. 

We have been told by a financial advisor that once we show it as LIF income on the tax return, we can split it but the program is recognizing it as RRIF income and therefore (because of our age), it's not allowing us to split it. Do you know for sure whether LIF income can be split when the persons are both under 65? We've been told that RRIF payments cannot be split, but LIF can! – Brenda M.

Whoever gave you that information needs a refresher course in pension splitting. The website of the Canada Revenue Agency clearly states that LIF income cannot be split unless "the pensioner is age 65 or older at the end of the year". You can check it out at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/pnsn-splt/xmpl-eng.html  - G.P.

Mutual fund losses

If I have losses from my bank mutual funds can I claim them on my income tax? Or do I have to sell the funds? – George N.

You can't claim a capital loss until you dispose of the units. As long as you own them, you have what is known as an "unrealized capital loss". Unrealized losses should not be declared on your return. Hopefully, they'll turn into profits over time. – G.P.

Spousal RRSP

My wife started a spousal RRSP at our bank in 2008. I am the contributor and she is the annuitant. She withdrew an amount before the end of 2008.

She received a T4RSP which shows the withdrawal amount and taxes withheld for that amount. Both she and I work. I have the higher income.
Who reports the amount withdrawn as income? Who claims the taxes that were withdrawn? Are there any special forms to fill out? – Baxter H.

It seems to me that neither of you paid any attention to the rules governing spousal plans. They are quite specific: any withdrawals made within three years of a contribution are attributed back to the contributing spouse for tax purposes. In this case, that's you. However, since the contribution was made in 2008, you will be able to claim a deduction for the amount you put into the plan when you file your return. Assuming your wife did not withdraw the full amount, you'll still come out ahead.

Since you have to show the withdrawal as income on your personal return (line 129), you can also claim the tax that was withheld at source. – G.P.

CPP payments

My daughter had a contract position in which she was responsible for payment (among other things) for the CPP premium. She did not pay that premium and she has now received a bill from Revenue Canada for $3,000. It is my understanding that she is not required to pay that tax; however, if she does not it could have an effect on her CPP pension. Could you give me your interpretation? - Frank G.

You can't opt out of the Canada Pension Plan, which is what your daughter seems to want to do. It's compulsory. Employees pay half the annual premium and the employer picks up the other half. It appears your daughter is self-employed so she is responsible for both the employer and employee contributions. The amount she has to contribute is calculated on her net business income for the year. - G.P.

RRIF mix

What is the best investment mix for RRIF which will start in January 2010? - Albert W.

There are two main investment goals for a RRIF. The first is to generate cash flow. The second is to preserve your assets. This suggests that your asset mix should be weighted towards fixed-income securities (e.g. bonds, GICs) and that equity exposure should be limited.

There is no "perfect" asset allocation formula. It depends on how high a return you want to aim for and how much risk you are prepared to take. However, as a general rule for people in your age group I suggest that not more than 25% of a RRIF's assets be held in stocks or equity funds. - G.P.

Tax on inheritance

I have no spouse. When I die, do my children have to pay tax on their inheritance? Rhoda L., Ontario

Technically no. Practically, yes. What I mean by that is that your estate will be responsible for settling your final tax bill with the Canada Revenue Agency. Certain types of assets will be fully taxed, such all investments in RRSPs, RRIFs, etc. Other assets attract no tax, such as life insurance payments. Once the estate settles with the government, the remaining money/property is distributed to your heirs. No further tax is payable by them. - G.P.

Paying off debt

I am a widow with a lot of debt. I have a mortgage of $80,000 on my house and a line of credit of $25,000 plus some credit card debt. I have $30,000 in a RRIF. Is there any way I can transfer some of this money to pay some of my debts without losing a major portion in taxes? - Susan B., Ontario

No. Any money you withdraw from a RRIF will be taxable at your marginal rate. However, if you have little income the amount of tax due will be small. For example, Ontario residents can have taxable income up to $10,320 this year before they are on the hook for any tax. But after that, you'll have to pay at least 15% on a RRIF withdrawal and it doesn't take a lot more income to jump you to a much higher bracket. For example, at $12,300 in taxable income your marginal rate leaps to 27.1% according to the tax calculator on the Ernst & Young website. - G.P.

RRIF conversion

I have to open a RRIF this year and transfer my RRSP into that account. Do I have to sell the stocks in the RRSP to my RRIF at market value or are they transferred at book value into the RRIF? That is can I carry my losses/profits from RRSP to the RRIF? Also, my wife is 63 and I am led to believe that her age affects the amount that I am required to take out of the RRIF until she reaches age 71. Is this a fact? - John F., Ontario

Generally, when a RRIF is opened the initial valuation of the assets is based on the market price on the date of the transfer. But this is simply for administrative convenience. It really makes no difference in tax terms because capital gains within registered plans aren't taxed and capital losses cannot be claimed.

To answer your second question, yes you can choose to have the minimum RRIF withdrawal calculated on the basis of the age of your younger wife. However, you must make this election at the time the RRIF is set up. Once this is done, your spouse's age will always be used to determine your minimum annual withdrawal; that does not change when she reaches 71. - G.P.

What's wrong with bonds?

I assumed that with the falling interest rates that bond funds would rise. Am I wrong with this assumption and, if not, why haven't bond funds performed better? - Josephine B.

You aren't wrong in the basic assumption. The problem is that we are not living in normal times. Government bonds have responded to the falling interest rate climate as you would expect, with prices rising. The evidence for this can be seen in the iShares CDN Government Bond Index Fund (TSX: XGB) which gained 7.1% in the six months to March 31. That's a significant move for a bond fund in a relatively short time.

Corporate bonds are a different story. The recession and accompanying credit crisis raised concern about default risk in these issues, resulting in the widest yield spreads we have ever seen compared to government bonds. In effect, corporate interest rates rose, driving their bond prices lower.

I have said on several occasions in my newsletters that this was overdone and we are now seeing evidence of that. Corporate bond prices have recovered to some extent recently and the iShares CDN Corporate Bond Index Fund (TSX: XCB) gained 3.4% in the first quarter of this year. I believe this trend will continue. As for government bonds, with interest rates at rock bottom I don't see a lot more upside for them going forward.

The bottom line is that if you want to invest in a bond fund at this stage, choose one that is weighted to high-quality corporate issues. - G.P.

Seeking income

Is there any reasonably safe way to generate a modest cash flow in this lovely market? - Norma S.

I have two suggestions for you. The first is good-quality corporate bonds (those rated BBB or higher). You'll find yields of 4.5% to 6% on several mid-term issues (maturities of 5-10 years). The second possibility to consider is the new issues of bank preferred shares, which have a coupon dividend of 6.25% to 6.5%.

Neither of these choices comes with zero risk but in the context of the return, the risk level should be more than acceptable. - G.P.


Discouraged from switching

My husband and I have all our money invested through CIBC portfolio management and have a range of different mutual funds through them. I wanted to use a different portfolio management company for my investments so we have a comparison and can see who is giving the better result. I’ve been told it’s best to keep our portfolio with one manager and switching now would result in even more losses. Is this correct? - A.G.

Of course they would tell you that. Why would they encourage you to take some of your business elsewhere? Ignore them and do what you think is best. I have never advised keeping all your money in one place for a number of reasons - one of which is the one you cite, the ability to compare results.

I fail to understand the suggestion that by switching you'll lose even more money. You should ask what their rationale is for that comment. It's true you will lock in capital losses if you sell the funds to make a switch (and can claim those on your 2009 return). But those losses have already been incurred. Once the switch is complete you will use the cash to buy new securities which hopefully will increase in value over time. - G.P.

Reinvesting distributions

Could you comment on the pros and cons of reinvesting fund distributions versus taking the monthly cash payments? - Thomas J. 

For starters, the tax implications are the same, assuming the fund units are not held in a registered plan. You'll still be on the hook whether you take the payment in cash or additional units.

The advantage of reinvesting is that you are using the time-honoured technique of dollar-cost averaging. When prices are down, your distributions will acquire a greater number of new units. When they are high, the reverse takes place. Over time, it averages out.

Of course, if you need the cash flow from the funds the question becomes moot. You'll opt for the income. - G.P.

Investing for parents

My mom came to Canada in 1996 and my dad came in 1999. My mom is now 55 and my dad is turning 60 soon. Their current equity is a house that is worth $300,000 now but with an outstanding loan of $250,000, as well as up to $20,000 in personal savings. With both of them trying to settle down and sending their kids to school, they were not able to save anything for retirement. Their employer never provided any pension plan either.

With my dad retiring soon, I am concerned about their retirement income. I have $10,000 that I would like to invest in their names. I expect my dad and mom would not utilize this amount for another 8-10 years. I would like to make the most out of the low market opportunity and maximize the growth. I am considering a TFSA instead of an RRSP for them. Could you please advise if this is the right way to go and what funds I can invest within TFSA/RRSP without having their OAS and CPP affected?

I might also occasionally add $300 - $500 yearly to the $10,000 amount.  Can you please advise what funds are best for the additional smaller amount? - Alia A.

You cannot invest in either a TFSA or an RRSP on their behalf. Neither type of plan permits third-party contributions. You would have to give them the money and let them open their own plans. There are no tax implications in doing this. Given the circumstances you describe, it would appear that TFSAs (Tax-Free Savings Accounts) would be the best choice. Since the maximum annual contribution is $5,000 they could each open a plan.

You say you want to maximize growth but given the uncertainty of the economy and the fact that they will need this money for retirement, I suggest taking a cautious approach to investing the money at least for now. You might consider bond funds or a conservatively managed balanced fund. Once the economy starts to recover, new contributions can be directed to equity funds, many of which can be purchased with a minimum investment of $500. - G.P.

Insurance payments

Is a home insurance settlement payment taxable income? - Phil P.

No. It's all yours. In fact, almost all insurance payments are tax-free. - G.P.

Tax on RRSPs

If I leave my RRSP ($100,000) to my children what percent will the government keep? - George N.

When you die, your RRSP is considered to have been closed and the value of the plan is added to your taxable income when your final return is filed by your executor. The exact percentage of the tax will depend on your other income in that year and your province of residence.

If we assume other income of $50,000, then the marginal tax rate on the top dollar of the $100,000 in the RRSP will range from a low of 39% in Alberta to a high of 48.25% in Nova Scotia. Note that the full $100,000 won't be taxed at that rate because the entire amount will not be included in the top bracket. If you need a precise figure, you should consult an accountant in your area. - G.P.

TFSA profits

Suppose I invest $5,000 in a Tax-Free Savings Account (TFSA) through a bank using their on-line brokerage service and on make $2,000 in three months on stocks. Can I reinvest the $7,000 or can I just reinvest the original $5,000? - Shelley S.

As long as you do not withdraw the money from the TFSA, you can reinvest all profits earned within the plan at any time. There are no restrictions. - G.P.

Returning to Canada

My husband and I sold our home three years ago and moved to the U.S. as that’s where he could find a job. Now he’s 65 and we, like a lot of people, have taken a huge hit on our retirement portfolio and we want to move back to Canada. We want to have a house and garden. Do you think it wise to take a mortgage or line of credit or rent at this time of life? - Anne G.

The answer to this depends in large part on your personal finances. That said, I am a strong believer in home ownership at any time of life. With housing prices soft and mortgage rates extremely low for people with good credit, my advice would be to begin by seeing if you can find the kind of home you want at a price and carrying cost you can handle comfortably. If the answer turns out to be that you can't, then consider renting. - G.P.

Insurance dilemma

You may not know it but you have been my financial advisor for a number of years. Because of you, I've done very well with PH&N etc.

I am on disability and have been for a number of years. I have an insurance policy for $60,000 with Empire Life. It has what they call a waver of premiums and have not paid for about 10 years. Now here is my problem. The insurance company will continue to pay the premiums until I reach 70 -I'm 64 now. When I reach 65 I have the option of paying for the policy - the premium will be around $180 monthly until I die. My question: should I continue not paying and have the policy end at 70 or start paying at 65 and be insured for the rest of my life? - Marinus V.

You left out a key point - who is the beneficiary? Do you have any dependants who will need the insurance money when you die? If so, then you should seriously considering keeping the policy in force, if you can afford the premiums. But if you have no one who would need the money (as opposed to someone who would like to get it) then you should ask yourself whether you need insurance at all.

Here's another thought. If the people who stand to inherit are financially secure, have them pay the premiums for you. After all, they're the ones who will get the payoff. - G.P.



TFSA and death

On pages 86 -89 of your TFSA book you recommend a process for transferring a TFSA to a spouse on death without incurring tax. My bank says this can't be done. Are they right or are you? - Bob S. 

It depends where you live. The provinces control the laws on succession duties and not all have passed the enabling legislation yet. For example, Ontario has promised to do so but the law has not yet been enacted. But several provinces have already moved including Alberta, Nova Scotia, and British Columbia. It is expected all the provinces will be onside by the end of the year. - G.P.

What's an IPS?

Can you explain the meaning and the tax implications of an IPS fund, such as Medical Facilities Corp. (TSX: DR.UN). I have heard that this type of fund will be immune to the new tax on income trusts coming in January 2011. If this is so, how does such a fund accomplish this feat of seeming legerdemain? - Charles M.

IPS stands for Income Participating Securities. You will also find references to Income Deposit Securities (IDS), which operate in the same way. Both are brand names for what are generically referred to as "stapled notes". These are securities that consist of two parts: a share of common stock plus a fractional interest in a high-yield note. The idea was to create a security that would provide investors with good cash flow plus some capital gains potential.

Since the underlying business is structured as a corporation and pays tax accordingly, these securities are not considered to be income trusts or limited partnerships within the context of the new trust tax and therefore will not be affected by it. If the corporation is Canadian, the dividend portion of the payment is eligible for the dividend tax credit.

Medical Facilities Corp. is a British Columbia-based company however its main assets are in the U.S. The company owns a 51%+ interest in four specialty surgical hospitals located in South Dakota and Oklahoma, as well as 51% of two ambulatory surgery centers in California.

Each IPS unit consists of one share of common stock in the company plus $5.90 worth of the aggregate principal amount of 12.5% subordinated notes. The units pay monthly distributions of 9.17c ($1.10 a year) which consists of an interest payment of 6.15c and a dividend of 3.02c. The dividend is eligible for the tax credit.

The units were trading recently $8.90. Assuming the monthly distribution remains unchanged, the yield at that price is 12.4%. - G.P.

XRE yield

Could you please let me know the yield on the iShares CDN REIT Sector Index Fund (TSX: XRE). I see it showing at 11% on Yahoo Finance but on a Canadian site it says 4.9%, so I do not know which is correct. - Nachum L.

The confusion arises from the fact that yields can be calculated in different ways. For example, over the 12 months to March 31, this exchange-traded fund (ETF) paid out a total of 85.26c per unit in cash distributions to shareholders. Based on the recent price of $7.77, that works out to a trailing yield of 10.97%.

However, the first-quarter payment for 2009 was only 9.494c per unit. If the fund were to maintain that level over the full year, the total payout would be only 37.98c per unit in 2009, for a projected forward yield of 4.89%.

You should not read too much into that first quarter '09 payment, however. Geri James of Barclays Global Investors explained that fourth-quarter distributions from funds that invest heavily in trusts are typically larger. That's because although the normal cut-off date for setting the distribution amount is the 15th of the quarter-end month (e.g. Dec. 15, March 15), for tax reasons Barclays is required to take into account all payments it expects to be receive from trusts before year-end. The effect is that the fourth-quarter payment covers 3-1/2 months while the following first-quarter distribution covers only 2-1/2 months.

So what can you expect for the rest of 2009? Distributions for the next three quarters will almost certainly be higher than the March payment. However, it is very likely the total will come in below the 2008 figure because one of the biggest components of the fund, H&R REIT (representing 13% of the portfolio) cut its distributions by 50% effective with the January payment. Some of the other REITs in the fund have also reduced their payouts in recent months, including InnVest REIT and Extendicare REIT.

My guesstimate is that the total 2009 distribution from XRE will come in somewhere in the vicinity of 60c a unit, give or take 10%. Therefore, in making your investment decision I suggest you plug in a yield of 7.5% to 8% and you'll be in the ballpark. - G.P.

BMO Monthly Income Fund

I hope you can help me to understand a bit more about income funds. I own some BMO Monthly Income Fund which gives a distribution monthly in the form of capital return, interest, dividends, and capital gain. Now the market has not been great but BMO continues with the distribution. Can it be that the monthly distribution I am receiving is my own capital investment? If so, it can be exhausted down the road. I hate to sell the fund now as I don't want to accept the loss. Please explain how the bank manages this kind of fund. - Helen C.

Your suspicions are correct - you are indeed being paid with your own money. Over the 12 months to April 16, investors received a total of 72c a unit in distributions. But during that time, the fund's net asset value fell from $9.26 to $7.49 per unit, a decline of $1.77. So the situation was worse than just getting back your own money - you actually lost 13.6% over that time.

Of course, as you note, this can't go on forever. The fund will be forced to reduce its payments if it cannot generate enough profit to sustain them. The good news is that things have been looking better recently and the fund was ahead by 2.3% for 2009 as of May 1. So don’t be too quick to sell just yet. - G.P.

Preferred share dividends

How can the banks offer such high dividends on their new preferred shares when, theoretically, they are in trouble? - Norma S.

For starters, Canadian banks are not in trouble. In fact they are being touted by world leaders, including President Obama, as models for a new global financial system. No Canadian bank has asked for a penny of government aid. The U.S. banking system is, of course, in a mess but lax regulation in that country is mainly responsible.

Canadian banks have been issuing new preferred shares to strengthen their financial position even further. In order to ensure the issues sell, they have to offer competitive yields. The preferred share market has been very weak for some time, which has resulted in higher yields on already existing shares as their market price drops. If new issues offered less, no one would buy them.

We are now seeing signs that the preferred share market is improving and this has resulted in lower yields on the latest issues. For example, a Royal Bank issue that came out last month paid 6.1%. A few months earlier, a similar offering from Royal came to market at 6.25%. We are not likely to see that again for many years. - G.P.

Return of capital

I understand the merit of having a return of capital fund in a non-registered plan but I think I see a benefit in having them in RRSPs, RRIFs, and TFSAs.
If instead of moving the money outside the plan one could reinvest the funds perhaps even through a planned investment program. This would mean you could grow the investments through "additional" funds into the account without exceeding the stipulated contribution limits set by the government. Since the investments are sheltered within the plan, a reduction in the cost base is of no significance.
As I see it, this could be managed along the same lines as if one sells an investment within a registered plan then uses the accrued funds to purchase other funds. Your views on this approach would be appreciated. - Newton D.

First, let's clarify what "return of capital" (ROC) actually means. In theory, it's a repayment of money you originally invested and therefore it does not attract any immediate tax. However, when you receive an ROC distribution from a mutual fund, REIT, etc. you have to calculate an "adjusted cost base" (ACB) for purposes of determining future capital gains tax liability. This is done by subtracting the ROC payment from the price you originally paid for the shares. For example, suppose you paid $10 for units of a mutual fund and receive a distribution of 50c which is determined to be return of capital (this will show up on your reporting slip). Your adjusted cost base is now $9.50. So if you should sell the units later for $10, you would have to pay tax on a 50c capital gain even though you only matched your original cost price.

Now to your point. Distributions received in a registered plan are all treated in the same way for tax purposes. There is no advantage to receiving return of capital as opposed to, say, interest payments. The reinvestment strategy you describe is therefore equally applicable to all types of payments. So there is no advantage to seeking out securities that make ROC distributions to hold in a registered plan. - G.P.

Which bond fund?

I am 62 years old, but not risk-averse. Using a 2-3 year time horizon
which would be the best "home" for about 15% of my RRSP portfolio that I plan to move out of long-term bonds into shorter-term holdings? The choices are the iShares CDN Bond Index Fund (TSX: XBB), the iShares CDN Short Term Bond Index Fund (TSX: XSB), and the iShares CDN Real Return Bond Index Fund (TSX: XRB). I include the last one on the premise that inflation MUST return given current government spending. - Larry H., Ottawa

If you want to get out of long-term bonds, the Real Return Fund should be crossed off the list. Almost all the holdings are in bonds that do not mature until 2021 or later. The Short Term Bond Index Fund fits your objective most effectively but the return over the next 2-3 years is likely to be quite low. The Bond Index Fund tracks the universe index which includes bonds of all maturities. Normally I would recommend it for someone with a longer time horizon but it will probably outperform the Short Term Fund in the time frame you are considering. - G.P.

Mortgage dilemma

I am 36 years old and our mortgage is coming due in November. We owe approximately $104,000 on our house. I also have a GIC for $125,000 coming due this month that was earning 4.5%. I am thinking of paying off my mortgage with this money. I also have about $100,000 in other investments like GICs, RRSPs, etc. What do you think? I am a guess a conservative investor. Please help. - Adam 

I think it's a good idea to pay off the mortgage, given the circumstances you describe. Yes, mortgage interest rates are near record lows but it still costs money to carry the loan - somewhere between 3.5% and 4% if you renew for a five-year term. You won't be able to earn anything close to that if you were to re-invest the money in another GIC. Use the amount that is left after the mortgage is paid to top up your RRSP and/or open a Tax-Free Savings Account. - G.P.

Applying for CPP

I am 59 years old, working at a good job that pays $36 an hour. I have a pension income of $3,100 a month from a previous employer. I am eligible to make an early application to the CPP as I'll turn 60 this September. I'm asking for a "second opinion" as to whether it would be prudent to do this.  Our company's business is still strong until 2012 (we build helicopters for Canadian clients). I have not pegged a retirement date as of yet, as things are going well and I still enjoy my work. But aviation is a very cyclical business with several years of extremely good sales followed by several years of drought, depending on several factors such as the price of oil, exploration, and the annual forest fire season. I thought that by applying early for my CPP, which would amount to about $630 per month, it would add to my present retirement income should the bottom fall out. Would you advise an early application to the CPP in my situation? I understand the penalty issues of doing this at this time also. - Wilf S., Beamsville ON

Technically, you're not eligible to apply for CPP at age 60 unless you have stopped working. However, the rules are rather lax about this. You only have to show that you were not working at the end of the month before the payments begin and during the month when the first cheque comes in. After that, you can resume work. But you would have to make arrangements with your employer (who may be reluctant to go along with such a plan) and forego salary for a period of time, which you may not want to do.

The more basic question is: why bother? You don't appear to need the money now. If the bottom falls out of the helicopter business you can always apply then and your pension will be larger because you delayed. I can't see any reason to rush. - G.P.


Thank you for your response and your advice. We noticed that you titled our question "Misinformed by Advisor". My husband and I certainly hope that it will help other investors to ask more questions, to read their prospectus, and to get things in writing from their financial advisors. We also would hope that any financial advisors who are guilty of this misinformation, whether it is intentional or unintentional or because of lack of competence, take time to pause and reflect.

They might ask themselves if they would like their children or other family members to have trusted a financial advisor and then experienced such negative consequences, emotionally, financially, and morally. Thank you once again for your straightforward and honest information and advice. - Maria C.

The writer and her husband experienced significant losses after their advisors made investments on their behalf that they felt were highly inappropriate. This is an object lesson in the need to ensure that your advisor clearly understands your priorities and keeps you informed of all actions. But it is also incumbent on investors to review any recommendations before approving them and to have a written record of all decisions in case of dispute. - G.P.

Who needs insurance?

I am a 62-year-old single female, with no dependants and own two businesses. I have health and dental insurance which is very costly. If I am well, and I am, why would I still need this coverage? - Jean W.

Nobody likes paying insurance premiums - until they get sick and need to make a claim. Then they're thankful they have the protection.

It sounds like you have been fortunate, health-wise, but how do you know what will happen tomorrow? You don't and neither does anyone else, which is why we pay for the coverage. In the end, it's your call but if you decide cancel your insurance I suggest you start to build a personal health fund to cover any unexpected expenses down the road. - G.P.

Inheritance dilemma

My mother is age 90 and lives in a nursing home in Nova Scotia. She has Alzheimer's so my youngest sister has power of attorney and looks after her affairs including her finances. The cost of my mother's care has been calculated based on her current income which includes Old Age Security, Canada pension, and a portion of my father's pension thus her bills for her retirement home are covered.

My question. Can my mother's estate be paid out to her children while she is alive since her financial requirements are being taken care of and she has no need of the money? All four children are in their late 50s and early 60s. We all love our mother dearly and happily, or sadly because of her condition, she might live for another 10 or more years and by the time any of us receive our inheritance we will be too old to enjoy it. My mother's estate includes cash of $85,000 plus the cash from the sale of her home of $182,000 for a total of $267,000. Me and my 3 siblings are to share in my parent's estate as laid out in my father's will. What would you advise? - Barrie M., British Columbia

I would advise you to consult a lawyer. If your mother were sentient, there would not be an issue because there is no law against giving cash gifts to adult children and no tax implications in doing so. But in this case she is not capable of making that decision and your sister, one of the beneficiaries, holds power of attorney. There would clearly be a conflict of interest if she were to use that authority to pay out the cash in the estate to herself and the rest of you. The laws covering this kind of situation are complex and vary from province to province so you need the guidance of a good estate lawyer. - G.P.

Conservative investor

I am a very conservative investor who does not like to gamble with hard earned money. I work six hours a day and collect a small pension. I am 56.

We lost a considerable amount like everyone else and will not be able to retire as planed. I have $10,000 I want to invest but where? It must be relatively safe. I also have $5,000 for a TFSA but I am unsure which to put it in. - Cathy H., Ontario

"Relatively safe" suggests you are prepared to live with a little risk but not much. If that is the case, you might want to consider a short-term bond fund. You won't earn a big return but you are unlikely to suffer any losses and if you do they will not be large.

Almost every financial institution offers Tax-Free Savings Accounts. Choose a plan that has no fees and that will allow you to invest in the type of securities that are of interest to you. - G.P.

Mortgage in RRIF

Four years ago, I bought a house and gave myself a mortgage from my RRIF at 6.05%. Being my own lender, the monthly payments are linked to the minimum withdrawal and both the principal and interest go back into my RRIF. Next year the mortgage is to be renewed at the then current interest rates. If they are as low as they are now, the earnings will be less than the minimum withdrawal. Will it therefore take much longer to pay off the mortgage?

According to my bank not many people are aware that this can be done and it is a relatively safe investment, since you pay yourself. - Ruth P., Ontario

You need to be careful here. If most or all of your RRIF is tied up in the mortgage and the repayment is less than the minimum withdrawal requirement, where will the RRIF get the cash to meet the payout that must be made to you? I'm sure the bank will take this into account in calculating the repayment but you need to be sure.

A more basic question is why are you doing this? It sounds like you are putting money into the RRIF to meet the mortgage payment and then taking it out again as taxable income. Doing it this way means you are paying a hefty fee to hold the mortgage inside the plan. I suggest you look at taking out a conventional mortgage when the term is up next year and paying off the RRIF mortgage with the proceeds. Use the RRIF withdrawals to make the mortgage payments. The on-going costs should be much less. - G.P.

CPP now?

I'm a seasonal worker and will be turning 60 in October. Would it be to my advantage to take CPP now? - Richard M., Nova Scotia

I generally advise people not to take CPP any earlier than they need to unless they require the extra income. You don't qualify for a full pension until you are 65. If you apply sooner, you lose half a percentage point of your payment for each month short of your 65th birthday. So if you were to apply at age 60, you would only receive 70% of the normal pension.

Of course, other factors have to be taken into account such as your health and life expectancy so the decision is not always cut-and-dried. - G.P.

Draw down RRSPs now?

I have decided to retire. I have money in savings and money in RRSPs.  My husband's pension starts in 2.5 years (we can easily live off it). However, we will have no income in the next 2.5 years. I will be using savings and I am wondering if I should take some lump sums from my RRSPs before my husband's Social Security, my work pensions, CPP, and OAS start? The older we get the higher our incomes will be so I would be taxed more on my RRSPs, no? I won't need the RRSP income later on as the pensions will suffice. Does this sound reasonable? Thanks - Sheila S.

Yes, your plan does make sense, as long as you have done your calculations carefully and taken the effect of inflation into account. (Yes, inflation is low now but it may be a different story in a few years.) In effect, you are using the RRSPs to bridge the gap until other income sources click in. Since you will have no other income in the meantime, the tax you pay on the withdrawals should be quite low. - G.P.

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In a financial quandary

I am a widow, age 62, and need income. I have some money to invest. What do you suggest is my best way to go taking into account safety, tax effectiveness, etc. I only receive CPP and will collect survivor allowance up to $21,000 a year if I am correct. Does it make sense to invest in GICs? I know it's safe but I will receive less allowance, I believe. What do you think of GIF Select from Manulife to invest in? I don't really understand it. Or an annuity? I am just scared to make the wrong decision.
Also, I have a life insurance policy with my kids as the beneficiaries. Do you think I should get long term care insurance in case they can't look after me anymore and I have to go in to a home in the future? Do I keep the live insurance on top of the long term or do I keep one or the other or none at all?
Thank you so much I really appreciate your input. - Margaret K.

Lots of questions here. Let's deal with each in the order you asked them.

First, I assume you are referring to the Canada Pension Plan survivor benefit. That is not income tested - in other words, it will not be reduced if you receive investment income. It will be affected by your personal CPP payment, however.

Second, in terms of where you should invest your money you should talk to a financial advisor. However, I am advising against long-term GICs right now because rates are so low. As for the Manulife product, it is very expensive and one of my cardinal rules is never to invest in something you do not understand. An annuity is certainly worth considering. You may also want to look at some of the new bank preferred shares which are yielding 6% or more. They are very tax effective because the payments are eligible for the dividend tax credit.

As far as insurance is concerned, this is a matter you should discuss with your children since they will be materially affected by your decision. - G.P.

Taxing decision

My husband and I are retired. He is 71 and I am 61. My income last year was just over $13,000 consisting of CPP and RRIF withdrawals. My husband's income was $32,455 of which $14,000 of that is a Workers Compensation Pension. My question is regarding a home renovation. We will require approximately $20,000 to complete the work. Should we borrow the money on a home secured line of credit and pay it back monthly or remove the lump sum from our retirement savings plans? I will not get OAS for four more years and am wondering if I should remove some of the savings now before I turn 65. I would appreciate your views on this matter. Thanks. - Hilary B.

If you can withdraw the money from your own retirement plan, that might be the best course. Since your income is only $13,000 a year, the tax will be relatively low. The rate will vary from one province to another but to give you an example the marginal tax rate in Ontario on a $20,000 withdrawal on top of your other income will be about 21%. However, if you have to dip in to your husband's savings, it's a different story. In that situation, the Ontario marginal rate on at least part of the withdrawal would jump to 31%. - G.P.

Lost money in RRSP

I lost money on my RRSP stocks. Can I swap stocks from the RRSP to a non-RRSP account and declare my capital losses against my capital gains? - Inessa S.

I'm afraid you are out of luck. Any investment losses inside a registered plan cannot be claimed and there is no way around this. That's why I always advise taking a very conservative approach to RRSP savings. - G.P.

PH&N takeover

I had some investments with Phillips, Hager & North Investments before they were taken over by RBC Wealth Management. What is your opinion on these funds now that they are not owned by the partners that previously held PH&N? Do you think they will be as well managed? Will the MER be maintained? Does the team still manage the funds or do individuals now make the investment decisions on the funds? In particular, I would like your opinion on the bond funds, dividend income fund, and international funds. I look forward to your comments. Thanks. - Paul J.

Actually, the takeover took place last year and so far I see no reason for concern. The same management team remains in place and RBC has had the good sense to allow PH&N to continue to function pretty much autonomously. I was concerned at the time of the takeover about a possible increase in the management expense ratios, but that has not happened.

As for the funds themselves, PH&N still has one of the best fixed-income teams in the business. I have had concerns about their equity funds for some time but they are looking better recently with the exception of the U.S. funds which continue to be weak. - G.P. 

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Bond bubble?

I recently read an article written by Richard Russell (Dow Theory Letters - May 12/09) in which he predicted that the Dow and presumably the TSX could fall back to the March lows if there was a collapse of the U.S. dollar and a collapse in the bond market. Can you tell me what he meant when he said "collapse in the bond market"? – Mike T.

The "flight to quality" that took place when the stock markets tumbled last fall resulted in billions of dollars flowing into government bonds. The demand drove the price of those bonds higher and pushed yields down to their lowest levels since the Great Depression.

Even after the recent stock market rally, the yields on government bonds remain stubbornly low. According to the PC Bond website, two-year Canada bonds were yielding only 0.51% on Thursday while five-year bonds were paying 1.86%.

This has created what some economists claim is a "bond bubble". We've seen many bubbles in the stock market (e.g. the tech bubble) but it's a rare occurrence in the bond market. The risk is that, as fears of a depression ease, investors will no longer be willing to accept such low returns for the perceived safety of government bonds and will bail out. The result could be a big drop in bond prices (I hesitate to use the word "collapse" however).

As we have noted on several occasions in this newsletter, corporate bonds have not experienced the same bubble effect. As a result, the spreads between government issues and highly-rated corporate bonds hit record levels last fall, creating what we regarded as a buying opportunity. Those spreads have since narrowed somewhat, although they are still unusually wide. Because of this, we are less likely to see a significant retreat in the price of corporate bonds as long as inflation remains muted and interest rates stay down. – G.P.

Bond ETFs

The iShares CDN Bond Index Fund (TSX: XBB), Corporate Bond Index Fund (TSX: XCB), and Short Bond Index Fund (TSX: XSB) are all recommended buys in your newsletters. For those close to or at retirement, and with interest rates at rock bottom, is there not a high risk that the capital value of the index will drop when interest rates start to rise? What's the alternative – staggered GICs? – Brian S., Richmond BC

Of course, there is always that risk. However, it is much reduced with XSB because of the short-term nature of the portfolio. As for XCB, corporate bonds have not experienced the same price bubble as government bonds.

Laddered bonds or GICs are certainly an alternative although their returns are very low right now. TD Canada Trust is making a lot of noise about its "5-year Stepper GIC" which the promo says enables you to "earn up to 6%". But that's only in the final year of a five-year term. In year one, the payout is only 0.5% and the effective annual return over five years is 2.483%. A few weeks ago, the effective annual yield was 2.74% which tells you all you need to know about which way rates are going. – G.P.

Investing in GIFs

We are selling our house and will have funds to invest before the end of this month. Our financial advisor is recommending the GIF investments through Manulife. What is your advice on this? There are a lot of good features such as no probate and a guarantee of the highest value at time of death with the resets that take place every three years. What are the cons of these funds? – Rita R.

GIF stands for guaranteed investment fund. These are known as segregated funds, which means they are issued by a life insurance company and therefore come with a number of features that regular mutual funds can't offer, including those you mention. The main "con" is cost. These funds are expensive. For example, the Manulife GIF 2 CI Harbour Fund is actually the same thing as the CI Harbour mutual fund, with the bells and whistles added. The original Harbour Fund has a management expense ratio of 2.31%. The GIF 2 version costs 3.41%. That means you are paying almost 50% more every year for those extras you like so much. Only you can decide it they are worth the price. – G.P.

Student wants to invest

I am a 23 year old graduate student and have recently taken a vested interest in the stock market. I would like to take advantage of the current market conditions, but have only saved about $10,000 of my own money. I have had great success so far with it but would like to be able to invest more. 

I have read several investment books and I have a fairly high risk tolerance (I am young, I have no student debts and currently have several assets to my name). I have been seriously considering the idea of taking out a low interest student line of credit (~3%), and investing the money in some of the blue chip stocks that currently offer high dividend yields (Telus, TransCanada, banks, etc.).  I would use the dividends to pay the interest on the loan as well as small portions of the principle, then ride out the recession in the hopes of a healthy capital gain in a couple of years. 

I feel that if I can get these stocks for a reasonable price, and as long as the dividend payments continue to cover the interest, then this strategy will work out nicely. Since I am a student with non-taxable scholarship income, the tax implications are negligible. Other than the obvious risks associated with borrowing to invest, do you see any other flaws in this strategy that I may have overlooked? – Mark F.

Beyond the fact you could lose a lot of money and end up with an even larger student debt to pay off, no I can't think of a single flaw in your idea. Of course, for some people that would be enough to deter them.

The problem with any investment theory that involves leveraging is that it sounds great until the market starts to slide and the stocks lose money. Then it isn't so wonderful any more.

One other thought. Unless your major is investing, there is a danger that you could become so caught up in this that your studies would suffer. Personally, I would focus on getting the post-graduate degree first and then worry about the markets. – G.P.


Can RRSP cash be put into a TFSA without being taxed on it? – Ed S.

I've answered this question before but it keeps coming back. Clearly, people are intrigued with the idea of getting a tax refund for an RRSP contribution and then moving the money over to a TFSA where it can be taken out tax free. So, once again, no you can't do it directly. You can, of course, withdraw the money from the RRSP, pay tax accordingly, and then contribute the after-tax amount to the TFSA but there is not much point to that. – G.P.

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Housing market

Where do you see the housing market going over next couple of years? I do not own a home but I see an increasing number of "for sale" signs and few buyers. – Jean W.

Home sales and new construction have been down in Canada in recent months however there have been signs recently that the combination of low interest rates, reduced prices, and warm weather has led to a pick-up in activity. There have even been media reports this spring of bidding wars resuming in Toronto.

It is logical to assume that when the recovery takes hold, house prices will start to firm and interest rates will move higher. This will increase the cost of home ownership. The exact timing is uncertain but it seems probable that we have seen the bottom of the current housing cycle. So if you find something you like, you may want to act now. – G.P. 

Investment dilemma

My husband and I are both in our early 60s and retired. We have $300,000 in non registered funds that we would like to invest in a monthly income fund to supplement our pension incomes. Right now we have $100,000 invested in the RBC Monthly Income Fund. I would like to invest the rest in two other monthly income funds but want to ensure I have "diversification". So many of the income funds appear to be heavily weighted to the financials. These investments will be long term, i.e. 5 to 10 years. – Denise F.

Unfortunately for your purposes most monthly income funds hold a high percentage of their equity assets in financial stocks. That's because they pay the highest dividends with the least downside risk at this stage. However, keep that in perspective. The RBC Monthly Income Fund, to cite the one you own, only had 40.5% of its assets in stocks as of April 30. So while 45% of the equities were in financial issues that only represented 18.3% of the total portfolio.

Since this is non-registered money, I suggest that you give consideration to the tax implications of your investments. This will enable you to keep more of the income you earn.

If you want to diversify away from financial stocks, look at securities such as REITs and funds that invest in them. For example, the Sentry Select REIT Fund pays monthly distributions of 8.33c per unit ($1 a year) and has been performing much better recently after a terrible 2008.

If you are willing to invest in individual securities rather than funds, ask your financial advisor to select a portfolio of high-quality, non-financial preferred shares. The payments will be eligible for the dividend tax credit.

Although you won't receive any tax breaks, you might also consider a quality bond fund that offers monthly payments. – G.P.

Pension or cash?

I am planning to retire in about two to four years after working for my company for over 30+ years. I will be 55 years old. I have a company pension and I can take it in monthly payments of about $2,000 (before taxes) or the commuted value of about $250,000 - $275,000 by the time I retire.

As I have no spouse or dependants, I'm thinking about taking the commuted value rather than the monthly payment. I will have saved about $150,000 -$200,000 by that time as well and will not have a mortgage by then.

My reasoning for the commuted value is my family history of longevity is not the greatest and my brothers and friends could inherit some money (if I haven't spent it all). I know this is long-winded but I'm wondering whether you think this is wise? – Shirley V.

Actually, the math is pretty simple. A pension of $2,000 a month works out to $24,000 annually. If you take the commuted amount and invest it at 6%, it will generate between $12,000 and $16,500 annually. So you will have to keep drawing against the capital to match the income from the pension.

Of course, if you add the commuted amount to your savings, you will have between $400,000 and $475,000 at retirement. Using the lower figure, an investment return of 6% generates $24,000 a year in income. This would give you the same amount of income as the pension would but it is an apples to oranges comparison because the investment income from your savings will be there anyway.

This is why in most cases I advise choosing the pension over the commuted value as long as the plan appears to be solvent. – G.P.

RRIF problem

When I convert my RRSP (holding GICs & stocks) to a RRIF, how do I withdraw the mandatory annual amount without penalty? GICs have a set term i.e. 1 year, 3 years, etc. before eligible redemption. Selling stocks in the RRIF to meet the required annual withdrawal amount means paying commission on every sale. I cannot locate any books or articles on the subject. Can you advise? – John Z., Ontario

You need to set up your RRIF in such a way that the cash will be available to withdraw as needed. This can be as simple as staggering the terms of the GICs so that some mature each year. Another possibility is to use no-load mutual funds so you can cash in units at no cost when money is required. This is really not a difficult problem. It just requires a little planning. – G.P.


GIC rates

I recently read a magazine article you wrote in which you gave a website of where to look for the best GIC rates. I've mislaid our copy of that
magazine and would very much like to get the website! – Cynthia P.

You can find all GIC rates on the website of Globeinvestor.com. Here is the direct link: http://www.globeinvestor.com/servlet/Page/document/v5/data/rates?pageType=gic_long&tax_indicator=R  - G.P.


CPP changes

I read recently that the government is planning on increasing the penalty (in 2012) if you take your CPP early - from 5% per year to 6%. I wonder if there are other CPP penalties that I may not be aware of. I am 57 and have been retired since March 2008. I contributed to the CPP each year from 1971 to 2008 with maximum contributions between 1975 and 2007. I turn 60 in 2012 so this would impact my benefits and although it's not a lot of money, it does add up. If there are other penalties, I may have to re-evaluate my retirement plan. - Dave D.

You have the right idea but your numbers are off. The current penalty for applying for CPP retirement benefits before age 65 is 0.5% a month or 6% a year. The proposal (which still must be adopted by Parliament and the provincial/territorial legislatures) is to increase this to 0.6% a month or 7.2% a year. This would mean that someone who applies for CPP on his 60th birthday would lose 42% of the amount he would have received at 65. This compares to a 30% penalty at present.

However, it is important to remember that the plan will be phased in over a five-year period from 2012 to 2016. This means that in 2012 the penalty for drawing CPP before age 65 will be 0.52% a month or 6.24% annually. If you apply in 2012 at age 60, your penalty will therefore be 31.2% as compared to 30% under the current rules.

The new rules will also require people who draw CPP before 65 to continue to make contributions to the plan if they keep working. (Currently you don't have to make contributions after you start drawing a pension.) This will add an extra "penalty" for those who remain in the labour force although the amount of their pension will be increased by the additional contributions. - G.P. 

Wants a worthwhile life

There is a money problem in my life that is looming greater as each day goes by and I write to ask for your thoughts that I might find a solution, before my nest egg is gone and then any chance for a worthwhile life has ended for me.
Before now, I would never have ventured revelation of my predicament to anyone, but I trudged along thinking I could somehow handle it myself. Here it is:
After sixty years of falling through many cracks and pitfalls, having put the interests of others ahead of my own, I now find myself with a monthly income of just $611 but with a nest egg of about $100,000, half of which is still in a struggling RRSP. Fortunately, I am alone with no dependents. The reverse is true, in my case: I get accommodation and other diminishing help from family members.
Gordon, you are apparently a man of means and secure, to the extent money can do that. However, I perceive in you something else beyond that: A seasoned measure of good sense.
I chance to write, therefore, to ask you what I might best do with what remains. A couple of old sayings help move me to seek your wisdom. They are: Nothing ventured, nothing gained; and: If you don't ask, you most likely will not receive. Yours sincerely, Rick in Nova Scotia

Assuming the $611 a month is secure, your financial future is obviously closed tied to the "struggling" RRSP. The fact you would use that adjective is a tip-off that something is wrong. If your RRSP is struggling then the money is probably invested in securities that have more risk than is appropriate in your situation.

The starting point is to carefully analyze everything in the plan (or ask a financial advisor to do it). Decide what is appropriate and what is not. It would appear that at this stage capital preservation is more important to you than growth - the language in your question suggests your fear is the loss of this asset, your "nest egg" as you put it. Therefore, the investments in your RRSP should reflect this.

This means fixed-income securities should be the largest component in your plan, say 70% of assets. With interest rates so low, we are advising readers of my Income Investor newsletter to stay with short-term bonds (not more than five years) or the funds that invest in them to limit risk. You might also consider adding some high-quality preferred shares to your RRSP to increase the yield. - G.P.


Would you say that TFSAs are becoming a better way to invest than RRSPs? I have both at 62, no dependents and no personal debt. Would the bank preferreds go into either one? - Jean W.

It's not a matter of one being "better" than the other. They're both excellent savings vehicles. Which one should get priority depends on your personal situation.

As a general rule, if you expect your income to be lower after retirement than it is now, contribute to an RRSP first. That's because your tax rate now is higher than it will be after you stop work. Your refund will therefore be greater than the amount of tax you'll be assessed when the money is withdrawn from the plan.

If you expect your income to be higher after retirement (perhaps because of a generous pension plan or an anticipated inheritance which will be invested) then use the TFSA first.

You can put bank preferreds into either plan provided it is self-directed. However, you will lose the benefit of the dividend tax credit by doing so. - G.P.

Applying for CPP

I will be turning 60 years of age in February 2010. I was told by a friend I could apply for Canada Pension at least six months in advance of this. How would I go about doing this and when is the best time? I am still working at this time. - Joan L., Nova Scotia

Under the current rules you cannot apply for CPP before age 65 unless you stop work for at least two months: the month before you start to draw benefits and the first month afterwards. If you will meet those requirements, it is advisable to apply six months before you want the pension to begin although it is not a legal necessity. You'll find an application kit on the CPP website at http://www.hrsdc.gc.ca/cgi-bin/search/eforms/index.cgi?app=profile&form=isp1000&lang=e  - G.P.

Mom passed away

My mom recently passed away. She has a RRIF and some money in her bank account. She also has a cottage that will be going up for sale. Would you be able to tell us what percentage of taxes will be taken by the government? Is there a way to divert these taxes? Do we need to get advice from a tax accountant? - B.P., Manitoba

No, I can't tell you what the percentage will be because each asset will be treated differently. There is no tax payable on the money in her bank account. The assets of the RRIF will be added to her income in her final tax return and taxed accordingly. Any profit on the cottage would be a capital gain.

Of these, the cottage offers the best possibility for reducing taxes depending on how long she owned it and certain other factors. You may well need the advice of an accountant on this.

Note that all taxes will be paid by the estate before any money is distributed to the heirs. - G.P.

Return of capital

I was wondering whether an ETF's yield should be adjusted by its return of capital (ROC) for comparison purposes. For example. the iShares REIT ETF quotes a yield of 9.1% but 51% of the distributions were ROC. Does that mean that it really had a yield of 4.47%? Am I missing something? – Jim B.

I can understand the confusion. Return of capital implies that you are receiving some of your own money back hence the true yield is less. However, that is not necessarily the case. For example, the return of capital portion of a REIT's distribution is produced by the application of depreciation charges to the assets it owns. Since a REIT is a trust, these are passed through to investors and have the effect of deferring taxes (but not fully eliminating them). So you aren't really getting back your own money; rather you are benefitting from a tax break.

It would be more correct to reduce the yield from a fund in cases where the net asset value drops on a year-over-year basis. Ironically, in many of those situations you get no tax credit at all for return of capital. – G.P.

RRIF withdrawals

Do I have to take a minimum withdrawal payment from my RRIF in the year it was set up? I turned 71 in February. – George B.

No. You don't have to begin withdrawals until the following year, in your case 2010. By the way, your RRIF does not have to be set up until the end of December so there is no rush. – G.P.

Child prodigy

I have a child who is 14 years old and is a successful musician. How can I set up banking for this business so it is the child's income and it is taxed to the child, yet I have control over the use of the funds? – Fred S.

There should be no problem opening a bank account for the child, in trust. Any payments should be made to the child directly so that there is a clear tax trail. If you are the trustee of the funds, you control them as long as the child is a minor, although you would be expected to use the money for the child's benefit. Once he or she reaches the age of majority, you can no longer retain control. At that point, the child can do whatever he/she wants with the money. You should consult an accountant to ensure the child's financial affairs are set up properly. – G.P.

Delisted stock

If a stock becomes delisted, can you show it as a capital loss on your tax return? How does one go about this? – John W.

I've received a few questions along this line which I suspect result from the delisting of the shares of Nortel Networks. The answer is yes, you can claim a capital loss. Since the shares are delisted, there is no resale market for them so their value is zero.

When you prepare your 2009 tax return, simply complete part 3 of Schedule 3, which is where you list the disposal of publicly-traded shares, mutual funds, etc. Show the proceeds of the disposition as zero in column 2 and provide the rest of the information as appropriate. – G.P.

Out of work

I lost my job last year and have no income now. Can I withdraw from my RRSP and how much tax should I pay? Thanks. – Jim W., British Columbia

Yes, you can certainly withdraw money from your RRSP to tide you over. There will be a withholding tax of 10% on withdrawals up to $5,000 (more on larger withdrawals) but that's not the tax rate you will actually pay. That will be determined by the total amount you take out of the plan plus any other income you have, including employment insurance.

British Columbia residents can receive up to $10,322 in taxable income before any tax becomes payable. Above that amount, the marginal rate is 15% and remains at that level until your taxable income exceeds $17,060.

So if your taxable income is less than $10,322, any tax withheld at the time you make your RRSP withdrawal will be refunded when you file your return. – G.P.

What's safe?

I am 70 years old. I was lucky to have been saved from the downside last year by selling all my common stock and investing in bond funds. I would like now to return into the stock market but with a very safe approach. What do you suggest? - Hugues R.

I suggest that you start by deciding what percentage of your assets you want to commit to stocks. At your age, the number one priority should be to protect your capital. The economy is still weak so I expect to see a lot of market volatility in the coming months. Having come through the recent meltdown unscathed, you don't want to risk heavy losses now.

So my inclination would be to move only a small percentage of your assets at this time, perhaps 20%. Stick with high-quality, dividend-paying stocks with low downside risk. Utilities such as Enbridge and TransCanada fall into that group. You might also consider some bank stocks such as Royal and TD.

There is no guarantee these stocks won't be hit in another deep correction but the risk is lower than you'd find in sectors such as energy, materials or information technology. - G.P.

TFSAs for seniors

Are TFSAs a good investment for low income seniors? My mother lives in Manitoba. She has little income but would like to open a Tax-Free Savings Account to shelter interest income. Would this be a good idea? Can she designate her adult children or her estate as beneficiary? - Mary in Dawson Creek

A lot depends on how low your mother's income actually is. If she does not receive enough to pay tax, then a TFSA is unnecessary. There is no point sheltering investment income from tax if no tax is payable anyway. Even if she is in a very low bracket, the amount of tax saved may not be worth the effort as long as interest rates remain low. For example, suppose she invests the maximum of $5,000 and earns 2.5% on a GIC. That would give her $125 annually. If her taxable income is, say, $10,000 her marginal tax rate in Manitoba would be 10.8%. So the tax saved by earning that money inside a TFSA would be only $13.50. Of course, over the years that would increase if she can keep contributing and if interest rates rise. So assess the situation carefully before going ahead.

Manitoba is the only province that has yet to pass enabling legislation to allow for the designation of a TFSA beneficiary, although the province announced in January that it intends to do this. Until then, it would have to be done through her will. - G.P.

U.S. dividends

My income is low enough that I do not usually have to pay income tax but I still have withholding tax deducted from any U.S. dividends. Would it be a good idea to hold U.S. dividend-paying equities in my TFSA? - Carolyn W.

Under the Canada-U.S. Tax Treaty, U.S. dividends paid in an RRSP or RRIF should not have any tax withheld at source, although I have heard from some readers that this rule is not uniformly applied. Tax-Free Savings Accounts are not specifically covered by the Treaty so the 15% withholding tax will apply. Therefore, I don't recommend holding American dividend-paying stocks in your plan - G.P.

Saxon fund

Apparently the Saxon Stock Fund has been acquired by the Mackenzie Group and is now called the Mackenzie Saxon Stock Fund. Since you spoke highly of the Saxon Funds in the past, can you tell me if this is a positive move for a Saxon Stock Fund holder like me? Also, is Rick Howson still continuing to manage this fund and is the MER still the same under this new management? - Francois F., West Vancouver BC

This is old news. Mackenzie acquired the Saxon funds last year and since then has added a new series (A units) designed for financial advisors. They offer a front- or back-end load purchase option and carry a higher MER (by 0.25%) than the original I units. Rick Howson is still involved in the management of the Saxon Stock Fund however the plan is to hand over the portfolio to his co-manager Suzann Pennington.

Saxon Stock Fund has been an underperformer since 2004, finishing in the third or fourth quartile of its peer group in every year except 2008. It has looked better recently, however, gaining 31% in the three months to May 31 thanks to heavy weightings in the energy and materials sectors (unusual for a value fund). - G.P.

Horizon BetaPro ETFs

I don't understand how the Horizon BetaPro ETFs work. I currently have 100 HQU shares (HBP Nasdaq 100 Bull+ ETF). I took an investing course which taught me how to pick stocks but this ETF has me puzzled. I understand you are doubling your exposure but I don't understand when I will see the profit/loss of this. When will it pay out? When will I have to send money if I've lost? These look like they could be a great investment but I'm hesitant (hence only 100 shares) without more understanding on how they work. Thanks for your help! - Sabrina R. 

I'm not surprised that you are confused. Most people are, especially when they look at the returns on these leveraged ETFs. For example, you may wonder how you could lose big-time either way on a bet on gold, energy, or financials but indeed you can. The HBP S&P Energy Bear+ ETF lost 35.3% over the 12 months to May 31 so you would expect its Bull counterpart to have been profitable, right? Not so: it lost 74.1%. The same thing happened with the Financials Bull-Bear combination as well as those based on Global Gold and Global Mining.

However, if you look at shorter-term movements you'll see a more predictable pattern. During June, the HBP S&P/TSX Financials Bull+ ETF gained 11.2% while the Bear version lost 12.9%.

The reason for these sometimes contradictory results is that performance is calculated on a daily basis. Therefore the longer the time frame, the more any distortions are magnified. These securities are really suitable for very active traders who are willing to accept a high degree of risk. They are not appropriate for long-term investors.

As to when you collect profits, you do so only by selling. You did not say when you purchased your HQU shares but they have been in an upward trend since March so you could be sitting on a decent gain. You don't "send money" anywhere if the units go down in value. You simply sell and take the capital loss. - G.P.


Claiming a capital loss

If I sell a stock in an unregistered account and generate a capital loss, can I still claim this capital loss if I immediately repurchase the same stock within a Tax-Free Savings Account? - Brad R., Winnipeg

No. The "superficial loss" rule would apply. This states that if you, an "affiliated person", or a trust you control buys the same stock "during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale", no capital loss can be claimed. TFSAs fall under the "trusts" designation. See the Capital Gains Guide published by the Canada Revenue Agency for more details. - G.P.

RRSP transfers at death

If you have unused RRSP room, can you transfer money from a LIRA (inherited by wife's death) to the RRSP before creating a RRIF? - Roy W., Manitoba

The rules governing locked-in retirement accounts (LIRAs) vary depending on which jurisdiction has authority over the plan. If your wife's LIRA was governed by the laws of Manitoba, the assets can be transferred tax-free into a locked-in plan in your own name. This could be a LIRA, a life income fund (LIF), a life retirement income fund (LRIF), or an annuity. You may not transfer the assets into your own RRSP if it is not locked in. For more details: http://www.gov.mb.ca/labour/pension/brochure/lira.html  - G.P.

Buying a cottage

I am thinking of making an offer on an affordable year-round cottage. Is it best to wait? Who has the lowest mortgage rate? Should I lock in for 10 years? - Jean W.

Real estate prices are very localized however there have been signs recently of some strengthened in the market. There does not seem to be any advantage in waiting unless you believe prices are going to drop again (possible, especially with a cottage after the end of summer) and/or mortgage rates are going down even more (highly unlikely).

You can find a chart of current posted mortgage rates out to five years at http://www.cannex.com/canada/english however remember that financial institutions are often willing to negotiate. You might also consider using the services of an independent mortgage broker to shop the market on your behalf.

The longer you lock in, the higher the interest rate you will pay. In effect, you are buying an insurance policy against future rate increases. My preference has always been to select the lowest possible interest rate but make payments based on the five-year rate. The interest saved will go to reducing the principal and reduce the time it takes to pay off the loan. - G.P.

O'Shaughnessy funds

I'm a long-term holder of the O'Shaughnessy funds in my RRSP (U.S. Value and Growth, Canadian, and International). For the most part they were good performers for many a year. But they've been decimated and have not rebounded. Do you like them going forward? I have enjoyed your column for many a year. - Eric R., Montreal

Unfortunately, I don't see better times ahead, at least not in the near future. All of the O'Shaughnessy funds are sub-par performers so far this year with the exception of O'Shaughnessy U.S. Value. And that fund's second-quartile results so far are deceiving because it has actually lost 6.2% year-to-date (to July 8). It only ranks in the second quartile because most other U.S. funds have done even worse.

The original three O'Shaughnessy funds (Canadian Equity, U.S. Growth, and U.S. Value) were outstanding performers for many years and I strongly recommended them during that period. But somewhere along the way, manager James P. O'Shaughnessy's stock-picking formula went awry. We advised readers of the Internet Wealth Builder newsletter to sell all the funds last year, fortunately before the bottom fell out of the market. I do not expect to be recommending them again any time soon. - G.P.

Wants to change portfolio

I am a new subscriber to your newsletter. You frequently caution about high MERs on mutual funds and discuss the merits of ETFs such as the iShares index funds.

I am unsure how to convert an established portfolio consisting of a self-directed RRSP, RRIF, and investment accounts with a large investment company without triggering huge tax issues.  I am an older investor (age 60), with an eye toward your sleep-easy style of conservative investment or couch potato investing, especially after this financially harrowing past year. However, I don’t understand how to move in this direction without triggering a big tax liability.

Incidentally, my financial advisor discourages any products other than those under their umbrella (e.g. iShares or Phillips, Hager & North funds are frowned upon). This makes consultative change even more challenging. - Virginia N.  

For starters, no tax liability will be incurred for changes made within your RRSP or RRIF. You may incur some deferred sales charges however so ask about that. The only tax implications will arise in your non-registered account and in the light of the terrible markets we have experienced you may find that you have enough capital losses to offset any capital gains. Ask that an analysis be done.

As far as your advisor's attitude is concerned, I suggest you tell him that if he cannot or will not offer you a full range of products you will move your business elsewhere. He appears to be trying to protect his trailer fees, rather than working to meet your concerns by constructing a portfolio you are comfortable with. - G.P.



Depression coming?

A friend of mine has a financial advisor that is recommending she pull the plug on all of her assets: stocks, bonds, and rental real estate (she owes nothing on her real estate). He indicates that by roughly August of this year the world will spiral into a depression which could last for several years (e.g. 2012). He is suggesting she liquidate everything and do bonds. She is retired now so I have a few concerns with this advice. Your thoughts? - Tracy M., Calgary

It's an extreme view, no doubt about it. The most pessimistic forecast I've heard from any credible source is that the recession might linger into next year and be followed by a slow recovery. There were widespread fears of a depression last fall but they have dissipated for the most part.

This is not to say it couldn't happen. But it seems unlikely at this point unless it was triggered by some unexpected and cataclysmic event (e.g. 9/11). I certainly would not counsel taking action as extreme as you describe. Your friend's portfolio could be made more defensive by increasing her holdings in cash and government bonds without throwing out the baby with the bathwater. The advice to sell the real estate seems especially strange, assuming the property is rented.

If she is fearful of the future, then an ultra-conservative approach may be appropriate, although the return on her investments will be very low. I suggest she obtain another opinion from a fee-for-service financial planner or an organization such as Second Opinion Investor Service (www.secondopinions.ca). - G.P.

Mawer fund

What is your opinion of the Mawer Canadian Balanced Retirement Savings Fund as an initial $5,000 TFSA holding for a conservative growth investor? The component equity funds are all highly regarded, the component bond fund appears to be middle of the pack, and the MER is a low 1.03%. Thanks. - Ron K., Nanaimo, BC

This is a fund of funds, meaning that it invests primarily in six other Mawer funds with the Mawer Canadian Bond Fund as the largest single holding (37% of total assets). The Calgary-based Mawer organization is a boutique house that I have recommended for several years. The firm recently received the 2009 Lipper Award as the best equity fund company in Canada.

This particular fund is slotted into the Global Neutral Balanced category where it has been an above-average performer for all time frames from one to 20 years. Over the two decades to June 30, it generated an average annual compound rate of return of 7.7%. I think it would be a fine TFSA choice for a low-risk investor. - G.P. 

Saving for retirement

Do you have any specific advice/guidelines on what type of vehicles/recommended fund groups to hold in my Tax-Free Savings Account? I am a 42-year-old, married, self-employed mother of two. I plan to use all funds in my TFSA as part of my retirement plan. Thank you for any guidance. - Heather R.-M.

My first comment is that you should probably make the maximum contribution to your RRSP before using a TFSA for retirement savings. You'll get a tax deduction for the RRSP, which a TFSA will not give you.

If you have done that, I suggest taking a conservative approach with your TFSA investments since this money is, in effect, part of your personal pension plan. Since the annual contribution limit is only $5,000, it can be expensive and inefficient to try to create a diversified portfolio immediately. Therefore, I suggest you start with a low-risk balanced fund. After a couple of years, when the assets in the TFSA have grown, you can blend in a range of other securities if you wish. - G.P.

Target prices

From time to time, I have noticed that some analysts give a "target price" for a particular stock. However, they never seem to give a time period within which this target price will be reached. Is there an assumption of a default time period? Otherwise, these projections make no sense. Thanks for clarifying. - Margaret J.

It varies depending on the brokerage firm. RBC Capital Markets, for example, uses a one-year time frame and their analysts' reports also include an implied one-year total rate of return based on the expected capital gain plus dividends. CIBC World Markets says its price targets are within 12-18 months. Ask your broker what their policy is.

Of course, an analyst can change the target at any time depending on events. That's exactly what many of them did last week. When a Russian firm agreed to sell potash to India at below the prevailing world price, every brokerage firm cut its target on potash-producing companies. So don’t put too much faith in target prices; then can change within a few hours. - G.P.


Take CPP now?

I'm self employed and have just turned 60. I am seriously considering
taking early CPP since I am required to submit both the employee's and
employer's contribution on a yearly basis. It seems all the advice to wait
is for those who are employed. Would you suggest the same for the self-employed? - Michael F.

You raise a valid point. Self-employed people have to pay twice as much into the CPP as those who are employed by a third party. This means that the maximum CPP contribution this year for a self-employed person is $4,237.20 compared to $2,118.60 for an employee who splits the cost with the employer.

Under the current rules, once you begin drawing CPP you no longer have to make contributions. There is a proposal to change that but it will not take effect for a few years.

However, there is a problem. You cannot begin drawing CPP before 65 unless you have stopped work. This means you cannot be working on the last day of the month prior to starting to collect CPP benefits or during the first month afterwards. The CPP website offers this example: "If you want your pension to begin in April, you have to stop working by the end of March and you cannot work during the month of April". If your business enables you to do that, then I would seriously consider taking the pension at age 60. You would save yourself more than $10,000 in contributions over the next five years. - G.P.


Energy ETFs

I just finished Jeff Rubin's book (Your World is About to Get a Whole Lot Smaller) and I am convinced that his broad conclusions are correct, specifically that the price of oil will rise considerably over the next several years. Are there stable, reputable ETFs that track the Canadian oil and gas industry? The international oil and gas industry? - John F. Tobermory, ON

My choice among the Canadian ETFs is the iShares CDN Energy Sector Index Fund (TSX: XEG). As you might expect, it is coming off a bad year but despite that the five-year average annual compound rate of return is 11.7%. The MER is 0.55%. The main weakness is the heavy concentration in three stocks: EnCana, Canadian Natural Resources, and Suncor account for almost 43% of the total assets.

For an international energy ETF, check out the iShares S&P Global Energy Sector Index Fund which trades in New York as IXC. It invests in large basket of 82 companies from around the world (including some from Canada). Largest single component is ExxonMobil with 16.52% of assets. The five-year average annual compound rate of return is 9.6%. - G.P.

Collecting CPP from abroad

Is there a time frame that Canadians can live outside of the country while collecting Canada Pension Plan benefits? - Denis P.

CPP benefits will be paid anywhere in the world and there is no time limit once you have qualified to receive them. However, there may be tax withheld at source depending on where you reside. Go to http://www.hrsdc.gc.ca/eng/isp/pub/nontax.shtml#a1 for details. - G.P.

Non-cashable GICs

I have a couple of questions regarding so-called "non-cashable GICs." Since the funds are not locked in as RRSP and RRIF funds obtained from a pension payout are, is it possible to access the money if need be? That is, in an emergency, can a non-cashable GIC be cashed out? And I assume no interest whatsoever would be paid, is that correct? - Jim B., Toronto

The decision is entirely up to the GIC issuer. Legally you are locked in until maturity so the only way to get the money is if the company that issued the GIC agrees to let you out prematurely. Each company may have a different policy and there is likely some latitude depending on the circumstances. For example, if you are a good customer who does other business with the firm, your chances of getting relief are better. The penalty will certainly be loss of interest and perhaps worse. You should set up a meeting with a manager to discuss the possibilities. - G.P.

Joint TFSAs

My wife and I share everything jointly: our real estate, our investments, our bank accounts, everything is joint. Is it possible to open a joint TFSA account? And if not, in the event of the demise of either of us would the beneficiary (the other spouse) be liable for taxation on the accrued amount? - Robert H. 

Joint TFSAs are not permitted (nor are joint RRSPs for that matter). Each account must be in an individual name. If one spouse dies, the other will acquire the assets tax-free. The most effective way to do this is for each spouse to name the other as "successor account holder." - G.P.

ETFs for small investors

How do you justify ETFs for people with smaller money? For example, $10,000 with monthly contribution of $100 will cost tons of money with commission. It doesn't make sense for dollar-cost-averaging. I think there is a place for non-ETF especially for those lower net worth or dollar-cost-averaging, which ETF can never serve as efficient vehicle. - T.T.

I have never suggested that ETFs are the ideal investment vehicle or that they are suitable for everyone. In the situation you describe, you would probably be better off investing in a low-cost mutual fund with an automatic contribution plan. - G.P.


TFSA contributions

I have been encouraging my family to open Tax-Free Savings Accounts this year even if they put in a minimum amount of $100. I have said that if they leave it to 2010, they will lose the opportunity to top-up 2009 at a future date, when their finances improve. Is this correct? - Morris R.

No. As with RRSPs, unused TFSA contribution room can be carried forward indefinitely. However, the longer the delay before the account is opened, the more tax-free earnings are lost. - G.P.

RRSP withdrawal strategy

I am 62 and retired. My taxable income for 2008 was just over $24,000, around $14,000 below the threshold where I would have gone up to the 22% income tax bracket from 15%. 
This is actually a two-part question. I have approximately $400,000 in an RRSP which I don't expect to need until I must convert to a RRIF at age 71. Is there a case to be made for withdrawing $5000 from my RRSP and investing the money in a TFSA, or is it better to leave the money in the RRSP until I must withdraw it? My tax accounting is simple enough that I can fairly accurately calculate for tax purposes the monetary difference between the lowest (15%) tax bracket and the next higher bracket prior to year-end, if I wanted to withdraw the maximum amount up to the 15% threshold.

I have enough capital outside my RRSP that I am able to put the allowable $5000 into a TFSA account for the next eight years, without using my RRSP money. - Geoffrey S.

Your last sentence tips the balance here. If you did not have the money available outside the RRSP for a TFSA contribution, I would have said your logic makes sense. But you do, so it doesn't.

The goal of any investor should be to minimize taxes. This means tax-sheltering as much money as you can for as long as you can. The money in the RRSP is already tax-sheltered. The capital outside the plan is not so you will pay tax at the marginal rate on any investment income it earns. Therefore, your best strategy is to shelter as much of that capital as possible by using it to make a maximum TFSA contribution each year.

You did not mention a spouse but if you have one you can give her $5000 each year to open her own plan, thereby doubling the tax-sheltered amount. - G.P.

Balancing act

I work on contract. Currently my income stream is fine until the contract expires in September. I can always try to get contract work again, although it is not guaranteed. I wonder about my priorities in managing my finances. Should I build my cash reserve, make an RRSP contribution, or make a lump-sum payment against my mortgage? I have cash for four months of living expenses right now. - Alison Y.

Given the uncertainty of your situation, I suggest adding to your cash reserve. You may want to consider opening a Tax-Free Savings Account and keeping your emergency money there so as to eliminate taxes on the interest. Just make sure you don't lock in to a GIC in case you need to withdraw money.

If your employment situation becomes more stable, you can then withdraw some of that cash and make an RRSP contribution. Use the refund it will produce to make a mortgage payment. Yes, it's a balanced act but it works. - G.P.

Needs TFSA money

My husband and I opened two individual TFSAs, depositing $5,000 each on April 29/09. Since then we have found out that our daughter has been accepted in a post-graduate program. We did promise to her a while back that we would help her out with tuition. Now the question is: Can we withdraw some of the funds at the beginning of each semester and apply the proceeds against her tuition and re-invest the same amount prior to the year end? For instance, this year we would withdraw money from the TFSAs in September and by December we will re-deposit the same amount in the same TFSAs, repeating this procedure semester after semester. - Nina S.

Sorry, your plan won't work. You are allowed to replace the money you withdraw from a TFSA but not until the next calendar year. If you redeposit the cash in December, it will be considered an overcontribution and you will be assessed a penalty of 1% a month on the excess. - G.P. 

Where to get money

In the next 2-5 years, my wife and I will be funding our retirement from CPP/OAS, a small pension, non-sheltered investments, TFSAs, and RRSPs. For tax efficiency, I assume we should draw down from our non-sheltered investments first (to supplement CPP/OAS and pension income). However, once those funds have been exhausted, will it be more tax efficient to drawn down from the TFSAs or RRSPs first?

We loaded up our TFSAs with blue-chip, dividend generating equities that should provide a dividend stream and (hopefully) long-term capital gains that can continue to grow completely tax-sheltered in the TFSAs. If these same investments were made in the RRSP, the dividend income and capital gains would eventually be taxed on withdrawal as if they were interest income. But these TFSA benefits will be short-lived if we have to draw down from the TFSAs first (recognizing that our non-sheltered investments will run out in a few years). - K.S.

I would leave the money in the TFSAs and draw down the RRSPs. Here's why.

Let's suppose you have the same $5,000 investment in each plan earning 7% annually. Five years from now, that investment will be worth $7,012.76. Now you are faced with a withdrawal decision. If you take the money from the RRSP, using a marginal tax rate of 30%, you will be assessed $2,103.83 on the withdrawal. That will leave you with a net, after-tax return of $4,908.93. Note that is less than the value of the original $5,000 investment which means that all the income you earned over the five years and more went in taxes. By comparison, a TFSA withdrawal will be worth the full $7,012.76 - you keep all the investment income.

This example does not take into account the benefit of the tax refund you received for the RRSP contribution but that is in the past. What you are concerned about now is realizing the highest after-tax return from invested money that is already tax-sheltered. Leaving the TFSAs intact is the best way to do that. - G.P.

Selling foreign property

What are the tax implications of selling a second property owned abroad? - Angela O.

As far as the Canadian government is concerned, you're on the hook for capital gains tax if you made a profit on the sale. The fact that the property is outside the country is immaterial; you must pay tax on your world-wide income.

Depending on where the property is located, you may also have to pay tax to the host country or at least file a return there. This is the case for property in the United States, to cite the most common example. In situations such as this you may wish to use the services of a professional who specializes in cross-border taxation. - G.P.

Gift money from Jordan

A friend of mine who lives overseas, namely Jordan, wants to send me a gift of $20,000. The money will be transferred from his bank in Jordan to my bank here in Canada. The way I understand it, there is no gift tax in Canada. Is this true?

My other question is: If he sends the money in one go, will this get me into any kind of problems with anyone? I understand that my bank requires a letter from his bank stating that the money is a gift.

Are there any other things I need be aware of regarding this transfer? - Khaldoun

It must be nice to have such a generous friend. Yes, you are correct that there is no gift tax in Canada. However, for such a large amount you certainly should keep a copy of the letter stating it is a gift in case the Canada Revenue Agency comes calling. And you should be able to explain to them why a friend would give you so much money if they pursue the matter.

You should also be aware of the fact that Canada, in line with other Western countries, has enacted tough anti-money laundering and anti-terrorist financing laws. Among other provisions, these require financial institutions to report any "suspicious" transaction to a new organization that few people have heard of: the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). I have no way of knowing whether this particular gift would be considered suspicious but you should be aware of the possibility. - G.P.

TFSA carry-forward

I am not sure if the carry-forward of unused contribution room starts when you open your first account or did it start with the introduction of the Tax-Free Savings Account program itself? For example, if I open my first TFSA account in 2015, will I have a $25,000 contribution limit at that time? - Ashok G.

Canadians begin accumulating TFSA contribution room at age 18, with 2009 being year one of the program. You don’t have to open an account or even file a tax return. Assuming you are age 18 or older now and don't open a TFSA until 2015 as you suggest, at that point you will have accumulated six years of carry-forward room (2009-2014), worth $30,000 using the current annual maximum. Add another $5,000 for 2015, and you'll be able to contribute $35,000 that year. In fact, the amount will probably be somewhat higher since the contribution limit is indexed to inflation, although it only moves in $500 increments. - G.P. 

Tapping into an RESP

We contributed to a family RESP. My daughter was accepted to university and will start this September.

We bought a house and we are counting coins to reach the 20% down payment to avoid CMHC insurance. My question is: I have money in the RESP and I want to know how can use it for three months to cover some expenses. After that time, I can put the money back (into her account or back into the RESP).

This is my first question, how can I know if you answer it? - Eddy L.

You are legally allowed to withdraw the contributions you made to the RESP any time with no tax consequences, unless the money is locked in. That will depend on the nature of the plan and how the money is invested. For example, some types of RESPs restrict capital withdrawals. You will also have a problem if the money is in a locked-in GIC. Check with the plan's administrator to find out your options.

If there are no restrictions, you can take out as much of the capital as you need to tide you over. You cannot withdraw the investment income earned, however; that must be used by the student for educational purposes.

The only way to know if your question is answered is to check this page each week. Due to the volume of questions, I cannot send personal answers. - G.P.

RRSPs and death

How is an RRSP that has two beneficiaries handled upon the death of the plan holder when one of beneficiaries has pre-deceased the plan holder? Is an RRSP held under joint tenancy? - Derek B.

To answer your second question first, RRSPs are the personal property of the annuitant. There is no such thing as joint ownership of an RRSP.

As for your first question, the laws relating to succession are a provincial responsibility so the rules differ depending on where you live. Generally, if the surviving beneficiary is the spouse or partner, there should be no problem. If it is someone else, that person will probably inherit but it would be a good idea to obtain legal advice. - G.P.

Using RRSP money for TFSAs

Could you withdraw money from your RRSP and use that for a Tax-Free Savings Account? - Louise V.

Of course you can. But why would you? Except in special situations, which I have discussed previously in this column, taking money from an RRSP to put into a TFSA is not advisable. What it amounts to is withdrawing funds from one tax shelter, paying tax on the money, and then depositing the net proceeds in another shelter. The result is that you end up with less tax-sheltered capital than you had before. - G.P.

TFSA beneficiaries

Can we designate a beneficiary for TFSAs, as is done for RRSPs? - Mrs. F.M. 

Yes. You can also name a spouse/partner to be "successor holder" of the TFSA if you die. There is a lot of confusion about the difference between a successor account holder and a beneficiary. You need to understand the distinction because you may have both a successor holder form and a beneficiary form handed to you when you open an account.

To be clear, a successor holder can only be the spouse or partner of the person who owns the TFSA. No one else qualifies. That person will take control of the TFSA when the original account holder dies. The successor holder will not be able to make new contributions to the plan but he or she can make a new beneficiary designation and may cash out the plan at any time, tax-free.

A beneficiary is anyone else who is named to inherit a plan's assets: a child, sibling, relative, friend, or charity. A beneficiary will receive the assets of a TFSA, tax-free, at death and the plan will be terminated. However, any profits earned within the TFSA between the time the holder dies and the date it is wound up will be taxable in the hands of the beneficiary.

Tax experts warn not to name your spouse/partner as a beneficiary but rather to use the successor holder designation. If you make a mistake and name the spouse as a beneficiary, the Canada Revenue Agency will probably interpret that as meaning successor holder but why risk complicating matters? - G.P.

Buying U.S. dollars

I would like to set up a U.S. dollar bank account to convert Canadian money to US currency when the exchange rate is good. I would use the U.S. account for my trips to the States. I would also like to have a U.S. dollar Visa or MasterCard credit card to charge things while in the U.S. and then pay the bill from the U.S. dollar account.

Can you give me some advice on the wisdom of this strategy? What financial institutions provide the best (perhaps even no fee) U.S. dollar accounts and U.S. dollar credit cards for Canadians? - Forrest K.

Your plan makes good sense and it is exactly what I do myself. We have a Canadian dollar and a U.S. dollar account at our bank and when the loonie is high I make it a point to convert more money. Unfortunately, this entails a trip to the branch as the bank we deal with has not yet figured out how to process such transfers on-line.

Most financial institutions offer U.S, dollar accounts and some even pay a respectable rate of interest by today's standards. ING Direct, for example, is currently offering 0.75% on its US$ Investment Savings Account.

I have not compared the fees on U.S. dollar credit cards so I cannot comment on that. Perhaps readers who have done some comparison shopping will share their findings with us. If so, I will include them in a future column. - G.P.

Where to invest $250

I'm currently in the process of purchasing my first home. I've taken a Home Buyers-' Plan (HBP) withdrawal to fund a portion of my down payment. I've worked through my budget and figure that after accounting for my mortgage payments, condo fees, regular expenses, saving towards irregular expenses, RRSP contributions, HBP repayments, etc. I should have in the neighbourhood of $250 left over each month.
I'm looking for some advice on where to direct that extra money. My RRSP contributions are already maxed through my employer's group plan. I've identified three potential targets: extra payments towards my mortgage, accelerating my HBP repayments, or putting the money in a TFSA.
Right now, I'm leaning towards the TFSA or mortgage prepayments, as I may want to buy another property when my current mortgage term is up and turn this one into a rental unit. In that case, I'd want the funds available either as cash in a TFSA or equity in the home. My mortgage rate is fixed for five years at 4.34%. Any thoughts? - Scott O.

My inclination would be to choose the TFSA for two reasons. First, your after-tax return on paying down the mortgage is equivalent to the interest rate or 4.34% in this case. You can easily earn a better return in a TFSA. Second, the money in the TFSA can be used for any purpose at all so it provides more flexibility than a mortgage pay-down. - G.P.

Advance contribution

I am writing to you regarding Tax-Free Savings Accounts. I have ready contributed $5,000 for this year, and invested in stocks. However, I would like to make another $5,000 contribution at this time for the next year. Can I contribute in advance? - Phillip

No. If you contribute any more money to your plan between now and Jan. 1, 2010 it will be considered an overcontribution. You will be assessed a penalty of 1% a month on the excess amount, which means you would have to pay $50 a month on a $5,000 overcontribution. - G.P.

TFSA withdrawals

If I make a $5,000 deposit to a Tax-Free Savings Account and need to withdraw it within three months will I have used up my 2009 contribution room even though there is basically nothing in my TFSA? – Ed Z.

Yes. You can replace the money but not until after Jan. 1. Otherwise, it would be treated as an overcontribution. By the way, some types of accounts charge a fee for early withdrawals. Ask if that will apply in your case. – G.P.


Where to invest?

I have money in a U.S. index fund that will mature in October 2009. The amount I have exceeds $5000. I was thinking of putting $5000 in a Tax-Free Savings Account. My question: If I do open this type of account do I have to contribute each month or could I make a one-time deposit of $5000 and just let it grow through interest? If I do this what is the interest per month? One other question: Will I earn more by moving my money from a U.S. index fund to a TFSA or should I leave my money in the U.S. index fund? I am not really sure which is the better investment. Thank you for your help. – Vivian H.  

There is clearly still a lot of confusion about what TFSAs really are. That's not surprising – the same thing happens with RRSPs and they have been around for more than 50 years.


To be clear, TFSAs, RRSPs, etc. are not investments. They are simply tax-sheltered "boxes" into which you place investments. When you open a TFSA or an RRSP, it is empty. You then fill it with whatever you want, as long as the investment is allowed by the Canada Revenue Agency.


So to be clear, this is not a choice between a U.S. index fund and a TFSA. You can move $5,000 worth of fund units into a TFSA, provided you set up the right kind of plan. In this case, it appears a self-directed TFSA with a broker would be the most appropriate.


You do not have to make monthly contributions. You can deposit $5,000 cash or make a "contribution in kind" of $5,000 worth of fund units. But a word of caution: if your fund has lost money, don't do a direct transfer as you will not be able to claim a capital loss. Sell $5,000 worth and deposit the cash. Then you can claim a loss when you file your next return.


You asked about the interest rate for a TFSA. That depends on what type of interest-bearing investment you choose, if you decide to switch from the U.S. index fund. If you don’t want to stay in the fund, check around for options. – G.P.

Taxing prizes

My wife recently entered an online contest run by Aeroplan, and won a home theatre system worth about $2,000. I know that contest winnings must be declared as income in the United States, but is the same true in Canada?  If so, where would we enter this income on the tax form? Thanks for your help. – Jim B., Toronto


The answer to this is a little more complicated than you might think. Lottery winnings are definitely not taxed. However, contests are not lotteries. A lottery is defined in tax interpretation bulletin IT-213R as "a scheme for distributing prizes by lot or chance among persons who have purchased a ticket or a right to the chance. If real skill or merit plays a part in determining the distribution of the prize the scheme is not a lottery (unless it is based essentially on chance and the degree of skill is minimal). Again, when the chances of a prize are obtained wholly gratuitously, as for instance, a prize awarded to the winner of a game, the scheme is not a lottery."


In the case of contest prizes which are received as gifts, the value does not have to be declared as income. However, your wife is deemed to have acquired the home theatre system at fair market value. If she then turned around and sold it for a profit, capital gains tax would apply.


The interpretation bulletin can be found at http://www.cra-arc.gc.ca/E/pub/tp/it213r/it213r-e.html  - G.P.

Investing for retirement

I have about seven years left in my military (Navy) career and hope to retire back in Sudbury, Ontario where I grew up. Right now I have 10,600 units of the BMO Monthly Income Fund which is outside of an RRSP. I put $85,600 into this fund in October 2006. I hope to supplement this monthly income, along with my pension from the Canadian Forces, as well as a pension I now receive tax-free from Veterans Affairs Canada for a back-related injury I suffered in the Forces. It is presently $348.32/month. So, I was wondering what you thought about this investment portfolio? Also, I have $59,000 in my RRSP and have 1,500 units of the BMO US$ Monthly Income Fund, again outside of an RRSP. – James B.


I cannot analyze portfolios in this column. You need to consult a financial advisor for that. What I can say is that I am a firm believer in not putting all your investment eggs in one basket. In fact, as a general rule I advise not having more than 10% of your money in a single security. There is nothing wrong with the BMO Monthly Income Fund as far as I can tell. But diversification is the key to reducing risk and that should be an essential part of retirement planning. You may wish to rethink your approach. – G.P.


Young person wants to get started

I am turning 22 soon and would like to start investing for retirement, buying a house, and paying off student loans. I want to invest $2,000 to start and would like to withdraw the money in 10 years at the earliest. 


I've talked with financial planners/investment specialists at Coast Capital Savings, BMO, TD, Scotiabank, and Royal Bank. However, I have found that they all offer similar mutual funds that charge about the same MERs.


I am an aggressive investor (based on these financial institutions' questionnaires) and would like to maximize capital gains for the long term. Are there any specific mutual funds you recommend to be put in a Tax-Free Savings Account? Since I only have $2,000 to invest right now, should I buy one or two mutual funds? Thank you very much for the help! – Charlie K.

Congratulations for understanding the importance of starting a savings program early. However, you may want to begin with an RRSP rather than a Tax-Free Savings Account because of the tax deduction the former will generate. Take a close look at the two options before you decide.


In either case, you should keep your costs as low as possible at the outset. Normally, I would recommend a self-directed plan for an aggressive young investor. But the annual fee would be out of line with the amount of money you have available. Therefore, I suggest you begin with a no-fee mutual fund plan from one of the financial institutions you have talked to.


My advice is to start with a high-quality balanced fund and put the $2,000 into that. Then, as you add more money to the plan, buy other funds for diversification. Once you have $15,000 invested, switch to a self-directed plan at a brokerage firm which will give you more investment options.


You might also wish to read my book Sleep-Easy Investing. It is possible to get rich without being overly aggressive in your approach. It is available at http://astore.amazon.ca/buildicaquizm-20 – G.P.

Small business shares

After making a $5,000 contribution to my TFSA this spring, I have managed build it to $12,000. Separate from my TFSA, I own shares in a private company (some held in a non-registered account, some in my RRSP). The company will be going public later this year. So I have three questions:

1) Is it possible to use cash in my TFSA to buy more shares in the private company (assuming I have the opportunity to buy more)?

2) If 'no' to #1, is it possible to swap the private shares in my non-registered account for cash in my TFSA prior to the company getting publicly listed?

3) If 'no' to #2, is it possible to swap the private shares in my non-registered account for cash in the TFSA the instant they are publicly listed, and at the share price I paid rather than whatever market value turns out to be that day or at close of day?

I've had conflicting information from my current broker, from CRA, and from articles I've read. Hope you can shed some light! - Neil M.

TFSAs use the same rules for holding small business shares as apply to RRSPs. In general, these allow a plan holder to invest in the stock of an active Canadian small business provided the contributor (or a plan beneficiary) is not a "connected shareholder".

(The CRA's definition of a connected shareholder is a person who owns 10% or more of the company's stock at the time the shares go into the registered plan unless the person's deals at arm's length with the firm and the aggregate cost of all shares owned is not more than $25,000.)

Also, it must be clear that any profit on the stock does not represent a payment to the plan holder by the issuer of the shares.

The small business does not have to be publicly traded. It may be an active taxable Canadian corporation, a venture capital company, or a "specified holding company". However, it must qualify as "Canadian" which means that at least 50% of its full-time employees are in Canada or at least 50% of the salaries "are reasonably attributable to services provided in Canada".

So let's go back to the questions with these facts in mind.

Yes, you can use the cash in his TFSA to buy shares in the private company, as long as it meets the eligibility tests and you are not a connected shareholder. However, the shares must be purchased at fair market value, which may not be easy to determine if the company does not trade publicly.

You could also swap the private shares in his non-registered account for the cash in the TFSA, again at fair market value. You will be on the hook for capital gains tax if there has been an increase in the value of the shares between the time you acquired them and the day they go into the plan.

If you wait until the company goes public to swap the shares you now own into the TFSA, then the market value at the time they go into the plan will apply and tax will be assessed on any capital gain.

Obviously, this can be a tricky situation. I suggest obtaining professional advice before proceeding. - G.P.

Planning for retirement

I have come across your question/answer sites and they are very easy to follow and understand. I have been spending a ton of time trying to find answers to some of my questions but have been getting a lot of contradictory answers. I'm really hoping you can help me out.
To give you a general idea about me, I am a 43-year-old teacher and plan on retiring at 55. I will be getting about $50,000 annual gross at retirement. I have maxed my RRSPs. I also contributed the maximum to a TFSA. My RRSPs are in medium to high risk mutual funds (80%) and in GICs (20%).  My TFSA is in a GIC. My risk tolerance is medium at best.
I am single with no dependents. I do have a nephew I would like to leave all my assets to when I die. My questions are:

1. Do I continue contributing into RRSPs or stop? Will I be better off to put that money into investment funds outside of RRSP? (Re: tax implications later when I retire and when I die)
2. Is it unwise to invest in GICs? (Re: inflation and the way interest is taxed?)
3. Where do I invest my RRSP and/or investment money? I have recently heard of segregated funds but have no idea what they are. I am interested in keeping my principal safe but would like the best return, while keeping in mind how the income earned is taxed as well.
My thoughts are:

1. Continue investing in RRSPs so when I do retire, even though I'll be in a high tax bracket still, I can top off my pension money so I can still have the same income that I have now.
2. I was told to consider investing in a condo for my nephew (now age 16) when he's at university and to consider having some roommates with him, during his usage. Then sell if I don't want to continue being a landlord. I am not a handy fixer-upper person.
If you can help me out with some wisdom I would greatly appreciate it. - Jin

There are several points to your question so I'll deal with them in turn.

First, I would agree that you should continue to maximize your RRSP contributions, for the reason you mention. You can never have too much money in retirement. However, I would give first priority to the Tax-Free Savings Account because there will be no tax on the withdrawals.

GICs are useful in that they provide core stability to an investment portfolio. However, because of their low returns at present I would not hold more than 20%-25% of your assets in them. I do not like GICs in TFSAs because the whole concept of those plans is to maximize tax-sheltered income. Put the higher risk mutual funds into the TFSA and keep the GICs in the RRSP.

The condo idea leaves me cold. I know from personal experience that college students can make a wreck of a home very quickly. If your nephew is very responsible and can handle the routine maintenance it might work but it is not something I would advise.

Segregated funds are the insurance industry's version of mutual funds. They come with a lot of bells and whistles, such as guarantees of principal, but they can be expensive. I don’t think you need them in your situation.

As for where you should invest, you need to discuss that with a financial advisor and/or subscribe to one of my newsletters such as the Internet Wealth Builder. - G.P. 

When to buy funds

I have been told that it is not a good practice to buy a mutual fund in November or early December as you could then receive, in December, a capital gain, on which you would of course have to pay tax. The problem, if I understand this advice correctly, is that you would not have held the fund long enough to earn this gain yet still have to pay tax on it. My attitude is that as long as I do not have to pay more than 100% of the tax, I do not care and am still further ahead if I receive the capital gain distribution. I am confused by this situation, and I expect other investors are also. Can you please clarify (an example may help). Thanks very much. - Robert T.

Okay, here is an example. Let's say you purchased 100 units of the Phillips, Hager & North Dividend Income Fund on Dec. 15, 2008 at a price of $52.29 a unit. So the total amount you invested was $5,229.

On Dec. 24, the fund distributed $1.10 a unit (this was the actual amount paid on that date). You therefore are entitled to receive $110 in cash. However, the net asset value of your units will fall by exactly that amount, to $51.19. Your total investment is still worth $5,229 only now it is in the form of $5,119 in fund units and $110 in cash.

That cash payment is taxable, so the Canada Revenue Agency will grab a chunk of it. In effect, you are paying tax on your own capital. If you had waited until after the distribution, you could have purchased the units at a lower cost and no tax would be assessed.

I hope this clarifies the matter. - G.P.

What to do with small RRSP?

I am retired with a good company pension, CPP, and Old Age Security. My wife will be collecting a small CPP benefit and OAS when she applies in five years. We have a spousal RRSP for $40,000, one in her name for $15,000, and one in my name for $20,000. We have $150,000 in savings such as GICs, $10,000 in TFSAs at 3.75%, and $5,000 in a stock. We own our home valued at $400,000 and have no debts. My question is should we cash in her small RRSP? I want to make sure she will be well provided for when the time comes. We have heard of income splitting, so could you tell me if that would be good in our circumstance. - J.B.

You have provided a lot of financial details but left out the most important one in this calculation - your wife's current income. If it is low or non-existent, then yes it would make sense to collapse her RRSP. I suggest it be done over two years to minimize or eliminate the tax bite through the use of the basic personal amount, which will shelter $10,100 worth of income. She could withdraw some of the money this year and the balance in early 2010. I suggest she then use $5,000 to add to her TFSA in 2010 (not sooner as she would be faced with an overcontribution penalty.) - G.P.

Death taxes

I picked up your book on Tax-Free Savings Accounts (TFSAs) the other day. In it I found the chapter about leaving more money at death. The chart displayed a person with a portfolio worth $250,000. The total tax was astounding. Does this mean that my dad's estate (non-registered account/fixed income) would lose this much? Really? And how can we avoid this? Joint accounts? Cash gifts before death? - Lawrence B., Ontario

The table in the book illustrates the maximum amount of tax an estate could face but everything depends on individual circumstances. Apart from your province or territory of residence, the nature of the assets and the form in which they are held will determine how much tax the government will take at death.

Registered plans such as RRSPs, RRIFs, and LIFs are the most vulnerable because unless they are passing to a surviving spouse they are deemed to have been collapsed at the time of death. The entire value of the portfolio is added to the deceased's income when the executor prepares the final return and is taxed accordingly. As a result, in the case of large accounts much or all of the money may be taxed at the top marginal rate.

For non-registered accounts, assets that have appreciated in value face the greatest tax risk. That's because all capital gains are deemed to have been crystallized at death and taxed accordingly.

The portfolio you describe carries the lowest tax risk: a non-registered account invested primarily or exclusively in fixed-income securities. That's because the capital gains potential in such a portfolio is minimal. Interest payments have already been taxed as they were received.

Cash gifts may be given to adult relatives at any time with no tax consequences. - G.P.

Moving TFSA assets

I have a TFSA account with TD Bank and my investment account with TD Waterhouse. Can I move TFSA funds to my general investment account or do these funds have to remain segregated? If the latter, does this mean I need another TFSA account with TD Waterhouse or does the TFSA account with TD Bank need to be transferred?
My example is for TD but I imagine the question applies to all the big banks with separate investment arms. - Rick A.

The only way you could move TFSA money into your general investment account is to withdraw it, which I assume is not what you want to do as you would lose the tax-sheltering.

You could open a new TFSA with TD Waterhouse and transfer some or all of the assets from the bank into it as there is no limit on the number of plans you can have. However, ask if a transfer fee will apply. - G.P.

The wrong question

I have a question about TFSAs. Say, for example, I contributed $5,000 into my TFSA and then withdraw $2,000, and later I put $2,000 back into my TFSA. The maximum balance in my TFSA never exceeds $5,000. I wonder if the interest earned in this account is still tax-free for this year? Thank you for your time. - David B.

You've asked the wrong question. Sure the interest would be tax-free. All profits earned in a TFSA are not taxed, that's what the plan is all about.

But that's not the real issue in your question. The problem your plan to withdraw $2,000 and later put it back. You can't do that, at least not until next year. Once you made your initial $5,000 contribution you reached the limit for 2009. It does not matter if you then withdraw some of that money; you cannot contribute again until 2010. If you do, it will be treated as an overcontribution and subject to a penalty tax. - G.P.

TFSA beneficiaries

Would you happen to know when the designation of beneficiaries was put in place for the TFSAs. When I opened mine up last November, I was told that this was not an option as of yet and that it was being worked on by the Government, probably to be put in place by the end of this summer 2009. I found this to be very odd. - Mrs. F.M.

As I explained in responding to previous questions, succession laws come under provincial and territorial authority. So the option to designate a beneficiary in a TFSA only became available when your province of residence approved enabling legislation. Some provinces, such as Alberta and British Columbia, were ready to go when TFSAs were introduced on Jan. 1. Others came later with Manitoba and Ontario the last to give the go-ahead in June. - G.P.

Forward averaging

Can you forward average your income any more? I believe they have taken that ability away from the tax law. I am a consultant and had a really good year, but next year will probably not be that good, so would like to carry forward some of the income. – Leanne L.

Unfortunately, you are out of luck. Forward averaging disappeared several years ago. Personally, I feel it is only fair to allow people whose income varies from year to year to even things out over time for tax purposes but the government has decided it wants its share of your money immediately. – G.P.

Safety of money market funds

I have mutual funds (money market) that I purchased at an independent broker. How secure are these if the brokerage firm goes bankrupt? Is there anything that I can do to protect my funds? – Tim from Ontario

Mutual funds are held in trust accounts, separate from the assets of the brokerage firm. So in the event of bankruptcy, the money in the fund should be unaffected. However, it's important to note that money market funds are not covered by deposit insurance.

There is an organization called the Canadian Investor Protection Fund (CIPF) that provides up to $1 million in coverage for losses sustained if a member company goes bankrupt in the event the firm fails "to return or account for securities, cash balances, commodities, futures contracts, segregated insurance funds (or other property) received, acquired or held by the Member in an account for the customer". More details at www.cipf.ca  - G.P.


Borrowing to invest

I am confused by what I believe you wrote in a past article and what my investment counsellor is claiming to be your opinion. It is my recollection that you advise not to borrow a large sum of money to invest in mutual funds as it was becoming a trend and, in your opinion, an unwise trend at that. Am I correct that you wrote this investment advice or could it have been someone else?  My advisor, on the other hand, says you encourage this type of borrowing to invest. I would really appreciate a brief clarification on this matter. - George F.

You are correct. As a general rule, I do not advise people to use "leveraging" (borrowing to invest) because of the risks involved. In my experience, some people who have done this have panicked when the value of their investments dropped and sold everything, thus incurring heavy losses.

Knowledgeable investors may make use of leveraging to enhance returns but it is definitely not for everyone. For more details about my views, there is a chapter on the subject in my book Sleep-Easy Investing. You can buy a copy at any bookstore or on-line at http://astore.amazon.ca/buildicaquizm-20  - G.P.

Government payments

I would like to know why we do not receive CPP and OAS payments at the beginning of the month instead of at the end. - George N.

The longer the government delays in making these payments the less it actually costs them, because of the time value of money. Consider the Canada Pension Plan, for example. The longer your money stays in the plan earning tax-sheltered profits (when it does earn a profit) the greater the total reserves in the plan. By delaying the payment of hundreds of millions of dollar each month for 25 days or so, the CPP gets to use that money for a longer period, hopefully to our benefit.

It's the same principle with an RRSP or RRIF. The longer you delay making a withdrawal, the more time you have to take advantage of tax sheltering. - G.P.

Made bad choices, now what?

Over the years we strapped ourselves to save for our RRSPs, in order to save taxes, to the point we had to sell the house, at our advisor's advice, as the mortgage and upkeep was surpassing our means.

My husband retired at 61 and had a stroke at 65. He is now 67 and has a $1,700/month total pension. I got a package deal last year from a job I held for 10 years. I am 59 and looking for a job but who knows if I'll find one? 

With the market situation our RRSPs went down from $200,000 to $150,000. Now our advisor wants us to place the money in income funds so they'll be safer. I wanted to switch to GICs but it was strongly discouraged because there is no room for growth.

I am totally disappointed as I should have used the money to pay the mortgage and now have a paid-off house, not RRSPs that are decreasing and can't even claim a loss on our income taxes? Any help? - Carmen F.

To begin with, there is no point in agonizing over past decisions. What's done is done. The important thing is where you go from here.

Step one is to determine how much income you need to maintain your lifestyle. You have told us that your husband receives $1,700 a month from his pension. I assume that includes CPP and OAS. You did not tell us how much you receive from your package.

You have $150,000 in your RRSP. If you invest that in a GIC that pays 4%, it will generate $500 a month in interest. Add that to your husband's pension and the income from your package. If it is enough to live on, you have your answer on what to do with the RRSP money. If it is not, determine how much more you need and tell the advisor to find the lowest-risk way to get it.

Also, remember that you can start claiming CPP yourself when you turn 60, which will add more income. - G.P.

RRSPs for older people

I am 61 years young and have been forced to take an early pension, which is my only income now, due to losing my job. I was surprised that I was taxed on this pension income (plus E.I.) and now owe over $3,000 in taxes. In order to reduce what I owe, I used the money I was going to spend on replacing windows to invest in an RRSP. Since I have already bought the RRSP for 2008 and have reduced my taxes somewhat, what should I do next year when I am sure I will have to pay taxes again? Also, why are we taxed on our pensions when this is money we have contributed? - Sherry P.

There is no reason why you should not keep making RRSP contributions to reduce taxes if you have the money available. While it is true that RRSPs and TFSAs work best for younger people, because of the years of tax-sheltered compounding they provide, older Canadians can certainly benefit as well.

We are taxed on money drawn from pension plans and RRSPs/RRIFs because we were allowed a tax deduction at the time the contributions were made. Withdrawals from the new Tax-Free Savings Accounts are not taxed because no deduction is allowed for the contribution. - G.P.

Stock swaps

In a recent column, you wrote about stock swapping from one's RRSP to a cash account. I had an RRSP and a taxable account with TD Private Investment Counsel (PIC), with lots of stocks in each account. I got tired of paying the high fees and decided to move my accounts to TD Waterhouse where I also had a small trading account which I did myself. I had at least 50 stocks, just a few shares of each in my RRSP and since I had most of the same stocks in my taxable acct. I decided to swap the stocks out of the RRSP for cash from my taxable account. 

I have to tell you that this cost me dearly. It was exactly as if I'd sold them before I moved them, except that I didn't! In essence, the selling value of the stocks in the RRSP is now are the "Book Value" in the taxable account, meaning that I've crystallized all my losses in my RRSP. I did not know that this was going to happen or I'd have left them where they were! I just thought it would be easier for me to look after just one portfolio of stocks and keep my RRSP in fixed income. 

Also, according to the Tax Department, I have to pay the gains on anything that had gone up in value when it was moved. (I don't think there was anything; out of 50 stocks that the PIC had bought, they were all losers). 

Also, I lost again when they were being transferred as I had quite a few U.S. stocks so by the time they were all converted I lost nearly another $1,000.  My stocks were all bought with Canadian dollars! So much for having professionals look after one's money! 

It's been an expensive lesson and I can't see how I'll now ever get back what I once had, as I'm 64 years old and have always watched every penny. If I sound bitter, it's because I am. If my husband hadn't died, I wouldn't have had this little nest-egg. I buy all your books and really enjoy them. Do you have any comments about my predicament? Thank you very much. - Eleanor S. 

This question should serve as a reminder to anyone who is planning a swap into or out of an RRSP to understand all the implications first. However, things may not be as dire as our reader suggests.

Yes, it is correct that when you move assets in or out of a registered plan, it is considered a taxable event by the Canada Revenue Agency. That is why the market value of the stocks that came out of the RRSP is the new book value in the taxable account. But there are no immediate tax consequences because the equities were transferred out of a registered plan.

It is different when securities are transferred in. At that point, any capital gains are crystallized and become taxable. However, capital losses cannot be claimed in these circumstances so it is never advisable to transfer a losing security to a registered account. Sell it to recognize the loss for tax purposes then transfer the cash.

The currency conversion issue is another matter. If you are talking about stocks in U.S. companies, they still have the same U.S. dollar value. It is just being converted to Canadian dollars for reporting purposes.

I don't think you lost as much money as you seem to think you did by doing these transfers. For certainty, ask your advisors for an accounting. - G.P.

Buy now or later?

Is this the right time to purchase a condo in downtown Vancouver for a 26-year-old who is dreaming to buy her very first condo? I truly appreciate your advice. Should I purchase something now or wait till next year? - Shirin K.

You're asking me to predict where the housing market in Vancouver will be a year from now. Unfortunately, no one can forecast that with any certainty. But two things are clear. First, prices have dropped considerably in recent months, not just in Vancouver but across the country. Second, mortgage interest rates are very low, especially for people with a good credit rating and a steady job.

It's quite possible that condo prices may drop more in the next few months. But a year from now, who knows? If the economy is showing signs of recovery at that point, the housing market will start to firm.

I suggest that your best course of action right now is to start shopping but don't rush to buy. See if you can find a really sweet deal on a condo you like - a situation in which the seller is anxious to vacate and is willing to accept an offer well below the listing price. Right now, buyers have all the leverage. Use it to your advantage. - G.P.

Wife laid off

The company my wife works for is closing (she has 27 years seniority with CAW) and she has the options of taking the pension benefits or having a large cash amount transferred to a locked-in account according to current laws. The company responsible for the pension/benefits is a large global organization from Germany. I was with the same company but was downsized back in 2002 after 25 years. Because she had "benefits", we chose to take the money. The company I now work for is very small with a so-so pension/benefits plan.
I'm 57 and my wife is 50. She does not intend to stay at home and will look for another job. We would like to "retire" in five years. We are mortgage free. I'm very concerned about the cost of health care in the future and assume that having benefits will be a major plus in paying for possible health issues when we're older.

We are getting mixed advice as to staying with the existing pension/benefits plan and hoping that the German company is around in the future to pay the benefits versus taking the money, investing it, and buying our own health care coverage.

I know this is a lot to comment about but I'm sure I'm not the only person in this position! Could you give some advice and possibly point out where we could obtain other information in order to make a sound decision. Your time and advice is very much appreciated! - Dave H.

Unfortunately, I'm receiving a lot of questions like this as lay-offs continue to take their toll in this shrinking economy. I wish there was an easy answer. There isn't.

You've correctly identified the critical issue in the decision making process - will the German company still be around to make good on the pension plan and health benefits when your wife needs them? The best you can do is to make an educated guess. Do some research into the company, check out its financial situation, see whether the pension plan is fully funded or in deficit - in short, get as complete a picture as possible about its current position and future prospects. If it is a company that is faring relatively well in this environment (e.g. Volkswagen) then the pension/benefits package is probably the better choice. If the future looks uncertain (e.g. any company in the General Motors family) your wife may want to take the money and run.

If you choose the latter course, make sure the money is invested in low-risk securities. Don't take unnecessary chances; remember this is a nest-egg for your future. - G.P.

Unclaimed RRSP contribution

What should I do with an RRSP contribution made 10-12 years ago that has not been declared? Can I declare it on this year's tax return if there is room? What are the consequences that I will face? - Hung

You are not required to claim a deduction for an RRSP contribution in the year it is made. If you wish, you may defer making the claim until it is more advantageous from a tax-saving perspective. In order to claim a deduction for a past contribution, you will need to complete Schedule 7 and file it with your return. For more details, see the CRA guide titled RRSPs and other registered plans for retirement. It's available at http://www.cra-arc.gc.ca/E/pub/tg/t4040/README.html  - G.P.

Returns on TFSAs

We've done some research, but couldn't find any institution offering a
competitive rate of return on a TFSA (Tax-Free Savings Account). Most are offering a maximum of 3%, so how would we get close to a 6% average rate of return on a TFSA? - Andrew and Jennifer R.

You're operating under the assumption that the money in a TFSA must be invested in some type of deposit account. That is not the case. TFSAs are like RRSPs in that there are several different types of plans. If you want to aim for a higher rate of return, choose a plan that allows you to invest in mutual funds or a self-directed plan that enables you to buy almost any type of security. You don't have to invest in the stock market to earn a 6% return these days - there are many good-quality corporate bonds that are paying yields in that range. - G.P.

Use TFSA to pay mortgage?

I am wondering if it would be strategic to invest $5,000 in a TFSA now, withdraw the total funds in December, and put the proceeds against my mortgage. In January 2010, I would invest $10,000 in my TFSA and in December withdraw the total amount to pay against my mortgage, repeating this strategy year after year. - David K.

This approach only makes sense if the rate of return you achieve within the Tax-Free Savings Account is higher than the interest rate on your mortgage. For example, if your mortgage rate is 4.5% but you can only earn 3% within your TFSA, you would be better off applying the $5,000 against the mortgage principal immediately rather than waiting. - G.P.


Taxing share sales

If I purchased 1,000 shares of Stock X at $10 in April and purchased another 1,000 shares in June when it dropped to $2, then sold 1,000 shares in November at $6, do I claim a loss against the first purchase or is my claim against the average cost of both purchases which in this case would be even at $6. (No loss no gain.) - Peter L.

You have to average the cost. The Capital Gains Guide published by the Canada Revenue Agency states as follows: "You may buy and sell the same type of property (for example, units of a mutual fund trust or publicly traded shares) over a period of time. If so, you have to calculate the average cost of each property in the group at the time of each purchase to determine the adjusted cost base (ACB)." You can download a copy of the Guide at http://www.cra-arc.gc.ca/E/pub/tg/t4037/t4037-08e.pdf  - G.P.

Taxes on RRIFs

I’ve read your books The Retirement Time Bomb and Tax-Free Savings Accounts. The information is highly valuable and helps to plan our investment strategies. However, I have a question about taxes when a RRIF annuitant dies. I understand that the money goes to the surviving spouse tax-free. In the case where no spouse is involved and no child can be declared as dependent is there a way to avoid or ease the tax bite? Thanks for the excellent job in helping us with financial issues. - Jacques B.

Unfortunately, no. In the situation you describe, the RRIF would be deemed to have been paid out at the time of death and all the money would be taxed as income on the deceased's final return.

You may find some financial advisors who claim they can reduce taxes on RRIFs but in reality these schemes are based on the use of leveraged investment plans in which interest deductions are used to offset the RRIF tax. You're not avoiding tax in this situation - you're just creating a deduction to offset it and taking on considerable risk in the process. - G.P.

Suckers' rally?

If the current upswing in the market proves to be a "bear market rally" or "suckers' rally" as some have predicted, what happens when the rally is over? I am a typical investor who bought mutual funds at $20 per unit, only to see them drop to $10. If the rally takes the units' value back to say, $15, is that where the fund would typically stay for a while or is there a tendency for another huge downturn? If the rally only lasts for one or two months as some have suggested, would it be prudent to do some reallocation of assets at that time (rally end?), especially if another drop is coming. - Mike T.

There are a lot of "what-ifs" in this question which means there is no easy answer. For starters, we don't know if this is in fact a bear market rally or the start of a turnaround. The TSX hit a low of 7,480 on March 6 but as I write it is up more than 16% from that level. I believe there is more bad news to come, however the recent move of the U.S. Federal Reserve Board to buy $1 trillion worth of U.S. Treasuries and mortgage-backed securities changes the dynamics for Canada. Effectively, the Fed is moving to devalue the U.S. dollar which means commodity prices are likely to rise. That's good news for our resource sector so the TSX may fare better than New York in the coming months.

Your mythical mutual fund is not likely to stay stuck at $15 in the scenario you describe. The markets will continue to be volatile so the fund's net asset value will bounce around. The best advice I can give you is to look at your overall asset mix and see if you are comfortable with it. If this is a suckers' rally and stocks drop sharply again, can you live with that? If not, take advantage of this opportunity to rebalance by selling some equities and raising your holdings in bonds and cash. - G.P.

Canadian banks

Recently I read an article you wrote about generating income in these tough times. You mentioned that the Canadian government would likely not let a Canadian bank fail. I agree. However, if one of them got into the kind of trouble that their American counterparts(or British e.g. Royal Bank of Scotland and Northern Rock) are in and the Canadian government took it over, would not the common share holders be wiped out? I understand that if you had a deposit in it you would likely get your money back via the CIDC. But a depositor is a loaner. What happens to the owners, those who own shares of the bank? - Dave in Oshawa (a fan of yours for many years.)

Equity owners would certainly be hit hard and perhaps wiped out as you suggest. The Citigroup experience is a classic example. Less than two years ago, the stock was trading above US$50. Now it's below US$3, thanks to huge write-offs and partial nationalization. Much maligned insurance giant AIG is in even worse straits. Its stock was worth more than US$70 a share in spring 2007. Now shareholders are getting about US$1.60. Those are the risks involved in investing in the stock market. That said, as things stand right now it appears highly unlikely any of the Canadian banks is in such a precarious position that the government would have to take over. - G.P.

TFSA savings

We are very intrigued by Tax-Free Savings Accounts...savings with no strings attached. But to contribute $5,000 each per year would require a contribution of approximately $833/month. I'm not sure how we would find the financial resources to do that. How would you recommend going about this? Also, if we aim for a 6% return can we be certain that the 6% interest rate would stick for the course of 20-25 years? And what banks/institutions offer the best interest rates? - Andrew and Jennifer R.

Most Canadians receive an income tax refund each year. If you are among them, use that money to start a TFSA for each of you. That will reduce the additional monthly contribution you need, perhaps significantly.

You can't be certain of a 6% return, certainly not in the form of interest payments. These days, you're lucky to earn 4% on a five-year GIC. But you can expect to average at least 6% over the long haul by investing in a good quality balanced fund or buying some high-grade corporate bonds. - G.P. 

Applying for CPP

I'll be 60 in about two years and I am still working, my question is: Is it wise to apply for CPP at the age of 60 or wait till 65? What are the advantages and disadvantages of applying at the age of 60? Is there any disadvantage on applying at age 65? - Editha in Manitoba

If you are still working and don't need the extra income, you are probably better to wait before applying. If you apply before you are 65, your pension is reduced by half a percentage point per month. So if you were to start drawing CPP on your 60th birthday, the pension would be 30% less than what you would be entitled to at 65. You will also pay a hefty rate of tax on the pension since it will be added to your employment income for the year.

There's another problem with applying early. You must stop working (at least temporarily) or earn less than the maximum CPP retirement benefit if you want to draw benefits before age 65. You'll find more information at http://www.hrsdc.gc.ca/eng/isp/pub/factsheets/retire.shtml#c  - G.P.

Inheritance from Australia

If a Canadian citizen inherits a cash settlement from a friend say in Australia, what are the Canadian inheritance tax implications if any? - Lorne P., Alberta

Canada does not have any inheritance taxes so there should be no tax due. However, if the amount is large you may want to consult with an accountant who specializes in international tax law to determine if there are any provisions in the Canada-Australia Tax Treaty that might be applicable. - G.P.


Which is the better tax advantage: cashing in RRSPs or converting the RRSP into a RRIF sooner than age 71? I am 65 this year and my income is decreasing soon. I took out $20,000 from my RRSP for 2008 due to low income and now am looking forward for suggestions. - Terri G., British Columbia

There is no difference in the way the money is taxed - RRIF payments and RRSP withdrawals are both treated as regular income for tax purposes. However, RRSP withdrawals are not eligible for the pension income tax credit whereas RRIF payments are for those who are age 65 and up. The pension amount has been raised to $2,000 and the federal credit is 15% of that, or $300 off your tax payable. If you move your money to a RRIF, you will be eligible to make the claim when you file your 2009 return. - G.P.

Investing in banks

Is there an ETF that invests primarily in Canadian banks? - Marcel L'H.

There is no exchange-traded fund that invests exclusively in Canadian banks. The iShares CDN Financial Sector Index Fund (TSX: XFN) is heavily weighted towards banks with 67.8% of its assets in the Big 6 but it also holds shares in insurance companies, mutual fund groups, etc. It's a similar story with the Claymore Equal Weight Banc & Lifeco ETF (TSX: CEW).

One way to invest exclusively in the Big 5 banks for capital gains is to buy shares in 5Banc Split (TSX: FBS.B). It has not been a good performer overall but it has doubled in price since hitting a low of $1.61 in late February. Talk to a financial advisor to see if it is appropriate for your needs. - G.P.

DSC fees

I currently own several mutual funds with a DSC (deferred sales charge). Can I move the money in these funds to other funds from the same mutual fund company without incurring a fee? If so, will the DSC be reset thus requiring that I keep my money in that family for another lengthy period? – Robert H.

Mutual fund companies set their own policies in this regard but most allow a switch from one fund to another within their organization without triggering a deferred sales charge. However, most companies also allow advisors to charge a switching fee of up to 2%. That is rarely applied in practice but you should clarify that point with your advisor. Usually, the DSC is not reset after a switch but again you should verify this with the company.

I should add that I strongly advise against the purchase of DSC mutual fund units because they tend to lock you in. (For those who are not familiar with them, no sales commission is charged when DSC units are purchased but if they are sold within a specific period, usually seven years, a commission becomes payable). Investors should purchase no-load funds or front-end load units at zero commission. – G.P.

Inflation hedges

You have suggested adding some gold to our portfolio as protection against future inflation. Is there anything else besides gold that we can buy such as REITs, oil stocks, infrastructure stocks, or are there any mutual funds that we can buy in case high inflation sets in next year? When that happens, will cash in money market funds become trash? What can we do besides buying gold? – T.V.

Hard assets tend to fare well in an inflationary environment. That suggests investing in resource stocks or natural resource mutual funds if it appears inflation is about to take hold. Normally, real estate would fall into that category as well but the current state of the market suggests caution.

In recent months, hundreds of billions of dollars have poured into government bonds. That makes sense in a recessionary environment but when inflation starts to climb you should dump most of your bonds immediately. As for money market funds (MMFs), they may do well because central banks will increase interest rates to combat inflationary trends. Higher rates will translate into better yields on MMFs, which right now are returning almost nothing. – G.P. 

Investing in REITs

I am planning to invest in REITs and I keep reading that they should be held in a non-registered account (outside an RRSP). Could you clarify why? Is the monthly distribution treated as a dividend (tax efficient)? Also, what is the impact on the new rule for 2011 on the REITs? – Ali J.

Part of the distribution paid by a REIT receives favourable tax treatment, which is why it is better to hold the units in a non-registered account if possible. For example, slightly more than half of the 2008 distribution from RioCan REIT (which totalled $1.36 per unit) was treated as return of capital for tax purposes. That means no tax will be assessed on that amount for the 2008 tax year. This is not a tax exemption but a deferral; when it comes time to sell the units some tax will become payable but not as much as if the money had been received as interest. – G.P.

TFSA rates

What is a usual interest rate banks offer for a TFSA? - Ivan R. 

There is no "usual" rate. It depends on the type of plan and the financial institution you are dealing with. If you have a savings account type of TFSA, the current interest rate will be minimal. It should rise when interest rates generally move higher but that may not be for some time. If you invest in a GIC, the rate will depend on the term and the type of GIC (redeemable or non-redeemable). A market-linked GIC will carry no fixed interest rate. Also, smaller institutions usually offer better rates. Shop around.

Remember, a TFSA does not have to come with any interest rate. It depends on the plan and how you invest. If you choose a mutual fund plan or a self-directed plan, no interest rate will apply. - G.P.

Husband died, bank confused

My husband passed away on May 17, 2009. He has a TFSA with our bank. The chequing and saving accounts are now in my name. It seems that my bank does not know what to do with his $5,000. Any ideas? - Irene D. 

My condolences on your loss. It sounds like he did not designate you as a successor holder or beneficiary before he died. Perhaps this was because your province of residence had not approved enabling legislation.

The assets in the plan should pass to you tax-free nonetheless but they might have to be processed as part of his estate, depending on the laws in your province. You should speak to a lawyer who specializes in this field. - G.P.


Can't get RRSP money

I have 20,000 in an RRSP which matured in June. I did not hear from my bank so I thought the money was still sitting there. When I went over to the bank to withdraw some money because I needed it, they told me that they could not get in touch with me so they put the cash into a GIC which is locked in until next July. I have lived at the same address for many years and still have the same phone number. I did not hear from the bank regarding these funds. Can the bank do that? I need my money now. Thanks a lot. - Charles

Yes, they can do that. Nor did they need to contact you first. This is one of the aspects of GICs that few people know about. At maturity, certificates are automatically rolled over for another term at the current interest rate. It is up to the investor to give the bank instructions to the contrary. To prevent this happening in future, give your bank a letter now saying that in future no GIC is to be rolled over without your authorization. Then ask a manager whether the bank is willing to cash in the GIC now because of the extenuating circumstances. You will probably lose any interest but it won't amount to much. - G.P.

Corporate class funds

I have a question about corporate class mutual funds. It has been suggested that I use this kind of class for revenue purposes. I'm told that I will not pay tax on the income that the fund will generate, only on dividends and capital gains. Is this true and is there a catch? I'm looking for a monthly revenue stream. This seems to be all good with no downside. Is this too good to be true? - Patrick A.

Yes, I'm afraid it is. Either the concept of corporate class units was poorly explained or you did not understand exactly how they work. The idea of corporate class units is to allow you to move money from one type of mutual fund to another without triggering a taxable event. This is done by creating investment "pools" of various types under the umbrella of a single large fund. Money movements under that umbrella fund are tax-free. But when you withdraw money, it becomes taxable.

Here's an example. Suppose you own units in an ordinary global stock fund and you want to invest that money in a bond fund. You would have to sell the stock fund units first, thereby creating a taxable capital gain or loss, assuming the units are not in a registered plan. You then use the cash to buy the bond fund.

Within a corporate class account, your money could be moved from the global fund to the bond fund with no tax liability. But if you decided to sell the global fund and withdraw the cash, then tax becomes payable on your profits. - G.P.  

Sleep-Easy question

I borrowed Sleep-Easy Investing for a weekend last November after my RRSP declines (100% equity) and revamped my allocations with a better spread of GICs, fixed income, large and small cap equities. I'm much more comfortable with the set-up now and had no trouble sending in my bi-monthly contributions even through the dark months prior to the March 2009 rebound. Thanks again for the advice. I'll no doubt have to weather more downturns before retirement but I'm pretty much sold on this investing philosophy.
Question: are there any rules of thumb for being temporarily overweight/underweight in a sector while still adhering to the Sleep-Easy approach? 
I'm 42 and a father of six. My preferred target allocation mix is 42% bonds and 58% equities. For the last 10 months I've been investing at a 32% bond - 68% equity ratio because the latter had been grossly oversold (generally speaking) during the meltdown. Over the next few years I plan to alter the mix by 4% per year so that by age 45 I'm back where I need to be (45% bond - 55% equity). Good idea? Or is this a departure from the Sleep-Easy ideology? - Regan B. 

Market fluctuations make it almost impossible to maintain exactly the same portfolio balance from week to week or even month to month. What's more important is to have a target and to adjust your portfolio periodically to get as close to it as possible. I recommend reviewing the portfolio at least once a quarter. In the case of a cosmic shift in the markets, such as we experienced, it may take some time to make adjustments, as you have recognized. You have a good plan so stick with it. - G.P.

Capital losses in RESP

Please let me know if I can claim capital losses for U.S. mutual fund purchases in an RESP (RBC O’Shaughnessy U.S. Value) made years ago. I would like to sell so I can place the remaining money into more viable Canadian mutual funds. If possible, what steps are necessary to do so and how do I go about claiming the capital loss? Thanks very much. - Cathy C. 

You're out of luck. Capital losses incurred within any type of registered plan (RESP, RRSP, RRIF, TFSA, etc.) cannot be claimed. The offset, of course, is that any capital gains earned within the plans are not taxed. - G.P.

TFSAs for older people

I have just finished reading your book on Tax-Free Savings Accounts (TFSAs). Very informative and easy to understand. My question is: you gave examples of how couples can become millionaires. Great, but what does a 70-year-old widow do to achieve similar status? I did start a TFSA this year and have investments in mutual funds, GICs, etc. How do I position myself to get the best results? Thank you for paying attention to those of us who don't want to leave ALL our money to the governments! - Gail M.

I wish I could promise you too could become a millionaire with your TFSA but unless you plan to live until about 110 I really can't. It takes time, especially given the low annual contribution limit of $5,000.

However, you can use your plan to maximize your tax-exempt investment earnings for as long as you live. The best way to achieve that is to hold securities that you expect to generate the most taxable profit inside your TFSA. These would normally be stocks or mutual funds, especially in this low interest rate environment.

Let's say you have a choice between investing in a GIC that pays 2.5% and a stock that you expect to gain 10% over the next year. For every $1,000 invested in the GIC, you would shelter $25 annually in interest. The stock would generate a capital gain of $100 for every $1,000 invested. Half of that ($50) would be taxable outside a TFSA. So you double the tax-sheltering value of the plan by holding the stock in the TFSA. Of course, that involves more risk but your question was how to get the best results. - G.P.


Doubling your TFSA

I opened my $5,000 TFSA account with one of the banks in January. The interest paid started out at 4% and is now reduced to about 1%. I do not know where to invest to get the best rates. Could you please give me a few great options from which to choose? One of your readers wrote the following, which I thought was rather amazing: "After making a $5,000 contribution to my TFSA this spring, I have managed build it to $12,000." Thank you. - Norma T.

Obviously, our reader did not build $5,000 into $12,000 by putting his money into a savings account or a GIC. Although he did not tell us how he managed to more than double his TFSA assets in a few months, he probably opened a self-directed plan and invested in stocks when the market was down. He didn't have to buy penny mining stocks to do it. An investment of $5,000 in Bank of Montreal shares on Feb. 24 would have been worth $11,350 in early August, not including dividends. There are many other examples of blue-chip stocks more than doubling in that period.

Of course, there is more risk in investing in the stock market. Each person has to decide whether they are willing to accept that. If you want to stick with low-risk, interest-bearing investments, the best rates are usually offered by smaller financial institutions. But a word of warning: before you decide to move your TFSA somewhere else for a slightly higher return, ask whether any transfer or account closing fees will be charged. They would probably exceed any additional interest you would earn for the next year. And don't expect to double your money any time soon by sticking with a savings account or GIC. - G.P.

Wants to claim a loss

I transferred 600 trust fund units valued at $5,000 to my TFSA from a non-registered account. They increased slightly in value and I sold them recently at a considerable loss from my original purchase. Can I still use this capital loss against my capital gains in the non-registered account it was transferred from when filling out my tax return? - Bryan N.

It sounds like you have made a classic and costly mistake, one which I warned against in my book Tax-Free Savings Accounts. Based on your question, it appears that your units were already in a loss position before you moved them to the TFSA. In that case, you lost the right to claim a capital loss when you transferred them.

With TFSAs, as with RRSPs, the rules are that when an asset is transferred into a plan from a non-registered account it is deemed to have been sold for tax purposes. Any capital gain is taxable and must be declared on your next return. But, and here is the kicker, capital losses are not recognized in this situation and cannot be claimed. You should have sold the shares instead of transferring them and deposited the proceeds in the TFSA. That would have crystallized the loss for tax purposes. There is nothing you can do now, unfortunately. - G.P.

TFSA beneficiaries

How does survivorship affect the TFSA, if you include children and spouse as beneficiaries in the TFSA account or through a will? Are there any probate fees to be paid? - Philip L.

Succession laws are governed by the provinces so the situation will depend on where you live. However, in all provinces except Quebec you can now designate a spouse/partner as a successor account holder, which you should do. This ensures the assets in a TFSA will pass to the spouse/partner without having to wait for the estate to be settled and with no probate fees. Do not designate your spouse and children as joint beneficiaries as that could create some legal problems. - G.P.

U.S. dividends

I understand that U.S. securities are subject to a 15% withholding tax
on their dividends to Canadian citizens if the securities are not held in an RRSP. Will they qualify for the same tax treatment if held in a TSFA? I can find no information on this. - Martin H. 

No. TFSAs are not covered by the Canada-U.S. Tax Treaty, which deals with such issues. Nor are they likely to be in the future as they are not technically "retirement savings plans". The bottom line is that any tax withheld from U.S. dividends paid to TFSAs will be lost. In this specific instance, TFSAs are not "tax-free". - G.P.

Nortel shares in RRSP

I have Nortel shares in my RRSP. Now that it is delisted can I claim it as capital loss and offset it with the gain when I sell other shares also within my RRSP account? - Carrie L., Ontario

No. Capital losses within an RRSP cannot be claimed for tax purposes. The good news is that any capital gains you earn on your other stocks won't be taxed either. - G.P.

Preferred shares in dividend fund

Do you have any recommendations on a dividend fund with high preferred share content? - Norman G., Christina Lake BC

If you are not looking for a dedicated preferred share fund, the BMO Guardian Monthly Dividend Fund (formerly the GGOF Monthly Dividend Fund) is the best choice. It holds at least half its portfolio in preferreds although right now the percentage is much higher, at 68.3%.

For a fund that invests exclusively in preferred shares, consider the Claymore S&P/TSX CDN Preferred Share ETF which trades on the TSX under the symbol CPD. It tracks the performance of the index it is named after which is heavily weighted (84%) to financial issues. Almost 60% of the portfolio is in top-rated preferreds (Pfd-1). The fund currently pays quarterly distributions of 21c a unit for a yield of 5%. - G.P.

Floating rate preferreds

What are floating rate preferred shares? How are they priced? Do you have examples? - Nizar D.

Floating rate preferreds have adjustable dividend rates that are tied to some benchmark such as prime or the Canada bond rate. They trade on the TSX and are priced so as to generate a yield that is comparable to that of similar securities. An example would be the Brookfield Asset Management Class A Series 4 Preferreds which trade under the symbol BAM.PR.C. The dividend rate is 70% of prime. The current dividend works out to 39c annually and the shares yield 3%. When prime increases, so will the payout. - G.P.

Wants to move assets

I plan to move my RRSP account of $180,000 from a money market fund. I would like to buy the Beutel Goodman Income Fund for my fixed income portion. I would like to stay with the same company to make it easier. If I purchase Beutel Goodman Canadian Equity Fund and their American Equity Fund, would this allow proper diversification? Should this transfer be carried out in stages? Thanks for any input. - B.O'H.

I can't offer personal investment advice in this column. What I can say is that Beutel Goodman is a highly respected money manager and the company takes a conservative approach in its investing strategy. The funds you mention all receive a top $$$$ rating in my On-Line Buyer's Guide to Mutual Funds. However, I would note that you would not have any international exposure in your portfolio if you only selected the three mentioned funds. You may wish to correct that. As for timing, you would need to decide that in consultation with your financial advisor. - G.P.

Putting shares into a TFSA

I have shares in a company that I want to invest in a TFSA. How can I do this and keep the shares as they are without selling them? - R.M.

If you have a self-directed TFSA, you can put the shares directly into the plan up to a market value of $5,000. This is called a contribution in kind and your advisor can arrange it for you. Sometimes there is a small fee involved, so ask.

If you have made a profit on the shares, the contribution will trigger a taxable capital gain which you must declare when you file your 2009 return. Do not contribute the shares if they have lost money. The Canada Revenue Agency will not recognize a capital loss in that case. - G.P.

About to be laid off

I expect to be laid off in the next two to three months. I have been working to pay off my line of credit and so don't have any cash on hand. If I cannot find a job prior to going through my lay-off package, which I expect will be eight or nine weeks of pay and have to cash in some RRSPs, which should I sell first? I keep a mixture of 45% equity mutual funds, 35% income funds, and 20% money market funds. I am 48 years old and have a mortgage. - Name and initials withheld by request

The money market funds would be my first choice. They are paying virtually nothing at this time because of low interest rates. You might as well cash them in if you need income to tide you over.

If possible, I suggest you wait until after Jan. 1 to make the RRSP withdrawal because your tax rate will be lower in 2010 if you are still unemployed at that time. - G.P.


Why the big drop?

I noted yesterday that the Globefund rating for AGF Canadian Balanced Fund has recently dropped from a five-star to a one-star rating. I would very much appreciate your comments on this dramatic downgrade. - Sandra M., Calgary

Each on-line service uses its own formula for rating funds but almost all of them are computer driven. (My On-Line Buyer's Guide to Mutual Funds is an exception as each fund is analyzed in depth before a rating is given).

The parameters used in computer ratings vary but recent performance results are a key component in most cases. On that score, this defensively-managed fund has done poorly. Manager Christine Hughes had almost one-third of the portfolio in cash until recently. This protected investors from the worst ravages of the market crash but also had the effect of severely limiting the fund's ability to profit from the turnaround we saw over the summer.

All this shows up in the numbers. The fund has better than average results for all periods from one to five years (to Aug. 31). But it has not fared well recently, with a six-month loss of 0.2% compared to an average gain of 18.5% for the Canadian Neutral Balanced category. That apparently was the main reason for the startling drop in the Globefund rating.

Looking at some of the other ratings, Morningstar.ca gives the fund four stars while The Fund Library gives it a B grade with two stars for performance and five stars for income stability. I give it a $$$ rating (out of four) because of its low-risk approach. But aggressive investors will find it too dull for their tastes. - G.P.

How much to withdraw?

I am confused about the percentage of my savings I can withdraw safely when I retire (I do not have a pension). I have always thought 4% annually was a reasonable figure to use, but Moneysense recently suggested 3%-3.5% (if retiring early) and a recent radio host in the U.S. I was listening to said 8% (which I find very hard to believe). The difference between 3% and 4% percent can be quite significant in terms of my lifestyle. Any thoughts? - R.P.

It's not possible to provide a universal guideline. There are too many variables involved. As a general rule, you should not withdraw more than your invested money earns or you will be eating away at your capital. But circumstances may dictate otherwise; for example you may have a very large amount of money saved which will enable you to withdraw more for special purposes such as travel or healthcare. Of course, if the money is in a RRIF or LIF, the government will dictate the minimum amount you can take out each year.

I suggest that when the time comes you sit down with a financial planner who will review your situation and advise you on how much money you can comfortably withdraw annually. - G.P. 

TFSA investments

If you were going to give $5,000 to each of your adult children for them to use in a Tax-Free Savings Account, as allowed by our government, would you care to suggest three investments you would suggest to them? I am looking at doing this and would appreciate your thoughts on it. My children are not sophisticated investors. Thank you for your kindness. - Ross R. 

It really depends on the purpose of the TFSA - and everyone who has an account should have a goal in mind. For example, if the money is to be used as an emergency fund then a cashable GIC would be a good choice. If the kids are saving for a home, I would look at a good quality corporate bond with a maturity date that roughly coincides with the time they will want to buy. If the goal is to maximize profits, then a well-managed equity fund or ETF would work. Some possible choices: Fidelity Canadian Disciplined Equity Fund, Harbour Fund, Mawer Canadian Equity Fund, or, for something much more aggressive, Dynamic Power Canadian Growth Fund. - G.P.

Looking for capital gains

I am an avid reader of your articles and would like to thank you for the information and clarifications that you provide. My question is as follows: During the past year I have realized capital losses on the dispositions of shares and do not expect to realize capital gains from my portfolio for quite some time. I am looking for a way to generate capital gains to offset the losses for tax purposes. Are there any mutual funds which provide only capital gains distributions? Could you also please advise what the risks are of owing funds that distribute capital gains versus dividend or other income? Thank you very much. - Philip C. 

The only funds I know have that offer 100% capital gains distributions are those in the NexGen Capital Gains series. In fact, they say their funds are suitable for the exact purpose you describe - to generate capital gains to offset capital losses. The downside is that the distributions are based on the increase in NAV over the year. If the NAV drops, no distributions! If you are interested in these funds, ask for the distribution history and whether there is likely to be a payout this year. - G.P.

Corporate class funds

What exactly are corporate class mutual funds? I have heard they have a tax advantage however I am unable to find any definition of them on any website. Are they of any use to anyone in the under $50,000 income range? Would they be of advantage to someone about to retire over regular mutual funds? - Frank Y.

Corporate class funds are actually pools of money with specific investment goals that operate under an "umbrella fund" which is usually structured as a corporation. The advantage is that you can move assets among the various pools, or classes, without triggering a capital gain.

For example, let's look at CI Corporate Class. It is a corporation under which there are more than 50 classes of funds, ranging from asset allocation portfolios to sector funds. You can move money around freely, with no tax consequences. However, any distributions will be taxed in the usual way.

These class funds are best suited to those who switch assets frequently because they don't need to be concerned about the tax effect of selling one fund and buying another. They are useless in tax-sheltered registered plans. - G.P.


Moving RRSP money to TFSA

I have just read your TFSA book with great interest and have used it to gain the understanding that I should switch my meagre RRSP funds to a TFSA as soon as possible. Given that their book value is only about $18,000 and given that we (my wife and I) did not make the maximum contributions to our TFSAs either last year or this year, I believe we can contribute all of these funds to our TFSAs (two accounts with President's Choice Financial and two with Royal Bank) without exceeding the maximum amount allowable. Please inform me if I have erred in the above reasoning, and thank you very much for your attention to this request. - Brian B.

Yes, you have erred. You only have $5,000 in contribution room for your own TFSA in 2009 and your wife has $5,000 as well. TFSAs did not legally come into existence until Jan. 1 of this year so you have no carry-forward room from 2008, even though you may have opened an account before then.

So only a total of $10,000 can be put into TFSAs this year and you have to subtract from that any amount you have already contributed. So, for example, if your wife and you each put $1,000 into your plans earlier this year, you each only have $4,000 in contribution room left for 2009. The rest will have to wait until 2010 when you will each have another $5,000 in contribution room. 

Remember, even though your income is low, there will be tax withheld on any RRSP withdrawals. You can claim that back when you file your 2009 tax return.

Finally, I'm puzzled as to why you would have four TFSAs between you and your wife since there is so little money into them. I would normally suggest your consolidate them but you would probably be hit with a hefty fee for closing the plans so you may have to continue with your current arrangement. - G.P.

RRIF vs. annuity

Can you briefly outline the pros and cons or considerations of purchasing an annuity over other options when a person has to mature their RRSP funds into a RRIF at 71? Thank you. - Ann F.

There are three options for your RRSP money when the time comes to terminate the plan. You can cash it in and pay tax on the amount withdrawn, you can move the money into a registered retirement income fund (RRIF) or the locked-in equivalent, or you can purchase an annuity. You can also choose some combination of the three.

Most people move to a RRIF because it offers the greatest flexibility. You keep control over your money and decide how you want it to be invested. You can decide how much to withdraw each year, as long as it equals or exceeds the legal minimum payout. If you die, the assets in the RRIF pass tax-free to your spouse or partner. If you don't have one, you heirs will inherit after taxes are assessed. The major negative is there are no guarantees. The value of the RRIF, and therefore the amount of money available to you, is subject to market forces. That's why many people hold GICs in their RRIFs, since they are covered by the Canada Deposit Insurance Corporation up to $100,000. (Some provincial plans for credit unions have higher limits.)

Annuities are sold by insurance companies and they provide the certainty that RRIFs lack. When you buy an annuity, you are guaranteed an income for life. However, you lose control of your money - it goes to pay the insurance company for the annuity.

Annuities can be complex and there are many variations. You will find plans that cover both spouses, plans with guaranteed minimum payouts in case you die early, plans for people with reduced life expectancies, and more. The best time to buy an annuity is when interest rates are high because the payouts will be greater.

As a general rule, I suggest that people move to a RRIF first and invest the money conservatively. An annuity is worth considering when you are older, say in your mid-80s, in order to ensure that your money will not run out before you die. - G.P.

Investing proceeds from house sale

We sold our house in 2008 and have kept the proceeds in a money market fund with very little return. We are considering investing this money in a stock with a good dividend like BCE and putting a stop-loss price on the stock to minimize our loss in a downturn, but share in the dividends in the meanwhile. Would you consider this a worthwhile strategy? Thanks. - Tom J.

We recommended shares in BCE in my Internet Wealth Builder newsletter last December when they were priced at $21.30. They were trading recently at over $26 so our readers have done well. Even at the higher price the dividend yield is over 6% and we continue to recommend the stock as a buy.

That said, I would never advise anyone to put all their eggs in one basket. I suggest you look at creating a diversified investment portfolio that holds some dividend-paying blue chip stocks (BCE can be one), some preferred shares, and some good quality fixed-income securities. A financial advisor can help you with your choices.

By the way, stop-losses don't always work. If the market is seized with panic selling, it may not be possible to find a buyer at your set price. - G.P. 

Wants money to grow faster

I have approximately $10,000 in a locked-in retirement account. Is there any way to make this LIRA grow faster? Perhaps changing the funds associated with it? Your thoughts? - Tim E.

There are always ways to make money grow faster. The question is: how much risk are you prepared to take to achieve that? You don't say how the money is invested now but the implication is that it is in very conservative securities such as GICs or money market funds. With interest rates at very low levels, the returns on such types of investments are minimal.

If you had the money invested in an average Canadian equity fund, you would have seen it grow by more than 30% in the six months to Sept. 30. But, of course, there is a lot more risk when you invest in the stock market. For somewhat less risk (which is more appropriate in a LIRA) consider a balanced fund. The average fund in the Canadian Neutral Balanced category gained 18.1% in the past six months. - G.P.

Investing mom's money

My father passed away earlier this year, prompting my mother to move to from Montreal to Toronto in order to be closer to her children. Totalling the life insurance payout, the proceeds from the imminent sale of her house in suburban Montreal, and so forth, my mother will have approximately $400,000 to invest sometime early next year. Primarily thanks to my father's defined benefit pension from Bell Canada, my mother (who is 80 years old) will only need about $10,000 per year from her investments. Added to this is the fact that my brothers and sisters (and I, to be honest) feel the best thing to do with the $400,000 is to create a safe (and guaranteed) five-year GIC ladder, despite the fact that rates are currently at historic lows.

It appears that the best available GIC rates are from virtual banks (credit unions, actually) based in Manitoba, such as Achieva Financial, Outlook Financial, Steinbach Credit Union, etc. They all make a big deal of the fact that the Credit Union Deposit Guarantee Corporation of Manitoba guarantees 100% of all deposits with no limit (unlike the CDIC's $100,000 per-person, per-institution limit).

My question for you, then, is: Would you consider it wise to put the entire $400,000 into GICs from one institution? That is, should I "trust" that the CUDGC would be able to cover all the losses should one of these virtual institutions go belly-up?

Thanks for your advice. I will certainly follow it. - Jim B., Toronto ON

Credit union deposits are covered by provincial plans and the limits vary depending on where you live. I have never heard of any problems with this type of coverage but neither have we experienced any widespread failure of credit unions in recent times. In extreme circumstances, who knows what might happen.

It's important to remember that the Manitoba coverage is not provided by the provincial government, nor is it government-guaranteed. The CUDGE, which is financed by credit union assessments, maintains a fund that is meant to reimburse depositors in the event of a failure. So the amount of money available is not unlimited. If the fund did not have adequate assets to meet the costs of a credit union collapse, depositors could be left holding the bag.

That's not likely to happen, but then neither was the failure of Lehman Brothers. Personally, I'd be a little uncomfortable putting all my money into one credit union. - G.P.

Tax on parents' house?

Both of my parents passed away. We sold the house and the money was divided by three children. This was my parents' principal residence. Is there any capital gains tax that we have to pay? We each received around $130,000. And approximately what would we have to pay? - John K.

A principal residence is exempt from capital gains tax so the answer to your question is probably that you and your siblings don't owe any taxes. But timing is a factor. If the house was sold before the probate process was complete and the cash proceeds then distributed to you as part of the inheritance, no taxes are due. However, if the three of you took possession of the house and owned it for a period of time before it was sold at a higher price, then some tax would be due. In that case, you need to consult an accountant to find out how much is owed. - G.P.

Mom died, left TFSA

My 85-year-old mother passed on last month and I am the sole beneficiary and executor of her estate in B.C.  In January she opened up a TFSA at TD Bank with $5,000 and designated me as the beneficiary since she had no spouse. I read somewhere that it was being proposed that funds from her plan can be transferred to my TFSA without an overcontribution penalty. I asked an advisor at the bank but they were not aware of this since so many rules are not clear with these new plans. Naturally I am applying for probate of her will and I believe that this TFSA will not be included in probate fees. Could you advise me if I am I right? Even the government website is not clear. - B.T.M.

The succession rules governing TFSAs are still not well understood and the situation is complicated by the fact that each province has its own regulations in this regard.

As a general rule, a beneficiary who is not a spouse will receive the assets of a TFSA, tax-free, at death and the plan will be terminated. The assets cannot be transferred into your personal account, except as a new contribution if there is room available. Any profits earned within the TFSA between the time the holder dies and the date it is wound up will be taxable in the hands of the beneficiary. TFSAs are normally not subject to probate although the provinces can set their own rules in this regard.

My forthcoming book, The Ultimate TFSA Guide, will go into all this in depth. Advance copies can be ordered at http://astore.amazon.ca/buildicaquizm-20 - G.P.

TFSA withdrawals

If I withdrawal $4,000 from my TFSA this year can I contribute for next year my normal $5,000 plus my $4,000 from the year of 2009? In total, $9,000. - George N.

Yes. Any withdrawals will be added to your normal contribution limit in the following year. - G.P.

Clarica shares

I've been a reader now for a few years and much enjoy your newsletters. I hope you can take a few moments to answer this question. I received shares in Clarica when it demutualised several years ago. Of course, my Clarica shares were converted to Sun Life shares when the merger occurred in 2003. Since then, for the most part, I've been reinvesting the dividends. I now own 81 shares in Sun Life. What are the tax implications if I sell these shares? I'm assuming that I would be taxed on the total amount.

Is it possible for me to transfer these into a TFSA and then sell them? Would that be to my advantage? I'd appreciate any guidance you could provide me. - Bernie B., Moncton NB

The tax situation is complicated by the fact you continued to purchase Sun Life shares at various prices over the years through dividend reinvestment. You will need to establish an adjusted cost base for all your shares as a result. If you bought them through a brokerage account, ask them to help. If you bought the shares directly from Sun Life, you can contact their Investor Relations department although they may simply advise you to talk to your accountant. Dividend reinvestment plans are great, except when it comes to tax calculations.

It won't help to transfer the shares to a TFSA. You will be deemed to have sold them before making the contribution. - G.P.

Barclays sale

As you know, the board of directors of Barclays PLC has agreed to the sale of its iShares business to Blue Sparkle LP. The transaction is not expected to have any impact on the ETFs provided by iShares nor on the holders of ETFs. I had recently started switching my mutual funds into ETFs to take advantage of the lower MERs but I can't help somehow feeling concerned. Any thoughts or comments about this transition? - Leslie R.

Since ETFs are passive investments, meaning they track an index, the ownership should not matter. It would be different if the funds were actively managed and the new company decided to fire all the existing managers. As for the assets of the iShares funds, they are all held in trust.

The main thing that I will be watching is the management fees. As you note, iShares units are attractive because of their low MERs. If the new owners try to increase profits by raising the fees down the road (and I have no reason to believe they will) that would be a cause for concern. - G.P.

Being laid off, what to do?

I am being laid off from my job at the age of 55 with no pension or other income other than E.I. My wife and I have saved $260,000 in RRSPs and also another $125,000 in a savings account. I need to generate income from this money and I'm thinking of buying a monthly income fund (BMO Monthly Income or RBC Monthly Income) to provide enough money to live on for the rest of our life (age 80). Do you think it is possible for us to have enough to live on? - Doug

It depends on how you want to live. You have not given any indication of how much money you require to maintain your lifestyle, which is critical to the whole calculation. Your total savings amount to $385,000. Invested at a 6% rate of return, that would generate $23,100 a year in income, which will be supplemented by CPP when you reach age 60 and OAS when you are 65. You might also qualify for the Guaranteed Income Supplement. Is that enough? Only you know.

Of course, you could draw down capital, gradually depleting your savings until you reach age 80. But then what happens if you live to be 85 or 90 (and the odds are at least one of you will)?

I would not put all the money into one fund. Create a low-risk, diversified portfolio that is designed to protect your capital and generate cash flow. Ask a financial planner to assist in that process. - G.P.

Wants to use LIRA to buy real estate

Can a LIRA (locked-in retirement account) be used to purchase an apartment building to generate rental income? - David D.

No. Real estate cannot be held directly in a registered plan of any kind. You could, however, buy shares in a real estate investment trust (REIT) that specializes in apartment buildings. - G.P.

Estate planning

My father died 40 years ago, however his estate is still in effect. At one point there was a house involved but that was sold 10 years ago and the money put in the bank to earn interest. My mother receives the interest yearly as she had a lifetime interest in the house (which is now cash in the bank). When my mom passes on my sister and I will inherit the money in the bank. Is that money taxable? The estate files income tax every year and my mom pays tax on her interest that she receives. - Kate M., British Columbia

If the money is simply held in a savings account, then it is not taxable. However, if that is the case your mother is earning very little interest and you may want to look at some alternatives on her behalf. When she dies, a final tax return will be prepared by the executor of her estate. Any taxes due would be paid at that time. Only when all debts and taxes have been satisfied will the remaining assets of the estate be distributed to the heirs. No further tax will be payable by you or your sister on that money. - G.P.

Draw CPP now?

I am a 59-year-old widow getting CPP from my husband's pension. I am wondering if I should take my pension at 60 or wait until later. I am getting so many conflicting suggestions from "non experts" that I am very confused. Can you help me? Thank you. - Petra C.

You are probably getting conflicting answers because there are several variables involved here. For example, when you start to draw your own CPP benefit, your survivor benefit will be reduced. You cannot receive a full survivor's pension plus a full personal CPP retirement pension. You can find out more on that subject at http://www.hrsdc.gc.ca/eng/isp/cpp/survivor.shtml

Also, if you are not working now you are not accumulating additional CPP benefits and you may end up reducing your entitlement as a result. I suggest you contact your local CPP office and ask for a meeting to discuss the situation. - G.P.

Are GICs guaranteed?

Is there any risk in investing in GICs with Achieva Financial? I am hearing conflicting reports. Their website says they are fully guaranteed and backed by the Manitoba government. I would greatly appreciate the correct answer. - David C., Ontario

I answered a similar question recently but they keep coming in, probably because of the high interest rates being offered on GICs by Manitoba-based credit unions like Achieva. None of these are covered by the CDIC (Canada Deposit Insurance Corporation). Rather, their deposits and GICs are protected by the Credit Union Deposit Guarantee Corporation of Manitoba. It is not a government-sponsored organization, nor does the Manitoba government guarantee any losses. If some kind of financial disaster hit the Manitoba credit unions (highly unlikely, of course), then conceivably there might not be enough money in the fund to cover all losses. I do not see this as a high risk, but after what happened to the world financial system last year it's something you should be aware of. - G.P.

TFSA transfer

I plan to transfer my account from ING to a full service broker, but I am getting conflicting advice on the amount that can be transferred. One source says only the initial $5000 can be moved by year end and re-deposited in 2010. Other sources say that the full $5000 plus interest can be moved. The last opinion makes a lot more sense, so I would appreciate your opinion on what an official ruling might be. - Morton R.

As long as it is a direct transfer from one TFSA to another and not a withdrawal followed by a redeposit, then you can move the entire $5,000 plus interest to the brokerage account right away. Check with ING to see if they will charge a fee for closing the account, which is a common practice. It may be more than the interest you earned! - G.P.

A worried man

I heard the government will crack down on TFSAs abusers. I transferred $5,000 into my TFSA account and used it to buy INN.UN (Innvest REIT). Am I doing anything illegal? Are we allowed to buy stocks in a TFSA? What is allowed and what is not? - T.V.

Relax. You've done absolutely nothing wrong. Stocks are permitted in all registered plans, including TFSAs, as long as they trade on what the Canada Revenue Agency refers to as a "prescribed exchange". The Toronto Stock Exchange, where Innvest trades, certainly qualifies. For complete details on qualified investments, check the CRA interpretation bulletin IT-320R3 which can be found here: http://www.cra-arc.gc.ca/E/pub/tp/it320r3/it320r3-e.html

Of course, you must have a self-directed TFSA set up through a broker to buy stocks. A bank TFSA won't offer that option. - G.P. 

Tax on trust payments

Do you have to pay tax on distributions received from trust units? - Tom B., Ottawa

Absolutely, unless the units are held in a registered plan (RRSP, TFSA, etc.) However, some trust distributions have built-in tax advantages. For example, some of the payments received from a REIT (real estate investment trust) may be treated as tax deferred return of capital. You'll receive a reporting slip from the trust advising you of the tax status of the distributions you received during the year. - G.P. 

Brompton fund

What is your opinion regarding Brompton’s VIP Income Fund which is made up of 39% business trusts, 11% oil and gas, and 16% REITs? This fund is charging a reasonable 0.85% MER, is currently yielding 12.1%, and pays a monthly distribution. - Walter W.

This is a closed-end fund that trades on the TSX under the symbol VIP.UN. The fund's mandate is to deliver steady monthly cash flow by investing in a diversified portfolio of income-producing securities including income trusts, dividend-paying common shares, and fixed-income securities. The current payment is 7c a month (84c a year).

In fact, this fund is an amalgamation of seven Brompton funds that were merged into one in a major reorganization last year. This is one example of the transition we are seeing in the industry as funds that were originally created to invest mainly in income trusts are forced to broaden their asset base as the sector winds down.

This particular fund is now 50% invested in trusts that will be affected by the new tax when it comes into effect in 2011. As for the rest, 21% is in dividend-paying Canadian stocks, 10% in fixed-income securities, and 16% in REITs, which will not be subject to the trust tax.

I like the stocks that the managers have chosen for the portfolio thus far, which include BCE, Telus, and TransCanada Corp. The income trusts holdings are a mixed bag. Some are very strong, such as Keyera Facilities Income Fund and Cineplex Galaxy Income Fund. Others are marginal in my opinion, with Boston Pizza a prime example.

The fund recently announced a warrant issue which management says is designed to increase liquidity, raise cash to take advantage of investment opportunities, and reduce the MER. However, it will also dilute existing shareholders.

The units are currently trading at a discount of 8.3% to the fund's net asset value. The yield on the trading price is 11% (not 12.1% as stated in the question). Based on the NAV, it is 10.1%. It is questionable whether that yield is sustainable without steady erosion in the NAV given the make-up of the portfolio. Investors should consider the possibility of a distribution cut in the future.

Brompton is known as a competent manager and the fund's portfolio appears solid, however there is nothing that makes it stand out from several others of the same type that are available. - G.P.

RRSP withdrawals

I have about half of my savings in an RRSP. I'm 61 years old and have an adequate pension right now. I'm concerned about withdrawing from my RRSP and paying taxes. What is the best way to go about withdrawing and when should you start? I'd like to be able to take it out in a tax-efficient manner. - Rosalind

At this point, I wouldn't worry about it. You have 10 years remaining before you have to wind up the RRSP - the cut-off is Dec. 31 of the year you turn 71. Just leave the money in the plan and allow it to grow tax-sheltered over that time. And who knows - perhaps in the interim some government will extend the life of RRSPs, as some lobby groups have been suggesting.

If you have a good pension and don't need the RRSP money now, there is little sense in incurring unnecessary taxes by starting withdrawals early. One of the basic rules of investing is to allow tax-sheltered money to grow for as long as possible. Yes, you will have to pay taxes on the RRSP withdrawals at some point in the future but that's a long way off. I suggest you focus more on optimizing the return within the RRSP, consistent with keeping risk low. - G.P.

Unsure about advice

I'm 62 and two years away from retirement. My advisor feels GICS are a bad investment for me because they don't account for inflation and the rates are so low. She recommends buying solid mutual funds that pay out dividends so once I retire I can use the income from the dividends, not dip into my principal. Most experts recommend at my age to have a large portion of investments in GICs. What do you think? Thanks. - Liz B.

GICs are safe, which is one reason they are recommended for retirees who cannot afford to take big risks with their money. But your advisor is correct when she says the returns right now are extremely low. I certainly would suggest staying short-term if you choose to invest in some GICs as I expect interest rates will be on the rise by this time next year and returns will be better.

When it comes to mutual funds, be careful. Many people were hurt badly by the market crash when they put too high a percentage of their assets into stocks and equity funds. The key is to find an appropriate portfolio mix that limits risk while generating a reasonable return. Your advisor should be working with you to achieve this. If she is pushing only equity funds, I suggest you ask for a second opinion from an unbiased, fee-for-service advisor.

Also, be careful about the term "dividend". It is often used as a catch-all word for all types of distributions, some of which may not be eligible for the dividend tax credit. And remember that dividends received in a registered plan do not qualify for a tax break.

In short, you need to ask a lot more questions and make sure your advisor is carefully balancing risk and return before you act. - G.P. 

Couple wants to switch to GICs

We have RRSP money in mutual funds and would like to move to more secure areas; we are over 60 years of age. Can we move them as RRSPs to GICs and if so what method is used? Second, would it be wiser to move half of our mutual savings to GICs and put the rest into a short-term mortgage and bond fund or just a bond fund? Are the Phillips, Hagar & North funds recommended? Third, what is the deposit protection available in Canada on these funds? - Ken and Penny R.

Yes, you can move from mutual funds to GICs however whether you can do so within the existing RRSPs depends on what type of plans you have. You will need to ask the advisor who looks after your plans about this. It may be necessary to open new plans and transfer the assets to it, in which case a transfer fee may apply. Also, ask whether there will be any deferred sales charges when you sell the mutual funds.

I cannot offer advice as to what percentage of your assets should be in a particular type of security as I have no knowledge of your personal situation. Ask your advisor for guidance. In our Mutual Funds Update newsletter, we recommend both the Phillips, Hager & North Total Return Bond Fund and the company's Short Term Bond and Mortgage Fund. The latter has the lowest risk.

There is no deposit insurance coverage for mutual funds of any type. GICs are insured by the Canada Deposit Insurance Corporation. - G.P.

RRIFs and taxes

Can a person sell RRIFs to invest in bonds etc. and not have to pay income tax on the RRIF sales? - Ken

No. All withdrawals from a RRIF are taxable at your marginal rate. It doesn't matter what you intend to do with the money. - G.P.

Tax on real estate

I inherited real estate over a decade ago and want to know if I am responsible for capital gains tax. The property should sell for more than the value when I inherited it in Manitoba. I have since bought a second home and need more information about tax liability before I decide which property to sell or possibly rent for profit. - Michael B.

You don't say whether you actually live in the inherited property. If so, no tax would be payable on the sale since it would be deemed as your principal residence. If it does not qualify as such, then yes you would be on the hook for tax on any capital gain since the time of the inheritance. - G.P.

Top up CPP?

I was a stay-at-home mom while raising our family and have been working part-time in a self-employed capacity for a number of years. Because of this decreased income, my CPP benefits will be significantly less than the maximum. Is there any provision for topping up CPP contributions, similar to how some part-time employees (teachers, for example) have the option to make extra contributions to their pensions? - Pam S., Delta BC

Unfortunately, there are no top-up provisions in the CPP. However, there is what is known as the "Child Rearing Provision" which may offer some relief for you. It can be used by anyone whose earnings either stopped or were lower because they were raising children under the age of seven. In these cases, application can be made to the CPP to exclude that period of time from the calculation of the retirement benefit. The effect should be to increase the amount of the payment you will receive. For more details about this go to http://www.hrsdc.gc.ca/eng/isp/pub/factsheets/chidropout.shtml  - G.P.

New trust tax

Has the government said how the new 2011 income trust tax will be calculated as far as the trust is concerned and as far as the shareholder is concerned? Thank you for your time. - Ian S.

The tax will be imposed on the trust itself (assuming any still exist at that point), in the same way as corporation tax. Shareholders will not be taxed directly but their payments will be reduced in most cases because there will be less money, after tax, to pay out.

On the positive side, trust distributions will be treated as dividends after Jan. 1, 2011 which means they will qualify for the dividend tax credit. As a result, the after-tax amount received in non-registered accounts may not drop significantly. The biggest losers will be investors who hold trust units in registered plans and foreign residents since the dividend tax credit won't apply in these cases. - G.P.

Where to start?

I just read Sleep Easy Investing. I'm not satisfied with the funds my bank offers and would like to manage my own portfolio. Where do I start? How do I buy funds on my own? - Gordon M.

You can start by setting up an account with a discount brokerage firm. Look for one that does not charge a commission on the purchase of mutual funds. In a recent Globe and Mail report by Rob Carrick, Qtrade Investor received the top mark. I also like Scotia iTrade.

You can get unbiased information on funds from a number of sources including my Mutual Funds Update newsletter and On-Line Buyer's Guide to Mutual Funds (go to www.buildingwealth.ca) as well as websites such as The Fund Library, Globefund, and Morningstar. - G.P.

Self-directed strategy

Is the following possible?

1. Change RRSP funds to self-directed where the self-directed holds a mortgage on a rental property that we own

2. At retirement can the funds from that self-directed RRSP be paid to us on a monthly basis?

3. If this is possible would there be a time restriction as to when those payments start?

4. What other implications would arise? - Carle J.

If I understand the question correctly, you now have an RRSP that is invested in mutual funds and want to set up a self-directed plan that holds a mortgage. This is feasible but there are only a few companies that make provision for RRSP mortgages, one of which is BMO Nesbitt Burns. Talk to them about conditions and fees; these plans can be expensive.

You can withdraw money from an RRSP or a RRIF at any time and there is no restriction on when payments can begin. Of course, all withdrawals are taxable. - G.P.


Are there any advantages to using an RESP versus a Tax Free Savings Account to save for your child's education? If you can invest more than the minimum required to get the government contribution for your RESP, is it better to put the extra money into the RESP or into a TFSA? - Pamela

You should certainly aim to take full advantage of the Canada Education Savings Grant (CESG) through which the government adds an extra 20% to your RESP contribution to a maximum of $500 annually (the lifetime limit is $7,200). This means you need to contribute $2,500 to qualify for the maximum annual amount. (There are additional financial incentives for lower-income families; see the website of the Canada Revenue Agency for more details.)

Beyond that, there is no particular reason to use an RESP for additional contributions. Any extra money you wish to save could go into a TFSA. However remember that there is a $5,000 annual limit on TFSA contributions. There is no limit on RESP contributions until the lifetime maximum of $50,000 per child has been reached. So if you have a lot of money, you could tax shelter more by using the RESP. - G.P.

Fidelity NorthStar

What is your view of the Fidelity NorthStar Fund? A financial advisor directed me into this fund several years ago and I have been less than impressed. - R.H.W.

This fund came out of the gate like a rocket and was a first-quartile performer in its first two calendar years (2003-04). But then it sputtered, losing 1.4% in 2007 and 33% in 2008 (B units). In part, this was due to weak global markets but the fund's exposure to the U.S. dollar (about 40% of assets currently) did not help.  The departure of former star manager Alan Radlo from Fidelity in the fall of 2006 further eroded investor confidence.

Lately, however, we've been seeing better results from the new team which is headed by Joel Tillinghast. The fund gained 12.2% in the year to Oct. 319, well above the category average. The three-and five-year returns are also above par.

The fund's mandate allows the managers to invest around the world but the focus is definitely on North American securities with over 68% of the holdings in U.S. and Canadian stocks. That is little changed from two years ago so investors should expect that ratio to remain about the same going forward.

Overall, this is a respectable entry if you're looking for a global equity fund with an emphasis on North America. The "B" units, which have a lower MER than the older "A" units, are the preferred choice. The code is FID253, The minimum initial investment is $500. - G.P.


Bond dilemma

We are retired and need to increase the fixed-income segment of our portfolio. I would agree rates can't go much lower so do we continue to accumulate short-term bond funds such as the Barclays XSB or the Claymore CLF, increasing our exposure to the risk of higher interest rates and falling bond values?
I find it difficult as a DIY (do-it-yourself) investor to get access to good quality individual bonds. I also have a problem getting comfortable paying more than par value for a bond. - Ed B.

Short-term bond funds are the safest way to retain exposure to the bond market while minimizing the risk of loss. I especially like the Barclays CDN Short Bond Index Fund (TSX: XSB) which has never lost money over a calendar year since it was launched in November 2000. In fact, the worst 12-month period it ever experienced was a 0.52% decline in the year ending June 30/06. That's about as safe as you'll find in the bond world.

I do not suggest that small investors try to buy individual bonds. You'll be whipsawed by the very high (and hidden) commissions. - G.P.

Planning retirement

My wife and I have been permanent residents in Canada since 1995. In March 2011, I will be 65 and my wife will be 60. We are thinking of retiring at that point. I will be eligible for OAS, QPP, and GIS while my wife will be eligible for QPP and the Allowance. That will amount to approximately $900 each per month ($10,800 yearly per person). My questions are:

1. How much extra yearly income we can have individually over and above this amount without attracting clawback from GIS?

2. Will the amounts withdrawn and used from a TFSA each year cause any clawback from GIS? - Arun S., Quebec

Based on current tables, you and your wife can receive other income of up to $8,351.99 annually before your Guaranteed Income Supplement benefit will begin to drop. However, the Allowance benefit is reduced with the first dollar of additional income you receive other than OAS and GIS. You can find the relevant table at http://www.servicecanada.gc.ca/eng/isp/oas/tabrates/tabmain.shtml#how

Withdrawals from a Tax-Free Savings Account will not be considered as income so they will not affect your payments. - G.P.

How is this possible?

In 2003 my spouse received roughly $22,000 from my government pension as a payout on our pension split. She received a total sum of $57,000 (with the interest for 18 years at 5% compounded yearly). So I figure she received $35,000 interest of the total sum of $57,000. My question is the interest amount correct? It seems high to me. - Kevin M.

No, it is not correct but neither is it very far off the mark. Using the figures you supplied, after 18 years the original $22,000 would have grown to $52,946. There's an additional $4,000 that is unaccounted for but I suspect this is either a matter of timing (a few extra months at the beginning can make a significant difference) or the "roughly $22,000" was closer to $24,000.

By the way, these numbers are a great illustration of the power of compound interest. - G.P.

Capital losses and DSC fees

If you sell mutual fund units at a loss, it creates a capital loss that you can use to offset capital gains. However, if you sold these units and there were deferred sales charges attached to the units, can you also claim these charges as part of the loss? - Brent L.

Yes. If you look at Schedule 3 of the income tax return you will see there is a space for "Outlays and Expenses" from dispositions. You would claim the DSC costs there. - G.P.

Looking for rate information

Is there a website to check the rates offered by various companies regarding high interest savings accounts? - Nico V., North Bay ON

You can find the rates for savings and chequing accounts at several financial institutions on the Globeinvestor website at

The range of rates offered may surprise some people. At the time of writing, they went from as low as 0.1% to a high of 2% on savings accounts. On chequing accounts you could get as much as 1.25% or as little as zero. - G.P.


Comparing monthly income funds

Spread through several accounts including RRSPs and RESPs, I have positions in the BMO, RBC, and CIBC Monthly Income Funds. On a comparative basis, how do you rate the TD Monthly Income Fund? - Michael B.

The TD fund has the best one-year total return of the four you mentioned, with a gain of 12.9% to Oct. 31. Over three years, however, the RBC fund comes out ahead. All of these are balanced funds so if we use the percentage of the portfolio that is invested in stocks as a measure of risk, the CIBC and TD funds show the most equity exposure at 65.9% and 63.8% of total assets respectively. The BMO fund has 50.3% of its portfolio invested in the stock market while the RBC fund is the most conservative at 42.5%.

Investors who depend on a monthly income fund for steady cash flow might be uncomfortable with the TD fund's pattern of frequently changing the amount of its monthly distribution. The fund was paying out 4c a unit each month until the end of December 2008. It then cut the distribution by 25%, to 3c. In July 2009, it moved it back up to 3.6c a month and in September it went to 4.8c. Anyone relying on the fund for predictable income would find all this very frustrating.

By contrast, the other three funds have maintained their distributions at the same level for at least 18 months. The BMO and CIBC funds each pay 6c per month while the RBC fund pays 4.75c. - G.P.

Stock market losses

When the market is down, very often we hear people have incurred financial losses. I was told when the market is down and you liquidate stock or funds then you incur loss. If you stay invested (market is going to rebound), no loss is incurred. Is there any other way to incur loss, even if you have not liquidated any stock during market downturn? - F.K.

Of course. There is no guarantee that a particular stock you own will go back up even if the broad market rises. And it will be a long time before many stocks regain the highs they reached before last year's market meltdown. Some may never get there. - G.P.

RRSP confusion

I have many RRSPs with various maturity dates in future years in three banks. I've been advised to transfer all of them into one brokerage house, which I'm afraid will only create more paper work, confusions, delays, and frustration when dealing with just one broker.
What problems will I be facing as far as tax forms are concerned when I turn 69 next year, assuming that I will withdraw only the minimum required percentage each year? - H.T.

None. You don't have to terminate your RRSP until Dec. 31 of the year you turn 71. It used to be 69 but that was changed a few years ago. So you won't have to worry about minimum withdrawals for a while yet.

It sounds like all your RRSPs are currently invested in guaranteed investment certificates (GICs). It's a good idea to consolidate them but at this stage in life you need to be careful about how you reinvest the money as the GICs mature. Don’t let a broker influence you to taking on more risk than you are comfortable with. - G.P.

Impact of HST

How will the new Harmonized Sales Tax (HST) in Ontario and B.C. affect my mutual fund and ETF holdings? I live in Alberta, but most financial investment companies are based in Ontario. Will I still pay a higher management fee? - Tyler B.

It is very possible that you will. The HST will apply to companies registered in each province. This creates a real dilemma for organizations that sell nationwide, such as mutual fund companies. The HST will be applied to their management fees and other expenses and will therefore be passed on to customers no matter where they live. There has been talk that some companies will create special fund units for Alberta residents only but so far nothing specific has been announced. - G.P.

Estate tax

My father has willed his estate to me and my sister. The main part of the inheritance will be his principal residence. What are our liabilities as far as inheritance tax or estate tax? Thank you for your assistance. - Herb W.

Canada has no estate tax or inheritance tax so your liability as far as those are concerned is nothing. In fact, you have no tax liability at all. When your father passes, the executor of his estate will satisfy all debts, including taxes. The residue of the estate will then pass to you and your sister tax-free.

There is no tax on the sale of a principal residence. If the house is sold after your father's death, and has not subsequently increased in value, tax on the sale will be zero. - G.P.


Move money from RRSP to TFSA?

I am a 56-year-old female with a spousal RRSP. I'm not really retired but I did not work in 2009 and have no income (my husband still works full time). Someone has suggested taking $5,000 from my RRSP to put into my TFSA and do this every year that I have no or little income to get the money out of the RRSP at a lower tax rate rather than leaving it in there until I'm 71. What do you think? - Cathy F.

I agree with the advice you received. You will pay no tax on the RRSP withdrawal because you have no income and you can then tax-shelter the money in the TFSA so that it will never be taxable. The one drawback is that your husband will lose some of the spousal tax credit he would otherwise be entitled to, so you won't completely escape a tax cost. I suggest you calculate how much that will be before you make a decision. You can get an approximate figure by downloading Schedule 1 of the 2008 tax return from the Canada Revenue Agency website. Go to http://www.cra-arc.gc.ca/E/pbg/tf/5000-s1/5000-s1-08e.pdf  - G.P.

Buy in New York or Toronto?

I have recently taken some profits on U.S. stocks that have done very well since March and the proceeds are in a U.S. dollar account. I like the buy recommendation on RIM in the Internet Wealth Builder as a long-term position. What are your thoughts on buying the stock on the NYSE with U.S. dollars and holding them there until there is a rebound in the greenback somewhere down the road as opposed to purchasing them on the TSX with Canadian funds? - Gary H.

It makes no difference from a price perspective whether you buy a Canadian-based stock in Toronto or in New York. The price adjusts each minute to reflect movements in the currency exchange rate. The only reason to buy in U.S. dollars is if you already have American currency available to invest, which you do. So in your case, you should go ahead and buy the shares on Nasdaq to avoid having to pay an exchange rate to convert back to Canadian currency. - G.P.

TFSA dilemma

Let's assume that I have a GIC within my TFSA. When this GIC reaches maturity I may wish to replace it with one from a different institution. To purchase  this new GIC, will I be deemed to have withdrawn the funds from my TFSA and have to wait until Jan. 1 of the following year to make the purchase? I do not wish to lose the interest while waiting to re-invest! How does one make such a transaction within the TFSA? - William C.

You have two options in this situation. The first is to withdraw money from the existing TFSA when the GIC matures while leaving the account open. This should cost you nothing however you cannot contribute the cash to a new account until after Jan. 1 unless you have contribution room available. If not and you buy a GIC in a new account before then, it will be considered an overcontribution and the tax penalty in that case is severe.

The second option is to open a new TFSA elsewhere and transfer the assets to it. However, there will probably be a fee for doing this. If you close the existing account entirely, that fee may be even higher. Check with the financial institution that holds the current plan for details of their policy in this regard. - G.P.

TFSA beneficiaries

My wife and I each have invested $5,000 in TFSAs for 2009 and expect to do so again in 2010. I wonder if you could comment on the following:
Can we name each other as successor account holder AND name our daughter and son as beneficiaries - or is the latter not necessary? The goal being that in order to avoid probate, if one of us dies the other would get the TFSA but in the event we die simultaneously the kids would get them.

If you think we should name the kids as beneficiaries (and if I understand correctly, you suggest not to name joint beneficiaries as this could complicate matters) I assume we probably should each name one child as beneficiary of our account.
Another question for you: while I realize our limit is $5,000 each per year, can we invest our $5,000 for 2010 at a different financial institute or are we limited to one TFSA account? My thinking here is that often you can get a higher interest rate for a few months when opening a new TFSA. - Bill H.   

Succession laws are determined by each province and territory so a strategy that may work in one part of the country may be offside elsewhere. Certainly, you should each name the other spouse as successor account holders; that can be done in all jurisdictions except Quebec. If you are given the option by the financial institution that holds the plans to name both a successor holder and a beneficiary, it is important to clarify that the beneficiary designation will only apply if the named successor holder is deceased. You may wish to obtain legal advice about this as this is a brand-new area of succession law.

As with RRSPs, you may have as many TFSAs as you wish. There is no legal limit on the number of plans but the more accounts you open the more complicated it becomes to keep track of them.

I would also like to comment on your remark about "a higher interest rate". I am aware that many people are using TFSAs to invest in GICs. During this period of low interest rates, I think that is a bad idea. The whole purpose of a TFSA is to maximize tax-sheltered profits. A GIC at 3% will only produce $150 interest a year on a $5,000 investment. If you get 3.5%, that only adds $25 more. I suggest you consider moving to a self-directed plan so you can broaden your range of options. - G.P.

TFSA dilemma

Let's assume that I have a GIC within my TFSA. When this GIC reaches maturity I may wish to replace it with one from a different institution. To purchase  this new GIC, will I be deemed to have withdrawn the funds from my TFSA and have to wait until Jan. 1 of the following year to make the purchase? I do not wish to lose the interest while waiting to re-invest! How does one make such a transaction within the TFSA? - William C.

You have two options in this situation. The first is to withdraw money from the existing TFSA when the GIC matures while leaving the account open. This should cost you nothing however you cannot contribute the cash to a new account until after Jan. 1 unless you have contribution room available. If not and you buy a GIC in a new account before then, it will be considered an overcontribution and the tax penalty in that case is severe.

The second option is to open a new TFSA elsewhere and transfer the assets to it. However, there will probably be a fee for doing this. If you close the existing account entirely, that fee may be even higher. Check with the financial institution that holds the current plan for details of their policy in this regard. - G.P.

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Catastrophic devaluation?

With regards to the present financial crisis, many people fear that with the value of American dollar falling constantly while the national debt keeps going up, a sudden major devaluation of the American dollar may occur in the near future. This would cause a catastrophe for the small investor with savings in cash or fixed-income securities. Apparently, such a scenario would help the American government to get out of its financial mess. What would be the impact for the Canadian investor? What about those invested in equities? - Gilles G., Gatineau PQ

The U.S. dollar may continue to decline, as it has been doing for some time, but it will be gradual and orderly. Washington is not suddenly going to unilaterally declare it is worth 50% less or whatever. The effect on the world financial system and the global economy would be too devastating to even imagine such a prospect.

A lower U.S. dollar will have the effect of increasing world prices for gold, oil, etc. and the shares of resource companies would strengthen accordingly. The Canadian dollar would move over parity. The biggest losers in terms of a Canadian investor would be U.S. equities. - G.P.

Draw CPP now?

My husband and I have been self-employed since 1993. He turns 63 in March 2010. We have not been able to draw a salary in 2009, due to the economic downturn's impact on our business. Thus he has not contributed to CPP in 2009.
We are contemplating having him start to draw on his CPP. Is this a wise decision? Should he wait till 65? (His chances of earning over the next two years are next to none). He has about $80,000 in his RRSP. The house is mortgage free. We have an outstanding home equity loan of $6,900 (our only debt).
I am younger at 48 and have secured a 30-hour job at minimum wage. - Nanditta C.

It may be a good idea to start drawing CPP now especially if you can use the extra income. Waiting two years might give him a higher pension but not necessarily. In calculating the amount of your husband's pension entitlement, the CPP will drop off the lowest 15% of his earning years over his lifetime contributory period. The contributory period begins at age 18 and continues until a person starts drawing a pension or turns 70. Since he made no contribution in 2009 it will be one of the years dropped off. If he waits two more years, they will also be included. By taking the pension now, two earlier low-income years will be substituted instead.

If the total amount of the pension entitlement is important, you would have to ask a CPP representative to run the numbers and tell you which course is more beneficial. My guess is that applying now will turn out to be the best choice. - G.P.

Interest rates and bond funds

I'm aware of the inverse relationship between bond prices and interest rates but am finding it somewhat confusing. Most of the discussions I hear about bonds these days warn of not locking in for too long a maturity (i.e. longer than three years). What should I expect (in general) for mutual bond funds in an RRSP that are comprised of provincial/federal bonds and corporate debentures as interest rise in the coming years? Presumably these mutual fund unit prices will drop as well, correct? - R.M.B.

As a general rule, bond funds tend to be weak in a rising interest rate environment. Of course, the fund managers know what is going on and take steps to mitigate the damage such as by reducing term but losses can occur nonetheless. In extreme circumstances, these losses can hit double digits. For example the AGF Canadian Bond Fund dropped 11.35% in the 12 months to Jan. 31/95.

If you want to stay in bond funds and reduce risk, move to short-term funds which are much less vulnerable to the effect of interest rate increases. Staying with AGF, the one-year loss ever experienced by their Short-Term Income Class was 4.53% over the 12 months to Aug. 31/99.

Of course, money market funds are the best hiding place when rates are rising. In fact, you'll actually benefit because yields on the short-term notes they hold will increase. - G.P.

Poor RRSP returns

Since opening my RRSP in 1999, its value is just under break-even. Any growth in my RRSP is the result of my contributions. My portfolio contains Canadian and foreign equity mutual funds. I accept some volatility is normal but shouldn't I be seeing at least a 5% to 8% 10 year rate of return? It seems I would have been better off putting my money in a low yield income fund.

I am 38 now, so still have time before I retire, but could really use some advice to on how to proceed. I appreciate any insight. - Steve W.

Obviously, you have not chosen very good mutual funds. Despite two stock market crashes over the past decade, the average Canadian equity balanced fund has gained 5.1% a year during that period (to Nov. 30). That's not a princely amount but it's much better that you have been doing.

You need to revisit your portfolio and see whether a complete overhaul is needed. You may want to consider subscribing to my Mutual Funds Update newsletter for guidance. Details at http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=80 - G.P.

Saving for a home

My wife and I are planning to buy a house within the next 18-24 months. Her RRSPs total is over $30,000 and mine is about $10,000. In order to take advantage of the Home Buyers' Plan, we are now contributing to only my RRSP, so that we can withdraw $20,000 from each RRSP. Can you please clarify if it is possible to transfer funds from my spouse's RRSP to mine? - Patrick M.

No, it is not possible. Each RRSP is the personal property of the owner and transfers between plans are not allowed. (There are a few exceptions such as marriage breakdown but that is obviously not the case here.) So putting the new money into your plan is the only way to build it up. One point of clarification: a recent change in the rules now allows withdrawals of up to $25,000 per RRSP for the Home Buyers' Plan. - G.P.

Lost in Tokyo

Thanks for your sage advice over the years. Here's a weird question. I'm a Canadian expat in Japan (18+ years), and I opened an RRSP 18 months ago, thinking I'd swiftly be a resident again. This didn't happen, due to the recession but now it's up to $8,000, with a $500 gain. I know RRSPs are for residents only, so should I call Revenue Canada about this, or speak to my branch manager first? Finally, could I lose any of the balance? - Steven in Tokyo

There are situations in which Canadians living abroad may still be considered as residents of this country for tax purposes. However, if you have been living in Japan for more than 18 years I can't imagine that you would qualify.

Because of the complexities of this issue, I posed the question directly to the Canada Revenue Agency. Here is part of their reply:

"One can open an RRSP no matter where one is located, but one does have to be a resident of Canada in order to accrue contribution room. Non-residents are free to open an RRSP, but there wouldn't usually be much point in doing so, since they wouldn't be gaining any contribution room if they weren't already living in Canada. Financial institutions should be able to provide advice to their clients on this.

"This also means that if your reader is putting money into his RRSP as a non-resident, he is likely overcontributing because, as mentioned above, he has no contribution room accruing. Your reader can find out more about the implications of excess contributions at: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/xcss-eng.html

"If however the intention is to just close out the RRSP, then your reader would indeed have to pay the withholding tax. For more information, please see: http://www.cra-arc.gc.ca/tx/nnrsdnts/pyr/menu-eng.html"

The bottom line to all this is if you are not a Canadian resident, don't open an RRSP. It will be more trouble than it's worth. - G.P.

Disappointed in TFSA return

Last January I opened a TFSA with my bank, but I quickly became disappointed when their interest rate plunged and I was left with little opportunity to grow. On top of that, their transfer out fee was greater than the maximum amount of interest that I could ever make under their new rates.

My intention for 2010 is to open a TFSA with an online brokerage (Scotia iTrade) where I am expecting to actually make money which I can claim tax-free. If I withdraw all of my money from my current TFSA in the last week of December, and thus finish 2009 with $0 in my current TFSA, am I allowed to then deposit $10 000 into my new TFSA with Scotia iTrade on Jan. 1, 2010?  Thank you in advance. - Brent Fisher, Kingston ON

Yes, you can do that. The $5,000 withdrawal in 2009 will be added to your contribution room in 2010, giving you a total of $10,000. But a word of warning. The bank will probably charge a fee for closing the account and it could be a lot more than you expect (the policy varies from one financial institution to another). Ask what the cost of closing the account will be. You might want to leave it open with a few hundred dollars in it to avoid the fee and take out the rest. - G.P.

Going for big gains

I have a high risk tolerance and as such all my investments are in equities. My question: Given the tax treatment we get from dividends would it be better to leave my dividend stocks in my margin account and open a TFSA with high-growth stocks to take advantage of the capital gains that I assume I would not have to pay in a TFSA? Thank you! - Rick Hunter

Both dividends and capital gains get a tax break. However, the potential profits from capital gains are obviously much greater so if the goal is to maximize tax-sheltered income then go with the high-growth stocks in the TFSA. Of course, there is one drawback - if you lose money, you will not be able to claim a capital loss. - G.P.

Outlook for trusts

What is your outlook on income trusts for 2010? There are decent distributions but stock values can go down to eat them up and then some. - Martin Dakers

There are some trusts that should be able to maintain their distributions at or near current levels after the tax kicks in on Jan. 1/11. Focus on those. We have recommended several in my Income Investor newsletter such as Daylight Resources, Brookfield Renewable Power, and Inter Pipeline. Ask your financial advisor about them. - G.P.

Interest deductibility

If I withdraw $10,000 from a TFSA in 2010 to pay down my mortgage, can I replenish the $10,000 by borrowing an equal amount and use the interest as deduction in 2011? The contributed monies were not borrowed but replenished monies are! P.S. I think I know the answer is NO but it's worth a try!! - Ash Pedwell

You're right, the answer is no. Money borrowed to contribute to a TFSA is not eligible for interest deduction, no matter how you try to disguise it. It's the same rule as for RRSPs. - G.P.


Confused about rising rates

I am in a bit of a quandary over the effect of rising interest rates on income from bond funds. My investment objective is to generate income using a long(er) term buy and hold strategy that includes interest income from two bond funds: PH&N Short Term Bond & Mortgage and PH&N Total Return Bond Fund. Both funds are held in registered accounts.

I keep hearing that interest rates are going to rise and that one should keep any bond holdings to a maximum maturity of five years. In a portfolio that is designed to generate income through selling securities I understand how decreases in capital value can be disastrous. However, where a portfolio is relying on cash distributions, I am thinking that holding bond funds through rising interest rates will ultimately result in increases in distributions. To take it a step further, holding bond funds with longer maturities should result in larger increases in distributions over time. Do you agree with my reasoning? - Ron K., Calgary

It doesn't necessarily work that way. It's true that as rates rise and the managers add new issues to a fund, they will carry a higher coupon rate. Meantime, the bonds already in the fund will continue to pay interest at their coupon rates. However, their market value will decline and government bonds are especially vulnerable in this regard.

Bond fund distributions are mainly interest-based but there may also be some capital gains in the mix. For example, the Phillips, Hager & North Total Return Bond Fund paid out slightly more than 28c a unit on Dec. 23, of which about 10c was capital gain. That was made possible by the increase in the value of the fund's corporate bond holdings during 2009. Obviously if those bonds had dropped in value the December payment would have been less.

Short-term bond funds are less likely to make any capital gains distributions but neither are their holdings as vulnerable to losses when rates rise.

What all this boils down to is that short-term bond funds will usually provide more consistency in their payouts, with the amounts gradually increasing as rates rise (similar to money market funds). Longer-term bond funds may see more variations in their payouts depending on the nature of their holdings and the steepness of any rate increases. - G.P.

Bank stocks

Is there any harm in buying and holding all five big Canadian banks, as part of a balanced portfolio of energy, telecommunications, and consumer stocks? Specifically, I have large holdings in Bank of Montreal, Bank of Nova Scotia, and CIBC. - Mark S., Nepean ON

It depends how you define "harm". The banks have all been on strong runs since hitting their lows last winter. As of the close of trading on Dec. 24, the S&P/TSX Capped Financials Index, which is heavily weighted to the banks, was up 37.7% for 2009. Any time we see gains like that, we need to be aware of the likelihood of a correction.

So to answer your question, there is nothing wrong with owning shares in all the banks although we think some are stronger than others (e.g. Toronto Dominion). However, you may wish to watch for pull-backs and add to your holdings then. - G.P.

TFSA query

In order to accumulate unused contribution room in a TFSA is it necessary to open a plan? If some one did not open an account until 2012 can they recapture contribution room back to 2009? - P.M.H.

You do not need to open a plan to accumulate carry-forward room. However, the Canada Revenue Agency will not be able to track your contribution room until a plan is in place. - G.P.

Lines of credit

I have a personal loan and line of credit with my bank. The bank called to advise me that I should consider taking a home equity line of credit at a lower rate of interest, from 5.25% and 5.5%  to 3.5%. I have a mortgage on my home and they would place a lien on my home. Can you please advise if I should take the home equity line of credit and define it for me? I truly enjoy your readings; they have helped. Many thanks. - Richard O., Montreal

I can't tell you whether to take the home equity line - that's your call. Yes, you will reduce your interest cost but offsetting that is the fact you will be taking on what amounts to a second mortgage on your home. Frankly, the most prudent course would be to pay off the existing line of credit entirely, thereby reducing your overall debt. If that is not feasible, then you might consider using the home equity line and direct the interest saved each month to reducing the loan principal. - G.P.

Income funds

I am entering a stage of my life where income is taking on greater importance than overall portfolio growth. I have money invested in both Monthly Income Funds of Bank of Montreal and Royal Bank of Canada. The B of M fund shows growth of 4% for 2009 and pays out 8.8% monthly while Royal Bank shows growth of 8% for 2009 and pays out 4.5% monthly. Overall performance shows very little difference but since income has taken on more importance B of M seems to be the clear winner. Am I missing anything? - Dave C.

The BMO Monthly Income Fund currently pays 6c per unit monthly (72c a year). Based on the Dec. 24 closing net asset value (NAV) of $8.08, that projects to a yield of 8.9% in 2010. (However, don't lose sight of the fact that these distributions are not guaranteed.)

The RBC Monthly Income Fund pays 4.75c per unit monthly (57c a year). Based on an NAV of $12.49, the projected 2010 yield is 4.6%. So if you base your decision strictly on yield projections, the BMO fund is the better choice.

However, I suggest you need to consider total return as well. Over the 12 months to Nov. 30, the BMO fund marginally outperformed the RBC fund. However, longer term the RBC fund is the clear winner. If you invested $10,000 in the BMO fund at the start of the year 2000, you would have received a total of $7,599 in distributions and capital gains to this point. The same amount invested in the RBC fund would have generated $13,725 in total profits.

In short, don't base your decision on one factor. You need to look at the total picture before making your investment. - G.P.


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