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Displaying All Questions and Answers for 2006.

Add car loan to mortgage?
My question is about adding the cost of a car to a new home mortgage. I am currently purchasing a new apartment. The price is approximately $300,000 after taxes. I will be putting down a $200,000 down payment and taking out a $100,000 mortgage. The developer, in conjunction with TD Canada Trust, is offering a finance rate of 2.95% for the first two years only of a mortgage amortized over 25 years on a five-year term.

As I will need to replace my current car at about the same time, am I better off to take out a separate $10,000 auto loan to purchase a replacement vehicle or should I add the $10,000 cost to my new mortgage, thereby putting it up to $110,000? – Tom L.

What this all boils down to is how to pay the least amount of interest to finance the purchase of both the apartment and the car. Generally, the interest rate on a mortgage will be less than on a car loan. In that case, you would be better to increase the size of the mortgage loan.

However, car loans are amortized over a shorter period of time. To ensure you realize the full saving from the lower mortgage rate, I suggest you ask for a repayment schedule for a car loan. See how much more interest you would have to pay and then add that amount to your monthly mortgage payment. The net result should be considerably less cost to you. – G.P. (Jan/06)

Helping families overseas
My husband and I send monthly “allowances” to a family in the Philippines to assist them with basic living expenses. The gross monthly amount is $785 and for the next three years we add a further $300 to help two children with schooling. There are likely other Canadians doing the same thing for families all over the world. We don’t mind helping, but can we claim any or part of this assistance in our tax returns? Thank you. – P.M.
If the money is given through a Canadian charity that is registered with the Canada Revenue Agency, then it should be eligible for a tax credit. However, if you are acting on your own then no tax relief is available. – G.P. (Jan/06)
Americans buying income trusts
Does the fact that Americans are buying up Canadian income trusts jeopardize the safety of their yields or their principal for Canadian investors? – Bill H.
Income trusts have become very popular among U.S. investors because of their high yields. Some are inter-listed on the New York and American stock exchanges and many others can be purchased through the national over-the-counter trading service known as the “Pink Sheets”.

Most Canadian income trusts do not market their product to U.S. investors, however, because of concern about the percentage of foreign ownership. If more than 50% of the shares are held outside Canada, a trust may lose its tax-privileged status. That mitigates the danger that a trust will issue new shares simply to satisfy U.S. demand.

As a result, it is unlikely that U.S. purchases will have an adverse affect on Canadians. As long as new shares are only issued to finance investments that will be accretive to investors, and not simply to meet growing demand, yield should not be compromised. The greater danger is that the underlying business will not do well, resulting in distribution cuts. We have seen a number of those in recent months and the market has punished the shares of the offending trusts by driving down their prices. – G.P. (Jan/06)

Bank account muddle
Tom is about to leave Canada as a taxpayer this year (2005). He has already closed his bank accounts in Canada in the preparation to leave, but realized that he has room left in his RRSP for his 2005 income taxes. His RRSP holding bank is asking that the money going into his RRSP account come from a Canadian bank cheque, but unfortunately he has no bank account in Canada now. Is there any way around this problem so that he can fill in his 2005 contribution room? – Soorma B.
I suggest Tom open a temporary account with the bank that holds the RRSP and deposit enough money in it to cover the RRSP contribution. He can then give the bank a counter cheque for deposit into the RRSP and close the account. Alternatively, the bank can arrange for a direct transfer of the money from the account into the RRSP.

One more point. Since Tom is about to become a non-resident of Canada, he should find out what tax laws will apply to his RRSP once he leaves. Some countries, such as the U.S, offer very favourable tax treatment for Canadian RRSPs, but you have to know the rules and there are specific steps to follow. Tom should also be aware that he may not be able to make trades within the RRSP once he departs so he should be sure the money is invested for the long term. – G.P. (Jan/06)

Retiring to a beach in Thailand
I am a single Canadian male, aged 42, with no dependants and no debt. I’ve recently returned to Canada following seven years working overseas. Through this period I’ve managed to accumulate roughly $400,000 in non-registered assets. Of this total I’ve got $40,000 in cash, with the remainder in offshore mutual funds split 50% into equity funds and 50% into fixed-income and hedge funds.

For six months I have struggled to find employment in my field, and I am seriously contemplating returning to Asia (Thailand) to retire – cost of living being significantly lower than here in Canada.

For $100,000 I can buy a very nice beachfront condominium, the purchase of which would entitle me to residency in Thailand – and also eliminate accommodation costs. This would leave $300,000 with which to create an income stream. With no accommodation costs, I could get buy on $1,200/month (but would need this to increase at 3% annually to keep pace with inflation).

I am looking at a variety of investment options including mortgage-backed securities, income trusts, annuities, systematic withdrawal plans (SWP), etc. Is there among these options a ‘no-brainer’ safe play for someone in my situation, bearing in mind I have no need to leave any inheritance behind, and tax considerations are irrelevant for non-resident Canadians. I need my income to be 100% secure.

I will be meeting with my financial advisor in a couple of weeks to discuss this, but am concerned that being a mutual fund dealer, he will steer me toward SWP. – Marty J.

A beach in Thailand sounds great but the math won’t produce a 100% safe and secure investment solution. You say you need $1,200 a month, which works out to $14,400 a year. If that were all, then I might be able to recommend something that meets your needs. But then you add that you need an annual increase of 3% to keep pace with inflation. That’s where the problem arises. While 3% may seem modest, after 10 years your annual income needs would increase to $19,352, which is a 34% increase from your starting point. After 20 years, when you’ll only be 62, you’ll need $26,008, an 80% increase from today. It can’t be done without taking some risk.

If the inflation factor didn’t come into play, your invested capital would have to yield only 4.8% to generate the $14,400 you need. That could be achieved with relatively low risk with a portfolio of high-quality corporate bonds, such as Bell Canada, supplemented by a few top-level REITs like RioCan. But that won’t provide the growth potential you need to meet your inflation-protection requirement.

This is not a unique problem. It’s the dilemma faced by everyone who wants to retire early. They may have enough money to live comfortably at the time but will it be adequate on 20 or 30 years?

So you have three choices. The first is to reduce your income needs, which means adjusting your lifestyle. The second is to take more risks with your money in the hope that it will pay off. The third is to continue working for a while and increase your capital. It’s your call from here. – G.P. (Jan/06)

Where to invest when rates rise?
You have noted that when interest rates are declining it is a great time to be in bonds. What similar statement could you make about it being a good time to be invested in _______ when interest rates are rising? – Leroy S.
The word that immediately comes to mind to fill in your blank is “cash”. Generally, rising interest rates are bad news for most types of securities because they are a signal that central banks believe the economy is overheated and needs to slow down. Too often, the bankers overshoot the market and high interest rates plunge the economy into a recession.

In a rising interest rate environment, bond prices tend to soften (although 2005 was an exception as long-term bonds rose in value). Higher interest rates are bad news for real estate because they increase mortgage costs. Stock markets have so far been oblivious to rising rates but if economic growth begins to weaken, watch out!

That leaves cash-type securities such as Treasury bills, term deposits, bankers’ acceptances, money market funds and the like. In the past few years, they’re produced negligible returns. But as interest rates move higher, so will the yields on these short-term securities. As an added advantage, they are virtually risk-free. – G.P. (Jan/06)

Looking for 6% return
As of Jan 1, I have $336,000 in RRSP investments. I hope to grow this by 6% per year for the next eight years before converting to a RIIF and/or an annuity. What would be the best mix of assets to achieve this? I am moderately conservative and preservation of capital is now high on my list of concerns. – Mike L.
Congratulations. You have set a reasonable target for yourself in relation to the degree of risk you are prepared to accept. Too often people ask how to earn a 10% return with no risk, which can’t be done these days.

However, a 6% return with limited risk is quite achievable. I suggest you start by reducing your exposure to the stock market to about 30%. Invest that money in conservatively-managed equity funds with a track record of performing well in both good and bad markets. Some of the current recommendations in my Mutual Funds Update newsletter that fit this description are CI Canadian Investment Fund, Harbour Fund, IA Canadian Conservative Equity Fund, RBC O’Shaughnessy Canadian Equity Fund, Saxon Stock Fund, Chou Associates Fund, Phillips, Hager and North Dividend Income Fund, and RBC O’Shaughnessy U.S. Value Fund.

To this, add about a 20% weighting in conservative balanced income funds, such as BMO Monthly Income or Mackenzie Sentinel Income. Invest about 40% of the portfolio in bonds of varying maturities or in bond exchange-traded funds (iUnits has two) or mutual funds. In my opinion, the various bond funds offered by Phillips, Hager and North are the best around, although TD Asset Management also has some very good ones. Hold the rest of the portfolio in a low-MER money market fund like Altamira T-Bill or directly in Treasury bills. – G.P. (Jan/06)

Interest on RRSP loans
Are the interest payments on an RRSP loan tax deductible? Thanks. – Kyle B.
Unfortunately, no. Generally, you can claim a tax deduction on interest paid on any money borrowed for investment purposes but RRSP loans are an exception. You’ll have to carry the full cost yourself with no help from the government. – G.P. (Jan/06)
Worried about trusts in funds
I'm concerned about mutual funds that contain unit trusts. Two of the funds I am looking at are TD Dividend Growth and TD Monthly Income. They hold 17.9% and 27.8% respectively in unit trusts. Does this add another level of risk? What is your take on this situation? – Dean T.
When you say “unit trusts” I assume you mean income trusts. You’ll find them to some degree in most mutual funds that are designed to generate income. Income trusts do tend to be more risky than, say, government bonds as we saw last autumn when the trust sector was hard-hit following suggestions that Finance Minister Ralph Goodale was about to impose new taxes. After he abandoned the idea, trusts rebounded but the inherent volatility was there for all to see.

If you don’t want significant exposure to income trusts, you need to look carefully at the asset mix in any mutual fund you’re considering, as you have done in this case. Unfortunately, many companies don’t show trust weightings separately in their financial statements – they lump them in with equities. So you may have to do some extensive research. In a recent study published in my Mutual Funds Update newsletter, we found that BMO Monthly Income Fund had the lowest income trust exposure among the big bank income funds. So you may want to take a look at it. – G.P. (Jan/06)

Rules confusion
If I own non-registered mutual funds and decide to transfer some to my RRSP account, are the mutual funds deemed to be sold at the time of transfer? I understand that if I sell the mutual funds at a loss, I cannot claim the loss on my personal tax return, but if I sell the mutual funds for a gain when transferring, do I have to report the gain on my tax return? – I would appreciate an explanation. - Fran K.
You are on the right track in your thinking. Transferring a security of any kind from a non-registered account to an RRSP is called a “contribution in kind”. This is deemed to be a sale by the Canada Revenue Agency (CRA) but the usual capital gains rules don’t fully apply.

You will have to pay tax at the applicable rate on any profits that you have made between the time you purchased your mutual funds and the time of the transfer. But you are correct in assuming you cannot claim any losses. Therefore, if you have a security that has lost money, you should sell it directly and not transfer it. This will produce an allowable capital loss and you can then contribute the cash from the sale to the RRSP. – G.P. (Jan/06)

RRSP mortgage
I have enough in my RRSP to pay off my mortgage. I have heard of holding one’s own mortgage in an RRSP. Can this be done and what would be the costs involved? Also what are the limitations? Thanks. – Joe F.
Yes it can be done, at least in theory. In practice, you may have trouble finding a company that will allow you to do it in a self-directed RRSP. Most plan administrators don’t offer the mortgage option because it is cumbersome to handle. If you want to go ahead, try BMO InvestorLine. Last time I checked they were one of the few major companies offering RRSP mortgages.

Holding your own mortgage in an RRSP can be an expensive proposition since the loan must be CMHC insured. The plan administrator will also charge extra fees for the paperwork involved so make sure you get a complete run-down of the costs.

There are many restrictions on this arrangement, one of the most important being that the interest rate on the mortgage must be consistent with current commercial rates. You can’t give yourself a special deal.

For more details, try to find a copy of my 2004 Buyer’s Guide to RRSPs at your local library. It contains a full chapter on the subject. – G.P. (Jan/05)

Investing for retirement
I will begin as many others do by congratulating you on your fine publications. I enjoy both Mutual Funds Update and the Internet Wealth Builder newsletters. Wherever possible I try to incorporate the guidance provided in building and maintaining my portfolios. This leads to my question.

I'm 45 and about 15 years away from retirement. I'm in a defined benefits pension plan through my employment but try to contribute what I am allowed to my RRSP each year. Is a 'balanced' portfolio approach appropriate for my circumstances? I suspect it's too early to adopt a 'safety' portfolio but given the pension plan perhaps a slightly more aggressive approach is acceptable? I realize the RRSP is a pension plan in its own right and I am prepared to proceed conservatively but I don't want to cheat myself either.

Would a 50% equity, 10% income trust, 35% bond and 5% money market be a reasonable current allocation? Too conservative? Too aggressive? Any help you can provide would be appreciated! Thanks. – Steven P.

People who have the benefit of a fully-funded defined benefits pension plan are in a very fortunate position. They know they will receive a steady income after retirement and they are able to estimate approximately how much that amount will be, even 15 years beforehand. If the plan is indexed against inflation, so much the better.\

In that situation, you can indeed afford to be somewhat more aggressive with your RRSP. The pension plan itself is probably very conservatively managed with a relatively low equity weighting. So you can take a little more risk in the RRSP, without going overboard of course. The asset mix you mention looks about right to me. The key will be to make sure you choose the best securities. – G.P. (Jan/05)

Time to go global?
Markets are at an all-time high and many people are cautious about buying individual stocks especially when they have appreciated as much as they have over the last few months. Also, there are concerns about market direction.

My question is around the topic of mutual funds. My broker is advising me to make a move into global markets at this time as he indicates that there may be better opportunities outside of Canada. As with individual stock purchases, I have similar concerns with paying top dollar for a suite of stocks in a mutual fund at this time. Would you make recommendations as to which global funds and/or fund managers might best serve my desire to get into global funds at a reasonable cost at present? – M.R., Calgary

To be precise, it is the Canadian stock market that is at an all-time high. None of the U.S. indexes are close to their record level. As far as international markets are concerned, the Nikkei is coming off a great year but still has a long way to go to return to the glory days of the 1980s. European markets were strong in 2005 but there is a feeling we could see some slowing there this year.

On balance, Canada still looks like one of the best places for investing right now, especially given our powerhouse energy sector. But diversifying with some global funds is always a good idea.

I have recommended several international and global funds in my new Special Report titled The Top 50 Funds for 2006. One of them is the Mackenzie Cundill Value Fund which has a fine track record in good and bad markets and is heavily invested in Japan. You can purchase a copy of the full report by going to Click Here – G.P. (Jan/05)

Recently married, want to invest
We are a recently married couple who have $100,000 as a wedding gift. From reading Multiple Stream of Income by Robert Allen, putting half into index funds and 30% into Berkshire Hathaway stock would be a suggested option. What do you think about Berkshire Hathaway?

And from a well-known Canadian financial advisor/columnist, S&P/TSX 60 would be a recommended choice among other index funds. We would like your opinion on this please.

We would like to decide very shortly on where to put our money for a long-term investment instead of having it in savings account. Specifically, we are wondering which would be a better choice for a long-term growth (about 10-20 years), the S&P 500 Index or the S&P/TSX 60 Index? - Stephen & Celeste

First, congratulations on your marriage. May you enjoy many happy years together. You are most fortunate to have received such a generous wedding gift and I’m pleased that you are planning to invest the money rather than spending it.

That said, I am not excited by the approach you are considering. Let’s begin with Berkshire Hathaway. This is Warren Buffett’s company and it has been a wonderful stock for investors over the years. But Mr. Buffett is getting on and he is not likely to be around for too much longer – certainly not for the time frame you are contemplating. That raises questions about who will run the company when he’s gone.

Berkshire Hathaway shares trade on the New York Stock Exchange under the symbol BRK. There are two types of shares, A and B. Since the A shares trade for about US$90,000 each, the B shares at about US$3,000 would be the ones to look at. Those shares are an active recommendation of my Internet Wealth Builder newsletter and they have risen about 10% since they were picked last June. However, that is in U.S. dollar terms. Some of that gain has been eroded by the rise in the value of our currency.

Putting 30% of your money into that one single stock therefore exposes you to two types of risk. One is the risk associated with any stock market investing. The other is currency risk. Most economists predict our loonie will go higher, which will diminish the return on any U.S. security.

You then suggest putting half your money into an index fund and ask whether the U.S. S&P 500 or the Canadian S&P/TSX 60 will do better over the next 10-20 years. The answer is, who knows? The S&P 500 is more broadly-based but some analysts are warning it could average less than 3% a year over the next decade. The S&P/TSX 60 is our version of the Dow, a blue-chip index. If you want to invest in Canada, I’d choose a more broadly-based vehicle, one based on the S&P/TSX Composite.

The bottom line is that I think this is far too simplistic an approach. You should set up a well-balanced portfolio with exposure to all asset classes, including bonds. Find yourself a good financial advisor and work out a practical plan. Stress that you want to take a balanced approach with reasonable risk and don’t be talked into anything different. Good luck. – G.P. (Jan/05)

Taxing income trusts
I have a question about income trusts. I would like to know how the distributions are taxed and if these trusts are a better investment for RRSPs or a non-registered account. – Les U.
Trust distributions are taxed in your hands on the basis of the form in which the income was received. In some cases, one trust may distribute several types of income, each taxed differently. You will receive a detailed tax statement from each trust you own that provides the full breakdown. You may see income in these categories:

Dividends from taxable Canadian corporations: These are eligible for the dividend tax credit. It was increased on Jan. 1 but the old rate will apply for distributions made in 2005.

Capital gains: Half of all capital gains are taxable at your marginal rate.

Other income: This usually refers to interest payments. The amount is fully taxable.

Return of capital: These are tax-deferred payments that usually result from depreciation, exploration, and similar deductions that are passed through to unitholders. Energy trusts and REITs often provide such distributions. No tax is payable in the year the payment is received but your cost base is adjusted accordingly which will increase your taxable capital gain when the shares are sold.

Whether you should hold trust units inside or outside an RRSP depends on the nature of the distributions. Trusts whose income is fully taxable, or nearly so, should be held within a registered plan to take advantage of tax sheltering. Trusts whose distributions consist mainly of dividends, capital gains, and return of capital should be held outside a registered plan. – G.P. (Jan/06)

What should an RRSP return?
I was wondering if this question has an answer. What would be the average rate of return for an RRSP in the year 2005? Talking to a friend, he says his return was 22%, compared to mine at a mere 13%. Is there a site where I can find RRSP mutual fund returns (industry averages) by the year? – Len K.
There is no possible way to calculate an average return for an RRSP because everything will depend on what is in the plan. For example, last year the Toronto Stock Exchange gained about 22% so if an RRSP were fully invested in an index fund that tracked the TSX it would have been ahead by about that percentage. Interestingly, your friend was right on that mark which suggests his RRSP is mainly in stocks or equity mutual funds.

A more balanced portfolio would have produced a lower return because bonds and cash did not do as well as the TSX in 2005. The Scotia Capital Universe Bond Index gained 6.46% last year. So if you had a portfolio that was divided equally between a TSX fund and an average bond fund, your RRSP should have gained about 14.7%. If you held a higher percentage of bonds and cash, the return would have been lower.

The best way to gauge your results is to compare the individual securities in the portfolio with a benchmark of some type. For example, if you have any Canadian equity funds check to see how they did against the average for the category and for the TSX. If they significantly underperformed, it’s time to start asking questions. – G.P. (Jan/06)

Wants to buy a home with LIF money
My dad has a LIF (life income fund) and is retired. We would like to access the funds to purchase a home. He would be a first-time buyer. Is there anyway to secure the mortgage with the LIF? Everyone says we are out of luck. Hopefully, you may know a loophole. – Ray C.
Sorry, no loophole. LIFs are not eligible for participation in the Home Buyers’ Plan, nor are RRIFs and locked-in RRSPs. Nor can the assets in any registered plan be used as security against a loan. Your dad will have to find some other way to buy the house. – G.P. (Jan/06)
Looking for income funds
My question is regarding fund suggestions that would be suitable for the non-equity portion of one’s portfolio. I am looking for something like a balanced fund but without equities as I have pure equity funds to make up that part of my mix. Ideally, the fund would have combinations of bonds, income trusts, mortgage, and money market securities, adjusted for the current market. TD Monthly Income Fund is one that I have looked at, although it does have some equity as well. Please let me know your suggestions and include a couple funds with varying degrees of risk. – Jack K.
There is a new category of funds called Canadian Income Balanced and that’s where you should start looking. There is a lot of choice; Globefund lists 170 funds in this group. However, most have equities in their portfolio so you need to look at the asset mix very carefully. Also, keep in mind that many fund companies still list income trusts as “equities”, which complicates matters.

One fund with a relatively low equity component (about 37% at the start of this year) is Mackenzie Sentinel Income Fund. It is a recommendation of my Mutual Funds Update newsletter. The fund pays monthly distributions of 3.33c per unit for a projected cash yield of 4.2% based on a recent NAV of $9.52. For information about subscribing to Mutual Funds Update, go to Click Here

By comparison, TD Monthly Income Fund, to which you refer, shows an equity position of 67.5%, although some of that will be in income trusts.

If you really want zero stocks in the mix, you’ll have to look at some type of bond fund or, if you are willing to assume greater risk, at an income trusts fund. – G.P. (Jan/06)

Take tax hit to invest in RRSP?
I'm 40 and we have a family income of about $70,000. We have about $20,000 in a somewhat underperforming non-RRSP account from my pre-family days when investing was more viable. I would have about a $12,000 capital gain on this account over the past 15 years. We have not been able to fully contribute to our RRSP in the past five years and have about $10,000 of unused contribution space.

My question is: Should I take some or all of the $20,000 from the non-RRSP account and top up my RRSP account? I believe this would cause a tax hit this year but it would allow my money to be sheltered and avoid further capital gains. Does my question make sense? Any help would be appreciated. – John B.

My advice is to do nothing right now. The coming to power of a Conservative government could change the entire picture.

One of the main tax promises in the Conservative platform was to defer any taxes on capital gains if the money was reinvested within six months. Obviously, we have no details about how such a plan would work at this stage and we won’t know anything until the new administration brings down its first budget (assuming that measure will be included).

But at this stage, it’s worth waiting to find out. If you act today, you’d have to pay tax on about $6,000 (half your total gain) at your marginal rate. The new government may allow you to avoid that expense, or at least defer it for many years. – G.P. (Jan/06)

Wants to buy a house
We have three children and a single income. We have no savings, no RRSPs. Our credit rating is decent as is our income. We need to move this summer and there just aren’t any suitable rental homes in our price range. However, we could comfortably handle a mortgage payment for a modest house and insurance. I know this because our current rent is high and so are utilities especially in a home which has not been adequately insulated or had the furnace or windows updated. Also, if we got a suitable home with a yard and finished basement, my earning potential rises as I could provide day care. We don't have a down payment though. Can we borrow to buy an RRSP until April or May to enhance our tax return and then use the RRSP toward a down payment for a house? – M.K.
You’re asking if you should take on more debt (an RRSP loan) in order to be able to qualify for still more debt (a mortgage). Generally, I would not advise this but a lot depends on how much debt you can comfortably carry and what the extra debt load would mean in terms of qualifying for a mortgage loan.

Here’s how the scenario might work. You could apply for a low-interest RRSP loan (the rate is usually prime or slightly higher) and use the money to set up a retirement savings plan. You will have to work out a repayment schedule with the lender. I suggest you use the tax refund to pay down the principal on the RRSP loan to keep that cost within reasonable limits. Be sure that the higher-income spouse makes the largest contribution so as to maximize the tax refund. However, you may want to set up separate plans for each spouse for reasons I’ll explain below.

You don’t say how much RRSP contribution room you have but since you don’t have a plan now it is probably considerable. The money in the plan(s) can become the down payment on the house through the use of the Home Buyers’ Plan (HBP), but you must be careful about the timing. You must not withdraw money from the RRSP for this purpose within 89 days of making the contribution or you will not be able to claim a deduction. You can find details about this and about using the HBP by reading the Canada Revenue Agency’s Guide at Click Here

You can borrow a maximum of $20,000 from an RRSP for this purpose. That’s a per person limit, so between you and your spouse you could get up to $40,000. That should be more than enough for the down payment on a modest home. – G.P. (Jan/06)

Spousal or personal RRSP?
Is it better to have a spousal RRSP, or both personal and spousal? I know that we can't transfer from personal to spousal. – Lisa W., London ON
There is no clear-cut answer to this. It depends on family circumstances.

The primary financial purpose of a spousal RRSP is future income-splitting. The ultimate objective is to reduce family taxes in retirement by avoiding a situation in which one spouse is in a high tax bracket while the other has little or no income. This strategy may also enable both spouses to avoid the Old Age Security clawback.

It’s important to remember that a spousal plan does not create extra deduction room. All that happens is that one spouse splits his/her contributions with the other. The contributing spouse claims the full deduction.

If both spouses are likely to have similar incomes in retirement because of pensions, etc., then there is not much need for a spousal plan. If circumstances change in the future, a plan can be set up at that time. – G.P. (Jan/06)

Managing a LIRA
I've read a number of comments on LIRAs including in your excellent book The Retirement Time Bomb, but search as I may, I haven't found the answer to a very simple question.

When I set up my LIRA in 1996, my then-advisor told me that I could pick just about any investment vehicle I wanted, but once that purchase was made, no further changes were allowed. I was wedded to that investment until the plan was converted at my retirement. Is this true, or am I actually free to buy and sell different qualified instruments within the plan just as I would with my personal RRSPs?

And if I'm allowed to ask a tag question: the funds for my LIRA came from a crown corporation RPP where I accumulated about three years of service. "Cashing out" of the plan gave me about $4,000, the total of my own contributions with nothing of my employer's contributions. Assuming that I left a defined-benefits plan, do you think I made the right or the wrong choice to transfer to a LIRA? – Jeff H., Kingston ON

You are certainly allowed to make trades in a LIRA if you have a self-directed plan. If you don’t have one, you can switch. Ask the company that administers the plan.

As a general rule, I advise people who are members of a defined benefits pension plan to accept a deferred pension rather than transferring the money to a LIRA. A pension is guaranteed, especially if it comes from a Crown corporation. The return on a LIRA is not.

However, we are talking about such a small amount in your case that it probably does not matter. By the way, if you are 55 or older you can simply collapse the LIRA and withdraw all the money. Ontario allows this for very small plans. Of course, you’ll have to pay tax on the withdrawal. Check the website of the Financial Services Commission of Ontario for details. – G.P. (Jan/06)

Stock splits
During 2005 there were stock splits in my portfolio. Are there any newsletters that have any articles regarding the financial issues, including taxation issues, with these stock splits? – Page M.
Stock splits are usually considered good news and there are normally no tax implications involved with them. All that happens is that you receive additional shares. The total value of your investment does not change.

For example, suppose you own 100 shares of a stock which is priced at $50 a share. Your investment is worth $5,000. The company then declares a two-for-one split. You will now own 200 shares, but the market price will drop by 50%, to $25 a share. The total value is still $5,000.

The reason splits are considered advantageous is that they reduce the cost of high-priced stocks thereby making them more attractive to small investors. To show you how this works, we recently recommended shares of Fortis Inc. in our Internet Wealth Builder newsletter at $83.20. Some people are reluctant to pay that much for a stock because a board lot of 100 shares would cost more than $8,300.

Subsequently, Fortis split the shares four-for-one. As I write, they are trading at $23.65, which means you can now buy 100 shares for less than $2,400. That makes them more attractive to retail investors. By the way, the stock is up almost 14% since we recommended it last August and pays a good dividend.

I do not know of any newsletters that are exclusively devoted to share splits. However, several of our Internet Wealth Builder recommendations have split and we always provide full details to our members when that occurs. You can find out more about the newsletter at Click Here –G.P. (Jan/06)

Cash to invest
I have cash to invest and I'm looking for a tax break. Can you advise what mutual fund category I should be looking into for a lower tax rate? - Paul C., Bowen Island BC
It really depends on whether you are more interested in steady income or long-term growth.

Growth funds, such as those in the Canadian Equity category, will hopefully produce capital gains over time. Half of such gains are currently taxable but the Conservatives have promised to introduce legislation that would defer all capital gains taxes if the money is reinvested within six months. So this could turn out to be a huge tax break, depending on the details.

If income is your main goal, look at mutual funds in the Canadian Income Trusts and Canadian Income Balanced categories. But do some homework as to which funds have the best tax-efficiency rating over time. We publish an annual report on mutual fund tax-effectiveness every spring in the Mutual Funds Update newsletter. The 2005 report has not yet been completed but in 2004 the best performers from a tax perspective were Clarington Canadian Dividend Fund (Clarington is being bought by Industrial Alliance), Talvest Dividend Fund, Standard Life Monthly Income Fund, AIM Canada Income Fund, Clarington Canadian Income Fund, BMO Monthly Income Fund, and CIBC Monthly Income Fund.

You can find more information about Mutual Funds Update at Click Here - G.P. (Feb/06)

How many funds?
I recently retired and have decided to engage an advisor to assemble a portfolio that will generate income at a reasonable level of risk. One advisor whom I am evaluating has come back to me with a suggested portfolio that contains 32 funds. Our holdings are divided into a registered plan for myself (six funds), a registered plan for my wife (four funds) and a non-registered portfolio for jointly held assets (22 funds). The registered portions will be left to grow while the non-registered will be withdrawn first. The registered portion seems reasonable but I am wondering how many funds are typically required to achieve a well diversified portfolio. – Ron K.
This seems like a lot of funds to me. I don’t really understand what the rationale would be for holding so many. A well-diversified income portfolio could be achieved with a much lower number of funds, which would be easier to manage and monitor.

As basic funds, I would include a core bond fund, an income trusts fund, a dividend fund, and a monthly income fund (which will blend holdings from all these categories). If you want more diversity, add a high-yield bond fund, a short-term bond fund, a real return bond fund, and a foreign bond fund to the list.

For growth, include a Canadian equity fund, a U.S. equity fund, and a global equity fund. That works out to a total of 11 funds, which is more than enough. Put the bond funds in the registered plans because interest receives no tax advantages. The rest can go in the non-registered portfolio. – G.P. (Feb/06)

Deducting mortgage interest
Is there any way I can claim my interest expense on my mortgaged house used as a primary residence? – S.M.
Yes, but only if you can meet certain conditions. In order for interest to be tax-deductible, the loan must be incurred for investment purposes. Normally, a mortgage does not qualify.

However, if you have an existing investment portfolio here is a strategy to consider. Sell the assets in the portfolio. Use the cash to pay off the mortgage. Then take a new mortgage on the property. Use the proceeds to invest in a new portfolio. Now the interest is tax deductible.

Of course, you need to consider such matters as capital gains taxes on the liquidation of the existing portfolio and penalty fees for early discharge of the mortgage so check all the details carefully. – G.P. (Feb/06)

Cashing GICs
If I cash in my GIC do I pay income tax on the total amount or just the interest? – Lynn V.
Only on the interest, assuming you are talking about a GIC held in a non-registered account. Actually, you are supposed to declare the interest each year as it accrues and pay the tax rather than wait until the GIC is cashed in or matures.

Note that you may not be able to cash in the GIC at all. Most are locked in until maturity. If you are allowed to redeem it, you will probably be hit with a stiff penalty. – G.P. (Feb/06)

Parents in nursing home
I am currently administering my parents’ funds as they are both now in a nursing home and cannot manage their financial affairs. Because their home and other expenses are covered out of the interest paid on about half of their available funds, my father is interested in giving the balance to my sister and me now rather than waiting until they have passed away. This way, we can purchase homes, pay off bills, make our own retirement investments, etc.

In reviewing their accounts, I noticed that the bulk of their holdings are in term deposits, but that they have around $68,000 in RRIFs. What would be the best way to deal with these funds? Collapse the RRIF plans now and pay the tax? Wait until their estate is settled and pay the taxes then? Any other suggestions? – Moira S.

Collapsing the RRIFs could result in a higher tax bite than spreading the payments over time since all the money would be taken into income in the same year. The tax-sheltering benefits of the RRIFs would also be lost.

It would seem that the easier and less expensive approach would be to have your parents make cash gifts to you and your sister as term deposits mature. They can continue to draw income from the RRIFs along with interest from the term deposits they retain.

As an aside, they could increase their income substantially by using something other than term deposits, which pay very low returns. There are plenty of low-risk securities that would be more effective, like bank preferred shares. Since you are administering the money, you may want to subscribe to my Income Investor newsletter which offers specific recommendations on a range of income securities. Details at Click Here – G.P. (Feb/06)

Investing in dividend funds
I am considering purchasing a dividend fund for my RRSP. There are two specific funds that I am looking at and both have performed very well. One of the funds reinvests its distributions monthly, while the other reinvests them annually. Would I be better off purchasing the fund that reinvests its distributions monthly? – Jim H.
In principle, yes. The reason is that monthly reinvestments allow you to take advantage of dollar-cost averaging. The benefit of this approach is that you buy new units on a regular basis, which smoothes out the ups and downs of price movements. If you only reinvest once a year, you could find you are buying at the top of the market. – G.P. (Feb/06)
Thinking of investing in a labour-sponsored fund
I recently retired and I am really an amateur investor. I saw a full page ad in the Halifax-Herald dated Jan. 24/06 from GrowthWorks Atlantic Venture Fund. It reads in part: "What would you do with $3,500 in tax savings?" I would consider putting $5,000 in this fund. Could I put this in an investment outside of my RRSP? As I am retired, I cannot use the investment as a deduction on my income tax return. Any advice or suggestion on this matter would be greatly appreciated. – Doug B.
My advice is to be cautious. The tax savings mentioned in the ad are attractive but they don’t tell the full story. A large part of the $3,500 figure includes the RRSP deduction, which you say that you cannot use. If you go to Click Here you will find a breakdown of the tax savings in the provinces where this fund is available. Look over the table carefully to see how much tax money you would really save.

You should also be aware that, as with all labour-sponsored venture capital funds, risk is on the high side. These funds are designed to invest in small businesses, some of which may still be in a start-up phase. Of course, the managers do their best to identify winners and GrowthWorks has a decent track record in this regard. But there are no guarantees and many labour-sponsored funds have been long-term money losers. Since you are retired, you need to be especially careful about the amount of risk you assume. – G.P. (Feb/06)

20-year-old wants to open RRSP
I am 20 years old. I am increasingly interested in starting an RRSP and with all the options available I wanted to know what you would suggest I get into. I want to start off with a lump sum investment of say $500-$1,000 and continue with monthly payments of $25-$40. Would you suggest a growth mutual fund? A conservative one? A balanced fund? Or even a segregated fund? I am looking for growth long-term. People always stress starting an RRSP early so you have the growth needed by the time you are ready to retire. What you would suggest? – Abbas D.
I agree that starting an RRSP early is a great plan. My advice in your situation is to begin with a well-managed balanced fund. I prefer this approach for beginners because it greatly reduces the chances of a loss. Over the years, I have learned that the worst thing that can happen to people who are just starting to invest is to lose money. It can be traumatizing and may result in a life-long aversion to investing.

This is unlikely to happen with a conservative balanced fund. Two that we recommend in my Mutual Funds Update newsletter are Harbour Growth and Income Fund, which is part of the CI group, and Saxon Balanced Fund. Both of these came through the market crash of 2000-2002 without losing money in any calendar year, which is a true test of capital protection. However, the Saxon fund requires a $5,000 up-front investment so that one is out of your reach for now.

Once you have developed more investment knowledge you can add other types of mutual funds and even move to stocks and bonds if you wish. But begin modestly and go from there.

If you would like more information about Mutual Funds Update, go to Click Here – G.P. (Feb/06)

Would RRSP investing be worthwhile?
I am 24 years old and pull an annual income of about $24,000, putting me well within the lowest tax bracket. I don't want to retire with a lower standard of living than I have now, so my retirement income could be in a higher tax bracket than my present income. In this situation, is RRSP investing sensible or would I be better off in non-registered investments? – J.H.
I suggest you start building your RRSP now but defer claiming the deductions until you are earning more money in the future. This will achieve two goals. First, it will enable you to start benefiting from tax-sheltered compounding at an early age. Even if you only invest $1,000 a year at 5%, by age 65 your RRSP will be worth almost $128,000. Second, your contribution credits will accumulate each year so that by the time you are in a higher tax bracket you will be able to get more bang for your buck when you claim your deductions. – G.P. (Feb/06)
Withdrawing money
If I withdraw money from my RRSP and my non-RRSP portfolio, do they charge any fees? - George N.
Not directly under normal circumstances, except for withholding taxes on RRSP withdrawals. But there are a number of situations in which some type of fee may be assessed. Here are three examples:

Mutual fund units. If you sell a position in a mutual fund in order to withdraw cash, a deferred sales charge (DSC) may apply.

Guaranteed investment certificates. If you cash in a GIC before maturity (assuming you are allowed to do so), a penalty will be assessed.

Stocks. If the cash comes from the sale of stocks, a brokerage commission will be charged.

Also, some financial institutions will charge a fee if frequent withdrawals are made from an RRSP. Check with the plan administrator. – G.P. (Feb/06)

Using younger spouse for RRIF
I will be 69 years old this year and will have to convert my RRSP to a RRIF. In order to reduce the minimum percentage withdrawal each year, I believe that RRIF withdrawals can be based on the age of a younger spouse. Is this indeed the case and are there any disadvantages to proceeding in this manner? My wife is seven years younger than me. Also what is the OAS claw back amount for 2006? - N.W.
Yes, you can certainly use the age of your spouse and it would make sense for you to do so. There is no disadvantage to this option, only upside. Here’s why:

The minimum amount of money that must be withdrawn from a RRIF (registered retirement income fund) increases significantly each year. At 69 (it’s your age on Jan. 1 that counts), you only have to take out 4.76% of the plan’s value. By the time you reach 71 that jumps to 7.38% and keeps on rising from there until it reaches 20% when you hit 94. You must make the minimum withdrawal and pay tax on it, whether or not you need the money.

By using the age of your younger spouse, you will add much more flexibility. At age 62, the minimum withdrawal based on her age will be only 2.63% and this will increase more slowly until the big jump at 71. If you find you need more money, you can take it out of the plan – there is no maximum limit on a RRIF withdrawal, only a minimum.

You must make the designation to use your spouse’s age at the time the RRIF is set up. If you don’t do it then, the option is lost.

Re your second question, the OAS clawback will kick in this year when your net income exceeds $62,144. – G.P. (Feb/06)

Won lawsuit, what to do with money?
I would appreciate your advice as I am very confused about what to do with some money that I have recently come into. I settled a lawsuit and now have $38,000, the most money I have ever had in my life! I am 35 years old, a single parent, and have $43,000 in student loan debt, almost $10,000 in credit card debt, and no savings.

I plan to use $30,000 to pay off debt ($10,000 for the credit cards to be wiped clean and $20,000 toward the student loans). I have already used $3,000 for a vacation and some necessary household items, which leaves me with $5,000.

I don't necessarily require an investment with tax benefits, as I still have a fair amount of tuition left to use as a benefit toward this year's claim. My annual income is $35,000, not leaving a lot for monthly contributions toward a savings or investment account. What is the smartest way to use this $5,000 to start an investment fund that I can continue to contribute to so that I can have a safe and secure 'nest egg'? Also, am I on the right track with my plan to pay off debt? - Angela W.

You should certainly pay off the $10,000 in credit card debt. That is costing you a lot in interest, which is not tax-deductible. The student loans are another matter. You get a tax break on the interest you pay on those, so they should rank lower on the priority scale.

Let me suggest another possible scenario you may wish to explore. You say you have no savings, which suggests you do not have an RRSP. Since you are 35 years old, that would indicate you have accumulated a lot of carry-forward room, perhaps tens of thousands of dollars. Instead of repaying the student loan immediately, you might want to consider making a large RRSP contribution. You would not have to claim a deduction for the full amount immediately; it could be spread over several years. Doing this may allow you reduce your 2005 tax to zero. You could then use the money from the refund cheque to begin reducing the balance on the student loan. If the RRSP contribution is large enough, you may be able to do this each year for the next two or three years.

In this way, you would give yourself a good start towards building that nest egg while at the same time accelerating the student loan payment with an assist from the Canada Revenue Agency. Check out the math and see if it makes sense. – G.P. (Feb/06)

College student thinking about RRSP
I am a 21-year-old in my final year of my undergraduate degree. I do intend to go to grad school, but I'm taking one or two years to gain work experience. The income from working will go towards grad school because I intend to continue to live with my parents and continue to sponge off of them. I have $3,500 in my savings account now and I make about $90 a week at my part-time job. Should I be thinking about making an investment into an RRSP? If so, how little or how much would you recommend? - Spring Graduate, Nova Scotia
It’s always a good idea to start an RRSP as soon as possible because it maximizes the effect of compounding over your lifetime. So if you want to put some of your savings to work in that way, go to it. However, do not claim a tax deduction now. You can delay making the claim until you are finished school and begin working. In that way, the tax benefit will be maximized.

You ask how much you should put in. My usual answer is “as much as possible” but the more relevant question is how much RRSP room do you actually have at this point? You can only contribute 18% of the previous year’s earned income. If you are earning $90 a week, your RRSP limit over a full year will be only $842. However, you may have some carry-forward room as well. Check your 2004 Notice of Assessment to see. – G.P. (Feb/06)

Wants to go to Florida on RRSP money
My wife and I have a spousal RSP as well as my own RRSP. We are currently pulling money out of the wife's spousal RSP to supplement my pension. My question is: Do you have any suggestion for options I could take advantage of with my own RRSP? Secondly, we enjoy traveling to Florida each winter and I was curious whether or not I could pull money from my RRSP to accommodate our travel? I would take out approximately $10,000 yearly and need to know the tax implications which I understand are about 20%. – Larry F.
I’m not sure what you mean about options for your own RRSP. Any money you take out is taxable at your marginal rate. I know of no legal way around that.

As far as Florida is concerned, no one asks what you are going to do with the money when you withdraw it from an RRSP. That’s your business. Go to Florida, blow it in Vegas, buy a house for the kids – it’s strictly up to you. The only question you have to answer for yourself is whether you can afford the additional expense. If making a $10,000 annual withdrawal from the RRSP is going to leave you financially strapped after a few years, you need to think about it carefully.

As I mentioned, the tax you pay on an RRSP withdrawal is at your marginal rate, whatever that may be. The 20% figure you mention is the amount that would be withheld by the plan’s administrator on a $10,000 withdrawal (assuming you do not live in Quebec). The percentage ranges from 10% to 30% depending on the amount taken out. However, this is not the total tax payable. It is simply an installment. The full amount due will be calculated at the time you file your return. – G.P. (Feb/06)

Claiming a capital loss
I have a capital loss from 2001. Can I use this against my employment income this year? Or does it have to be against capital gains only? – W.P.
You’re out of luck on this one. Capital losses can only be written off against capital gains. Claims against regular income are not allowed. The good news is that you can carry forward those losses indefinitely. They don’t expire. – G.P. (Feb/06)
Who gets the dividend?
If shares or trust units sold five days before a dividend payment who gets the dividend, the seller or the buyer? – James M.
In the time frame you mention, usually it will be the buyer. It depends on the “record date” – that’s the date on which all investors who own shares or units qualify to receive a payment. It is usually several weeks before the actual payment date. If the trade is settled after the record date, then the buyer receives the dividend. If it is before, the dividend goes to the seller. When a stock trades “ex-dividend” it means that the record date for the next payment has passed.

You can usually find the record date for all dividends by checking a company’s or a trust’s website. – G.P. (Feb/06)

RRIFs and the pension credit
Does a RRIF qualify for the $1,000 pension income deduction? – Frank J.
Yes, but only under certain circumstances. Before I explain them, let me clarify a point. You refer to this as a “deduction”. It is not – it is actually a tax credit. You are allowed to claim a “pension income amount” of up to $1,000 at line 314 on the tax return. The federal tax credit is worth 15% of that, or $150. The provincial credit is on top of that, so the total credit will usually be worth between $200 and $250, depending on where you live.

You can claim income from a RRIF at line 314 if you are age 65 or older or if you received the payments because of the death of a spouse or common-law partner. So you can’t just set up a RRIF at any time and make this claim. – G.P. (Feb/06)

Wants tax advice without paying for it
I am looking for tax planning advice without having to pay for a professional analysis. What books or newsletters would you recommend?

My situation is fairly simple and there are probably limited ways to reduce my tax bill, but I want to be aware of all options. My retirement income (indexed employer pension and CPP) is sufficient for a comfortable lifestyle and I also have a modest investment portfolio (mostly non-registered but also RRSP) from which I draw periodic income for the "extras", such as special purchases and extended travel. My wife and I own our home mortgage-free, and I have no other significant debts. – Tom K.

There are two books that stand out above the rest. One is Essential Tax Facts, by Evelyn Jacks. It has been completely updated for 2006 and provides tax tips for everyone from young families to retirees. It’s published by Knowledge Bureau Newsbooks.

Also take a look at Winning the Tax Game 2006 by Tim Cestnick, published by John Wiley and Sons. It’s very well written with a lot of revealing anecdotes and plenty of useful tax advice.

I have also found that it is helpful to buy tax preparation software and to use it for your return. These programs are very sophisticated and will draw your attention to deductions or credits that you may be overlooking. – G.P. (Feb/06)

Choosing the right portfolio
How do you choose a good mutual fund investment portfolio? (In my case it’s for an RRSP.) All the banks have a set of low to high risk portfolios, claiming that they perform better then the others. What key factors should be considered when shopping around? – Marty F., Ottawa
Portfolios have become big sellers for the banks and for other mutual fund distributors. Personally, I’m not thrilled with them. I think they are more about marketing than performance. In my experience, a simple balanced fund will usually perform as well or better as a complex portfolio.

Let’s look at an example. The RBC Balanced Fund recorded a three-year average annual compound rate of return of 14.2% to Jan. 31. RBC also offers seven “Select” portfolios, tailored for different levels of risk from conservative to aggressive growth. If you check them out, you will see that only one, RBC Select Growth, did better than the plain vanilla balanced fund over the same period, with a 14.9% average annual return. Returns on the others ranged from 8.9% to 12.4%, all well below RBC Balanced. Faced with all those options three years ago, would you have picked the right portfolio fund? You’ll find a similar pattern with the other fund companies.

The process of getting to the supposedly right portfolio can be time-consuming and somewhat nerve-wracking as there is typically a detailed questionnaire that must be completed. If your RRSP is relatively small, it’s not worth it. If there’s a lot of money in the plan, use a top-notch professional to build a personalized portfolio. – G.P. (Feb/06)

Sold condo, repay HBP now?
I sold my condo 11 months after buying. It was my principal residence. I borrowed $18,000 from my RRSP as part of the down payment. I now have excess cash from the sale and am renting an apartment (so I don't have a mortgage to use the money towards).

Would you recommend paying back the entire $18,000 immediately, or putting back some smaller portion of it (somewhere between the minimum required and the full amount?). I have already maxed out my RRSPs for 2005 and I still money left over. – Trish H.

I think the real question is why would you not repay your Home Buyers’ Plan (HBP) loan right away? You have the cash and you don’t seem to have any other plans for the money. Putting it back into the RRSP allows you to invest it in low-risk mutual fund, GIC, or some other type of security within a tax shelter. If you leave the money outside the plan, you may end up spending it. Even if you invest it, any interest, dividends, or capital gains you earn will be taxable.

The key to building a large RRSP is to get money into a plan early so it can compound for you over many years. Using the HBP compromises an RRSP’s growth, however it can be argued that the trade-off (owning a home, which is an appreciating asset) is worth it. But in your case, you no longer have the home so your best move is to make the RRSP whole again. – G.P.

Claiming CPB interest income
I hold a number of Canada Premium Savings Bonds. It is my understanding that I pay income tax on the interest when I redeem the bonds, not each year. However, I have received a T5 slip for the interest accrued in 2005. Do I pay each year, or only when the bonds are redeemed? – Doug M.
As a general rule, interest income from all types of securities including Canada Premium Bonds (CPBs) must be reported each year, even if you don’t actually receive any money. That may not seem fair but those are the rules.

For the record, there are actually two types of CPBs: regular interest and compound interest. The regular interest “R” bonds make annual payments while the compound interest “C” bonds pay interest only at maturity or when you redeem the bond. In the 2005 General Tax Guide, the Canada Revenue Agency gives this instruction: “For both kinds of bonds, report the amount shown on the T5 slip.”

So you don’t have any choice, no matter which type you have. You must declare the interest earned in 2005 when you file your return. – G.P.

Mom wants to give daughter $5,000
I live in Ontario. My mom lives in Quebec. She wants to give me a $5,000 cash gift. Do I have to declare this as income on my 2005 taxes? What kind of proof, if any, does my mom have to provide that the $5,000 was a cash gift? Are there any taxation issues between Quebec and Ontario to consider in such a cash transfer as a gift?

I could swear that someone told me at one point that a parent could make a ONE-time cash donation to their children and that would help the parent with their amount of tax being paid (not sure on this, just something I heard). – P.S.

There is no gift tax of any kind in Canada. Your mother can give you $5 or $5,000 or even $5 million without tax implications, as long as you are over 18 (there are special rules for minor children relating to income attribution). And she can do this as often as she wishes – there is no such thing as a one-time rule. Neither you nor your mother needs to declare this on a tax return. – G.P.
Needs money to keep a roof over his head
I live in Alberta. I have recently had a very bad year and would like to withdraw money out of a vested RRSP. I need this money to maintain a roof over my head and have no income currently. How can I withdraw this money? I do not care what the penalty would be as I require the money to live. Any advice would be appreciated. – Brian P.
I assume you are talking about a locked-in RRSP (LIRA). If that’s the case, you’re in luck as long as your plan is administered by the province of Alberta (if it falls under federal jurisdiction, you’re out of luck). There are a number of situations in which withdrawals from locked-in plans are permitted and yours appears to be among them.

Alberta residents may apply to the province’s Superintendent of Financial Institutions for access to a LIRA if, among other things, they face eviction or mortgage foreclosure, need money for first and last months’ rent, or have income of less than $28,067 a year. Keep in mind that when the money comes out of the plan it is taxable. You’ll find more details at Click Here

Also, there is a full chapter on this subject in my new book, The Retirement Time Bomb. You can order a copy through Amazon.ca at 34% off the cover price by going to Click Here - G.P.

How long should tax records be kept?
How long must receipts and tax returns be kept before they can be safely destroyed? – Neil W.
The Canada Revenue Agency recommends keeping copies of all receipts, reporting slips, and similar documentation for six years “in case we select your return for review” (doesn’t that sound ominous?). If you file electronically, keeping supporting documents is even more important because they validate claims made on the return for which the CRA has no hard evidence. – G.P.
Borrow from RRSP to buy stocks?
If I should borrow money to buy out stock securities from my RRSP can the interest be deductible? - Arnold C.
It’s an interesting idea. It sounds like you want to borrow cash and use the money to swap stocks out of your RRSP, then claim the interest cost as a tax deduction on the grounds that you used the money to “invest”. Since the RRSP is a separate legal entity, you might have an argument. However, I don’t think the Canada Revenue Agency would allow anything like this for the obvious reason that the whole transaction would be a sham. You wouldn’t really have invested in anything. All that would happen is that assets would be shifted around in the hope of getting a tax break.

And what would be the purpose anyway? You already own the stocks in your RRSP. Even if you could deduct the interest on such a loan, there would still be an after-tax cost to you. In effect, you’d be paying out money to finance stocks you already own. – G.P.

Earns $300 a week, wants to invest in stocks
I am a housewife with a weekly salary of $300. How can I buy stocks and make money? I would really appreciate the help from an expert as I am not experienced in this line of work. – Blondelle D.
Let me put this as kindly as possible. Forget it! The stock market is no place for someone with limited income and zero experience. If you really have some extra money to invest, start modestly with a conservatively-managed balanced fund. Any of the no-load balanced or monthly income funds from the banks would qualify and you can usually open an account with as little as $500 (less for an RRSP). If you have more income later and want to invest in stocks, educate yourself before sticking your toe in that water. There are lots of great books on the subject. – G.P.
Understanding spousal contributions
Suppose my RRSP contribution limit is $10,000. If I contribute $10,000 to my RRSP account and also contribute $6,000 towards my wife’s RRSP would I be overcontributing? Does contributing to my wife’s RRSP affect my contribution limit? My wife is not working. - I.B. from Toronto
Yes, you would be overcontributing by the $6,000 you added to your wife’s spousal plan. Many people are confused by this. A spousal plan does not provide any extra contribution room. All it does is to allow contribution splitting. If you contribute $6,000 to your wife’s plan, you will be able to put only $4,000 in your own RRSP without going over your limit. – G.P.
Using RRSP money for rental property
I am in my early 50s and have about $70,000 invested in mutual funds. I have been thinking about taking $10,000 out of my RRSP and using the money for a down payment on buying a house in another city and renting it out for a few years until we are ready to retire. Is this a good idea or are we getting too old to do this? If this doesn't work out, the house can always be sold. – Mariann M.
I’m dubious, perhaps because I did exactly this when our children were in college. We never made any money on the property and it was a huge relief when we sold it and recovered our principal.

You don’t say whether you have ever been a landlady. If not, it’s probably something you should not undertake. The headaches and frustrations aren’t worth it. Having the property situated in another city would make it even more difficult. At least if it is located nearby you can keep an eye on the place and make sure the renters aren’t trashing it. I suggest you think this through very carefully. – G.P.

Deciding on mortgage term
We have a large mortgage on our home although we have no other debt and the ability to service is not an issue. My question is related to your take on interest rates. Right now our mortgage rate is 3.4% and we have been utilizing one-year terms to our benefit (i.e. to reduce interest costs and apply more to principal) for the last couple of years. I see now that the spread of interest rates is very small over 1-5 year terms. Do you suggest continuing to renew with one-year terms or should we consider locking in for a longer term at this time? My mortgage comes up for renewal in April. – John B.
You have been following exactly the strategy I have recommended for years – pay as little interest as possible and direct the difference towards reducing principal. I see no reason to change now.

True, interest rates have been rising. But in its March statement, the Bank of Canada hinted that the current tightening cycle may be coming to an end. Certainly, no one is expecting a big upward spike in rates any time soon.

The fact that one and five-year rates are so close tells you that the financial institutions expect rates to remain fairly stable. If they didn’t, the five-year rate would be much higher.

Of course, predicting interest rate movements is not an exact science. But based on current indicators, it would seem logical to stick with your plan. – G.P.

Sell everything now?
We have a considerable capital gain in our portfolio at present. My husband wants to liquidate the entire portfolio to "lock in" this gain because we have enough (old) capital losses to match it, then gradually rebuild the portfolio. I cannot see the logic in this and we agreed to ask you if there is in fact some logic in this? Thanks so much. – Edna C.
I’m always reluctant to insert myself between a husband and wife when they are having an argument. Call it self-preservation! I only do so in this case because there is no black-and-white answer to your question.

Taking some profits when the market is high is never a bad idea if you are doing it as part of a well-defined strategy. However, I would not advise selling only to trigger a capital gain.

I suggest you come at this from a different direction. Ideally, what would you and your husband like to own in your portfolio at this time? If it is exactly the same securities as you already own, then selling everything isn’t a great idea. If you’re selling and buying stocks, you’ll have to pay two sales commissions, which can be expensive depending on your arrangement with your broker and the volume involved. If it’s mutual funds, there may be load fees or deferred sales charges.

However, if there are some securities that you feel are now too expensive or no longer appropriate, then by all means sell them and use the proceeds to reinvest at the right time. If you don’t use up all your capital losses this year, they will carry forward indefinitely.

There is one thing to watch, however. During the election campaign, the Conservatives promised to bring in a measure that would defer taxes on capital gains if the money were reinvested within six months. This could have the effect of delaying capital gains tax for many years, which would mean there would be nothing against which to claim capital losses over that time.

At this stage, it’s anyone’s guess whether the Conservatives will actually fulfill this promise and, if they do, what form the new rules would take. But you should be aware of this possibility as you discuss how to proceed. – G.P.

Segregated funds for RRIF?
In the next few years I will be 69 and will have to convert my RRSP and my choice would likely be to a RRIF. I just came from a meeting with a retirement advisor with a company that represents themselves as income specialists. Since I would like to preserve the money I worked so hard to earn, the suggestion to me was segregated funds. Is this a good way to go with my RRSP portfolio? Could you please tell me the pros and cons of this type of investment? – Coralie B.
The recommendation may have been made because segregated funds come with guarantees. These may protect 75% or 100% of your capital; find out which applies. However, you pay a hefty price for the guarantee and it normally does not cut in until you have owned the units 10 years. Many seg funds have very high management expense ratios (MERs), in some cases as high as 6%. That’s a lot of money to pay for peace of mind, especially when you can achieve a similar result in other ways.

Your advisor probably won’t suggest this because it will cost him commissions, but you could invest in some low-risk, no-load mutual funds with low MERs and save yourself a lot of money. A portfolio that included a couple of bond funds, a monthly income fund, a dividend fund, and a conservatively-managed equity fund would work very nicely. Compare the annual costs for yourself. I expect you’ll find a big difference. – G.P.

Considering putting everything into universal life policy
I am a single investor. I have saved $166,000 in a RRIF. I also have an annuity and a $5,000 RRSP. Would it be wise to put all of these investments into a universal life insurance policy or a full term life insurance policy? It appears my investments, at Great West Life, are taking one step forward and two steps backward. I am feeling the need to be more secure. I am still putting sums of money into savings accounts to help build my funds. Thanks for your answer. – Elaine F.
Good heavens! Who is trying to sell you this idea? It amounts to trading your RRIF capital for life insurance coverage with an investment component, and there is no guarantee those investment will perform better than the ones you now have.

If you proceed, the investment portion of a universal life policy will be worth less than the current value of your RRIF because some of the money will go to pay your insurance premiums. Find out exactly how much you will have left as investment capital before you do anything. And remember that the insurance agent will earn a nice commission if you go this route, so he/she is not exactly unbiased.

I think you should keep the money in the RRIF. If you’re not happy with the performance of your investments, move to a new financial advisor. There are lots of good companies with whom you can invest. Look at some of the small boutique firms like Mawer, Leith Wheeler, and Phillips, Hager and North. They offer top-quality products with no commissions and low MERs. – G.P.

Overwhelmed with money
I appreciate an unbiased answer from someone knowledgeable. It seems that when you receive money, everyone is an expert and your buddy. Anyway, if a person inherits $50,000, what would be the best investment (other than property) for the money? And please consider taxes on the interest of the investment. This is confusing when I know very little about investing. Some say GICs, mutual funds, money market etc. Thank you for your time. – Overwhelmed in Canada
Yes, it can be overwhelming to inherit a large chunk of cash, especially when you have no idea what to do with it. I would like to give you a quick and easy answer. Unfortunately, there isn’t one. There are many variables to consider and the right answer for one person will be completely wrong for someone else.

The best place to start is by looking inside yourself and deciding how much risk you are prepared to accept when you invest this money. Would you be devastated if you lost all of it? Half of it? A third of it? Any of it? Your “risk tolerance level” will go a long way in determining the correct course for you.

Next, ask yourself what you want to achieve with this money. Do you need income? Are you saving for a special purchase, such as a home or a child’s education? Different goals require different investment strategies.

You mention taxes. This suggests you are already in a high enough tax bracket for this matter to be of concern. If that’s the case, you should look at putting some of the money in an RRSP, assuming you have the contribution room. If you don’t, focus on tax-advantaged investments like dividend-paying stocks, preferred shares, REITs, and some mutual funds and income trusts. Avoid interest-paying securities; they are taxed at your top marginal rate.

Once you have your priorities clear in your own mind, consult a fee-for-service financial planner who does not sell any investment products (ask first to be certain of this). Such planners are paid by the hour or the job and have no vested interest in promoting any specific type of security. The planner will prepare a tax-friendly investment program to meet your requirements which you can then take to a broker of your choice to implement. The service will cost a few hundred dollars but it should ensure that you receive the unbiased advice you’re seeking. – G.P.

Contribute more to spousal plan?
I have a group RRSP with my company. I recently opened a spousal RRSP for my wife, as I was told that because I earn quite a lot more than her this would be a good idea upon redemption of the RRSPs at retirement. I only put about 23% of my total monthly contribution into the spousal RRSP account. The rest goes in my company RRSP. I receive all the tax benefits.

Since I also have a company defined pension plan that I contribute to, should I put more or all of my monthly contributions into the spousal account? I have some unused RRSP room that allows me to contribute more money at this time. – Allan W.

Putting everything into the spousal RRSP would appear to be a good idea at this stage, especially if your wife does not have a pension plan of her own. The purpose of a spousal plan is to split income in retirement. This may achieve two goals.

First, it may lower the combined tax rate of the spouses. Of course, this will depend on the actual income levels so some careful calculations are needed as you approach retirement.

Second, splitting income may keep both of you below the threshold for the Old Age Security clawback. In 2006, that’s net income of $62,144 per person. The amount is indexed to inflation so it goes up every year. – G.P.

Wondering about two funds
What are your thoughts about Clarington Canadian Small Cap Fund and CI Harbour Growth & Income Fund for an RRSP? I will be retiring in approximately three years. – Fran
When you’re close to retirement, you should stick with low-risk, conservatively-managed funds. Of the two you mention, the Harbour fund better fits that profile although the Clarington entry is outstanding for its type. We recently profiled the Clarington fund in the Mutual Funds Update newsletter with the following commentary:

“This is one of their best performers. The portfolio is in the hands of Leigh Pullen and the team at QVDG Investors. This fund got off to a slow start after its 1997 launch but it has looked strong ever since. It did not lose money in any calendar year during the bear market of 2000-2002 and has been on a tear ever since. In the three years to Jan. 31, it averaged 28% a year in profits, which made everyone happy. The risk profile is better than average for a fund of this type, but be aware that small-cap funds can be volatile. The fund was overweighted to oil and gas in early 2006, with about a third of the portfolio in that sector. Rating: $$$$.”

The Harbour Growth & Income Fund also gets a top $$$$ rating from us. The manager, Gerald Coleman, is regarded as being very conservative and capital preservation is one of his strengths. Even during the 2000-2002 bear market this fund did not lose money. Returns are well above average.

So you have chosen two very good funds. Given your circumstances, however, Harbour Growth & Income may be a better fit. Ask your financial advisor. – G.P. (April/06)

Are balanced funds the answer?
Instead of holding equity mutual funds plus bonds or bond funds in order to achieve some asset class diversity in an RRSP, what is your feeling about holding balanced mutual funds to do the same thing? – Mike L.
You can certainly do that but you need to select your balanced funds with care. The problem is that their portfolios can vary widely. There is no standard asset mix criterion that a balanced fund has to meet.

Some balanced funds are heavily overweighted towards stocks. For example, the Clarington Canadian Income Fund, which is in the Income Balanced category, is 100% invested in equities. Conversely, Mackenzie Sentinel Income Fund, which is in the same category, is only 39% in stocks.

You will have to decide what mix of stocks and bonds you want in your RRSP. Then look for a balanced fund that closely approximates those weightings. – G.P. (April/06)

Converting funds to back-end load
I am 64 years of age. My financial manager for the last couple of years has been taking all my front-end load mutual funds and converting them to back end. Got to thinking about that recently and am now wondering even though it cost me nothing to change them won't I have to pay when I start drawing the money out of the fund or when I reach 69? – Barrie G.
Yes, that would be a concern. By moving to a back-end load (also known as deferred sales charge or DSC) you put yourself in a position of having to pay a commission if you cash in your units before a specific time.

Frankly, I don’t understand why your advisor is doing this and I suggest you ask for an explanation. On the surface, it appears to be against his interests – trailer fees paid to dealers on back-end load funds are usually lower than on front-end loads. For example, AGF pays a 1% trailer on its standard front-end equity funds but only 0.5% on DSC funds.

However, he must have a rationale for this. Find out what it is and decide if you agree. It’s your money, after all. – G.P. (April/06)

Wants to earn 8.5% to 9.5%
Could you suggest areas where one can invest money to get a return of 8.5% to 9.5%? – Sid E., Newmarket ON
There are lots of places where you could potentially obtain that kind of return or more – but none that are guaranteed. So it really comes down to how much risk you are prepared to accept.

Interest rates have been on the rise, but they are still relatively low. As of mid-March, five-year GICs at the major banks are paying only 3.25%. That’s less than half what you are aiming for.

It is possible to put together a low-risk portfolio that would have a projected return of 5%-6%. It would consist of a mix of government and corporate bonds, preferred shares, and some conservatively-managed mutual funds. As you move higher up the return ladder, you have no choice but to add more risk to the mix. So if you want to hold to your target, you would need to use some combination of stocks, equity mutual funds, income trusts, monthly income funds, and the like to achieve it. A financial advisor could give you specific recommendations. – G.P. (April/06)

New Canadian wants to save
I want to save money for my future. What do I need to do for this? Please help me. I need your help, you are so good at this. I am from Dominican and now I live in Canada so I need an idea for how save money here. – J.L.
The fact you have gone to the trouble of asking the question is a good start. Here is what I suggest. Decide how much money you can afford to save each month. It doesn’t have to be a lot. Even if it is only $50, it’s enough to get started.

Go to your bank and ask to set up an automatic RRSP contribution plan. Tell them you would like to invest the money in a balanced mutual fund. They will deduct the amount from your account each month. At the end of the year, you’ll receive a receipt that can be used for a tax deduction.

As your income rises over time, increase the amount of the monthly deduction. Read some books about investing and when you feel more comfortable, add other types of mutual funds or different securities to your RRSP.

Over time, you’ll be amazed at how large the plan will grow. Plus you’ll be creating a nice tax deduction for yourself every year. Good luck. – G.P. (April/06)

Imaginative ideas for a LIRA
Can I start a numbered company and put my LIRA (locked-in retirement account) in the company and invest the money within the LIRA and within the company? Can my numbered company provide mortgage money to myself or family, i.e. non arms-length as well as arms-length mortgages? – Carol S.
You have some imaginative ideas about how to use the money in a locked-in RRSP. Unfortunately, they won’t work. You most certainly cannot put a LIRA into a numbered company, or any kind of company for that matter. Just as with a regular RRSP, a LIRA is a personal savings plan that belongs to the individual. It cannot be transferred to another person or to a corporation. So you can forget that idea. – G.P. (April/06)
Living in Australia, wants to get RRSP money
I have a locked-in RRSP (through London Life) as a result of leaving the Canadian Forces. I am a non-resident now in Australia and have been since late 1997. I have seen other websites (some provincial) that state certain provinces allow non-residents to unlock their locked-in RRSP. Does Ontario allow this and if so who grants the authority? – Mr. Z.
Ontario allows withdrawals from locked-in plans for several reasons, including financial hardship and shortened life expectancy. However, there appears to be no provision for non-residents to take out their money simply because they now live elsewhere. You can visit the website of the Financial Services Commission of Ontario for more details.

You may want to explore the possibility of transferring the assets into a similar Australian-based program. This is sometimes allowed, depending on the tax treaty agreements between countries. You would need to consult with an expert on Canada-Australia tax issues in this regard.

Also, keep in mind that if you are 55 you can convert the plan to a life income fund or annuity and start receiving income from it. – G.P. (April/06)

Wants to use RRSP to buy mother-in-law a house
My wife and I would like to buy my mother-in-law a house (approximately $250,000) and use RRSP monies that we have in order to do this. Is there a way to use this RRSP money to buy the house and what, if any, tax implications are there for me? Any suggestions would be appreciated. She lives in another province (Quebec; we live in Ontario); are there any local issues we should be concerned about? As she is retired she has limited income and would like to have a place of her own and we would like to make it happen for her. – Leonard G.
It’s a generous thought, but it won’t fly. You cannot use RRSP money to invest in real property so you can’t buy a house for her. Your RRSP could hold the mortgage on a property purchased by her, but she would have to come up with the down payment. Also, the rate of interest paid to the RRSP could not be less than the current commercial rates, so there would be no financial benefit for her. – G.P. (April/06)
Looking for tax-advantaged mutual funds
I have recently used up all my RRSP contribution room and am looking at investing in unregistered mutual funds. I know the basics about distributions and how interest income is taxed more than capital gains and dividends. Still, I have no idea which types of funds have the most tax advantage. Any direction would be great. – K.T.C.
Coincidentally, I just completed an analysis of tax-efficient funds for calendar year 2005 which was published in the April issue of my Mutual Funds Update newsletter. I found that there is no single fund category that offers across-the-board tax efficiency. Instead, you need to look at each fund individually although your best bets will be found in the Canadian Income Trusts and Canadian Income Balanced Groups.

Among the funds that I found were most tax-efficient last year were Northwest Growth & Income Fund, which paid out 96c a share, all of which was tax-deferred return of capital; RBC Tax Managed Return Fund, which paid out 72c a share of which about 80% was tax-deferred and 20% tax-advantaged; and Mackenzie Maxxum Dividend Growth Fund, which paid 60c a share, also with about an 80-20 split.

Keep in mind that the tax treatment of distributions can change from year to year. However, some funds are structured so as to maximize tax efficiency. Ask your broker to find them for you.

If you would like to read the full Mutual Funds Update article, you can subscribe by going to Click Here – G.P. (April/06)

Silliest question?
This is probably the silliest (stupid) question you've ever been asked – but what is the point of searching out high-yield interest rates on investments when the return is mostly taken away by tax? Just wondering. – Fay C.
No, it’s not the silliest question I’ve ever received and I understand your reasoning. But you could also ask why anyone should bother to ask for a raise in pay, using the same logic. The obvious answer is that even though the government takes its share, you still end up with more in your pocket than you had before.

However, if taxes are a real concern then you should not be looking for high interest securities. Instead, invest in those that provide a tax break. Dividend-paying stocks are an obvious choice, especially now that the federal dividend tax credit has been sweetened. Real estate investment trusts (REITs) also offer good tax breaks. There are many non-interest paying choices available. Do a little research or ask your broker to help. – G.P. (April/06)

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Sold condo at a loss
I had to foreclose on my condominium and I had to sell at a loss. It was used as my principal place of residence at the time. Can I claim a capital loss on the disposal of the property under this circumstance? – Howie H.
No. Any gain realized on the sale of a principal residence is not taxed and any loss may not be claimed. – G.P. (April/06)
Where to invest money?
I recently sold my principal residence and have a profit of approximately $300,000 after setting aside enough for a down payment on a new home. I am 52 years old but having been a single parent raising children since birth with no outside (paternal) financial support, I have only about $150,000 in a LIRA and RRSP. I have paid all my credit card and loan commitments. Can you advise how I should I best invest this tax-free money for the greatest benefit? – Sue S.
It sounds like you want to use this money as your retirement nest egg. If that is the case, you should consider investing it in a low-risk portfolio. However, because the money will be in a non-registered account, the income generated will be taxable. Therefore, you should try to avoid interest-bearing securities, which are taxed at your top rate, and look for tax-advantaged investments instead. Some possibilities to consider are real estate investment trusts (REITs), high-quality preferred shares, and mutual funds that are set up so as to provide a tax break.

You don’t have to shoot for big returns. If you can realize after-tax gains of just 4% a year, the $300,000 will grow to almost $500,000 by the time you are 65. Meantime the money in the LIRA and RRSP will increase to about $320,000 in value at a 6% return within the plans. So at 65, you would have about $820,000 in retirement capital, even if you don’t add another penny to the pot.

Ask a financial advisor to help you set up appropriate portfolios. Just be sure to find one who will not become overly aggressive with your money and try to talk you into taking unnecessary risks. – G.P. (April/06)

Another way to invest in real estate
It looks to me that people who wish to invest in real estate for retirement purposes are not treated equally with the people who invest in the financial market. I have heard that "You cannot use RRSP money to invest in real property". However, if we get more imaginative, can my RRSP hold the mortgage on the rental property purchased by my spouse? Can I for instance, register a company that will purchase the rental property and finance the purchase with personal RRSP? – Eric S.
Technically, your RRSP can hold a mortgage. But there are several problems with your idea. First, there would be no advantage to this arrangement because RRSP mortgages must be issued at commercial rates and terms. You cannot give yourself any special deals. Second, RRSP mortgages are more expensive than conventional mortgages because the loan must be insured and the RRSP administrator will impose additional charges. Third, very few financial institutions allow mortgages to be held in their RRSPs. You would have to do a lot of shopping around to find one.

As you may have gathered by now, I am not a fan of RRSP mortgages. I think there are better places to invest your retirement savings. – G.P. (April/06)

Couple needs RRSP money for medicine
My husband was just downsized after 17 years and was offered a package upon leaving. On top of that we also have his locked-in RRSP that we will need to transfer over to our bank.

My question is this: We live in Ontario and I am wondering about the hardship clause and how it works for medical. He will be leaving his medical insurance behind in eight weeks and my medical costs alone for prescriptions will run us approximately $1,000-$1,100 a month at the moment. Because of the severance package we will not be eligible for any help from anywhere for drug coverage and I am on Canada disability pension. Will it be possible to access any funds to see us through this time for prescriptions until we can get coverage? – Heather S.

It looks like you’re in luck. Ontario is one of the most liberal jurisdictions in the country when it comes to allowing access to locked-in plans in certain cases of financial difficulty. As long as the locked-in RRSP is under provincial jurisdiction (and not that of the federal government) then you should be able to get at some of the money.

One of the specific reasons for allowing access to a locked-in plan is medical expenses. The website of the Financial Services Commission of Ontario (FSCO), the organization that oversees these plans, says an application can be made under these circumstances: “You need the money to pay for certain medical or dental expenses (e.g., prescription drugs, medical devices) to deal with an illness or physical disability for you, your spouse, or a dependant of either of you. These expenses cannot be covered by a provincial health plan, your private health insurance, or any other source. You may claim for expenses already paid or those you will incur in the future, as long as they meet these criteria. You must provide a doctor’s (or a dentist’s) letter stating that the treatment is necessary.”

On the basis of the information you provided, it would appear that your husband’s plan qualifies. You should apply through the FSCO. You can download the forms and find instructions at Click Here – G.P. (April/06)

Borrowing to invest
I'm trying to decide if it makes sense to borrow money to invest in mutual funds outside of my RRSP. My wife and I make good money. We max out on our annual RRSP contributions with a balanced approach and we are almost caught up on our allowable RRSP contributions from years gone by. My wife is a teacher and hopes to collect from her Ontario Teacher's Pension in about 16 years with a total of 28+ service years. I have a DPSP that my employer has paid into for 15 years and, with luck, they will do so for 15 more before I retire. We still have a mortgage but we're hoping to pay that off in the next 6 to 8 years. As we advance in our careers and our incomes grow, I'm thinking we should do more to grow our nest egg.

I've never invested heavily outside of my RRSP mutual funds before and I don't believe I have the knowledge pick the right stocks. The couple of times I've ventured into the stock market, I inflicted my anti-Midas touch and the stocks tanked. This of course doesn't give me any confidence in my abilities pick 'em.

So, does it make sense to borrow money to invest in equity mutual funds? Is the interest in this situation tax deductible? With rising interest rates, is it still okay to get into equity funds? I'm very interested to find out what you think! – Richard W.

Sounds to me like you’ve answered your own question. You’ve had bad experiences with the stock market but now you’re talking about going in debt to invest? Hello!

Granted, you’re talking mutual funds here and apparently you have had better luck with them. But since you’re doing well financially as it is, why would you want to want to incur the risk of borrowing money and buying in at what could be the top of the market. People who did that in 1999 and early 2000 are still licking their wounds. Sure the interest is tax-deductible, but so what? If the stock market dives, your equity funds will probably go along for the ride.

It seems to me that you folks are doing very well. My advice is to stick with the plan. – G.P. (April/06)

Regrets converting to RRIF
If I put my money in a RRIF before I turn 69 and then I change my mind can I revert back to a RRSP? Would I be allowed to do that? Or is it not possible to go back to my RRSP? – George N.
Yes, you can get the money back into an RRSP but it’s a little complicated – it’s not just a simple transfer. A RRIF requires that you make a minimum annual withdrawal and pay tax on that money. So here is how you would have to proceed. First, take all the money out of the RRIF. The minimum withdrawal amount is taxable and must be declared. The excess over and above that can then be contributed to an RRSP. That RRSP contribution will offset the tax payable on the excess withdrawal. The excess RRIF payment must be made directly to the RRSP by the RRIF carrier and form T2030 must be completed.

This is why I advise never converting an RRSP to a RRIF until you are required to do so by law. – G.P. (May/06)

Tragic history, trying to get life back together
You say be wise about investing, so who do I go for advice? I am so lost as I am assuming so many people are. But so many people just muddle along, hoping their life situation will change. I CAN NOT AFFORD TO BE ONE OF THEM ANY LONGER.

In 2000, my only granddaughter aged 10 was abducted and murdered. Since that date I have not been able to work. CPP denied me for 2-1/2 years then finally came through, but in the meantime I had no income so asked welfare to help. They refused and I had to cash in all my RRSPs and all my insurance policies that had a cash surrender value. I did all that and lived on those funds and was down to my last few dollars so I applied to welfare again and was refused.

At my darkest hour with collection people at my door and no hope left, CPP finally agreed that I was disabled. I sold my apartment and moved up to the Okanagan to be nearer family and have recently purchase a mobile home (not my first choice but since I can not get a mortgage nor afford much on my $841 per month CPP disability pension it had to be a mobile).

After all is said and done I will have roughly $10,000 left. Where can I invest this so that it will grow fast for me so that later it can supply additional income if necessary? Can you help me? I am so lost on all this and have absolutely no one who can help me. My family does not know about investing. Where do I go or who can I see to help me make a wise decision? Should I sell the mobile and invest it all? – P.P.

I am so sorry to hear of all your problems. However, it sounds like you are trying to get your life together and I commend you for that. As I read it, your basic question to me comes down to where you should invest your remaining $10,000 "so that it will grow fast". I would like to be able to give you a simple answer but there isn't one. If you want fast growth, you have to take more risk and I would not advise that in your circumstances.

Since the amount of money is quite small (not to you, but in relative terms) I suggest you consider a non-load monthly income fund from one of the major banks. Those from BMO, RBC, and CIBC are all current recommendations of my Mutual Funds Update newsletter. These funds are conservatively managed so the risk is reasonable and they have a good record. And you don't need a financial advisor to buy them.

For example, if you invested your $10,000 in the BMO Monthly Income Fund, it would buy 984 units at the current price. The fund pays monthly distributions of 6c a unit so this would add another $59 a month to your income if you decided to take the payment in cash. That may not seem like a lot to many people but based on what you say it would increase your monthly income by 7%. You also have the option of reinvesting it if you prefer.

I would not sell the mobile home. You have to live somewhere, after all. Good luck. - G.P. (May/06)

Take more out of RRIF than required?
I am retired and my income is at the beginning of the OAS clawback range. I have a RIIF of $196,000 and have been told by a financial advisor to take out more than the minimum amount since it will be taxed at a lesser rate then if the full amount went into my estate. Given my clawback situation do you think this makes any sense? – W.J.B.
Based on what you have said, it may not make sense but ask to see some specific projections. The marginal tax rate of anyone who is affected by the Old Age Security clawback is usually the highest rate there is, because it comes on top of your base marginal rate. However, the difference may be quite small.

For example, in Ontario the marginal tax rate for someone who has $65,000 in taxable income and is not eligible for OAS is 32.98%. If you are age 65 or older and have the same income, you’re in the clawback zone and the government takes back 15% of your OAS until the total amount is reclaimed, thus bringing the effective marginal rate to about 48% for as long as the clawback applies. The top marginal tax rate in Ontario at present for someone not subject to the clawback is 46.4%.

So by adding to your RRIF withdrawal, you may exposing more of your income to the higher rate. Perhaps your advisor is suggesting this with the idea of getting the tax pain out of the way up front but personally I would rather defer taxes as long as possible. – G.P. (May/06)

Repaying the HBP
My wife and I are currently purchasing our first home and plan to use the Home Buyers’ Plan (HBP), taking out $20,000 each to minimize the size of our mortgage loan. My wife does not work and therefore earns no taxable income. When it comes to paying back the HBP what prevents my wife from allowing the Canada Revenue Agency to count the 1/15th installment as income and accept the tax that the income tries to generate? Won't her personal tax credit offset that amount and she won't have to pay any taxes?

We do plan on repaying the loan as we want to get it reinvested and working for us but we were just wondering. If we find our first year or two of home ownership a little tight it would be nice to know we could use that HBP repayment if it was necessary. – D.J.

Your plan would work just fine. If an HBP installment is missed, the payment is automatically considered as income in that year. – G.P. (May/06)
Looking for 7% return
If I want 7% return annually, what kinds of mutual fund I should buy? Is it a reasonable return over long term? – Henry H.
You have a pretty wide choice. Many types of mutual funds have produced 7%+ annual gains over the past decade. Here are a few examples, as reported on Globefund. Results are the 10-year average annual compound rate of return to March 31 for each category.

Canadian Small Cap: +12.4%

Canadian Dividend: +12.2%

Natural Resources: +11.5%

Canadian Equity: +9.8%

U.S. Small/Mid-Cap: +7.9%

Canadian Balanced: +7.4%

European Equity: +7.1%

Of course, past results are no guarantee of future performance but this gives you some idea of the history. Some of the key categories that did not achieve your 7% annual benchmark were U.S. Equity, Global Equity, and International Equity. – G.P. (May/06)

Confused about Home Buyers’ Plan
I have made a large catch-up RRSP contribution this tax year of $20,000 but will not be claiming all of it (i.e. I am carrying forward some of the RRSP contribution to claim in future tax years and only claiming enough to reduce my taxable income to the lower tax bracket). My question is, am I able to take out all of the RRSP contribution under the Home Buyers’ Plan (the entire $20,000), or only the amount that I have actually claimed on the tax return of $10,000? – Andrew F.
The key point is the date of the actual contribution. The timing of the deduction claim is irrelevant in this context. The CRA’s Home Buyers’ Plan (HBP) guide explains it this way:

“You cannot deduct the amount by which the total of your contributions to an RRSP during the 89-day period just before your withdrawal from that RRSP is more than the fair market value of that RRSP after the withdrawal. The same rules apply if you contributed to your spouse’s or common-law partner’s RRSP during the 89-day period just before that individual made the withdrawal from the same RRSP under the HBP.”

All that jargon simply means that if you withdraw money from an RRSP under the Home Buyers’ Plan within 89 days of the original contribution, you may lose the right to claim a tax deduction. So be sure to wait at least 90 days. – G.P. (May/06)

No-load mutual funds
What is a “no load” mutual fund? How is that different from others? Is it preferred? - Garth L.
No-load simply means that a fund carries no sales commission charges, either at the time of purchase or on disposition of the units. Load funds all have commissions attached, although in some cases advisors are waiving them to get your business.

Are they better? Not necessarily but in many cases no-load funds also have lower management expense ratios (MERs), which are the on-going fees and expenses associated with managing the fund. Lower costs can mean more money in investors’ pockets so by all means look at no-load funds closely to see if they work for you. – G.P. (May/06)

Using RRSP for education
I am recently separated and my settlement is $20,000 in RRSPs. I already have $12,000 of my own RRSPs and another $12,000 in a locked-in retirement account. I am 45 years old. I am currently employed full-time and in university studies part-time. Our daughter is also entering her educational post-secondary studies and I want to help her out financially. I’m considering cashing out half of the $20,000 RRSP amount for me and my daughter’s educational purposes. Would this be wise? - Cathy M. (non-financial woman)
Unfortunately, you cannot make use of the federal government’s Lifelong Learning Plan (LLP) in the circumstances you describe. The LLP cannot be used to finance a child’s education and you could only use the program for yourself if you were enrolled in university full-time (unless you are disabled in which case part-time enrolment qualifies). If you were eligible, you could withdraw up to $20,000 as an interest-free loan from the RRSP to pay for your education.

Since you don’t have that option, let’s look at your idea of withdrawing $10,000 from the plan. Remember that this will be taxed as income in the year received. This means you’ll pay tax at your marginal rate, which could be quite high since you are working. Check this year’s tax return to see what the marginal rate would have been on an extra $10,000 in income. Whatever it is, you’ll end up with a lot less than $10,000 once the tax is factored in.

Only you can decide if it’s worth it. However, I would comment that a total of $44,000 in RRSP savings at age 45 is not a lot. Unless you have a good pension plan working for you as well, you should think twice before dipping into your retirement capital. – G.P. (May/06)

RRSP mortgages
I’ve heard through several colleagues that I can lend out my RRSP money into a second mortgage. I have an investor who owns a rental unit and we are talking about me putting a $150,000.00 second mortgage on his property from my RRSPs. Is this possible? He claims that he will pay me 12% p.a compounded semi-annually with a full balloon payment in five years. This obviously is in my benefit if it can be done. – Matthew R.
Legally it can be done although there are a lot of conditions so you need to check them out. In practical terms, you need to find an RRSP administrator that is set up to handle RRSP mortgages – most of them are not. You might start with BMO Nesbitt Burns, one of the few brokerage firms that does this, to my knowledge. – G.P. (May/06)
Gold and silver
Can a Canadian hold pure gold bullion in his RRSP? I have been informed that since February 2005, this is the case. – Gordon T.
Yes. The change was contained in the 2005 federal budget. – G.P. (May/06)
Can’t figure out pension
I have a simple question that I just can't seem to find an answer to. I will be retiring in October 2007 (at 55). I have been paying into a company pension plan for 16 years. It's a defined contribution plan with a current value of around $100,000.

Given projected growth until I retire, along with continued contributions from both myself and the employer, is there any formula or calculation that can be done to figure out how much I'll be getting from this pension each month? – Mark H., Aurora, ON

Actually, it is not a simple question at all and no, there is no formula. This is the problem with defined contribution plans, which are becoming much more common in Canada because they cost employers less money. With a defined benefits plan, a pension is determined by a combination of years of service and income. In the case of a defined contribution plan, everything depends on how well the invested money performs. As we saw during the bear market that can change dramatically from one year to the next depending on what investments are in the plan.

You can, however, arrive at a rough estimate of how much your pension will be. First, do a projection (or have the plan administrator do one) of how much money you will have in the plan when you retire in 2007. Let’s assume that it’s around $110,000.

Now calculate the average return over the past five years that you’ve earned from the investments in the plan. This is a long enough period to allow for a reasonable idea since it includes the worst years of the bear market and the bull market run from 2003 to now. If the average gain is 6%, it tells you to expect to receive about $6,600 a year in cash flow from your pension plan, assuming you stay with the current investment mix. If you take more, you’ll be dipping into capital and that may not be allowed.

If you want a more precise figure and an income guarantee, ask the plan administrator about purchasing an annuity at retirement and get an estimate of how much income that would generate. – G.P. (May/06)

Carrying tuition fees
I find your articles very interesting and helpful. I hope you can help me in my situation! I was an MBA student last year and paid quite a bit of money in tuition, around $25,000. As a result, I have quite a high tax credit. On the other hand I also have a $6,000 deduction limit for my RRSP. When I was using the tax program to do my taxes the program told me that I don't need to deduct the $6,000 RRSP deduction for the 2005 tax year and that I should carry forward the amount for the 2006 tax year. However, I do not want to do that! I would prefer to deduct the $6,000 RRSP limit for 2005 and carry forward the tuition that I paid to 2006. Is this possible? - Charles A.
Perhaps. It depends on your taxable income. The rules state that you must use your tuition and education credits right away to reduce your tax payable to zero. Once you have achieved that, you have a choice of what to do with the balance.

The first is to transfer the credit to a supporting person, such as a parent. It appears you do not wish to do that. Alternatively, you may carry forward the balance to the next tax year, but by doing so you forfeit the right to transfer it to anyone else. The General Income Tax and Benefit Guide says:

“You can carry forward and claim in a future year the part of your tuition and education amounts you cannot use (and do not transfer) for the year. However, if you carry forward an amount, you will not be able to transfer it to anyone. You have to claim your carry-forward amount in the first year that you have to pay federal tax.”

The RRSP deduction may be carried forward indefinitely. – G.P. (May/06)

Wants to cash in RRSP
I am a mother of two children, divorced, and have been living with my common-law spouse for two years now. He is the only source of income at this time and was for all of 2005. Due to health and personal reasons I have not yet gained employment.

My question is: I have approximately $23,000 in RRSPs and I want to cash them in to help reduce my debt. Am I eligible to do that? If so, is there one way that is in my best interest that you could recommend? Thank you for your time, and the opportunity to ask my inquiry. - S.P.

There is no reason you can’t cash in all or part of your RRSP, assuming that it is not a locked-in plan. You only have to give the plan administrator the appropriate instructions.

When you take money out of the RRSP, it will be treated as personal income in the year it is received and therefore subject to tax. However, if you have no other income you could withdraw up to $9,039 this year tax-free since your basic personal tax credit would offset it. A certain amount of tax would be withheld at the time of the withdrawal but that would be refunded when you file your 2006 return.

This would be the most tax-efficient way to take money from the plan but there is a downside. Your common-law husband would lose the spousal tax credit (which I assume he claims), because it is tied directly to your net income. So he would end up paying more tax as a result. This is not a concern for single people but for couples it clearly is a factor to consider. – G.P. (May/06)

Amount for eligible dependant
I have a question on the eligibility of claiming for a dependant in the tax return in particular the interpretation of the following wording relating to line 305: "you did not have a spouse or common-law partner or, if you did, you were not living with, supporting, or being supported by that person."

The way I interpret it is you would meet this condition if one of the requirements is satisfied in the above, i.e. either no spouse, OR you have a spouse but you are not being supported by the spouse etc.

I know there are many other conditions to satisfy to claim for the dependant (my father in this case who lives with us) but I have great difficulty interpreting the above line due to the use of "or" which I would say means any one of the conditions. – D.D.

This is officially called “amount for an eligible dependant”. It is most often claimed by single parents. I agree that the wording is somewhat vague but the correct interpretation is that if any of the listed conditions apply, you are not eligible to claim this credit. So if your spouse is living with you, you don’t qualify; if you are supporting a spouse who is not living with you, you don’t qualify; or if you are being supported by a spouse, you don’t qualify. – G.P. (May/06)
Husband had stroke, can he claim disability credit?
My husband had a stroke last March and a few months later, at my son's request, our physician filled out the forms for the disability tax credit. Could you tell me how this works please? Our income is not very high, but we don't qualify for G.I.S. (Guaranteed Income Supplement). Thanks so much – Jean C.
The disability tax credit can be claimed by anyone who is unable to perform basic physical or mental functions, or who takes an extraordinarily long time to do so. These include seeing, hearing, walking, thinking, dressing oneself, etc. A certificate from a doctor or other qualified medical practitioner is required, which you have obtained. The claim is made at line 316 of the tax return. The base amount for the 2005 tax year is $6,596. The federal tax credit is 15% of that, or $989.40. The provincial credit is on top of that amount. – G.P. (May/06)
Worried about retirement since age 10!
I have been worrying away about retirement plans since I was about 10 years old and used to listen to your segments on CBC radio. I am finally getting around to opening an RRSP on my 20th birthday, which is in about a month. I go to university full time with three years left to complete my degree. I only work part-time during the year and full time during the summers, with a significant amount of that money going to cover school costs.

Because my annual income will be a few thousand dollars below the lowest income tax bracket, I know I won't be receiving any tax benefits by making contributions. Despite this, I want to get started. What is a good amount to begin contributing monthly for the next few years while I am in school?

Thanks for your help. - Jenna G., London ON

Gosh, I really didn’t mean to have 10-year-olds worrying about their retirement. I apologize for that. However, you are right to start making RRSP contributions now because the younger you are the more your plan will grow over the years – always assuming you invest intelligently, of course.

And here’s the good news – you won’t lose the tax break! You don’t have to claim a deduction in the year you make a contribution. You can let the contributions accumulate until you start working full time and claim them then. It will mean a nice tax saving down the road.

How much to invest? How long is a piece of string? It comes down to how much you can afford. Some companies allow you to open an RRSP with as little as $100, although $500 is more normal. Monthly contributions can be as low as $25.

I suggest you start with a low-risk balanced fund that has a low MER. Build it for a few years while you are completing your education and then you can diversify further when more money is available.

Just for the fun of it, I did a quick calculation for you. If you invest $600 a year between now and age 65 and earn an average of 6% a year, your plan would be worth $127,000 at the end of that time. If you waited 10 years to start (i.e. until age 30) you would have to almost double that annual contribution to achieve the same end result. Starting early really does pay off! – G.P. (May/06)

Concerned about having too much money
I'm in a bit of an unusual situation. I'm 54 and have been retired for a year. I have an adequate, fully funded and indexed defined benefit work pension which covers my expenses and part of my discretionary spending. I have around $200,000 in my RRSP and around $500,000 in cash and equities in my non-registered account. I also have a fully paid for new house and vehicle in order to minimize short-term expenses. I'm divorced with no dependents and have left my entire estate to charity in a bequest.

I'm looking for direction about how to maximize my income and minimize my tax exposure now and when my estate is passed along to charity. I'm planning on taking CPP at age 60 and am concerned about having too much income later in life with OAS clawbacks. - Fred L.

You need to sit down with a financial planner to work out the precise details of how best to organize your affairs. However, let me make a couple of general observations.

First, since you are already retired applying for CPP at age 60 makes sense even though it appears you won’t actually need the extra money at that point. The reason is that if you wait until 65 you will add five more years of zero employment income which will have the effect of reducing the amount of your pension entitlement, under the CPP’s complicated calculation system. However, if you decide to go back to work you may wish to reconsider this time frame.

Second, millions of people would love to share your worry about “having too much income later in life”. If that’s how things work out, the Old Age Security clawback should be the least of your worries. Certainly, I would not be concerned about it at this stage. This year’s OAS income threshold is net income of $62,144. Since it is indexed to inflation, let’s assume that increases by 2% a year. By the time you reach 65, the threshold will be around $77,000. If your income is higher than that, you’ll be well off indeed. – G.P. (May/06)

Early retirement
I plan on retiring early (46 is my goal). I have approximately $200,000 in RRSPs split between my wife and I (hers as a spousal plan) and expect to add about $100,000 more. Can I convert the RRSP plans to a RRIF and both of us draw income on this and still work? There is about 5% of the RRSP plan (mine) that is locked in. – W.M., Brampton ON
Unfortunately, it’s not that simple. You cannot combine the two RRSPs (yours and the spousal) into one plan – they have to remain separate, even after RRIF conversion. To further complicate your life, the 5% that is locked in would have to go into a life income fund (LIF). So you would end up with three different plans.

In order to gain access to the lock-in money, you will have to move to a LIF. But there is absolutely no reason to convert the regular RRSPs at this time. You can make withdrawals from the plans as needed while retaining the flexibility to make future contributions if either of you should work again. – G.P. (May/06)

Wondering about advice
Thanks for helping the general public. I read some of the Q&A and it is quite interesting. I appreciate your contribution.

I sold my house and asked my advisor to invest it very low risk mutual funds. I also mentioned that I want to reduce the taxes (perhaps on funds that disburse capital gains once a year and in lower quantities). I communicated that I don’t need the money for the next 3 to 5 years. He recommended the following:

40% CI Signature Income & Growth

20% TD Income Trust Capital Yield

20% Fidelity Global Asset Allocation

10% AGF International Stock

10% Templeton Growth

I don't know too much and from what I can research, it appears that "TD Income Trust Capital Yield" is a brand new fund and that kind of a recommendation makes me nervous. Please advise. – Damodar P.

You are absolutely correct. The TD Income Trust Capital Yield Fund was launched in January of this year so it has no track record to speak of. It is still a very small fund with less than $30 million in assets. The fund focuses on income trusts and there is no reason to expect it will not perform well. However, I frankly don’t understand why your advisor recommended this one when there are lots of other income trusts funds available with well-established track records. You may wish to discuss this with him.

I should also comment that this does not look like a “very low risk” portfolio to me. The Signature and Fidelity funds are both heavily weighted to stocks at this time, so by my calculation you are looking at a portfolio that will be about 61% in stocks, 13% in bonds, 20% in income trusts, and a small amount in cash. It is not a high-risk mix, but neither is it very low risk. As well, Templeton Growth and Fidelity Global Asset Allocation have been mediocre performers in recent years. In short, you may wish to review the mix with your advisor in greater depth. – G.P. (May/06)

Hong Kong residents looking for mortgage information
Can you tell me an easy way to calculate mortgage payments? That is, how do I figure out how much a monthly payment would be on X mortgage at Y interest rate?

Also, could you please tell us the mortgage rules for non-residents? My wife and I currently live in Hong Kong but are looking to buy in Vancouver. We are Canadian, but non-residents. I have heard that we would have to come up with at least 1/3 of the price as a down payment before a bank would consider a mortgage. Thanks for any help you can give. – Michael and Elizabeth M., Causeway Bay, Hong Kong

There are many mortgage calculators available on the Internet. You’ll find an example at Click Here

Also, Canada Mortgage and Housing Corporation offers information on all aspects of home buying, including a calculator at Click Here

I have received similar questions regarding home purchases from expatriate Canadians. While it is true that the big banks may be reluctant to underwrite such mortgages, you should be able to obtain a loan at reasonable terms by using the services of a mortgage broker. I also recently received a letter from the president of the Canadian division of GE Money, the financial subsidiary of General Electric, in which he informed me that his company has underwritten mortgages for expatriates and is willing to consider new applications. – G.P. (May/06)

Broker wants client to pay fee
My financial advisor (aka "investment executive" at a big brokerage house) has asked me to change my payment arrangement to one in which I pay her 1% of my total portfolio/year rather than the 2% per transaction I have hitherto paid. She claims this will work out in the end to be approximately the same amount and that it will open up the door to certain securities I don't currently have. She claims it is a "fair" way to pay for professional money management.

I have never spent anything like 1%/year of my RRSP on transaction fees since a big portion of it is invested in stripped coupons that I've had for years and plan to keep till maturity. In my RRSP I tend to buy something conservative and keep it. I am concerned about turning over 1% of my RRSP funds because there is no tax advantage and I can't replenish the money since I make the maximum contribution each year.

My non-registered account is considerably more active with stock transactions but even so I have not spent 1% of the total in any one year. There might be a bit of a tax advantage for the non-registered account.

What do you think of this approach to brokerage service? It seems self-serving for my advisor and I don't see the benefit to me. I feel quite uncomfortable that my advisor has leaned on me to do this but otherwise I like her and find her investment advice to be good. - Catherine E.

Many financial advisors are encouraging their clients to do this and there is certainly a degree of self-serving involved because the fee system guarantees the advisor a fixed level of income no matter how much trading you do. Whether it’s a good move for the client depends on how much trading is done and the type of securities that are held.

The fee approach is more likely to be cost-effective for an investor who is active in the stock market and who does a lot of trading, thus incurring significant commission expenses. It may also be beneficial in cases where the investor holds much of the portfolio in high-MER mutual funds because fee-based accounts qualify for the less-expensive F units that many companies now offer.

A fee-based approach is unlikely to benefit someone who does little trading, owns mutual funds that do not have F units available, or who has a large percentage of assets in bonds or strips.

I suggest you ask the broker to explain just how a switch to a fee-based account would benefit you and to run some numbers to demonstrate this. If she cannot, or is unwilling to do so, stick with your current plan. – G.P. (May/06)

Donated comic books to charity
A couple of years ago I bought some comic books, had them appraised at a higher value than I'd paid for them, and donated them to a registered charity. I received a receipt at the appraised value and used that value as a charitable donation on my tax form. I also used a capital loss from a previous year to lower the capital gain on the deemed disposition of the comic books.

CRA has now reassessed me in a way that has confused me. They have lowered the amount of the charitable donation by using their own value on the comics that is lower than the appraised value, but have demanded that I still pay capital gains tax based on the appraisal value.

What are the rules when CRA assesses or reassesses a taxpayer and blatantly contradicts itself like this? I have already filed an objection to the reassessment, but I was hoping to discover if the government or tax courts have already laid down some basic guidelines when the professional accountants of the CRA make basic mistakes like this. – D.S.M.

The Canada Revenue Agency cracked down on tax shelters such as this a few years ago and issued several public warnings about using them. Essentially, their message was that taxpayers cannot claim charitable donations based on questionable valuations of art, merchandise, collectibles, etc. Many taxpayers have received notices of reassessment as a result. Some have filed objections and these are still working their way through the system.

In your case, it sounds like the CRA is trying to have its cake and eat it too by denying the charitable donation claim while using the valuation they have rejected for purposes of calculating your capital gains tax liability. You have taken the correct first step by filing a notice of objection but if this does not produce a satisfactory result I suggest you retain the services of a tax lawyer if you want to pursue it further. – G.P. (May/06)

Credit card dilemma
My husband and I have three credit cards. Combined total owing on all three is $11,000. I have set up a payment system on the net where each credit card receives $100 every week. Would I be better off making the minimum payment on two and putting a bigger lump sum on the third? If so, how do I choose which card to pay off first, by the highest interest rate or the highest amount owing? – J.V.
Your best bet would be to consolidate all three balances onto the lowest-interest card that you have. That way, you will only have to worry about one payment and you’ll reduce your costs. If you don’t have a low-interest card, consider applying for one. – G.P. (May/06)
Wants to know whether company is legit
I'm considering depositing some funds in Achieva Financial. Is this a legitimate organization? They claim to pay significantly higher interest rates than anyone else I have noticed. Thanks for any information you may have. – Ron M.
I have received several queries about Achieva, perhaps because the name keeps popping up on surveys of financial institutions offering the highest interest rates on savings accounts. Currently, Achieva is paying 3.85% on its daily savings accounts and that’s enough to get anyone’s attention.

Achieva Financial is a division of Manitoba-based Cambrian Credit Union. Because it is a credit union, it is not covered by the Canada Deposit Insurance Corporation (CDIC). However, deposits are protected by the Credit Union Deposit Guarantee Corporation of Manitoba. That organization insures 100% of all deposits, including accrued interest, which is actually better protection than that provided by CDIC, which has a $100,000 maximum.

The company offers on-line banking services and you can find out more information by going to Click Here - G.P. (May/06)

Question about income trusts
Why do most of the income trusts pay bigger dividends than their earnings per share? – Artem B.
This is an issue that puzzles a lot of people. Actually, earnings are not the key factor in determining a trust’s ability to make payments. What really matters is something called “distributable cash flow”. That’s the amount of money left for payment to shareholders after real, out-of-pocket expenses.

This may differ significantly from net earnings because that calculation takes into account non-cash charges, such as depreciation and amortization. For example, a real estate investment trust (REIT) will show annual depreciation charges on its properties in the millions of dollars. The capital expense was actually made years ago but the depreciation is amortized over time. This reduces net earnings (profit) but has no effect on the amount of cash available for current payments to investors. – G.P. (May/06)

Pay off loans or make RRSP contributions?
I have a car loan that is $12,000 at 7.5% interest and a student loan that is $6,700 at 8.5% interest. I am contributing to RRSPs ($400/month) and am wondering if I should stop my RRSP contributions and pay off my debts first, or keep paying into my loans as well as making contributions to my RRSP. I am 26 years old. – Jarett D.
Your student loan has the higher interest rate but in that case the payments are tax deductible so the effective rate is much less. This brings your decision to a choice between the RRSP and the car loan.

Although I applaud the fact you are investing in an RRSP at a young age, I have to come down in favor of paying off the car loan in this case. It is costing you 7.5% in after-tax dollars. It is unlikely that you can earn the after-tax equivalent inside your RRSP, which could be more than 10% depending on your tax bracket at the time the money comes out. Directing that money to the car loan should eliminate it reasonably quickly since you are already making payments on it.

Once the loan has been paid off, go back to making your RRSP contributions but increase them to reflect the monthly payments you were making for the car. This will help to offset the contributions you will have to forego while you are retiring the loan. – G.P.

Thinking about going home
I'm thinking of leaving Canada and returning to my birth country (Portugal). I am 27 and have been contributing to an RRSP for roughly seven years. I started young and have accumulated roughly $30,000 in RRSP money. What are the tax implications involved in de-registering my RRSP? - Marco A.
If you deregister the plan while you are still in Canada, the money will be considered to be income in that year. When you file your last tax return before emigrating, you will have to declare that income.

If you wait until you return to Portugal to de-register, you will be governed by the tax laws of that country and by the terms of the Canada-Portugal Tax Treaty to the extent they deal with registered plans. In that case, you would need to obtain tax advice from a professional. – G.P.

Use RRSP to pay mortgage?
Can an RRSP be used to pay off the outstanding mortgage on a home and, to offset the tax implications, transfer the home, as it were, back into the RRSP? - L.W Calgary
Definitely not. What you are suggesting is a form of asset swap. It could work if you were dealing with securities but not with your home.

There are two rules that make this impossible. First, the money would have to come out of the RRSP to pay the mortgage, which means it would be treated as income and taxed at your marginal rate. I doubt that would be acceptable.

Second, RRSPs may not own real estate directly, which is what you are proposing here.

Your RRSP could hold the mortgage on your house, although the expense involved in setting up this kind of program is very high. But that’s as far as you can go. – G.P.

Stock market blues
In view of the latest down swing on the stock market, what is your advice regarding the individual investor approaching retirement? Hold, sell mutual funds? What do you see ahead for the TSX and the Dow? Thanks. – Joyce G.
My advice is to never attempt to time the market. Even the pros can’t do it consistently. I have always favoured a balanced approach to investing. In the case of mutual funds, which you mention, that means a mix of equity, income, and money market funds in proportions that are suitable for a person’s age, risk tolerance, and priorities.

We have had a very strong bull market since the latter part of 2002. Sooner or later it will run out of steam, although no one can predict precisely when that will be. A prudent investor approaching retirement should be prepared for that event. In practical terms, this would mean reducing exposure to equity funds and ensuring that those you continue to hold are conservatively managed (there are several equity funds that actually made profits during the 2000-2002 bear market). Bond and money market fund positions should be increased so as to protect capital. – G.P.

What to do with CSBs
I have some Canada Saving Bonds that mature on Nov. 1 2007. These are regular interest bonds. Is it worthwhile to hold on to these bonds that only gave 1.5% interest in 2005 or is it better to cash them in for something better? – Margaret S.
These bonds no longer carry a rate guarantee, which means they will receive the current CSB rate until they mature. The latest series carries a rate of 2.75%, which is much higher than you received in 2004-05. If you are content with that, you should continue to hold. However, some small financial institutions are offering savings accounts with rates as high as 3.85%. Larger companies, like ING Direct, are paying 3.15%. – G.P.
Stock swaps in RRSP
I am 35 years old and hold common stock inside an RRSP. I would like to confirm my understand regarding switching stock out of an RRSP (near retirement) and any tax implications.

To keep the math simple: In 2006 a 35-year-old invests $1 in XYZ stock in an RRSP and holds until retirement. At age 69, 34 years later, that stock is now worth $100. He switches the stock out of the RRSP into a non-registered plan using a cash-equivalent ($100). He holds the stock one more year and sells at a market value of $101.

Does the government recognize the capital gain of $1 ($101-$100) and therefore apply a capital gains tax on 50c (assuming the rule that the first 50% of a capital gain is not taxed). Or do they recognize the capital gain from the original cost of $1 through to market value of $101 and assess a capital gains tax on $50? – Mark G.

When you swap an asset out of an RRSP using the method you describe (which is perfectly legal), it is considered a sale by the RRSP and a new purchase by you for tax purposes.

Using your example, in this case the RRSP would have a capital gain of $99 on the stock ($100 - $1), however since the gain took place inside a registered plan no tax is payable.

When you acquire the shares in your personal account, the new book value is the market price of $100. So if you sold a year later at $101, your capital gain for tax purposes would be $1, half of which is taxable.

Aha, you may say. Here’s a way to beat the system! Sorry, no. Your RRSP now has the $100 you paid for the stock. When the money comes out of the plan, it will be taxable at your marginal rate, which will be higher than the capital gains rate. In reality, you would have been much better off holding the shares in a non-registered portfolio from the start. – G.P.

Cash gifts
One of your previous answers regarding a gift of cash from a mother to daughter stated that: "There is no gift tax of any kind in Canada".

Silly question, but does this apply globally between any pair/group of Canadian citizens, or is this some kind of family exemption? For example, say I just won a million dollars and want to pay off a friend's mortgage with cash. (Nice to think about!) – Brian U.

It applies to everyone. You do not have to be related. You could even give the money to me if you wish. - G.P.
Wants access to retirement money
Due to health reasons, I am taking medical retirement from the federal government. I am fifty years old, but only have 13-1/2 years of pensionable service. My termination payout includes approximately $7,500 which is being issued as an RRSP. Can I cash this in immediately and if I do so what taxes am I paying? Thank you. – C.T., Brandon, Manitoba
It sounds like this money represents your pension entitlement. If so, you will acquire it in the form of a locked-in RRSP, which means that you cannot gain access to it unless you convert the plan to a life income fund. If you do that, you will receive annual payments but they will be very small. You cannot withdraw the principal.

Check with your employer to make sure this is the case. If by any chance the money is not locked in, you can deregister the RRSP and take all the cash. However, it will be included in your income and you’ll pay tax at your marginal rate. – G.P.

Clarification

In April, I published an answer in which I stated that non-residents of Canada are not allowed to withdraw funds from locked-in RRSPs. This was based on information given to me by the Office of the Superintendent of Financial Institutions (OSFI), which is responsible for overseeing plans that fall under federal jurisdiction.

Following publication of that answer, I was informed by a professional financial planner that people can indeed redeem money from federally-regulated locked-in plans if they have not been residents of Canada for at least two years and complete Canada Revenue Agency form number NR 73 and a spousal waiver. He sent along a copy of the relevant guidelines issued by his company.

On that basis, I went back to OSFI for clarification. It took several days but in the end they confirmed their original position – money held in locked-in RRSPs cannot be redeemed, even if you become a non-resident of Canada.

However, people who have been non-residents of Canada may be allowed to unlock money which is still held in their name in a pension plan. That may be the source of the confusion. Locked-in RRSPs, no. Pension plans, yes. – G.P.

Wants to sell locked-in RRSP
How can I locate someone to buy my locked-in LIF (life income fund) which I received in a divorce settlement? I require funds now and cannot cash in due to legislation. – Virginia J.
You’re out of luck. You can’t sell your LIF to anyone. It’s legally your personal property and is not transferable to anyone else except in the case of death or, as has happened in your case, marriage breakdown. You will have to look to another source for the money you need. – G.P.
Winters in Florida
I go to Florida for the winter and need U.S. dollars for expenses. If I buy U.S. interest income securities through a Canadian broker to finance all or part of my stay, how is the income taxed in Canada and in the U.S.? Can tax-free U.S. bonds be used by a Canadian? How does it affect the 8840 Closer Connection form I file each year? - Barry B.
You’re making this overly complicated. Any Canadian resident can invest in U.S. dollar securities; in fact you can buy U.S. dollar GICs or term deposits at your local bank. You declare the interest on your Canadian tax return just like any other interest income, except you must convert to Canadian dollars using the CRA’s official exchange rate for that year. The income does not have to be reported in the U.S., assuming you are not a resident or citizen of that country.

There is no point in buying U.S. tax-free municipal bonds, since the tax break only applies to Americans. Canadians have to declare the interest on their returns and pay tax at the usual rate.

The Closer Connection form to which you refer is not affected by any of this. – G.P.

Off to a good start
First of all I'd like to thank you for providing such wonderful advice over the years to those of us who may not have access to professionals. I've been fortunate enough to heed your advice, and now find myself in a relatively comfortable position; however I still have a question.

I'm 27 years old, have paid off my student loans, and recently put down 25% on a little condo that costs $225,000. I currently have about $5,000 in my RRSP and contribute $700/month to it (the maximum I can contribute), as well as $40,000 in non-registered savings. My question is, when I occupy the condo in about six months and the time comes to take out a mortgage (I have a pre-approved and guaranteed rate of 4.7%), should I use the $40,000 in non-registered savings towards reducing the amount of my mortgage, or keep it invested for long-term growth considering the relatively low interest rate on my mortgage? - A.B.

You’re certainly off to a good start, congratulations. The way you’re going, you’ll be a millionaire by 35.

One of the standard rules of investing is not to tie up all your money in a single asset. On that basis, putting all your cash into the condo isn’t a good idea. But here’s a strategy you may want to consider.

You don’t say whether you have any unused RRSP room from carry-forwards. If you do, you may want to put some of the $40,000 from the non-registered account into the RRSP up to your maximum entitlement for this year. You can then borrow up to $20,000 interest-free from the RRSP under the Home Buyers’ Plan. Just be sure you get the money into the RRSP at least 90 days before you will require the loan for the condo or you risk losing part of the tax deduction.

This strategy will save you $940 a year in after-tax interest charges ($20,000 x 4.7%) plus you will receive a tax deduction for the amount you contribute to the RRSP. If that’s $15,000 and your marginal tax rate is 40%, the deduction is worth $6,000 which can go back into your non-registered savings.

You can repay the RRSP over 15 years, although in your case I would advise doing it faster so as to maximize the tax sheltering of investment income. The net result of all this will be more money for your RRSP, a tax deduction, less mortgage interest to pay, and a substantial amount remaining to invest in non-registered assets.

If you don’t have any RRSP room, ask yourself whether your non-registered securities can earn 4.7% a year after tax. If not, direct a portion of the money (say half) to paying down the mortgage and invest the rest. – G.P.

Disability insurance
I am 62 and plan on working another five to six years, do I need disability insurance? My fees have gone up to $2,000 per year. I am working on a visa in the U.S. and have some disability insurance through the company I’m employed by but will eventually return to Canada and consult. Thank you for your assistance. – Confused in Texas
Do you need disability insurance? No. Should you have it? Only you can answer that question.

No one needs insurance, except when it’s required to obtain a mortgage or drive a car. It’s really a matter of whether you want to have it for the peace of mind it provides – and the financial support if something bad happens.

Disability insurance is very expensive and can get even more costly as you age and your risk profile changes. In my own case, it reached a point where I felt the cost was not worth the protection and I dropped it.

You need to look carefully at your own situation and decide whether the coverage is worth the premium. Start by assessing the benefits package carefully. What will you actually receive from the insurer in the event you do become disabled – and what constitutes being disabled? How long will the coverage remain in force – you’re 62 now; are you sure you won’t be cut off at 65?

If you drop the coverage and are unable to work in the future, do you have a plan to replace the lost income? Although you are currently working in the U.S., you should be eligible for at least a partial Old Age Security pension at 65 when you return to Canada. You may also be eligible for some CPP benefits. To what extent would they cover the loss of the insurance income?

Everything is a gamble, which is why insurance companies exist in the first place. You have to decide whether to take the risk yourself or pay someone else to do it for you. – G.P.

Doubting decisions
I've learnt a lot about investing just by reading your Q&A Section – thank you very much for making it available.

I'm 25 years old, without dependents, with a salary of around $55,000. I currently have around 5,000 in a savings account which I'm planning to invest, I will have around $1,000 available to invest every month. My main goals are to save for retirement (at age 60), for the down payment on a house (3-4 years), and also to contribute to my sister's university education (in 3-4 years).

I opened up a registered and a non-registered savings account at RBC in May 2006. Currently I have the RBC O'Shaughnessy Canadian Equity Fund in my registered account and I'm thinking of adding the O'Shaughnessy U.S. Growth Fund as well. I have the RBC Dividend Fund in my non-registered account. I have not made any contributions to these accounts yet.

Can you please suggest what mutual funds I should consider for these two investment accounts to create an aggressive growth-oriented portfolio?

I've been reading that the bull market has come to an end so I am doubting my decisions at the moment. I appreciate your help. - M.B., Toronto ON

It’s quite possible the bull market is over, although no one can say for certain at this stage. The reality, however, is that the bull began in late 2002 so it is now well over three years old. Bull markets don’t go on forever (at least they never have before) and this one is very long in the tooth. If we’re not in a bear market yet, we’re likely to be within a year.

That makes an aggressive growth approach very dicey at this time. Growth stocks and mutual funds that use a growth style are more vulnerable in a falling market than those which employ a value philosophy. The O’Shaughnessy U.S. Growth Fund, which closed to new business on June 30, is definitely a growth-oriented fund it has been under pressure recently. The O’Shaughnessy Canadian Equity Fund, on the other hand, uses a more balanced value/growth approach.

My advice at this stage is to adopt a more conservative approach. Focus on blue-chip stocks (the RBC Dividend Fund fits the bill), bonds, high-grade income trusts, and the like. Check out the RBC Monthly Income Fund for the latter types of securities.

The time to be aggressive is in the dying days of a bear market and at the start of a new bull. In the July issue of my Mutual Funds Update newsletter, I have written an article titled “Batten Down the Hatches!” which is what I think investors should be doing today.

That goes double in your case since two of your goals are relatively short-term – to buy a home and to help your sister through college. Losing a lot of money over the next few years won’t further either objective!

So I suggest that you focus on lower-risk funds for now. There’s always a trade-off between risk and reward and right now I would opt for less risk even if that reduces your short-term return potential. – G.P.

Wondering about RESPs
I'm wondering if you can give me a little guidance on RESPs – how much is necessary to accumulate, etc.

We have saved about $24,000 over the past years in a family-plan RESP for our two sons, which is managed professionally. There is another $5,000 in mutual funds that is earmarked for our kids' post-secondary education. In total, this $29,000 would currently provide for about six years of university (assuming they live at home, which is most likely). Our oldest is in Grade 11 and may begin post-secondary schooling in the fall of 2008 or later, and the youngest not until 2010 or later. Neither one would be in the high-priced faculties (i.e. the professions), and would likely be in an arts program.

We are possibly looking at several more years of contributing to an RESP, but are wondering if we have adequate savings already. Currently, we contribute $2,000/year to the family-plan RESP (monthly contributions).

At what point we should stop contributing to an RESP and perhaps contribute this same amount in a separate account (outside our RRSPs) ear-marking it for the boys' educational needs? I don't want to incur tax disadvantages (if any) if the funds are not used and revert back to us.

What are the limitations in RESPs about use of the funds, and if the funds are not needed for the kids' education what happens? Do we get the entire investment back (including interest)? Any tax implications, penalties we need to be aware of if the funds are not all directed to the kids' education? Cheers and thanks. – Wendy F.

It sounds to me as though you have already put enough aside. Assuming the $29,000 is invested wisely, that total will continue to grow for the next few years so you should end up with something like $32,500 when your first son starts college (assuming a 6% annual return). Therefore, the idea of continuing to save but doing so outside the RESP looks like the right approach at this stage.

You will need to review the terms of the RESP to see the formula for withdrawals and whether there are any penalties built into the plan if the money is not used for education. Terms and conditions vary greatly so I cannot provide a blanket answer.

However, under federal tax law there are some potentially high costs if the money is not used for education. You can recover the amount of your contributions without tax consequences, but income earned within the plan is a different matter. You are allowed to transfer any such amount to a personal RRSP, but only if you have the RRSP room available. Otherwise, it is treated as personal income when the RESP is collapsed and taxed at your marginal rate plus an additional 20% (12% for Quebec residents).

You can read more details by consulting the Canada Revenue Agency RESP Guide at Click Here - G.P.

Should he use Home Buyers’ Plan?
I just purchased my first home and already have 25% down payment. I was thinking about putting down a little extra using my RRSPs. Do you think it is a good idea to use the Home Buyers’ Plan in my situation? - M.W.
No. If you already have the down payment you need and can afford the monthly carrying costs of the mortgage, I recommend that you leave the RRSP intact.

The Home Buyers’ Plan is a useful way for people who do not have the money for a down payment to get into the housing market, but it is very costly in terms of the end value of the RRSP. That’s because borrowing from the plan deprives you of many years of tax-sheltered growth at the worst possible time – when you are relatively young.

If you have a good employer pension plan, the RRSP may not be as important to you in relative terms. But if you don’t, the plan may be the prime source of income when the time comes to stop work. – G.P.

Another Home Buyers’ Plan query
My spouse and I recently separated. Are there any exceptions to the conditions of the Home Buyers’ Plan that would allow me to borrow up to $20,000 towards a new home under these circumstances? – Christina A.
I’m afraid not. To begin with, although you say you are separated it appears that you are still legally married. I also assume from your phasing of the question that you and your spouse have been living in your own home until recently. The Canada Revenue Agency’s Home Buyers’ Plan Guide states as follows:

“You are not considered a first-time home buyer if, at any time during the period beginning January 1 of the fourth year before the year of the withdrawal and ending 31 days before your withdrawal, you or your spouse or common-law partner owned a home that you occupied as your principal place of residence.”

There are some exceptions for disabled people, but you don’t indicate that you are in that group. – G.P.

Why is fund falling in value?
I have over 30% of my total retirement savings invested in the TD Real Return Bond Fund. Although I am very satisfied with the returns from this fund through the years, I am puzzled by its performance over the last six months. During this period of higher inflation, the fund’s share price has actually fallen by approximately 9%. Why? – Darryl R.
Real return bonds usually have medium to long maturities. For example, 41% of the bonds in this portfolio do not mature until after 2030 (some as late as 2036) while another 30% mature between 2020 and 2029. Long-term bonds are especially vulnerable to interest rate increases and that is exactly what we have seen here. Higher rates have resulted in lower market valuations for the bonds and the portfolio’s net asset value (NAV) has declined accordingly.

In TD’s monthly report on the fund, the company notes that real return bonds continued to underperform regular bonds during May. The managers go on to say: “Medium-term fundamentals for real return bonds remain solid, with stable economic growth and relatively low short-term interest rates. Real yields have reached a level where capital gains are not expected to meaningfully enhance performance.”

Interpretation: much of the strong performance of this fund in recent years was fuelled by capital gains in the bond market. The managers believe we are unlikely to see a repeat of that going forward so your return will be primarily yield. The current yield for the Real Return Bond Index is 1.9% annually plus the rate of inflation, which was running at 2.4% in May. On that basis, the outlook is for a return in the vicinity of 4.3% over the next 12 months. – G.P.

Great deal on a loan
I have a family friend that has $150,000 they would like to lend and wondered if I would be interested in borrowing some or all of it. I would be able to borrow the money for 4%. I currently have a mortgage with $110,000 owing and paying 5.84%. I realize there will be a penalty for an early mortgage payoff but the interest savings would more that offset that. I would be looking at a 10-year term. Just wondering if you can think of any reasons why this would be a bad idea on my part. – Tim from Collingwood ON
It sounds like a great deal from your perspective but this must be a very good friend. A 4% interest rate is extremely low, as you obviously recognize. Your friend could get a better return by simply investing in Government of Canada bonds.

If you both want to go ahead, I suggest that a proper loan agreement be drawn up by a lawyer. There is nothing that can ruin a friendship faster than a dispute over money so make sure you are both in full agreement about the terms and that the deal is put down in writing.

Also, make sure that you obtain the exact cost of the penalty for early repayment of the existing mortgage before proceeding. It could be more than you think, given the recent increase in interest rates. – G.P.

Lost job, going back to school
I am a single woman in my 40s. I have been unemployed for over a year after I lost my job in the healthcare field as a result of restructuring. I am reasonably well off. I recently received a $300,000 inheritance which when added to my own portfolio gives me a net worth of $700,000. I still have a mortgage of approximately $63,000. I have been accepted into a three-year master's program in another field. Do you have any advice for how I can maximize my investments to give me some cash flow over the next three years while I am not working? – Karen M.
I suggest you begin by using some of the inheritance to pay off the mortgage, if you can do so without incurring a substantial penalty. Otherwise, you should be able to reduce it by $10,000 or $15,000 without penalty; check your mortgage agreement. Paying off the mortgage would immediately relieve you of that monthly financial burden, thereby increasing your cash flow.

Your inheritance money is not in a registered plan (you don’t tell us about the funds you already had). Therefore, I suggest you invest the proceeds after discharging the mortgage in low-risk tax advantaged securities, such as a no-load monthly income mutual fund and some conservative income trusts or REITs. These will provide regular cash flow and, to the extent that the money is received in the form of dividends, return of capital, and capital gains, your after-tax return will be higher than if you invest in interest-bearing securities. – G.P.

How to manage retirement money
I am 54 years old and I am retiring at the end of August. I will be receiving my first pension cheque in September and I received a severance of $129,000.

With this severance I am eligible to roll over at least $47,000 into an RRSP. I have about $35,000 of unused deduction room for 2006. So about $82,000 can be rolled over for the tax year of 2006, is that correct?

Can this money be put into a life income fund instead of an RRSP? I do not have an RRSP at this time.

I would like to withdraw money when needed. What are my options? – Fernande S.

Let’s start with the rollover. I can’t say for sure whether your math is right but I can provide the information you need to figure it out. You are entitled to roll over $2,000 for every year of service prior to 1996, assuming you were vested in the company pension plan the whole time. (If you weren’t, add $1,500 for each year before 1989 that you were not in the plan.)

Your working years from 1996 on do not count towards the tax-free rollover. However, you can use any available RRSP room to roll over additional money, providing certain conditions are met. I suggest you try to find a copy of my 2004 Buyer’s Guide to RRSPs at your local library for complete details. It’s not clear whether the $47,000 figure you mention relates to pre-1996 service. If it does then yes, your $35,000 in unused deduction room can be added to that amount.

You absolutely do not want to put the money into a life income fund (LIF), and fortunately you would not be allowed to do so anyway. LIFs are locked-in plans that have all kinds of restrictions. There is nothing involved in opening an RRSP; your bank can do it for you if you wish. That is definitely the way to go and it will give you the flexibility to make withdrawals at any time. Just remember that the money will be taxed when it comes out of the plan. – G.P.

Stock de-listed, can he claim loss?
I had some holdings in Kasten Chase in my RRSP. They went bankrupt and the stock was de-listed from the exchange. Do I lose that money or can I at least pull it out of my RRSP and claim a loss against my income? – Jason P.
If it was in the RRSP, you are out of luck. You cannot claim any tax relief for the loss. If the shares had been held outside the plan, you could have claimed a capital loss for tax purposes.

This is one reason why I consistently discourage people from putting risky securities in registered plans. By doing so, you compound the risk because if there is a drop in value your loss is 100%. If the security is in a non-registered account you can mitigate the financial damage by claiming a capital loss. – G.P.

Tried to help son and got into trouble
I have taken out a home equity loan of $50,000 to give to my son to help make a down payment on a new home for him and his wife (who is in med school). They will only be able to start repaying this loan as of October 2008 with full repayment by March 20ll at 10% per year interest.

I now find that I am required to repay my home equity loan at the rate of $1,500 per month. I did not expect it would be this much as I had calculated repayment at about $600 per month which I could handle. Now my problem is what I should do?

I have assets of $450,000 according to my bank as of May 2006. I am currently thinking that maybe I should cash in a $42,000 RRSP maturing in February 2007 in order to reduce my home equity loan and subsequently my monthly payments to a more reasonable rate. What would be the drawbacks to this option and what if any kind of advice would you give me now that I am in this situation? My salary is only $50,000 per year and I have a home to maintain and pay taxes of $4,000 per year. Thank you. – Pat S.

Wow – what a mess! It’s easy to say this in hindsight but obviously you should have asked for confirmation of the monthly repayment rate before you made the decision to take the loan. It’s a lesson for anyone contemplating a similar goodwill gesture.

I do not advise cashing in the RRSP. You’ll be hit with tax at your marginal rate which, given your employment income, could be more than 40% on at least part of that amount. That’s a hefty penalty to pay for a mistake.

Your first step should be to discuss the repayment schedule with the lender. A monthly payment of $1,500 on a $50,000 loan sounds excessive. Find out how it is calculated. At an interest rate of 8% (which is likely more than you are paying), that would mean the loan has been amortized over just three years. That makes no sense and leads me to believe there has been a miscalculation somewhere.

If they insist the figure is correct, then I suggest the simplest solution is to convert the line of credit into a conventional mortgage with a 25-year amortization. The financial institution that holds the PLC should be able to do this for you since the loan presumably is already secured by the home.

The major banks are quoting rates in the 7% range on a five-year term but there are special deals around that can reduce the rate to below 6%. Even if you pay 7%, the monthly payment on a $50,000 loan over 25 years should only be around $350 which you can certainly afford. – G.P.

What to do about pension?
I am a 56-year-old woman recently retired and have to decide what to do with my pension from a large bank. Option 1 is either to take my pension now at a reduced amount or wait until 62 and take my full pension. With this option my spouse will receive 60% of the monthly pension upon my death.

The other option I am considering is taking my pension and transferring the commuted value of $152,000 to a locked-in RRSP of my choice and then converting into a LIF.

The reason I am considering transferring my funds out of my pension is because my spouse does not have any pension and will only received 60% from my pension but would be entitled to 100% if he was the beneficiary of my LIF.

I will probably need to start taking my pension now or, if in a LIF, start to withdraw immediately.

What is the better option? If it decide to manage the funds myself what would be a good investment strategy? – Nancy B.

As a general rule, I advise people to choose a pension instead of moving the assets to a locked-in account because of the certainty the pension offers. Many folks in your position know very little about investing and therefore risk seeing the RRSP or LIF underperform or, worse, lose money.

Your concern about your spouse is valid but the odds are that you will outlive him so you may be placing too much emphasis on it.

You don’t say how much you would receive from your pension. The commuted value of $152,000 invested to earn 8% annually (which is about the maximum you should aim for) would generate $12,160 a year or a little over $1,000 a month. Compare that to the amount you will receive by drawing the pension and it may make the decision easier. – G.P.

Student loan interest
I have a question concerning interest on student loans. I have student loans from law school. I finished articling not long ago and I am currently staying home because I recently had another child. I currently have no income, so I would like to know if my husband can claim the interest on my student loans. It only seems fair particularly since it is his income that is currently paying them. – Paula R.
It may seem fair, but it isn’t legal. Only you are allowed to claim the interest on your student loan. If you check line 319 in the General Tax Guide you’ll read: “Only you can claim most of the interest paid on your student loans even though someone related to you may have paid it.”

The good news is that you can carry forward any unclaimed interest charges for five years. If you are working by then, you can claim the tax credit at that time. – G.P.

Funds for kids
I would like to buy mutual funds for my children. At what age can they open their own accounts? – Stephen C.
Any funds you buy for them will have to be held in an in-trust account until they reach the age of majority. Meantime, all interest and dividends earned by the funds will be attributed back to you for tax purposes. Any capital gains can be claimed by the children, however. Be sure to file tax returns on their behalf to declare any such gains since the personal tax credit should be more than adequate to offset the income. – G.P.
Leveraging leads to trouble (again!)
My husband and I are both 62 and still working. Because we had little put away for retirement our financial adviser persuaded us to take out $300,000 in leveraged loans for a seven-year period. This was in April 2006. As at the end of June, the mutual funds have already decreased from $300,000 to $290,000. I am terrified of losing everything and want to sell but my husband wants to hold on. We do not have many years to recover. If we sold now we have a loss of $10,000 plus the service charges of 5.5% will cost another $16,500 for a total loss of $26,500. Is it better to take the loss now before the market sinks any further? – C.G.
You have a problem. It would be nice to be able to offer a pat answer, but there isn’t one. Telling you to lock in a loss of $26,500 after less than four months is not going to sit well although, given my view of the prospects for the markets going forward, it might be the most prudent thing to do.

The best step would be to sit down with the advisor who got you into this, have a frank heart-to-heart about the situation, and review the entirely portfolio carefully. If appropriate, the investments should be restructured in a way that minimizes risk and is more defensive. For example, that could mean reducing exposure to resource stocks and adding to utilities and financial services. If the whole market goes south, those stocks will lose some ground but they probably won’t fall as hard as the cyclical issues. Alternatively, choose some conservatively-managed mutual funds with a track record of having performed well in the 2000-2002 bear market.

Sorry I can’t be of more help. Leveraging is a strategy best left to highly experienced investors, as you have learned. – G.P.

Single mom needs money
I am a 46-year-old single mom who had to relocate recently and left a job I had for 21 years. I will be able to collect my pension from that job when I am at the appropriate age but I am currently unemployed and may be in trouble of supporting my family. I'm thinking about withdrawing the money (I cannot withdraw only a portion of it – which would be my option – so I am required to take it all out). I'm thinking I could reinvest a larger portion of it and use what I need to get by until I secure a job. What do you think? Where should I reinvest the bulk of that money? Should I invest any of it in real estate and put the rest in another retirement fund? Thanks for your help. – Roseann
I’m afraid I have bad news for you. Yes, you have the option of taking a lump-sum payment from your pension plan. However, it does not follow that you can then do whatever you want with the money. The proceeds will have to be transferred into a locked-in RRSP, which you are not allowed to dip into at will. Locked-in means exactly that.

Exceptions can be made for people in financial difficulty, which would seem to apply in your case. However, this depends entirely on the rules of the jurisdiction that administers your locked-in plan (which is the same one that governs the pension plan you contributed to). The rules vary greatly from one jurisdiction to another (bureaucracy at its worst!). For example, if your pension plan was under federal jurisdiction, hardship withdrawals are not allowed from a locked-in RRSP. Locked-in plans administered by Ontario and Alberta have the most liberal rules. Other provinces are somewhere in between the two extremes.

So if the main reason for choosing a lump-sun withdrawal is immediate access to cash, your first step is to find out what jurisdiction the plan falls under and what financial hardship rules apply. Then see if you qualify and go from there.

As far as investing the money is concerned, the pension plan managers can probably do it a lot better than you can so if you aren’t able to get access to the cash you need I suggest leaving it where it is and taking the deferred pension. – G.P.

Losing job, has big debts
I'm 43 and losing my job. I don't have any other work as of yet and still have about six weeks before I lose my employment. I have a mortgage of about $49,000 on a property worth about $350,000 as well as a line of credit debt of about $42,000. I have about $130,000 in RRSPs. I also have a severance of about $20,000 and a pension amount of $30,000 - $40,000. The pension amount, of course, is locked in.

If I can make it through until the end of this tax year, what would you think about using my RRSPs to pay off the line of credit or mortgage early in 2007 when my income will probably be much less? This would give me some flexibility as far as choosing my next line of work, or returning to school, as opposed to just taking the first thing that comes along. Thanks. – Greg G.

Normally, I advise against withdrawing RRSP money to deal with a temporary financial crisis. While you may solve a short-term problem, you create a long-term one in the process.

Consider your situation. You are 22 years away from the normal retirement age of 65. Your pension credits are minimal and there is no guarantee your new place of employment will offer a pension plan. As things stand, your RRSP is the only real retirement nest egg you have. If you deplete the plan to pay off the mortgage and the line of credit, you’ll have almost no savings left.

If the RRSP money is invested conservatively and returns a modest 6% annually, your retirement savings will grow to almost $470,000 at age 65, even if you never contribute another cent. That will generate annual retirement income in the $30,000 range, which will be supplemented by Canada Pension Plan and Old Age Security. The loss of that retirement income is the risk you face if you withdraw the RRSP money.

Before you take that step, look into the possibility of combining the line of credit and the mortgage and extending the amortization period. The result could be a significantly lower monthly payment. This may enable you get by on income from employment insurance, your severance, and perhaps some part-time work while you are deciding on your future career path.

Of course, don’t lose the house because of failure to make mortgage payments. If that becomes a threat, then use the RRSP money. But treat the RRSP as a last resort, to be dipped into only if all else fails. – G.P.

Mom’s money is running out
My mother is going to be 80 this year and has recently moved into an assisted living complex. She is one of the rare women of her age who worked until the age of 65 and provided a RRIF income for herself after retirement. Since her income was limited, so was the amount she was able to put away. She took the minimum amount out until recently and now finds she needs another $300 a month on top of that to make the monthly obligation to the facility (which includes amenities as well as lunch and dinner each day).

At the rate she is going, she will have used up all of her savings in three years at which point my sister and I will contribute to the shortfall. We decided this because the money will be taxed at a lower rate as a RRIF withdrawal in her hands than if we paid the shortfall now and had the amount bequeathed to us when she is deceased.

My mother is understandably concerned about this. In B.C. she qualifies for a SAFER allowance (Shelter Aid for Elderly Renters) if her income is low and would receive the maximum if she was only getting government pensions when her RRIF investment runs out. The investment people were questioning this but I feel this is what the money was saved for.

Are we doing the best for our mother and, if not, can you suggest other options? One of my concerns is that at 52 years of age I could be retired in a few years and while I have planned for my retirement I didn't plan to be contributing for my mother's as well. – Sandy K.

One possible alternative would be to review the securities in the RRIF to determine whether it would be possible to increase the return on the remaining funds without unduly adding to the risk. You don’t say how the money is invested but if, for example, most of it is in GICs your mother could get more cash flow by moving the money into monthly income mutual funds, conservative income trusts, and the like. It’s probably not feasible to find another $300 a month in this way but it may be possible to extend the life of the RRIF for another few years.

If the returns on the RRIF cannot be increased with reasonable risk, then your plan sounds like the best course. The tax on the RRIF withdrawals will be very low in your mother’s hands. When the money runs out, her SAFER allowance will increase and she may also qualify for a payment under the federal government’s Guaranteed Income Supplement (GIS). Check out the details of the program. You may find that the financial burden on you and your sister will be less than you expect.

I suspect your mother is concerned about two things, which are related. One is the fear of being left penniless. The other is the reluctance to be a burden to her daughters. It sounds like she was always an independent woman who looked out for herself and now, at 80 years of age, that independence is threatened.

So the issue here is probably as much psychological as it is financial. You may need professional assistance in easing your mother’s mind, whatever course you take. – G.P.

Claiming student loan interest
If a student loan was transferred to a Royal Bank credit line because the credit line had a lower interest at the time when the student loan repayment was to commence, can the credit line interest be tax deductible as if it was the student loan? Thanks for your help. – Mike T.
It looks like you are out of luck. You may be paying less interest but you have lost the tax deductibility. If you check the website of the Canada Revenue Agency under student loan deductibility, you’ll find the following:

“You cannot claim interest paid on any other kind of loan, such as:

* a personal loan or a line of credit;

* a student loan that has been combined with another kind of loan”

I suspect that a lot of people may fall into this trap. Unless you are in a zero tax bracket, the interest deductibility of the loan will be worth a lot more than a slightly lower rate. – G.P.

In deep trouble with Canada Revenue
I am disabled and live on a modest disability monthly amount. They do not take tax from my cheques and I am now in trouble with the Canada Revenue Agency. Last week I received a notice that I owe CRA $6,000 and change. I have spoken with the Fairness Committee who have assured me that penalties and interest will be taken off my debt. Today, not even a week later, CRA decided that I owe over $15,000. I don’t make much money and live month-to-month with no ability to even have a savings account. I send post-dated cheques for six months at a time. How do I get out of this mess? I know I don't owe this much but I'm afraid of what the CRA can do. They have advised "they may take legal action." What does this mean and is there anything you can help me with? – Diana A.
This sounds like an extreme position on the part of CRA but there is nothing I can do to help you directly. CRA will not discuss a specific tax case with a third party for privacy reasons, with the exception of your lawyer or accountant.

The first thing that I suggest is that you send CRA a “notice of objection” letter. This puts your concern on the record and buys you some time. You don’t need to put a lot of detail in the letter; simply provide your Social Insurance Number and include a copy of the notice of assessment.

Once that is done, you are going to need professional help to assist you. I realize that you probably can’t afford the cost of a lawyer or a tax accountant. However, since you are living on a disability pension perhaps you are entitled to public assistance. Check with the organization that provides your disability payments and with your local social services office.

That’s all I can suggest. If I hear from a lawyer or accountant who reads this and is willing to help you on a pro bono basis, I will put that person in touch with you. – G.P.

Wants to give RRSP to charity
I am 57 years of age and have a locked-in mutual fund that is from a company pension plan. Is there any way that I can transfer this locked-in mutual fund to a charitable organization as a gift so that they can use all the funds immediately? – Mike R.
No. RRSPs cannot be transferred in the way you describe, whether they are locked in or not. – G.P.
Fund for daughter’s education
I have money invested in AGF Aggressive Growth Fund for my daughter (15). It has been invested for 10 years with a reinvestment of $30 per month. I realize this is a volatile fund. Is it better to change to another type of fund? It is for her education. Any suggestions would be helpful. – Fern F.
Over 10 years, the fund has done pretty well for you with an average annual compound rate of return of 8.6% to June 30. That’s well above average for the U.S. Small and Mid-Cap category.

But you’re right, it is volatile – extremely so. According to the Globefund website, the risk factor is about one-third higher than the average for the peer group. That was confirmed in spades when the fund lost 10.6% of its value over the three months to June 30 when the markets were undergoing a sharp correction.

So yes, it is time for a change. Your daughter is now only a few years away from university. If we experience another major correction, the money you have invested for her could be seriously eroded. Your goal at this point should be to preserve the capital. Profits are secondary.

My advice would be to switch into a lower-risk fund at this point. If you want to stay with AGF, their Canadian Balanced Fund is worth considering. Talk to your financial advisor.

A word of warning, however. You don’t say whether this money is in an RESP. If not, and it is invested in your name, switching to another fund at this point will trigger a taxable capital gain. You need to take that into account before making a final decision. Of course, even if you stay in the Aggressive Growth Fund you will still be hit with a capital gain when you sell the units to pay for her college education. That’s why I always recommend RESPs for education savings. – G.P.

How to handle an inheritance
Our son will inherit $100,000 from his grandfather’s will this fall. He is 19 and attending college via a student loan of about $11,000 and a part-time job (minimal amount). He will be finished school next May. My question is this: should he pay off the student loan? What is his best investment so he will have a nice nest egg later on in life? He wants to get a better car, which is reasonable, but we would like to see him invest at least half his inheritance. Any suggestions would be a help. Thanks. – Nils and Tess
Paying off the student loan would be a good start since he wouldn’t have that burden hanging over him. But he should not do that if he is then going to turn around the borrow money for something else because the interest on the student loan is tax deductible.

For example, one of the best ways to build a lifetime nest egg is to buy a home. If he decides to do that, it would be better to put the $11,000 towards the cost of the property, since mortgage interest is not tax deductible.

If becoming a homeowner is not on his priority list, then I suggest he pay off the student loan, buy his car, and invest the rest of the money in a tax-efficient portfolio. That means the focus should be on dividend-paying stocks (including preferred shares), conservative income trusts, REITs, and the like. This will maximize his after-tax returns. He should use the services of a financial advisor to identify securities that best meet his needs. – G.P.

Sell condo now?
I am 53 and have an income of around $29,000 annually. I plan to retire at age 60. I bought a two-bedroom condo at $190,000 and can sell it at $300,000 now. If I sell, I will have around $152,000 cash on hand (I have a $138,000 mortgage).

Should I buy another one bedroom condo right away at a fairly high price or should I rent for two years and wait until the price of real estate slows down? If I do decide to rent, what should I do with the cash on hand? I would like to have a return of at least 6% on this amount. However, the tax consequence is a big worry for me. Looking forward to hearing from you. – Jonathan

You are asking me to predict the movements of the real estate market over the next two years. I don’t know of anyone who can consistently do that accurately. Moreover, real estate prices are very much driven by local factors and you don’t say where you live. For example, a condo in a boom town like Fort McMurray is unlikely to drop in value unless development of the Alberta Oil Sands is dramatically curtailed. But in a city like Vancouver, where prices have gone through the roof, a correction at some point is likely. Of course, no one knows when.

I can tell you that, historically, we have seen periods of weakness in residential housing and especially in the condo market after excessive price run-ups. I can also tell you that the housing market in the U.S. softening. But if inflation moderates and the Bank of Canada starts to lower interest rates again, that could provide new impetus to housing. You can see why predictions are so uncertain.

So there is a danger in dropping out of the housing market for two years. You might find that prices have moved even higher when you buy back in. Only you can decide whether you want to take on that risk.

If you do, where should you invest the cash? Since the money is not in a registered plan, you want to maximize your after-tax return. That means avoiding interest-bearing securities like bonds and GICs, the income from which is taxed at your marginal rate. Instead, consider high-quality preferred shares which benefit from the enhanced dividend tax credit. The dividend rate will likely be less than your 6% target but your after-tax return will more than compensate for that. In fact, lower-income taxpayers may pay hardly any tax at all on dividends, depending on where you live. For example, an Alberta resident with $30,000 in taxable income pays tax at a rate of 0.10% on dividend income. Residents of British Columbia, Ontario, Manitoba, PEI, Saskatchewan, and the Territories pay nothing. – G.P.

Kids and tax returns
I am a teacher trying to teach my 16+ year-old students their taxes. I have told them that as soon as they are 16, they are no longer dependants on their parents' taxes and should file their own taxes. Some of the parents/students feel they are still dependants and the parents are still getting tax benefits from their children as dependants. Which is true? Can a student file taxes without income for the sales tax credit? – Cindy C.
Actually, children can file tax returns at any age and should do so if they have any income to declare from part-time jobs, etc. One reason for this is that they will build up RRSP contribution credits on all earned income that can be claimed in later life when they have significant income. Over the years, those credits can add up to future tax savings.

Also, in cases where an informal education trust (not an RESP) has been set up on behalf of a child, all capital gains accrue to the child and should be declared as they are crystallized.

Everyone age 19 or older should file a return whether or not he/she has any income to declare in order to collect the GST tax credit. This is a refundable credit that college students often fail to collect because they think they have so little income that filing a return is unnecessary.

There is nothing magic about age 16. The Government of Canada does not give tax deductions for dependent children; instead it compensates parents through such programs as the Child Tax Benefit which is available to all families who have children under 18 and who meet the income requirements. – G.P.

Questioning financial advice
Our financial advisor advised us to borrow money to invest for income tax purposes. We borrowed from the bank and paid the principal, plus interest. He then advised us to transfer the loan from the bank to their firm and we only pay the interest on it. He also advised us to take a universal life insurance policy on our married daughter, taking the money out of our portfolio. My husband and I are both retired, and have a moderate income. Our ages are 64 and 68. Are we doing the right thing? Thank you. – Joan J.
You are certainly doing the right thing from the sales person’s perspective. He earns commissions on the invested money and the insurance policy. He probably also received a commission on the transfer of the loan to his company – I suggest you ask him that question directly and at the same time ask how much in total he is earning in fees and commissions from all these transactions. You may be shocked.

Whether you are doing the right thing for yourselves is highly questionable. You say you are both retired and living on a modest income. It seems to me that your priorities in that situation should be to stay out of debt and use whatever savings you have to increase your cash flow through low-risk investments.

It’s true that borrowing to invest can work to your advantage because the interest then becomes tax deductible. But the only way you end up ahead is if the after-tax return on your invested money exceeds the after-tax cost of the loan on a consistent basis. And you have to be willing to assume the additional risk that a leveraged portfolio entails.

I suggest you seek a second opinion before you do anything more. Consult a fee-for-service financial planner who has no axe to grind and who will give you some unbiased answers. The cost will be more than worth it in terms of peace of mind and may end up saving you a lot of money. – G.P.

Wants to withdraw RRSP money
I would like to cash in my $10,000 in RRSPs. I know I will be taxed but if I could take some leave from work to decrease my income to help counteract the tax how much leave would be required? I earn around $42,000 per year. – Aileen P.
If your question is simply how much time do you need to take off work to offset the income from an RRSP withdrawal, the answer is easy. If you earn $42,000 a year, you need to take off about 12 weeks. That will translate into foregone income of about $10,000.

However, you should ask yourself if you really want to do that. You don’t tell us where you live but if you continued to work full time and made the withdrawal, the marginal tax rate on the extra RRSP money will be in the 30% to 35% range in most provinces based on your salary. If you forego your regular income, you’ll reduce the RRSP marginal tax rate to 20% to 25% in most provinces. In other words, you’ll give up $10,000 in gross salary to save about $1,000 in taxes. – G.P.

Burdened with credit card debt
I am a PhD student in my late twenties and I am struggling with about $7,000 in credit card debt. A few years ago, I had a good job and began contributing to an RRSP. It is now worth about $7,400, although I have not been able to contribute since returning to school. Should I use this RRSP to pay off my credit card debt? I am paying more in interest on my cards than what I’m earning from my RRSP, and I figure that in a few years when I finish my degree and get another good job then I can begin again to save as much as possible in an RRSP.

I understand that if I withdraw the RRSP money now, it will count as income on my tax return next spring. If my income is already quite low, because I’m only working part-time while studying, will I still end up paying at tax time? Thanks for the help. – Vicky S.

Well, you’ve learned one financial lesson early – don’t fall into the credit card trap. I can understand the difficulty you are having in coping with the financial burden of meeting those monthly payments.

However, I would encourage you to avoid using the RRSP money if at all possible. It’s easy to say that you can start again in a few years. In reality, you can never regain the years of tax-free compounding that you’ll lose. I once did a study that showed that a person who contributed regularly to an RRSP between age 25 and 35 and then stopped would end up with more money in their plan at age 65 than someone who started at age 35 and contributed for 30 years, assuming the same compound rate of return in both cases.

Before you go that route, I suggest you explore other options. For example, some financial institutions offer student lines of credit at reduced rates. You could switch your debt to one of those and cut interest costs. Another possibility is a low interest rate card.

If you decide in the end that the RRSP is the only option, you’ll be assessed a 20% withholding tax on the withdrawal (30% in Quebec). That applies to amounts between $5,001 and $15,000. You may be able to recover some of that when you file your next tax return. – G.P.

Role of executor
My parents made a will and they told me that the house and estate will be divided between me and my sister. But they also said that my sister is named executor. (Just her, not both of us.) What is the executor's job? Is she in charge for the sale price of the house or can we both decide this? – George N.
The executor has legal responsibility for all aspects of settling an estate and it is an important job. Among other things, that person must ensure that all taxes are paid and that the assets of the estate are properly distributed as per the terms of the will.

As far as selling the house is concerned, if it is left jointly to both of you in your personal names then your sister could not unilaterally decide to sell it, nor could she set a price on her own. But if the house forms part of the estate, with no designation in the will that it should go to one or more named heirs, then as executor your sister could deal with it as she sees fit. Of course, the proceeds from any sale would form part of the estate and would have to be divided accordingly.

Note that this is generally the way these things work. However, estate law is under provincial jurisdiction so it is best to consult a lawyer if you want to be sure of the precise details in your case. – G.P.

Family cottage a headache
I own a cottage that was given to me nine years ago by my parents. I am not using it as much as I originally intended. I had it for sale through a real estate agent for three months and did not have any prospective buyers. If I had sold it my intention was to share proceeds with parents. Now my father has a renewed interest in the cottage. If I give it to him am I required to pay capital gains? If so, how would property value be determined? My parents paid $5,500 in 1974. I paid nothing but invested $6000 or $7,000. My property tax bill values property at $8,900. – Paul C.
Your property tax assessment may or may not reflect the fair market value of the cottage. You would have to have it appraised to get that figure.

Yes, you could be on the hook for capital gains tax if you give the cottage back to your parents. A gift such as that is considered to be a sale for tax purposes. You would need to establish how much the cottage was worth when you received it, although that figure should be available because your parents should have declared it for capital gains purposes when ownership was transferred to you.

You may need a real estate lawyer to sort all this out. Plus, keep in mind that many provinces have a land transfer tax that could also be assessed in this case. – G.P.

Sons want to invest
I have two sons aged 15 and 17. They want to start investing now for the long term now so when they are 55 and 57 respectively (40-year investment) they will have a comfortable nest egg for retirement. They look to start investing $2,000 and at least $3,000 each year after that, to be conservative.

I am looking for a return for them over the long term of something in the 8%-10% area while prepared for volatility at times over the years. I am considering having them buy a RRSP dividend fund i.e. BMO or one of your recommendations. These funds appear to be fairly stable even in poor markets and seem to be the closest thing to manna from financial heaven considering the long term. Should I be looking elsewhere for these eager young investors? Are there significant risks to dividend funds over the long term? Thank you. – Ed S. (Typical dad giving advice who could use some advice.)

Over the long term, a well-managed dividend fund should do fine. However, keep in mind that most of these are actually blue-chip stock funds – the word “dividend” usually means nothing more than that they focus on dividend-paying stocks.

I think this type of fund would be just fine, but if you wanted to be more conservative you might consider a balanced fund instead, at least for starters. Of course, given the amount they are investing their portfolios will eventually have to be more diversified. At an annual return of 8%, I calculate that their plans will each be worth about $360,000 after 30 years, using the contribution figures you suggest.

However, that’s assuming the money is in a tax-sheltered RRSP. You mentioned an “RRSP dividend fund” but given the ages of your sons, do they really have enough earned income to make RRSP contributions of $3,000 a year right now? – G.P.

Sold house, what to do with money?
My wife and I are in our mid-70s. We finally decided to sell our house of almost 50 years to one of the family members. After all bills are paid, we would have a small amount of about $30,000 left. I would like to invest it safely, so we have some money to fall back to. What's your suggestion? – C.W.
It sounds like you want to keep the money as an emergency fund, which means you should not lock in to something like a five-year GIC. In this situation, your best bet is a high-interest savings account. They are currently paying 3.5% to 4% and they are perfectly safe since they are covered by deposit insurance. You’ll get the best rates at smaller financial institutions but even some big banks are offering high returns if the account is large enough. Check around. – G.P.
Portfolio losing ground
I had purchased several mutual funds back in 1999. Since then, I have not put money into them. My portfolio is down 5%. I currently have money taken off my paycheque bi-weekly. That money is going towards a mutual fund that our company set up for our employees (it is part of our benefit package).

Is it a good idea to continue to hold on to the mutual funds that were purchased in ‘99? – Vito P.

It’s not clear from your question whether the fund being sponsored by your company is different from the ones you purchased in 1999 but I assume it is. I would certainly dump the funds you bought seven years ago. They must be dogs of the first order! To be showing a loss after all that time, when we have just come through a great bull market, is inexcusable. My guess is that these are high-tech funds that were squashed in the crash of 2000-2002 and have never fully recovered. It’s time to move on. – G.P.
Wolves breaking down her door
I am inquiring as to the possibility of unlocking my retirement funds. I live in Ontario and lost my job due to the company closure the end of February of this year. I have been on EI since March and as much as I appreciate the money that I am receiving it is in no way enough to cover my monthly expenses. I have managed to keeps the wolves away from the door but it seems like it's turning to straw and they are starting to break through. I do have some money that would more than help but I need access to it. Is there any way other than death that I can get it out? Thank you in advance to your quick response to my question. – Cyndy D.
You’re in luck. Ontario is among the most liberal jurisdictions in the country when it comes to getting money out of locked-in retirement accounts. You can apply to the Financial Services Commission of Ontario to withdraw funds based on financial hardship for any of a number of reasons (such as risk of eviction or medical bills), or if your expected 2006 income is less than $28,066.67. For more details go to Click Here - G.P.
High interest rate looks great
I've been considering an investment with a mortgage finance firm that has paid a quarterly cash dividend averaging 11.9% since 1995, or 12.4% if the money is reinvested for a 5-year term. It's an RRSP-eligible investment, is open-ended, and the finance company pays 100% of its net earnings to investors. What do you think of this type of investment? Is this a good time for investing in a mortgage financing firm? – Terry H.
There are a number of these firms around, offering very attractive rates of return. I can’t comment on any specific company but I would remind you of the classic investment axiom: the higher the projected rate of return, the greater the risk. No one gives something for nothing.

My assumption is that this company is in the business of high-risk mortgages – perhaps second or third mortgages, maybe bridge financing on higher-risk projects. You should find out exactly where the money is placed. Some of these companies have good records but there have been a few cases where they have crashed and burned. Check out the sad history of FMF Capital Group, a Michigan-based residential mortgage lender that went public as an income trust on the TSX in the spring of 2005 at $10. The shares now trade for thirty cents.

The bottom line: be careful. – G.P.

Investing in bonds
I was wondering whether you have written any articles on how to select the lowest cost means of purchasing bonds. I currently have an account with TD Waterhouse, where I seem to be restricted to purchasing bonds from TD's own inventory at their prices. I noticed that the quotes in the paper and in your articles give much higher yields than I can obtain from TD, where the spread on yield can often be 10% on some of the longer-term instruments.

Is this the case with all of the brokerages? Who offers a more competitive service? How can retail investors get the best yields (as we can with stocks and income trusts)? – Lorne H.

Unlike the stock market, where you can see the trading price at any time, the bond market is completely lacking in transparency. Brokerage firms can (and do) charge what the traffic will bear and the commission you pay is never broken out separately, unlike with a stock trade. (In fact, the commission is not an identifiable fee but is built in to the yield you are quoted.)

Like TD Waterhouse, brokerage firms sell bonds from their own inventory. If they have to go to a third party to buy a bond you specifically request, it will cost you more in the form of a reduced yield.

You could always try calling bond desks at other brokerage firms to obtain a quote on a bond that interests you and then ask TD Waterhouse to match it if you find a better price. But that’s time-consuming and not very practical for small orders. Maybe you should consider using a bond ETF instead. – G.P.

Larger RRSP withdrawals?
I am 57 and a female widow. I receive a fixed pension of $24,000 a year. I have liquid savings and am comfortable. I am considering yearly withdrawals on my $80,000 RRSP in order to save my son and only heir the bigger tax hit when I die. Your opinion please. – Fay C.
Given the average life expectancy for women in Canada, you probably have more than 20 years left. Don’t you think it’s a little early to start worrying about tax on your RRSP (or RRIF) when your time is finally up? I think it’s more important to ensure that you can live comfortably during those years. Your income may be adequate now but you say your pension is fixed. Over time, even modest inflation will erode your purchasing power and that RRSP money may come in handy. I suggest you give this more thought. – G.P.
Small income, big RRSP
I am no longer working (age 57) and my annual income consists of investment income of $4,000. I have $250,000 in RRSPs. My question is: with my marginal annual income should I consider annual withdrawals from my RRSP and to what extent? – Dan S.
If your income is only $4,000 a year, what are you living on? Unless someone is supporting you, it seems to me that withdrawing money from your RRSP more a matter of necessity than convenience.

If you don’t actually need the money to live on, withdrawing enough money each year to raise your income to the threshold where taxes cut in is a good idea. The basic personal amount for 2006 is $9,039, which means you could withdraw about $5,000 from your RRSP this year tax-free.

However, don’t lose sight of the fact that if you reinvest the money once it is out of the plan, you’ll pay tax on any profits earned. You will lose the tax-sheltered growth the RRSP provides. – G.P.

Income trusts and taxes
I enjoy looking after my stock portfolio and among my holdings are several good quality income trusts. Lately, I have become pretty well convinced that holding these trusts within my stock portfolio is not as beneficial as it looked at first glance because all but one of them of them generate “yield” which is classified as either “Interest” or “Other Income”, both of which are taxed as interest.

My work pension together with my Canada pension, OAS, and dividends generated from my stock portfolio put me into the $65,000 bracket so far as my taxable income is concerned. I have an RRSP which will begin kicking out to me an additional $9,000 a year this coming spring. Am I correct that, other than the relatively few among the good quality trusts which generate either a significant “true” dividend or “Return of Capital”, income trusts held in an unsheltered account are not tax efficient for someone with healthy work and government pensions which put him into my tax bracket, because so much of the benefit is lost due to the yield being taxed as interest? - Martin Q.

You’re both right and wrong, but you have hit on a common misconception. Many investors seem to believe that all trusts come with built-in tax benefits. That is definitely not the case.

That said, there are a lot of trusts that offer good tax advantages. You might want to consider making some changes in your portfolio to benefit from them. I suggest you start with the REITs. Virtually all of them offer good tax breaks in the form of tax-deferred return of capital. For example, look at the country’s largest REIT, RioCan. In 2005, about 37% of the distributions qualified as return of capital with another 13% considered capital gains. So investors paid the full tax rate on only half the amount they received.

You can also find some business trusts that are tax-friendly, such as Primary Energy Recycling Corporation. About 75% of its payments qualify for the dividend tax credit.

Some of the closed-end funds and mutual funds that specialize in income trusts are also tax-efficient. To cite one example, only 50% of this year’s distributions from the Citadel HYTES Fund are fully taxable. Do some research to identify others that meet your needs.

Note that I am not recommending the purchase of any of these securities. I am only using them as examples. – G.P.

Lifelong Learning Plan
I am considering withdrawing some funds from my RRSP as part of the Lifelong Learning program with Revenue Canada to help finance some further education. Can you please provide your opinion on this compared to the other option of getting a student line of credit? - Aldo A.
The Lifelong Learning Plan wins hands-down if those are the only two choices. There are no interest charges on the government loan and you have 15 years to repay. Moreover, if you are financially strapped and can’t repay on schedule, all that happens is that the amount due is added to your taxable income for that year.

A student line of credit will ding you for interest costs and the bank could get rather snarky if you miss your payments. Take the free government loan. – G.P.

Investing child benefits
I am a regular reader of your columns and have very high regard for your suggestions. My question is about my wife, she is a stay-at-home mom taking care of our little one. Can she invest the money she gets for universal child care and Canadian child benefits (approx. $150 combined) in her name? She does not have any other source of income. Thanks a lot. – N.K.C.
The Canada Child Tax Benefit is actually considered to be a payment to the child, not to the parent. This means that the money can be invested in a separate account, in the child’s name, and any interest earned in that account would be the child’s for tax purposes. Since your young one probably has no other income, this effectively means that any investment income earned in this account (which will grow over time) is tax free. Take advantage of it.

The Universal Child Care Benefit of $100 per month came into effect in July. This payment is taxed in the hands of the lower-income spouse (your wife in this case) and therefore would be declared by her on her tax return (which she should file, even if she has no other income). Since she is the recipient of the payment for tax purposes, she can invest it in her own name. – G.P.

Invest in stocks?
I have $2,000 in an RRSP. Should I invest in stocks? – Gizella H.
Absolutely, positively, unequivocally not! You do not have anywhere near enough money to create a properly diversified stock portfolio and putting the small amount you do have into the market would involve more risk than is appropriate for an RRSP. I suggest you find a well-managed balanced mutual fund and start with that. – G.P.
Best tax choice?
I'm considering a new investment and have been confronted with two options: a fully taxable investment earning 12% per annum or a tax-exempt investment earning 6% p.a. I'm not sure how to figure out which would be of greater benefit to me in the long run. Any advice? Thanks. – Adam T.
It’s a simple enough calculation. All you need to do is determine the nature of the income you’ll receive and then find out your marginal tax rates for interest, dividends, and capital gains (they will differ). Use those two factors to determine how much you’ll actually receive from each option, after-tax. You’ll find a table of 2006 tax rates at Click Here

However, I can make things easier for you by telling you in advance that it’s a dead certainty that the taxable investment will win. That’s because no province has a marginal tax rate higher than 48.64% (Newfoundland and Labrador). That means the worst after-tax return on the 12% option would be 6.16% and that would apply only if the income is received in the form of interest or the equivalent.

Of course, tax should not be the sole criterion here. The big difference in the rate of return should raise concerns about risk. Look at all the aspects before deciding. – G.P.

Wants to move locked-in funds
I have a locked-in RRSP which was set up when I left a previous employer (I was told the funds from the pension plan were required to be in a locked-in account). My problem is that the balance is only $6,000. It is hard to find investments for this account and I would like to have the funds moved into my RRSP account in order to reduce fees and open up better investing opportunities. Can I do this? How? – Jennifer C.
You probably can’t make a direct transfer but it may be possible to achieve the same end result. It depends on your age and on which jurisdiction has the responsibility for administering your locked-in plan. For example, Ontario residents age 55 and older who have less than $16,840 in all their locked-in accounts can apply to have the money released. For details, go to Click Here

In this case, you could withdraw the money from the LIRA, which would make it taxable. However, if you have enough RRSP room you could make a corresponding contribution to offset that tax liability.

Alberta has just announced that effective Nov. 1, up to 50% of the assets in a LIRA can be withdrawn (tax payable) or transferred into an RRSP or RRIF upon the conversion of the plan into a LIF. You must be at least 50 years old to qualify.

The situation is constantly evolving and the rules are different in each province and for plans under federal jurisdiction (the latter offer very little flexibility). I suggest you check with the appropriate administrative body for the rules that apply to your plan. – G.P.

Confused about tax on RRSP
If I withdrew $20,000 from my RRSP, I know I would pay tax on the $20,000. Would I also pay personal income tax on the amount that was left? – Derick A.
No. The $20,000 will be treated as ordinary income when it comes out of the plan and you will have to declare it as such when you file your next tax return. There will be 30% withholding tax at the time of withdrawal (more if you live in Quebec) but you’ll be able to claim that as a credit against your total tax bill on your return. The after-tax amount becomes part of your capital (if you don’t spend it) and is not taxable again. However, if you invest the money and earn income from it, that income is taxable. – G.P.
Wants to use RRSP money for a rental property
Your website is an incredible source of information. I am really impressed with it.

I am a woman in my late 40s with an RRSP of about $26,000. I have a reasonable income, but no pension, and I am doubtful that it would be possible at this point to build up enough in my RRSP to make it a meaningful source of income for my retirement.

I already am a joint owner of a house which we purchased this year, so I cannot use my RRSP to purchase a house under the Home Buyers’ Plan. I would like to invest the RRSP capital to purchase a house as a business, which I would rent out. I know that I will be charged a large amount of tax to withdraw the money (my current income is about $52,000 per year). I have three questions:

1. Can I claim the amount withdrawn from my RRSP as a business expense when purchasing a house as a business venture?

2. Would this offset the amount that I would have to pay on my income tax?

3. Can I register a house used for rental purposes and claim the cost of the mortgage down payment, interest and other expenses as legitimate business expenses on my income tax?

I really hope that you can answer this question, as no one else has been able to. – Luanne R.

Let me preface my response by saying that I am not a tax lawyer. I’ll give you what I believe to be the correct answers but if you decide to proceed you should seek professional legal advice.

First, you will definitely have to pay tax at your marginal rate when the money comes out of the RRSP. Based on your $52,000 income, that rate will range from about 30% to 45%, depending on where you live (note that the same rate will not apply to the whole $26,000 withdrawal).

Second, you cannot claim a business expense for the entire purchase price of the house. You can make a claim for depreciation when you file your return. I cannot say whether this will offset the RRSP tax liability because it depends on several factors, including the total price of the rental property.

Finally, yes you can claim various expenses against rental income from the house. You should read the Rental Income Guide published by the Canada Revenue Agency at Click Here - G.P.

Lives in U.S., wants to contribute to RESP
My family are U.S. residents but Canadian citizens. We are working in the U.S. with an L-1 Visa. We would like to continue our RESP contributions in Canada. Can we do this? We are planning on moving back to Canada in two years. – Shawn P.
I’m afraid you are out of luck. The RESP Guide published by the Canada Revenue Agency states that you can only make contributions if “the beneficiary is resident in Canada”. Presumably, your children are not.

You can check out the Guide at Click Here - G.P.

Where to start investing?
I'm only 26 and just starting my career. A few years back I started using my RRSP plan through my company up to their matching limit. I've recently paid off any immediate debt I have (other than student loans) and opened RESP plans for the kids (6 and 2). I'm putting money in to the RRSP through work specifically to use for the Home Buyers’ Plan within the next four years. Other than the RRSP and RESP plans, I have no other investments.

Considering my age and having a long time to recover from any potential losses, I was considering jumping in to some investing, but starting slowly with something along the lines of the TD e-funds Canadian and U.S. index funds. I would appreciate your comments on these as a launch pad for my hopefully long investing career, as well as possibly your thoughts on other ways to start and learn. – David W.

The TD e-fund series offers the lowest MERs (management expense ratios) you’ll find among Canadian mutual funds plus they are sold on a no-load basis. For example, the MER on the e series of the TD Canadian Index Fund, which tracks the performance of the S&P/TSX Composite Index, is only 0.31%. However, the MER of the iShares CDN Composite Index Fund, which tracks the same index, is even lower at 0.25% and it has a better performance record than the TD fund over the past three years (average annual gain of 19.5% versus 18.8% for TD). The difference is that iShares trade on the stock exchange so you will have to pay a sales commission to buy or sell. If you plan on holding for many, many years, however, the slightly lower MER will cancel out the commissions over time.

However, my advice to any young investor is not to put everything into the stock market or, by extension, into equity mutual funds. There are times when bonds outperform stocks and we may be moving in to that phase of the cycle now. I have always maintained that a top-quality balanced fund is a better choice for a beginning investor because it offers immediate diversification over the key asset classes.

Alternatively, if you want to emulate a balanced fund on the cheap, you could set up a comparable iShares portfolio by investing one-third of your money in the iShares CDN Bond Index Fund and dividing the rest three ways among the iShares CDN Composite Index Fund, the iShares CDN S&P 500 Index Fund, and the iShares CDN MSCI EAFE Index Fund. – G.P.

Cashing in RRSP
I was thinking of cashing out some of my RRSPs because I lost my job. Do you know how much might be withheld for taxes? – Sherri W.
It depends how much you take out. On withdrawals in all provinces except Quebec, the withholding rates are 10% on amounts up to $5,000, 20% on withdrawals between $5,001 and $15,000, and 30% if the withdrawal is more than that. The comparable Quebec rates are 21%, 30%, and 35%.

You’ll receive credit for the tax withheld when you file your annual return. If the government has kept too much, you’ll get a refund. Of course, if your tax rate exceeds the amount withheld, you’ll have to pay the difference at that time. – G.P.

Wants to use RRSP to buy home abroad
I retired early and have a very large RRSP portfolio. I would like to purchase a house outside of Canada (this will be my first house purchase). Can I use the money in my portfolio to do so without paying tax? – Allan P.
Sorry, no way. RRSP rules specifically prohibit a plan from owning any real estate, wherever it may be located. RRSPs can hold mortgages on properties but they must be situated in Canada. – G.P.
Offshore funds in RRSP
I have thoroughly enjoyed your books and now I am a member of Buildingwealth.ca site. I have done well by your recommendations. I thank you! My question:

I know that foreign property can be held in a self-directed RRSP, however; does that include what is commonly referred to as “offshore funds”? Many of these funds do very well. - Brian M.

No, you cannot hold offshore funds in an RRSP. Interpretation Bulletin #IT320R3 from the Canada Revenue Agency provides details of the investments that qualify for registered plans. Under the section “Trusts”, it includes Canadian mutual funds, an index trust that trades on a foreign stock exchange and meets the requirements of the regulations, and qualifying small business investment trusts. You can review the document at Click Here – G.P.
Finding a financial advisor
I have a silly yet legit question. Everywhere I read, it always says: "speak to your financial advisor". Our bank mutual fund rep is more interested in getting us to invest more with them; our insurance agent is more interested in getting us to buy different types of insurance products with them. Our accountant is more interested in reducing tax payments. Where do I find a good financial advisor who will look at our overall financial picture (income/investment/education fund/retirement etc.) and offer us independent tailored advice? Thanks. – Gloria T.
It's not a silly question at all. The simple answer is that you have to pay for that kind of service. You are correct that there is a built-in conflict of interest when you deal with someone who earns commissions from selling products. In fact, many financial professionals refer to such people as “sales representatives”, as opposed to “financial advisors”.

For true, independent advice, find a fee-for-service advisor who does not sell any products. You’ll pay a fee, which you should discuss in detail in advance, but you’ll get unbiased advice which you can then implement through a broker, insurance agent, or whoever is appropriate. – G.P.

Correction
In a recent answer to a question about the federal government’s Lifelong Learning Plan (LLP), I wrote: “There are no interest charges on the government loan and you have 15 years to repay.”

In fact, the repayment term for the LLP is 10 years. Repayment of RRSP loans made under the Home Buyers’ Plan (HBP) can be made over 15 years.

Thanks to sharp-eyed reader Frank C. for bringing the error to my attention. – G.P.


Interested in tax shelters
I would like your views about “The Donation program 2006 from E-global investments” or these types of investments in general. I have attached a shortcut to their website. My son works with someone that is “into” it. He asked me for my opinion. I never heard of it before and told him I would send you an e-mail asking your opinion. I have four questions.

1. What would the “risk” level of this type of investment be?

2. Are there management fees involved?

3. Is there a fixed period of time the investment must be held?

4. Do you have a book that explains these kinds of investments in detail? – Dianne Y.

The link provided by Dianne took me to a website that is a work in progress. The company says it offers “a unique Tax Strategy Program” that enables people to “earn a cash return of 40%-130%” while significantly reducing tax liability. Unfortunately, the section explaining exactly how the plan works is not yet functioning but the FAQs page suggests that it involves the purchase of medicinal drugs for diseases such as malaria and AIDS which are distributed to third world countries. “Your contribution will have a positive effect to impoverished areas around the world,” the site says.

From what I can gather from the site, you make a charitable contribution that is used to buy “medicine units” that are then distributed by foundations. You receive a charitable receipt based on the “fair market value” of the drugs. According to the sponsor, this is perfectly legal “within current Canadian tax laws”.

That may be true and since I am not a tax lawyer I would not want to dispute it. This whole venture may be a noble way to help disadvantaged people around the world and save tax dollars in the process.

However, my advice is to be extremely careful before you decide to participate. The Canada Revenue Agency has been cracking down on aggressive charitable plans, particularly cases in which the amount of the receipt exceeds the total actually donated. I have received several anguished e-mails from people who got involved in some of these a few years ago. They reported that their claims were denied and in some cases they faced stiff penalties.

So if you are serious about this, I suggest you seek independent professional advice before acting. Even better would be an advance ruling from the CRA stating that this plan does indeed meet with their approval, although I somehow doubt that will be forthcoming.

And no, I have no book on this topic. – G.P.

Just starting out
I am currently 22 years old and interested in starting to invest. I have $5,000 cash that I want to start with as well as the flexibility to add several hundred per month as I go. What would you suggest, and what are some good resources that you would recommend to use for research to grow my knowledge?

Also, say someone were 25 and inherited $100,000; what should they do as they have such a long period of time for it to grow so as to maximize its potential, both tax-wise and growth-wise? Thank you for your time and look forward to your responses. – Max K.

I suggest you start by maximizing your RRSP contribution. It appears you are earning a decent salary so you may as well save on taxes while you build your nest egg. A self-directed plan will give you maximum flexibility.

Begin modestly, perhaps with a conservatively managed balanced fund. Some that are currently recommended in my Mutual Funds Update newsletter are Harbour Growth and Income, Saxon Balanced, Dynamic Focus+ Balanced, and Fidelity Canadian Asset Allocation. A financial advisor can help you determine the best choice for you.

As you develop more investing knowledge you can move on to other types of securities. There are numerous sources of information including books and newsletters. Check out some of the options at Click Here

As for your inheritance question, my advice would be to put the money towards buying a home. Home ownership and RRSPs are two of the key elements in building personal wealth. – G.P.

What type of RRSP?
My wife and I are 43 years old and we want to start an RRSP. I earn approximately $35,000 and my wife is a stay at home mom. Would it be beneficial for us to have a spousal RRSP or should I just have an RRSP in my name with her as the beneficiary? Thanks in advance. - Tom N.
On the face of it, a spousal RRSP would be the better choice. One of the objectives in retirement planning should be to try to balance income between spouses as much as possible after your working career ends. This could have the effect of reducing your total family tax bill.

Since you are working and your wife is not, you may be entitled to pension benefits after retirement and you’ll also be able to collect Canada Pension Plan. If all the RRSP income flows to you as well, you might end up with a fairly high marginal tax rate. Putting some of that money into your wife’s hands through a spousal plan is one of the few forms of income splitting available to families and you should take advantage of it.

Review the situation periodically to see where you stand in terms of projected retirement income. If your wife returns to the work force at some point, that will change the equation. – G.P.

Invest in banks?
Is this a good time to invest in the financial sector (banks, insurance companies) for Canada and USA? Keep up the great work. – Daniel B.
Banks and insurance companies have a great track record for investors, especially in Canada (there have been some bank failures in the U.S. in the past). However, they are not immune to a stock market correction. For example, Royal Bank dropped from a high of $51 in 2000 to as low as $41.60 in 2001, a loss of more than 18%. Of course, that was nowhere near as bad as the beating suffered by the high-tech sector but for conservative investors it was worrisome. So while almost any time is a “good time” to buy these stocks, some investors prefer to wait for price pullbacks to make a move. – G.P.
Divorced mom wants pension safety
I have been divorced for two years and will be receiving half of my ex's pension plan. I am 50 years old and have two children, ages eight and 13. I need to put these funds from my half of the pension in a locked-in plan. I am not familiar with many of the plans. I do have a little mutual fund for my girls, but I am not sure where to put the pension money. I am not a risky type of person, however I would like some return. If you can give me any advice, I really would be grateful. Thank you and I await your reply. – Deanna
I suggest that you set up a self-directed RRSP to hold the pension money. This will allow you to invest in almost anything you want. For maximum safety, you could stick with GICs, government bonds, and the like. However, if you want to improve returns you might want to add some lower-risk income trusts (e.g. Yellow Pages and the upcoming Telus and Bell Canada trusts) to the mix. A financial advisor can help with the selections.

Alternatively, look at one of the monthly income mutual funds offered by the banks and other companies. They are essentially balanced funds that generate cash flow, which can be reinvested within the plan. – G.P.

Fairness provision
When I read your answer to the person who was on disability and owed the back taxes that there was nothing he could do, I remembered there is a Fairness Provision for those who cannot pay their taxes. Please advise that person to call the Canada Revenue Agency and ask about the Fairness Provision. If they have tried to pay their taxes and it has become a hardship they should be able to use this. Thanks. – B.D., Nova Scotia
Our reader is partially correct. The Fairness Provision gives the CRA the flexibility to waive penalties and interest on overdue taxes for several reasons, one of which is “a serious illness or accident”. However, the CRA may not forgive actual taxes due. You can read the latest Fairness Provision Fact Sheet by going to Click Here - G.P.
RRSP mortgage loans
I have heard that it is possible to use RRSP money for a loan such as a second mortgage. The RRSP loans the money, the loan is paid back at a reasonable rate of interest that usually is a bit better than a GIC. Is this a possible scenario? – Karen L.
Yes, RRSPs can hold mortgages however there are strict rules governing the terms of such loans. For example, the interest rate paid on the mortgage must be consistent with comparable market rates – you can’t give a sweetheart deal. All the other terms of the mortgage must meet a similar test.

RRSP mortgages are not cheap to set up or maintain. There are some expensive fees involved and mortgage insurance is required. Also, most RRSP plan administrators will not accept mortgages because of the extra paperwork they produce. So yes, it’s legally possible. Logistically, it’s not so easy. – G.P.

Investing for mom
My mother has a large sum of cash that she has to invest to last her through the rest of her retirement. How can she earn a good income from it without losing principal? – Jason S.
It all depends on what you mean by “a good income”. If she’s content with a return of between 3% and 4.5%, she could invest in monthly-pay guaranteed investment certificates (GICs). The rates vary significantly, with smaller institutions paying the most so you need to shop around.

Good-quality bonds will also protect her principal as long as they are held to maturity. However, they only pay interest semi-annually. Provincial issues and AAA corporate issues offer a higher rate of return than Government of Canada bonds.

Mortgage-backed securities and Treasury bills are other good choices if principal-protection is paramount, but again the returns will not be very high.

You may want to suggest that your mother discuss the options with a financial advisor. – G.P.

Unhappy with financial planners
I have had bad experiences with financial planners. Specifically, they are all over you for your business at the time of signing, however they quickly forget about you after they make the initial sale. This has happened to me twice. The first time, I had invested $35,000 in technology before the tech bubble burst. I lost about $25,000 and the rep never called me once to offer changing my plan. The second time, I invested $10,000 in an RESP late in 2004. My report as of June 30, 2006 showed a total return of only $156.45.

It seems to me that I can’t count on investment advisors for good advice. How can I transfer all of my investments so that I can direct my investments personally? Is there a simple “how to” book you can recommend to get me up and running? Thanks. – Michael S.

The easiest way to control your own investment decisions is to set up an account with one of the discount brokerage firms such as E*Trade Canada, Action Direct, BMO Investorline, TD Waterhouse, etc. They offer inexpensive trading (some charge no commissions at all on mutual fund purchases) plus on-line research tools.

For basic investment advice, you might want to get a copy of my book Get Control of Your Money, which we are currently offering at 65% off the suggested retail price while supplies last. Details at Click Here

For more in-depth investment background, check out my book The Retirement Time Bomb. It’s available at a 34% discount at Click Here

Your local library may have copies of some of my out-of-print investment guides like Building Wealth and Low-Risk Investing. – G.P.

Young couple saving for a home
My husband and I are both 23 and looking forward to buying our first house, hopefully within the next five years. Would it be a good idea to start another RRSP (we already have monthly automatic savings going into a RRSP for retirement) in order to save for a down payment? My thought was that our money would grow tax-free at a decent interest rate and we could use the Home Buyers’ Plan to take the money from this account to fund our down payment. Would this work or would it make more sense to save our money in a high interest savings account or a mutual fund? Thank you! – Emily B.
By all means, do your saving within an RRSP. The tax-sheltering will allow the money to grow more quickly. Technically, you don’t need to open another plan to do this – the one you have is fine. However, if you are both contributing to the RRSP then a second plan would make sense – it should be set up in the name of the spouse who is not the annuitant of the existing RRSP.

The reason for this is that the rules of the Home Buyers’ Plan allow each spouse or partner to withdraw up to $20,000. If you have only one plan that will be your limit but if you each have an RRSP you could obtain up to $40,000 between you, which would make for a very healthy down payment. – G.P.

Wants to invest for grandson
I have $1,000 to invest for my newborn grandson. What should I do to get the best return for him? Thanks. – Pam M.
How about a 20% return right off the top? That’s what he’s guaranteed if you open a registered education savings plan (RESP) on his behalf and contribute the $1,000 to it. The federal government has a program called the Canada Education Savings Grant (CESG) that adds an extra 20% to all RESP contributions, up to a maximum grant of $400 a year. Your initial contribution will qualify for $200 from the program.

All investment income earned inside the RESP is tax-sheltered, just as in an RRSP. You don’t get a tax deduction for the contribution, but you can withdraw the principal tax-free when your grandson is ready to start college (or any other time for that matter). I suggest you invest the money in a conservatively-managed balanced mutual fund for reasonable growth without undue risk.

RESPs can be set up at any financial institution or brokerage firm. – G.P.

Parents in a bind
My parents are 63 and 66. They have a considerable amount of money in RRSPs however they are now in a bind. They want to know the best way (if any) to withdraw their money, or some of it, so that it does not affect what they get for Old Age Security, and allowances. They were also wondering if they can transfer it into any other account and make use of it. – Krista M.
Unfortunately, any money that is withdrawn from an RRSP is considered to be income. It is taxed accordingly and every dollar taken out reduces the amount of payments from the Guaranteed Income Supplement and other income-tested grants. Old Age Security payments are not affected however large RRSP withdrawals may push your 66-year-old parent to an income level where the 15% clawback tax is applied (the 63-year-old is not yet eligible for OAS).

RRSP accounts are personal and non-transferable except in the case of marriage breakdown or death.

If your parents’ home is mortgage-free, or almost so, they might want to consider a reverse mortgage as an alternative way to get out of their financial bind. Proceeds from a loan are not considered to be income for tax purposes and do not affect eligibility for government payments. – G.P.

RRIF or annuity?
I am now age 65. I estimate my self-administered RRSP portfolio to be worth about $100,000. At 69, I realize that the RRSP has to be converted either to a RRIF or an annuity. My spouse’s RRSP, valued about $40,000, will have to be converted a year ahead of mine. Tax-wise which product would you invest into, and any pros and cons? – Barry Y.
From a pure tax perspective, there really isn’t much difference. In the case of annuities purchased with money from an RRSP, the full amount of the payment is taxable. Annuities purchased with non-registered funds are treated differently, in that the portion of the payment that represents return of capital is not taxed. All withdrawals from a RRIF are also 100% taxable, so I suggest that you not base your decision on tax considerations.

The advantage of annuities is that they guarantee income for life and do not require any financial management. One disadvantage is that they require you to use all your RRSP savings to purchase them. A RRIF enables you to retain your capital and draw against it. – G.P.

RRIF payments to wife?
I have tried without success to determine whether it is possible to have my bank make payments to my spouse from my RRIF. Family income tax reduction is the motive here. I just haven't seen that strategy suggested anywhere in plain words. However, when one looks at CRA form T2205 titled “Amounts from a spousal RRIF”, this suggests that my wife would be able to receive money from my RRIF and as I am over 65 (see line 19 on form) she would report the RRIF income in her tax return and be taxed accordingly. Can you clarify please? – Colin C., Ottawa
You haven’t seen this strategy suggested anywhere because it could be done. You may not designate that payments be made from your RRIF to your spouse, or anyone else for that matter.

You are mistaking the purpose of form T2205. It is only for spousal plans, not personal ones. The intent of the form is to determine whether any withdrawals made from a spousal plan should be attributed back to the person who made the original contributions for taxation purposes and, if so, how much. This happens when spousal withdrawals are made within three years of the last contribution to the plan.

However, as of 2007 the whole situation will change if the pension-splitting proposal announced on Oct. 31 by Finance Minister Jim Flaherty becomes law. The new rules will allow couples to split all pension money between them, simply by making an appropriate declaration on their income tax returns. For people over 65, as in your case, RRIF payments will qualify. – G.P.

Collecting CPP at 60
I am turning age 60 in three months. Is there a financial advantage to collecting CPP at age 60 versus waiting to collect at a later date? I am familiar with the early collection penalty as well as the summary statement "it depends on your annual income situation." – Dan S.
The only way anyone can calculate whether there is a financial advantage to drawing CPP benefits early is if they can predict with certainty when they will die. Obviously, that can’t be done.

That said, we can do a few “what-if?” scenarios. The maximum CPP benefit at age 65 this year is $844.58 a month, or $10,134.96 a year. Let’s use that as a base figure.

If you start to draw benefits at age 60, you’ll receive 70% of that amount, or $7,094.47 a year. If you live to age 80, you’ll draw a total of $141,889.44 (I have not included the annual inflation adjustments since they are an unknown quantity). If you start drawing at age 65 and live until 80, you’ll get $152,024.40. So in gross terms you come out ahead although once the time value of money is taken into account there probably is not a lot of difference.

If you delay taking CPP until age 70, your pension will be 30% higher so you’d get $13,175.45 a year in today’s dollar terms. But if you lived to age 80, you’d only collect $131,754.38, so it would be the least desirable choice in those circumstances. On the other hand, if you lived to 100, you’d collect $395,263.50. If you started drawing at 65 and lived to 100, you’d get about $40,000 less.

It’s your call. How long are you going to live? – G.P.

Wondering about gift tax
My father, who lives out of Canada and is neither a citizen nor resident of this country, wants to gift me a sum of $45,000 to be used as down payment to buy my first house. What could be the tax implication, if any, on such a gift from my father (any gift tax)? If there is any tax implication due to me being an adult, could he gift it to my son who is a minor? I would appreciate your experienced comments and suggestions in this regard. – S.M.
There would be no tax payable by you in Canada on such a gift so that’s not a problem. However, your father may face some tax liability depending on the laws of the country where he lives. Some countries, including the U.S., impose a gift tax. He should check with local authorities on the rules that apply where he lives. – G.P.
Wife has quit work – what do to with her RRSP room?
My wife has just quit her job to stay home with our first son. I have no room in my RRSP and have a group pension plan at work which matches my contributions at 4%, which reaches my maximum allowance every year. My wife has about $40,000 worth of unused room in her RRSP. She will have earned about $50,000 (gross) this year before quitting. However, now she has no income. What do you suggest we do to capitalize on her unused RRSP room? – Calvin D.
Just because she has stopped work doesn’t mean she can’t contribute to an RRSP. Since she earned $50,000 this year, I suggest that she put some of that money into her RRSP to reduce her 2006 tax liability. The contribution room that remains can then be carried forward indefinitely. When she has income again, she can make use of it at that time. – G.P.
Spousal RRSPs
Both myself and my wife borrowed from our RRSPs under the Home Buyers’ Plan to buy our house. Now I make $65,000 a year and my wife has no income. Since I will be eligible for a large pension at retirement I would like to make all future contributions to a spousal RRSP in her name, keeping the tax deductions in my name.

But we both still have RRSP loans to repay. My question is, can I simply contribute via a spousal RRSP, allowing me to get that tax deduction, and not worry about paying down my RRSP loan as the loan penalty would be offset by my spousal contribution?

As for her loan, I don't believe my contribution would be eligible to pay her loan either, but she has very little income therefore as long as the HBP penalty added to her income amounted to a total less than her basic personal exemption, she wouldn’t have to pay income tax on that anyway.

Or is there a rule that says I MUST pay off my HBP loan before I am allowed to contribute to a spousal RRSP (or my RRSP for that matter)? – Jack S.

The Oct. 31 announcement on pension splitting by Finance Minister Jim Flaherty will make spousal plans obsolete if it is approved by Parliament. The only purpose of such plans is to split income in retirement. If the Conservative plan goes through, all couples will be able to do this routinely. So you’ll be able to shift up to 50% of your pension and RRIF payments to your spouse for tax purposes.

There is no need for her to repay her HBP loan. The amount due in any given year will simply be added to her income. Since the maximum she could have borrowed was $20,000, this works out to a repayment of $1,333.33 a year over 15 years.

As far your personal RRSP contributions are concerned, the Canada Revenue Agency will treat the first $1,333.33 a year as HBP repayment, assuming you also borrowed the maximum allowable. – G.P.

Wants to know tax rate
I live in Alberta and have an annual income of approximately $70,000. What is my marginal tax rate? – C.D.
The important figure is not your total income but your taxable income. That’s what your marginal tax rate depends on. Your taxable income will be affected by a number of possible deductions, such as RRSP contributions.

A taxable income of $70,000 puts you at a 32% marginal tax rate in Alberta. At $75,000 you’ll move up a notch to 36%. So if you get a raise you might want to consider putting some of it into an RRSP.

Anyone who wants to see their own marginal rate can do so by using the Ernst & Young tax calculators at Click Here - G.P.

Single mom wants to save money
I am a single mom living on $10,000 a year. I am 50 years young and I need to invest for my golden years, planning not to ever retire. What should I invest in on a monthly basis? I have $100 per month. Some people are suggesting Canada Savings Bonds. – Milica S.
First let me congratulate you. It’s hard to save $100 a month on your income and you’re doing the right thing by making the effort. Now you need to find the right place for your money.

I suggest looking for a safe investment, one with minimal risk. You don’t have a lot of money so you want to avoid losing any of your savings.

Having said that, Canada Savings Bonds (or Premium Bonds) may be too safe. The current rate on CSBs is only 3%. You can get more in a high-interest savings account. However, my advice is to buy a conservatively-managed no-load balanced mutual fund. All the banks offer them. Some examples from the Recommended List of my Mutual Funds Update newsletters are CIBC Monthly Income Fund, BMO Monthly Income Fund, and RBC Monthly Income Fund.

Given your income, your tax level is probably very low so I don’t advise opening an RRSP. Just ask the bank to set up a mutual fund account for you and arrange to have $100 contributed to it each month. Ask that all distributions be re-invested. They’ll take care of it all and you’ll be surprised how quickly it will grow. – G.P.

Income splitting
Does this new income splitting that is to begin in 2007 mean it will be used in April 2007 for the 2006 tax year? – Paul N.
I believe you are referring to the pension splitting plan announced by Finance Minister Jim Flaherty on Oct. 31. If so, the answer to your question is no. Pension splitting won’t be allowed until the 2007 tax year, which means it comes into effect Jan. 1. The first tax return affected is the one you will file in 2008. – G.P.
Time to rebalance?
I had some back-end load mutual funds and they have matured so I can sell them now with no penalty. Is it a good time to re-balance now or should I wait until after the New Year? They are all equity funds. – Stan L.
If the funds are held within a registered plan, it doesn’t matter. If they are held in taxable portfolio then you should consider waiting.

There are two reasons for this. First, selling now will trigger any capital gains (or losses) in the 2006 tax year, which will have to be declared when you file your return next April. If you have gains, you can postpone paying the tax on them until 2008 by waiting until January to make your switches.

Second, if you buy new equity funds now you may receive taxable distributions in December based on profits made before you acted. In effect, this would mean you’d be paying taxes on part of your capital which is something you should avoid at all costs. – G.P.

RRSP withdrawals
I have recently retired and have approximately $45,000 in RRSPs. I would like to occasionally withdraw $2,000 to $4,000. Should I leave it in RRSPs or transfer it into a monthly income fund outside of the RRSPs? I also still contribute $100 per month to my RRSP. - G.J.
You certainly don’t want to transfer the money into a mutual fund held outside the RRSP. That would be considered an RRSP withdrawal and you’d be liable for tax on the full $45,000. Don’t even consider that idea!

There is nothing wrong with taking small occasional withdrawals, such as you suggest. They’ll also be treated as taxable income but the bite won’t be as hard.

As far as current contributions are concerned, since you have retired you better be sure you have the RRSP contribution room available to cover your $100 a month. You won’t have any earned income going forward and new contribution room is calculated on that. – G.P.

Withholding tax
I am wondering if I am able to withhold my income tax from my place of work (save it in my own bank account) and make my income tax payment at the end of the tax year? If so, are there any issues I need to be aware of in order to make this happen? Does this red flag me with Revenue Canada? – Greg W.
I believe what you are asking is whether you can instruct your employer not to withhold any tax from your pay so that you can keep the money in your own account. The answer to that is no. Employers are required by law to withhold tax from everyone on their payrolls and to remit it to the Canada Revenue Agency, usually on a monthly basis. – G.P.
New tax rules
The Canadian Federal Government made a recent announcement concerning investment trusts and at the same time announced they are going to allow "Seniors" to income split all income sources with their spouse. They mentioned pension income and RRSPs however there was no further information concerning the news release. They did not provide a definition for the word "seniors" therefore I assume it could mean those that are retired, regardless of their age; or those 60 plus or those 65 plus. Can you provide direction regarding this announcement? Thank you. – Brian T.
It’s not all income, only pension income. What constitutes “pension income” will be determined by age. Here how I explained it in a recent issue of my Internet Wealth Builder newsletter:

“Beginning in 2007, couples (including common-law partners) will be able to divide pension income between them. This is a significant development and in some cases it could save a family hundreds or even thousands of dollars in taxes.

“For couples age 65 or older, the new rules will apply to lifetime annuity payments from a registered pension plan, RRSP, or deferred profit sharing plan. Payments from RRIFs and similar retirement income plans will also qualify. Those under 65 will have fewer options, but payments from a pension plan will qualify. CPP retirement benefits have always been eligible for income-splitting.”

For information on subscribing to the Internet Wealth Builder go to: Click Here - G.P.

Looking for more income
I have a question regarding the fixed income portion of RRSPs. My husband’s RRSP will have to be transferred into a RRIF at the end of 2008. Our open portfolios are approximately the same value as our RRSPs and we have always taken your advice to hold most of our growth portion and dividend paying stocks in our open portfolios for the best tax treatment and interest bearing GICs, bonds, etc. in our RRSPs.

Since it has become very difficult again to purchase bonds or GICs with an interest rate above 4.1% and the fact my husband will need more income to maintain and not drain his RRIF during the first few years, I have been considering two other products. Why not keep some preferred shares in our RRSPs? We have them in our open accounts, about 10%, and they average approximately 5.5% return. I know you lose the dividend tax benefit when held in an RRSP but the return is much better than GICs, bonds, etc.

Second, what are your thoughts on GICs from credit unions? Last week when reading a magazine I saw an advertisement for Achieva Financial. I checked it out online and found that its parent is Cambrian Credit Union. I called Achieva to get some more information and they gave me a phone number for the Credit Union Deposit Guarantee of Manitoba since credit unions are not guaranteed by the CDIC. Their interest rate for a five-year GIC was 5.1%, almost one percent higher than other institutions. How risky are they since they are guaranteed by the Province of Manitoba?

Look forward to receiving your views. Thank you. – Jane S.

Prior to the Oct. 31 announcement by Finance Minister Jim Flaherty, I would have recommended income trusts as one of the components for your husband’s RRSP to help boost cash flow. Some trusts are still worthy of consideration but the problem right now is that analysts are still trying to sort out exactly what will happen to their valuations down the road. If you do decide to consider some trusts for the RRSP, look for those with a history of increasing distributions and which do not offer any significant tax breaks.

I understand your logic about including preferred shares in the RRSP, but I really don’t recommend it if you can find other options. The major advantage of these shares is the dividend tax credit and they are priced accordingly. That means you are overpaying to some extent when you put them into a registered plan.

Credit union GICs are certainly worth considering. In many cases, the provincial deposit insurance programs that protect credit unions are actually more generous in their coverage than the Canada Deposit Insurance Corporation. I see no problem in using them. – G.P.

Lost job in downsizing
I was recently downsized from a company where I was employed since 1994. I believe I am entitled to claim $4,000 from my severance package as a retiring allowance to contribute to an RRSP. My question for you is when I file my income tax return how do I claim this RRSP contribution as a retiring allowance? This is quite important to me as I also plan to maximize my regular RRSP contribution. – Keith D.
If you have not made arrangements for this money, ask the employer to transfer it directly into your RRSP. This way no tax will be withheld at source and you will receive the appropriate paperwork to file with your tax return.

If you have already received the money, some tax will have been withheld. In this case, contribute the full amount you are allowed to the RRSP. To make your claim, show the $4,000 on line 130 of the tax return, which is where retiring allowances are declared. The withheld tax will be refunded. You can also make your full regular plan contribution on top of that. - G.P.

Are ETFs really better?
I read that ETFs are much better investment than mutual funds. Can you write a brief comment regarding your advice and recommended strategy? Thanks. – John V. Langley BC
It is foolhardy to state that one particular type of security is “better” than another. They all have advantages and disadvantages. In the end, the choice comes down to what works best for each individual.

ETF is short for exchange-traded fund. These are index-linked securities that trade on a stock exchange. The best known are iShares from Barclays Global Investors. Some are listed on the Toronto Stock Exchange but there is a much wider variety available in the U.S.

ETFs track the performance of a specific index or sub-index. Sticking with the Canadian entries, you can buy ETFs that are based on the S&P/TSX Composite Index, the S&P/TSX 60 Index, and such specialized sub-indexes as Energy, Real Estate, and Gold. In terms of on-going expenses (MERs) they are cheaper than mutual funds. However, since they trade on a stock exchange you must pay a commission both when you buy and when you sell.

Are they better than mutual funds? Sometimes yes, sometimes no. It depends on the fund. For example, the iShares CDN Energy Sector Index Fund (an ETF) gained an average of 24.05% a year over the five years to Oct. 31. That was better than most energy mutual funds, but not all. The CIBC Energy Fund returned 27.68% annually over the same period. So you could have done better than the iShares, but only if you’d had the foresight to pick the right mutual fund.

On the other hand, look at the iShares CDN Gold Sector Index Fund. Over the past five years, it generated an average annual compound rate of return of 16.49%. Not bad, you may say. Not so good either, when you consider that several precious metals mutual funds did much better, topped by RBC Global Precious Metals Fund which averaged 43.91% a year during the same period. In fact, according to The Fund Library, the iShares fund finished 12th out of 13 precious metals funds over past five years.

Overall, iShares ETFs have done reasonably well. Except for the Gold fund, all rank highly against their mutual fund counterparts over all time frames. But only rarely do they top the performance list. Almost always, some mutual funds beat them.

So are they better? Not always. That said, they’re generally pretty good. – G.P.

Nortel share consolidation
I currently own 800 shares of Nortel. I am reading that they are going to consolidate the shares 1 for 10. What happens to the current price? I paid $3.77 per share. Is it better to sell now and take my loss or wait to see what the new price will be? I don’t really understand what happens to the price when a consolidation takes place. It would seem with only 80 shares I will not be able to get back to even. Any comments would be appreciated. Thank you. – Harry W.
You are correct. The consolidation was approved at Nortel’s annual meeting in June and will take effect on Dec. 1. At that time, shareholders will receive one new share for every 10 they currently own, so you will end up with 80 shares. Nortel says the move is being made “to increase investors' visibility into the Company's profitability on a per share basis, reduce share transaction fees for investors and certain administrative costs for Nortel, and broaden interest to institutional investors and investment funds”. Frankly, I think that’s a lot of double-talk but since investors approved it, the deal is done.

The pricing of the new shares will be determined by the market. Logically, we should expect the new shares to trade at ten times the price of the old ones. As I write this, Nortel is trading at $2.43 so on that basis the new shares would be trading at $24.30. However, share consolidations are often interpreted as a sign of weakness by the markets so the actual price could be lower.

I cannot advise you whether to sell your shares now or not. Talk to your financial advisor about that. – G.P.

What to do with inheritance?
I’m 41 years old and just received a $20,000 inheritance. I’m not sure which way I should invest this money. I have a mortgage which will be paid off in 10 years. I was wondering if I should buy an RRSP and a spousal RRSP or apply the money onto the mortgage or split it between both. What do you think would be the best return? – Kim V.
This is one of the most frequently-asked financial questions but it has no easy answer. Over the years, many computer models have been done with the end result being that it all depends on each person’s situation. Variables include your tax bracket, the interest rate on the mortgage, the time remaining on the mortgage, how the RRSP money is invested, etc.

As a result, my general advice is to give yourself the best of both worlds. Make your maximum allowable RRSP contribution. Then take the tax refund it generates and use it to reduce the principal on your mortgage. By doing this, you build two types of assets: home equity and a tax-sheltered investment portfolio.

By the way, I don’t advise putting any money into a spousal RRSP. The recent announcement by Finance Minister Jim Flaherty that pension-splitting will be allowed between spouses and common-law couples starting in 2007 makes this form of tax planning unnecessary. Put it all in your own plan, to the allowable limit. – G.P.

Generous grandparents face a tax problem
Our three children (ages 15, 12 and 6) recently received a $5,000 gift each from their grandparents to be put away for their future. We would obviously like to invest in something that will provide long-term growth for our younger children and short-term growth for our 15-year old, as he would eventually like to use the money to purchase his first car. Their education has been taken care of through a joint RESP account. They also have individual accounts to which we plan to add this money, invested in mutual funds (80%) and various preferred shares. We are considering a monthly income fund for each child but wonder if a good balanced fund would be a better choice. What strategy do you recommend? – Julie W., Richmond BC
I recommend that you be very careful. You may not realize it but your parents (the children’s grandparents) face a tax liability if you proceed along the lines you suggest. Cash gifts to minor children from close relatives are subject to the income attribution rules. That means that any interest or dividends earned on the invested money must be declared on the tax return of the person who made the gift. The exception is money in a registered plan, such as an RESP.

Capital gains are not subject to this rule, however. They are taxable in the children’s hands. So if you want to avoid potential problems in the future, you’d be smart to invest in mutual funds that have a good growth record and which only make capital gains distributions each year. A monthly income fund doesn’t work.

Of course, if the grandparents don’t mind picking up the tax tab, then the money can be invested however you wish. But I suggest you have the discussion with them first. – G.P.

Dividend funds in an RRSP
Is there anything wrong with holding my RRSP investment in a dividend fund? I have been holding the PHN Dividend Fund for 10 years and it seems to be doing all right. All the articles I read seem to suggest only holding it outside an RRSP as some sort of tax advantage. I currently have my wife’s RRSP portfolio holding TD Dividend Growth Fund as well and it seems to be performing well. – Robert S.
The main reason for keeping dividend funds outside an RRSP is to take advantage of the dividend tax credit. Inside the plan, the credit is lost and dividends are taxed at your marginal rate when money is eventually withdrawn.

However, both the funds you mention pay out very little in dividend distributions. They are really blue-chip stock funds and most of their profits are generated through capital gains. Of course, capital gains also get a tax break so it would be preferable to have the funds in a non-registered account if possible. But if it’s not, then stick with your current plan. It seems to be working for you. – G.P.

Where to hold stocks?
I have a question for you regarding investing in stocks. I am considering purchasing a blue chip, dividend paying stock. I would re-invest my dividends to take advantage of compounding. My time horizon would be greater than 10 years and more than likely closer to 30 years. Would I be better off to purchase this type of stock within an RRSP or outside of an RRSP? - Greg M, Toronto
If you have the option, hold the stock outside an RRSP. There are two reasons for this. First, the dividends you receive will be eligible for the enhanced dividend tax credit (you have to declare them, even though the money is reinvested). Second, only half the capital gains that accrue over many years will be taxable under current rules, and the tax treatment may become even more favourable if we are to take Finance Minister Jim Flaherty at his word. If you hold the shares in an RRSP, everything will eventually be taxed at your marginal rate. – G.P.
How much foreign content?
What percent of my RRSP should be in foreign content for diversification purposes? My present level is 22%. My advisor suggested a change to my portfolio that will bring my foreign content to 30%. I was considering going to 40%. All my investments are in large-cap blue-chip funds or bonds. – Hugh R.
With the rise of the loonie from 2003 to the middle part of this year, many Canadians overweighted their portfolios with domestic stocks and mutual funds. The strategy worked well but now with our dollar pulling back and oil and gas prices somewhat weaker, it’s a good time to be thinking about adding foreign securities.

We publish guidelines for a model balanced portfolio in my Mutual Funds Update newsletter. Our latest update suggests a 12.5% weighting in U.S stocks, a 5% weighting in international stocks, a 10% weighting in foreign bonds, and a 2.5% weighting in U.S. money market securities, for a total foreign content of 30%. – G.P.

Is this legal?
Have you every heard of Canadian Humanitarian Trust? They are telling me if I donate $12,390 to buy pharmaceuticals I will get a receipt for the $12,390 plus I can re-donate the pharmaceuticals with a fair market value of $35,000 minus the lien amount of $5,600 leaving a net gift in kind of $29,400. My total donation receipt would be $41,790. That would give me a tax credit of $19,391 which is a $7,001 surplus income on my donation. I don't understand how this can be legal. I have heard of tax shelters before but I am not sure how this works. – Jason S.
I receive a lot of questions about charitable tax shelters at this time of year and my advice is always the same – be very, very careful. The Canada Revenue Agency takes a dim view of arrangements that give you a tax receipt for more money than you actually donate. In fact, you’ll find a news release on their website at Click Here which reads in part: “The Canada Revenue Agency (CRA) is warning Canadians of the financial risks associated with participating in certain tax shelter gifting and donation arrangements, including gifting trust arrangements, leveraged cash donations, and buy-low, donate-high arrangements.” The release goes on to say that several of these plans are now being audited.

The Canadian Humanitarian Trust has a website at www.canadiandonations.com but it is password-protected with instructions to contact a representative so details of exactly how the plan works are not readily available. I have no personal experience with this organization but I came across some discussion groups elsewhere on the Internet that you may want to look at before doing anything. You can locate them with a Microsoft search.

Again, I advise being very cautious unless you want to risk ending up being audited. Perhaps this plan will work out all right in the end but I know of many other aggressive tax shelters that have been challenged by the tax department, creating all kinds of problems for people who used them. – G.P.

Financial problems
I am having financial hardship and want to know if I can cash my RRIF in? If so, how? Thanks. – Sharryn K.
If it is really a RRIF (registered retirement income fund) and not a LIF (life income fund) then you can withdraw as much money from it as you want at any time. There is no limit on the maximum amount that can be taken out. If you choose, you can even close the plan entirely.

Of course, all the money that you withdraw will be considered taxable income. There will be a withholding tax of between 10% and 30% on your withdrawal depending on how much is taken out (the rate in Quebec is higher) but this can be claimed as prepaid tax when you file your return.

The procedure is straightforward. Just advise the bank or institution that holds your plan in writing how much you want to withdraw and they will handle the paperwork. The process shouldn’t take more than a few days. – G.P.

Confused about CPP
I am confused in regards to the Canada Pension Plan. I am 61 years old and some people say I should start collecting now. Others say I should collect my Canada Pension when I turn 65. I would like your advice on this. – Annette
There is no hard-and-fast rule about when to start collecting CPP. However, the longer you wait, the larger your pension will be. You qualify for a full pension at age 65 but you can collect a reduced pension starting at age 60 if you have stopped work (even if only temporarily). If you wait until after 65, your payment will increase by 0.5% for every month you delay.

My advice is that if you are in good health and you don’t need the money right now, wait. If you are short on cash, then by all means go ahead and apply.

Spousal RRSPs
I see that since the announcement of income splitting for seniors you and other advisors are saying not to put money into spousal RRSPs. However, I still see one advantage to them. If there is an age difference such as we have – I am five years older than my wife – we would then have five more years before we have to convert this money to a RRIF. Please comment. – Jerry H.
You are correct. Spousal RRSPs are usually used for income-splitting in retirement but in situations in which there is a significant age difference between the spouses or partners, these plans can be used to delay the forced conversion to a RRIF at age 69. So they do still serve a purpose. – G.P.
Swapping securities in RRSP
I would like to swap some securities in my RRSP with some in my trading account. I would like to do this to get a tax break. I understand while one transaction will be considered a contribution to the RRSP, the other will not be a withdrawal. Am I right? Thank you for your help. – Katarina D.
Swapping securities in the way you describe is legal but it is not considered to be an RRSP contribution and there is no tax break involved, at least not directly. All that happens is that you exchange assets within the RRSP for something of equal value outside the plan. There are no tax implications either way.

However, swaps are useful if you want to shelter interest-bearing securities (which attract tax at your marginal rate) within an RRSP and bring out tax-advantaged securities, such as dividend-paying stocks. You can also use a swap to get tax-free cash. For example, suppose you have a locked-in GIC outside your plan and need money now. There is cash in the RRSP. If you withdraw it, that money will be considered taxable income. But you could swap the GIC into the plan in exchange for cash without incurring any tax liability. – G.P.

Son not going to college
My son turns 18 in September and I have a trust account in his name at TD Waterhouse worth $47,000. The savings in this account were to be for his university education. He has decided not to attend university. I do not want to give him control of this money when he turns 18 but I no longer want to pay the tax on his interest and dividend income. What are my options? – Marge H.
I assume that this is not a registered education savings plan (RESP) – if it is, special rules apply.

If it is a trust account, then it all comes down to the terms of the trust. If it is an informal trust with no clearly-defined terms, there is a very good chance that legally you don’t have any option – the money will be his when he reaches the age of majority. I suspect you may need a lawyer to unravel this.

Informal trusts for education savings are used instead of RESPs on occasion because there are no limits on the amounts that can be contributed. But this is the kind of danger that comes with them. If this were an RESP, you could withdraw all your contributions (but not accumulated income) tax-free without any problem. That’s why I advise going the RESP route in most cases. Anyone who wants to use a trust should obtain legal advice. – G.P.

Spousal RRIF withdrawals
Could you answer a tax question for me? I have a regular RRSP and my wife has one also. I have been putting money into the spousal for many years. We are both now 69 and have turned both into RRIFs. When my wife takes her minimum out of her spousal plan will I have to pay the taxes on it? In other words, does the three-year tax have to go on my taxes instead of hers even though it is now a RRIF and in her name? I would appreciate an answer. Thank you very much. – Bill B.
If you did not contribute to the spousal RRSP within the past three years, no tax restrictions apply. If you did, then your wife should not withdraw more than the government-mandated minimum amount from her RRIF until a full three-year period has passed since the last contribution. Any amount withdrawn in excess of the minimum would be taxable in your hands. – G.P.
What’s a guarantee worth?
I want to invest in a GIC in a Manitoba Credit Union. Its deposits are 100% guaranteed by the Credit Union Deposit Guarantee Corporation. I have tried to find out whether the “guarantee” is worth anything should some credit unions fail however I have hit a brick wall. How can I find out whether the guarantee is worth more that the paper it is written on? – Don K.
Deposits with credit unions are not covered by the Canada Deposit Insurance Corporation (CDIC). Instead, each province has taken steps to provide its own guarantees for depositors and investors in deposit-type securities like GICs. The amount of coverage differs from one province to another.

In your province, the organization responsible for this is the Credit Union Deposit Guarantee Corporation of Manitoba. It is not officially a government agency but its directors are appointed by the province’s lieutenant-governor in council – in other words, by the cabinet. The government is not required by law to bail out the Deposit Corporation but obviously failure to do so if a major financial disaster were to strike would destroy public confidence in the whole credit union system. So I think you can feel reasonably confident that the guarantee is worth more than a piece of paper.

Unlike the CDIC, which provides maximum coverage of $100,000, there is no limit on the protection available for credit union depositors in Manitoba. You can find out more at http://www.cudgc.com/home.html – G.P.

Taxation of spousal RRSP
I'm in second year of retirement. My spouse is in his second year of unemployment (I was the higher earner). I have been told that if we cash our spousal RRSP within first three years of retirement I will be taxed as if I was still employed. Is it more factual to say that we will be taxed based on my current income (pension) rather than my spouse's lower income? – Jo-Ann B.
You are correct. The tax will be assessed on the basis of your income in the year the withdrawal is made, not on your income in prior years when you were employed. – G.P.
What to do with money
I currently pay support payments of $2,000 per month. In the near future, I won't be making these payments. I would like to hear what you feel I should do with this extra income. I currently have a home on which I have a mortgage of $200,000 remaining. I am not maxed out in my RRSPs. I have a line of credit of $50,000. I'm 49 years old.

Should I put the money toward my RRSP? Should I put it towards my mortgage? Should I pay off my line of credit or should I invest it in the stock market? – Dominic M.

Looking at those four options, I suggest eliminating the last one immediately. You are carrying $250,000 in debt so the last thing you should be considering is getting involved in the stock market.

Debt reduction should be a priority and you should start by reducing the principal on the loan that carries the highest interest rate. That is probably the line of credit. However, you should also be building up some funds for retirement. So you might want to consider directing $1,000 a month against the line of credit and putting the other $1,000 into the RRSP, with the idea of using the tax refund that generates to further reduce the balance on the credit line. – G.P.

Pension cap
I was reading an article of yours from 2002 regarding the pension cap, whereby the maximum pension anyone can have under a defined benefit program is $1,722 times years of service. I believe this was changed to $2,000, however, I cannot find anything under the Income Tax Act or Pension Benefit Act. Could you tell what the current maximum is and where I would find it outlined. Does it change in 2006? – Paul B.
In the 2003 budget, the Finance Minister of the day, John Manley, introduced changes to the pension cap rules. However, these weren’t implemented immediately. In Ralph Goodale’s 2005 budget, the issue was addressed again with a proposal to gradually increase the cap until the year 2010, at which time it would be indexed to inflation. The enabling legislation received Royal Assent on June 29/05.

The cap for 2006 was set at $2,111 times years of pensionable service. In 2007, it increases to $2,222. So a person who retires in 2007 who has contributed to a defined benefits plan for 30 years will be entitled to receive a maximum pension of $66,660 (this can be indexed so it can rise in later years). – G.P.

Converting to a RRIF
I will be turning 69 next year. How much red tape is involved in changing all my RRSPs into RRIFs? Can I put them all into one RRIF at a later date, and would this be a good thing to do, or is it just a matter of keeping track of the three withdrawal amounts? – Jan G.
In technical terms, there is very little involved in converting an RRSP to a RRIF. It’s simply a case of signing the appropriate papers, which the companies that administer your plans will provide.

However, I recommend consolidating all RRSPs into a single RRIF if possible since this makes managing the withdrawals much easier and reduces administration fees. So there will be some additional paperwork involved in setting up these transfers. I suggest you start the process after the RRSP season is over. Decide which company you want to handle your RRIF on an on-going basis and make arrangements to transfer your other RRSPs into that company’s plan. Then when the time comes to convert to a RRIF near the end of 2007, all the money will be in one place and the change-over will be easy.

You will probably also have to reconfigure your portfolio so that it generates the income you will need to withdraw starting in 2008. A financial advisor can be of great help here, so you may wish to base your decision on which company will hold the RRIF on the degree of confidence you have in the advice you’ll receive. – G.P.

Minimum RRSP age
What is the minimum age to invest in an RRSP? Can I invest for my 16-year-old daughter in a non-registered account? Is there any tax advantage? – J.P.
There is no minimum age to open an RRSP but your daughter would need to have earned income to have contribution room. You may not contribute on her behalf. In fact, the only time that one person can make an RRSP contribution on behalf of another is in a spousal RRSP. You can invest for your daughter in a non-registered account but the tax advantages are limited because any interest or dividends received are attributed back to you for tax purposes. However, capital gains would be taxed in your daughter’s hands. – G.P.
Splitting pensions
My uncle was asking me where he should go to ask for his RRIF and CPP to be split with his wife to pay less tax? I told him to go to his bank where his RRIF was held, but I was not 100% sure. Your help is needed. – George N.
Your uncle has to apply directly to the CPP for income splitting. The legislation regarding RRIFs and other pension income has not been passed yet so there is nothing he can do at this time. It is supposed to come into effect for the 2007 tax year. – G.P.
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