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.

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.

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.

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.

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.

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. 

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.
 

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.
 

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.