Emergency Fund

If there is anything we have learned the past few years, it is to expect the unexpected. From a worldwide pandemic to war in Europe to the highest inflation in decades; we have been confronted with large, unexpected events. This has driven home the importance of having a safety net to protect from these shocks.

An emergency fund is intended to protect you and your family from these shocks and help you weather financial setbacks without getting pushed off course. 

It will keep you from entering debt to cover unexpected expenses or tapping into your retirement savings to cover a work absence due to a month-long accident/illness. It is also there to provide peace of mind and free you up to be more aggressive with your other investments. 

An emergency fund is typically suggested to equal three-to-six months of basic living expenses. Depending on your situation it may make sense to have even nine or twelve months worth.

Figuring out your monthly spending means tracking your expenses for a few (at least three) months. If you cannot bring yourself to complete a full tracking of your spending then just average three months worth of your income (paycheque, pension, RRIF withdrawals etc.) to get a rough estimate of monthly needs.

Now you must decide how many months of expenses to cover. This depends on your personal situation and risk tolerance. Here are questions to consider:

  • Is your job and pay stable? If no, then the higher end of the range would be better.
  • Do you often worry about money? If money is a significant stressor for you, then have a larger emergency fund.
  • Are you a one-income household? If yes, then yet again, have a larger fund.
  • If retired, is most of your income from guaranteed sources (pension, CPP, OAS)? Yes, then a smaller emergency fund is reasonable.

These are just a few of the relevant considerations when determining the size of your emergency fund. Keep in mind your emergency fund shouldn’t be too large either. It is only to provide safety for financial shocks, it is not meant for long-term investing goals.

Where to Keep your Emergency Fund

The most important characteristics for the emergency fund are liquidity (easy accessibility) and safety from loss. If you can earn a small return, even better. For these reasons keeping it in a high interest savings account is ideal. In a chequing account you won’t earn any (or much) interest. Also, a locked-in product is not a good fit. An emergency fund is useless if you can’t access it when an emergency arises.

Most banks will offer a high-interest savings account and online banks tend to have the best rates. There are also mutual fund and ETF high-interest savings accounts available.

Don’t keep your emergency fund inside of your RRSP/RRIF as you will need to pay taxes when you withdraw the money. If you have TFSA room, it can be kept there, but you will eventually use your TFSA to hold long-term investments.

NexT Steps

To begin building your emergency fund, start by setting up automatic weekly, biweekly or monthly withdrawals from your chequing account that go straight into your high-interest savings account.

​Once your emergency fund is fully funded move on to paying down debt or investing for other goals. Do not skip setting up an emergency fund, it is an essential step towards healthy finances and reduced financial stress.

Dollar-Cost Averaging

Even if you have not heard of dollar-cost averaging there is a good chance you have used it in your investment portfolio or through an RRSP at work. It is a powerful investment strategy during the accumulation stage of your financial life.

What is Dollar-cost averaging?

It is the system of investing a fixed dollar amount at regular intervals (monthly, weekly) to purchase investments. Here is a quick example to explain:

You decide to save $500/month and set up an automatic contribution to your investments. Here are the purchases for the first three months.

MonthContributionCost per unitNumber of units
January$500.00$50.0010
February$500.00$30.0016.67
March$500.00$40.0012.50
Total$1,500.0039.17

After the purchase in March, you have 39.17 units and a total investment of $1,566.80 (39.17 * $40.00). Seeing the unit price decline 20% from January to March, you might assume that you lost money. In fact, you are up almost $67 or 4.45%. This is because dollar-cost averaging automatically makes you purchase more units when an investment is “on sale” and buy less when it is expensive. This is the beauty of dollar-cost averaging, it uses the volatility of investments to your advantage.

Other Benefits

A big benefit of dollar-cost averaging is the simplicity to implement, all you need is to determine the amount you can regularly contribute and then you leave it on autopilot. It also helps form the habit of regularly and automatically contributing to your investments.

Dollar-cost averaging helps to control the emotional response when volatility inevitably strikes your investments. When your investments decline in value you can know that you are taking advantage of this decline by buying more “on sale”. This reduces stress and regret through the volatility inherent in long-term investing.

Most importantly dollar-cost averaging removes the decision on when to invest because it is on aut0pilot. It is no longer necessary to spend time wondering “is now a good time to invest? Or should it wait till next week or next month?”. This automatic approach reduces the stress around the timing of contributions and stops the futile attempts to time the market.

The Other Option

Without the scheduled contributions of dollar-cost averaging you must make the decision on when to invest each contribution. This inherently leads to trying to time the market with your contribution. Using the same investment as above; here is an example of what can happen when not using dollar-cost averaging.

The first month you don’t want to put the money in as you don’t know where the market is going, so you save the $500. In the second month you don’t want to invest in something that just lost 40%, so again you wait. Now you have $1,000 in cash and no investments. In the third month you see the investment increase to $40. Now that it is moving in the right direction you invest. Good thing you didn’t buy at $50, too bad you didn’t buy at $30.

In this example you end up investing the same $1,500 but you only have 37.5 units at the end instead of 39.17 units. You also missed any dividends or interest paid out by the investments in the first two months. The worst part is that each month (or week or day) you must decide if you are going to invest or wait for the market to drop/increase. This is a mentally exhausting way to invest. It is impossible to consistently invest at the “right” time, so there will inevitably be regrets on the timing of your investment.

Conclusion

Dollar-cost averaging is a high-impact contribution strategy that is simple to implement and reduces stress and regret. It is a great fit for long-term investment goals that require regular contributions over an extended period of time (ex. retirement).

April 2022 Quarterly Investment Update

Uncertainty and Market Volatility

Uncertainty goes hand-in-hand with market volatility – and political uncertainty offers no exception to this rule. Think back on the summer of 2015. The S&P 500 dropped by over 12% on fears that Greece would default on its debt and exit the European Union (Grexit). In the summer of 2016 markets again dropped as Great Britain initiated its own process to exit the European Union (Brexit). Later that year in November, the S&P 500 futures dropped by over 5% on the evening Donald Trump shocked the world by winning the US presidential election (it recovered overnight and was up by over 1% the next day). The Russian invasion of Ukraine did not come as a surprise to the world. The S&P 500, nevertheless, convulsed in the first quarter – dropping by over 13% by March 8. (Source: yahoo.ca/finance).

It is during these times of market volatility that we are well-served to check our convictions on why we own what we own. This is process is known in our industry as conducting due diligence. It is defined by the Oxford Dictionary as: a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.

Due Diligence

In our investing process we employ professional managers who are constantly conducting due diligence on our behalf. They ask questions such as:

  1. Does the business solve compelling problems for its customers – and will it continue to do so in the future?
  2. Is the business able to generate a solid stream of free cashflow from its operations?
  3. Are the business managers competent, honest and hard-working? Do they have a successful track record?
  4. Is the business well-positioned to survive a crisis?

I encourage you to ask the same questions too.  If for no other reason than to reassure yourself that you are holding shares in businesses that will provide for you and your family in the future. If you have a moment, look up the securities you hold in your mutual fund portfolios and ask yourself if these are the kinds of businesses you want to own in a volatile world. Search for the top holdings of your mutual funds (this information is publicly disclosed and updated each month).

Taxes 101

Personal income tax filing, everyone’s favourite annual task. Right?

Most Canadians dread having to complete their taxes and with good reason. The tax code in Canada is complex and convoluted. We hope the information presented below will help you make sense of your personal income tax filing in Canada.

Due Dates

  • Income taxes owing need to be paid by April 30th of the following year.
  • Income tax filing is also due April 30th.
    • If you have self-employed income, then the filing deadline is June 15th. Keep in mind the amounts owing are still due by April 30th.

New for your 2022 tax return

  • Repayment of Covid-19 benefits – You may have received a notice in 2021 or 2022 requiring the repayment of a portion of the Covid benefits you received. If you made a repayment in 2022 you will receive a tax slip that can be claimed to reduce your taxable income in 2022, 2021 or 2020.
  • Home Accessibility Tax Credit – If you are 65 or older and are eligible for the disability tax credit you can claim up to $20,000 in Home Accessibility remodels to your home.
  • Ontario Staycation Tax Credit – one time tax credit allowing you to claim 20% of your stay in an Ontario hotel, cottage or campground during 2022 up to a maximum of $1,000 individually or $2,000 as a family.

Common Tax Slips

  • T4 slips – Received in February or early March
    • T4 – Employment income – Provided by each of your employers
    • T4A – Pension, Retirement, Annuity and Other Income – You will receive this if you have pension or annuity income. It is also a “catch-all” tax slip.
    • T4RSP/T4RIF – RRSP/RIF income – Withdrawals from your RRSP/RIF
    • T4A(P)/T4A(OAS) – CPP/OAS income – CPP and OAS pension income and any withholdings tax taken
    • T4E – EI benefits – EI benefits received in the year
  • T5 slips – Received in February or early March
    • T5 – Investment income – Income from any non-registered investment accounts or bank accounts.
    • T5007 – Benefits – You will be issued this slip if you received more than $500 in Worker Compensation benefits, social assistance or provincial supplements.
    • T5008 – Securities Transactions – Disposals or redemptions of any non-registered investments
    • T5013 – Partnership Income – If you were invested in a partnership you will be issued this slip for any income or loss.
  • T3 slip – Investment income (trusts) – Some investments (such as mutual funds) are structured as trusts and they issue T3 slips for any income distributions. These are often issued in March or early April.
  • T2202 – Tuition payments – Tuition payments made in the year will be included on this slip. Issued in February or early March.
  • Foreign Income – If you have income from another country, such as a foreign pension, you will need to report it on your Canadian tax return.

Common tax deductions

These are deducted from your taxable income meaning you save taxes at your marginal tax rate.

  • RRSP/RPP contributions – Contributions to your RRSP or pension plan reduce your taxable income.
  • Split pension deduction – Certain types of pension/retirement income can be split with your spouse, moving income from the higher income spouse to the lower.
  • Union and professional dues – If you pay union or professional dues (that are not reimbursed) these can be deducted.
  • Child care expenses – Payments for child care can reduce your taxable income.
  • Employment expenses – If you are required to work from home, drive to clients (and not reimbursed) or paid through commission there may be an opportunity to deduct some employment costs.
  • Spousal support payments – If you are paying spousal support to your ex-spouse these are deductible from your income. If you are receiving spousal support this would be taxable income.
  • Carrying charges and interest – If you pay investment management fees or you pay interest on a loan used to invest you can claim that as a deduction on your return. Keep in mind this is only deductible on non-registered investments.

Common tax credits

Credits are applied against your taxes payable. In most cases they are at the lowest federal tax bracket of 15% plus your lowest provincial tax bracket. Most credits are indexed to inflation. The majority of credits are non-refundable, which means they can reduce your income taxes to zero but they cannot create a refund on their own.

  • Basic personal amount – Every filer receives this deduction ($14,398 for 2022).
  • Age amount – If you are age 65 or older on December 31st of the tax year you may receive an age amount deduction. It is reduced and eventually eliminated as your income level rises.
  • CPP and EI contributions – You receive a credit for your personal CPP and EI contributions.
  • Employment income credit – You receive a small credit if you have employment income ($1,287 in 2022).
  • Home buyers’ amount – If you are a first-time homebuyer (did not live in a home you own for the tax year and 4 previous years) you get a credit of $10,000.
  • Pension income amount – If you are receiving pension income you receive a maximum credit of $2,000.
  • Disability amount – If you or one of your dependents have a disability please complete a disability tax credit form. If approved you would receive the disability tax credit ($8,870 in 2022).
  • Tuition/education – amounts paid in tuition and education can be claimed as a tax credit. They can also be carried forward if they cannot all be used in the current year.
  • Medical expenses – Only the amount in excess of the lower of:
    • 3% of your net income, or
    • $2,479 (in 2022) can be claimed.
  • Donations – donations to registered charities create a credit on your tax return. On the first $200 they are credited federally at the 15% rate applicable to other credits. Any donations over that amount are credited federally at either 29% or 33% depending on your income tax level. These can be carried forward if they cannot all be claimed in the current year.

These are a selection of the most common and relevant federal tax deductions and credits. There are additional federal and provincial deductions and credits not included in the above lists.

Increased inflation

Canada’s inflation rate is the highest it has been since 2003. Last year we experienced a 4.7% increase in the Consumer Price Index (CPI) (StatsCan: reported November 2021). Annual inflation in the US is running at 6.8%, Germany 5.2% and the UK 4.6% (Source: OECD). This is much higher than many of us have experienced in over 20 years and those under the age of 40 may have never experienced in their lives.

Inflation is in the news with good reason – because we see and feel price increases when we shop too. We want to be a part of the discussion and navigate it together with you.

WHat is Inflation?

Inflation is the decline of purchasing power of your money over time. It is often measured by comparing the price of a basket of goods and services from one year to the next. If the basket cost $100 in the first year and $102 in the second, then inflation would be calculated at 2%. This basket of goods and services method is a useful tool to measure inflation. Yet it is only measures inflation of the goods and services included in the basket in the proportion they determine. Alcohol, tobacco and recreational cannabis, for example, feature prominently in this basket. If your spending on goods and services differs from the CPI proportion, you may experience higher or lower prices than the CPI would indicate. Click here to see what is included in the CPI basket.

A one-year increase may seem inconsequential but over decades this can really add up.

Hyperinflation

The most extreme examples of inflation are those in countries such as Zimbabwe in 2007 – 2009 and Germany between World War I and World War II. In these countries inflation was so high that the prices of goods were doubling every few days. This led to wheelbarrows of cash being used to buy groceries, or cash being burned because it was cheaper than using it to buy wood. These are extreme outliers often driven by unique and specific circumstances such as civil unrest and war (Source: Forbes). We have here in our office a $50 trillion bill (its current value is ~$20, but only as a collector’s item) from Zimbabwe that serves as our reminder of what “money” means. It is simply a claim against real goods and services. If more money is injected into an economy with no more goods and services to consume with that money, then it stands to reason that more dollars are competing for the same things and prices must increase.  This is a truth learned the hard way in countries such as Zimbabwe where the value of a dollar became effectively worthless.

WHat causes Inflation?

The causes of inflation are both simple and complicated.

The simple reason for inflation is a mismatch between demand and supply. This is because either there is additional demand or a reduction in supply that forces the price up. In a healthy economy this inflation is mitigated, businesses can increase production to meet the demand and most supply disruptions are temporary in nature or can be worked around.

During the pandemic we have experienced both. Many service businesses closed, resulting in individuals having more money available to purchase goods. At the same time disruptions in production and shipping resulted in lower supply. This combined to increase the costs of many goods and services.

The more complicated causes of inflation are driven by fiscal and monetary policy. Stimulative fiscal policy moves by the government such as cutting taxes or spending on infrastructure projects lead to increased demand for goods and services leading to inflation. The monetary policy decision to reduce interest rates leads to more money being available to be lent to business and consumers. This increases the money available throughout the economy to be spent on goods and services, increasing the costs.

Those in charge of fiscal and monetary policy have a tight rope to walk as they navigate keeping the economy growing while at the same time keeping inflation low.

Over the past two years extraordinary amounts of money has been added to economies and interest rates at historically low levels were dropped even further to mitigate the financial effects of the pandemic.

Finally, inflation is also driven by sentiment. If businesses believe their costs will increase in the future, they will increase their sale prices. If individuals believe the price of goods will increase, they will demand higher wages which increases costs for their employers which leads to increased sale prices. As you can see the fear with inflation is that it feeds on itself and becomes self-reinforcing.

What Are the predictions?

Economists are about as good at making accurate predictions as meteorologists, but many of them see this increase in inflation being temporary. As we move past the pandemic and supply chains are repaired, many economists see inflation settling back to the 2-3% range by the end of 2023 (Source: OECD).

To achieve this goal of decreasing inflation, central banks across the developed world will begin increasing interest rates, likely multiple times in 2022 and 2023. This reduces the availability of money in the economy and should result in a dampening of inflation.

What Can We Do?

The first advice is not to panic. It is unlikely we will see inflation anything like the double-digit inflation of the 1970s. Inflation is higher than we are used to and is likely to stay higher for the next two years. This does not forebode a new world where drastic action is necessary.

As mentioned earlier, inflation is the decline of purchasing power of a currency. Therefore, those who are most affected are those who are holding large amounts of cash or assets denominated in currency, such as bonds. These assets become less valuable in a high inflation world.

We believe that the best place to invest your money over the long term is into the ownership of a diversified basket of quality businesses through the mutual funds you own. These are businesses that can increase prices to maintain their profit margins and have the flexibility and ability to adjust to changing business conditions. This approach is what has enabled our clients to succeed in a variety of economic environments over 50 years – and why we are committed to continuing with this discipline.

January 2022 Quarterly Investment Update

Let’s take a quick look back at 2021 even as we shift our focus to 2022.

Year of Vaccination

2021 was largely defined by the rollout of vaccines to curb the spread and impact of COVID-19 in Canada and the world. In the developed world this was a remarkable achievement with a vast number of people being vaccinated. In Canada, we progressed from less than 1% of our population being vaccinated at the beginning of the year to over 77% by the end (Source: Our World in Data). Even as we recognize this achievement, we acknowledge that there are issues as poorer countries – especially those in Africa – have been unable to procure and distribute vaccines to large portions of their population. This challenge may lead to a prolonging of the pandemic as new variants mutate over time. We remain hopeful that 2022 will be the year we put many of the impacts of COVID-19 in the rear-view mirror.

Increased Tension with Russia and China

 As America continues to pull back from the world stage both Russia and China have begun testing America’s commitment to its ideals. China conducted record numbers of air force drills near Taiwan in October 2021 and has increased their insistence that Taiwan is part of China (Source: Washington Post). Russia, meanwhile, continues to threaten the independence of the Ukraine and has reportedly massed 100,000 troops on the border (Source: New York Times). It is unclear if either of these situations will lead to violence, but it is likely that the testing of America and its allies will be a theme going forward.

Inflation rearing its head

The pandemic and its effects have resulted in increased inflation. Canada’s inflation rate remained at 4.7% in November, the highest inflation rate we have seen since 2003 (Source: Economist). When inflation concerns were first raised earlier in 2021 much emphasis was put on inflation being transitory and likely to return to normal levels soon. Those predictions have been adjusted and it appears likely that higher inflation will remain for longer than originally anticipated.   

There is much that is outside of our control as we have experienced through the last few years. As such, we do not spend our time predicting the future but instead we focus on what is within our control with appropriate asset allocation, tax planning and estate planning.

Looking to 2022 we return to similar themes as we examine the forces that will influence your financial plan in the coming years.

Inflation and increased interest rates

As noted above inflation is a serious concern in Canada and around the world. As governments look to curb inflation it is likely that we will see multiple interest rate hikes in the coming year. Although the Bank of Canada did not raise the interest rate at the end of 2021, it is anticipating raising interest rates between April and September of 2022 (Source: Reuters). Economists anticipate that there could be as many as four rate hikes by the end of 2022. This situation again confirms our belief that owning good businesses that can weather change and adjust is the best investment. Our approach to fixed income remains focused on shorter duration (which measures the amount of time we lend our money to others) and higher-yielding corporate debt.

Canada’s housing Market

According to the Financial Post, Canada has the second-highest housing bubble ranking in the world and there is significant risk of a pullback. One source of risk to Canadian housing is higher interest rates. The market share of variable-rate mortgages increased to 51% in 2021 up from less than 10% in early 2020 (Source: Financial Post). As the bank of Canada raises rates these variable rate mortgages (and eventually fixed-rate mortgages) will become increasingly expensive. Many Canadians have stretched themselves to afford homes in the recent housing market environment and an increase in interest rates is likely to squeeze the budget of many Canadians. As mortgages become less affordable this could drive down the price of homes throughout the country. Due to this risk, we work to create retirement plans that are not dependent on continuous price increases and eventual downsizing.

Short-term vs. Long-term

It is no secret that attention spans worldwide are shortening. This phenomenon is infiltrating investor mindsets. In the 1960s the average holding period for stocks was eight years. In 2020 the average holding period dropped to below five months (Source: Reuters). This short-term focus works against investors as it encourages damaging behaviour from investment managers such as closet indexing and high portfolio turnover. We also find that a short-term focus may tempt investors to chase short-term investment returns. ARK Invest is a US-based investment management firm that invests solely in disruptive innovation. Their flagship ETF (ARKK) dropped roughly 31% in 2021 while the S&P 500 finished up. The average investor in their ETFs is now estimated to have lost money (Source: Financial Times). This is why we work with investment managers who are focused on long-term results. These managers have established investment processes that keep them from chasing the latest short-term investment idea, instead focusing on fundamentals and long-term performance of the businesses in which they invest.

2022 promises to be a year of change as we emerge from the pandemic. We remain focused on your long-term financial health and look forward to working with you through the changes this upcoming year has to offer.

Registered Education Savings Plan (RESP)

Many Canadians have heard of the RESP and plenty of us probably had one when we went to post-secondary education. It is a very important and powerful savings plan and is one of the big three registered plans in Canada along with the TFSA and RRSP. 

As the name of the account makes clear, an RESP is a savings plan for education. Specifically this is for post-secondary education which includes college, university, trade school etc. 

It is a tax-sheltered account where contributions grow tax free. The contributions are not tax deductible. Lifetime contributions are limited to $50,000 per child with no annual maximum.

Government benefits

The significant benefit of the RESP is the Canada Education Savings Grant (CESG) which is a 20% federal government match on annual contributions. The government will only match the first $2,500 of contributions each year unless you are catching up for past years, then the match would apply to the first $5,000 in contributions that year. No match will be provided for annual contributions above those limits. The lifetime maximum CESG each child can receive is $7,200. If you don’t exceed the annual maximums you need to make $36,000 in contributions to receive the full $7,200 lifetime CESG.

The Canada Learning Bond is an income-tested government payment of up to $2,000/lifetime. Eligibility depends on family income and number of children. Review this link to see the eligibility criteria. 

When can I start?

You can begin contributing to an RESP for your child in their first year. If you contribute the $2,500/year you will have received the full CESG before the end of your child’s 15th year.

What if I haven’t contributed yet?

As mentioned you can catch up on CESG by contributing up to $5,000 a year and still get the 20% match. Your child can continue to get the CESG up until the year they turn 17 but there are some special rules. 

To receive the CESG between ages 15 and 17 the RESP contributions by December 31 of the year the beneficiary turns 15 must either:

  • Total at least $2,000
  • Have had annual contributions of at least $100 in any 4 previous years. 

Withdrawals

When it comes time to withdraw, the contributions are not taxable but the earnings and the grants would be taxable income when withdrawn. These would be taxable on the beneficiary’s (student) tax return. In many cases the student will not end up paying taxes because they will have low income and tuition tax credits to offset any income taxes from the RESP withdrawals.

What if my kids don’t end up going to post-secondary education?

If the funds are not used by your child there are some other options:

  • The RESP can be transferred to a sibling fairly easily. Although the grants may need to be repaid. 
  • Contributions can be withdrawn tax free but the grants would need to be repaid and there would be taxes charged on the earnings in the plan. 
  • The contributions and earnings could be transferred to the beneficiary’s RRSP (if they have contribution room). 
  • The contributions and earnings could be transferred to the beneficiary’s Registered Disability Savings Plan (RDSP) if the beneficiary qualifies for one.  

Keep in mind that RESPs can stay open for up to 36 years so you do not have to close it if your 18 year old child decides they don’t want to go to school. They could always change their mind. 

Conclusion

The RESP is a great tool in saving for your loved one’s post-secondary education. Receiving a 20% return on your investment as soon as you contribute is incredibly powerful in accumulating funds. Coupled with the tax-free growth in the plan, the RESP becomes an extremely compelling investment vehicle.

If you have any questions or would like a projection for your RESP, please do not hesitate to call or email us.

October 2021 Quarterly Investment Update

China Rises

For years we have been tracking China’s rise as the world’s political, military and business superpower. This summer we learned that 2021 China’s spending on Research & Development will exceed $500 billion and for the first time ever will exceed R&D spending by the United States (Source: Bank of America). We believe China will be to the 21st century what America was to the 20th: the world’s superpower. The growing importance of China is why we work with investment managers who are located in China and have in-depth, local knowledge on how best to invest there.

A Cautionary Tale

On August 31, the criminal fraud trial of Elizabeth Holmes (former CEO of Theranos) began. The story of Theranos is a cautionary tale on the importance of investing in things that are well-understood while eschewing investments that seem too good to be true. Theranos was a high-flying health-care company founded by Holmes in 2003. It claimed to have technologies that would make blood tests widely available at a fraction of the cost. Theranos embodied a wonderful promise that enabled its value to grow to $10 billion (USD) by 2013. Unfortunately for their clients and investors, the technology never delivered as promised, patients were harmed, and many investors lost their savings when the value of the company collapsed. When we see stories like Theranos, we are reminded of why we work with investment managers who research and understand the businesses we invest in so we can avoid these situations. 

Ethical Investing, ESG and Greenwashing

We continue to cast a skeptical eye on so-called “green” mutual funds and ETFs.  Investors are increasingly concerned about how their investments are impacting the world and the future – and we think this is a good thing. At the same time, investment companies are using investor sentiment as an opportunity for profit without really helping the environment (this is a process called “greenwashing”). Helping the environment is a complex endeavour and serious solutions are needed. TransAlta, a Canadian power company, is in the process of converting from coal to natural gas power generation. This conversion will reduce the company’s annual carbon emissions by 30 mega tonnes which represents 14% of the target carbon emission reduction for Canada (Source: Edgepoint). We believe a typical “green” investor would be disinclined to invest in TransAlta, yet it is difficult to find a company that will contribute as much to the reduction in Canada’s carbon emissions moving forward as TransAlta.

We believe that investing continues to be a nuanced and complex endeavour where simplistic solutions are counterproductive.  We agree that making the world a better place through our investments is a good thing – and affixing simple labels to investments and/or people does more harm than good. 

Welcome Garrett Boekestyn

We are pleased to announce a new addition to our team. Garrett Boekestyn joined us earlier this year, and his expertise in tax and financial planning will continue to strengthen our service.  You can review his bio along with the rest of the team on our updated website.

TFSA vs. RRSP

One of the first questions when Canadians begin saving and investing is:

What account do I use, the RRSP or the TFSA?

The RRSP has a long history and Canadians have used it for their retirement investing for decades. Meanwhile the TFSA is the new(er) kid on the block and is quickly gaining in popularity. While the choice between RRSP and TFSA comes down to your particular situation there are some general principles that can inform your decision. 

A brief description of each account:

The RRSP (Registered Retirement Savings Plan) is intended for retirement savings. Any contributions made to the plan are deducted from your taxable income. The growth and earnings accumulate tax-free. Withdrawals are considered income and are taxable. 

The TFSA (Tax Free Savings Account) is intended to be more flexible and used for other savings goals in addition to retirement. The contributions are not deducted from taxable income and withdrawals are not considered income and therefore not taxable. As with the RRSP, the growth and earnings within the plan accumulate tax-free. 

Both of these accounts can hold the same types of investments including stocks, bonds, mutual funds, ETFs and more.

General guidance on your choice

The general guidance on when to use each account is based around your current and future tax brackets. If you are paying taxes in a higher bracket when contributing than when withdrawing the RRSP makes the most sense. If your tax bracket will be the same or higher when you withdraw the money then the TFSA makes more sense. Here is a quick example:

In the first comparison, there is more money after-tax when using the RRSP. This is due to the lower tax rate when the funds were withdrawn. In the second comparison you would have more after-tax money available if you had saved within the TFSA. The tax rates don’t affect the results of investing in the TFSA but they have a large impact on the RRSP results. 

Keep in mind the benefit of the RRSP is dependent on contributing more than you would in the TFSA (the tax deduction allows you to contribute more to the RRSP).

Additional RRSP features:

The Home Buyers’ Plan allows RRSP account holders to withdraw up to $35,000 for a home down payment without paying immediate taxes. Keep in mind this is only available if you are considered a first-time home buyer purchasing a qualifying home. More information and rules about the HBP can be found here.

You are allowed to withdraw the money out under the HBP without paying taxes but you must repay the funds over a 15 year period starting the second year after the year you withdraw the funds. If you don’t make the repayments, 1/15th of the amount withdrawn will be added to your income each year starting at the first required repayment year.

There is a similar plan called the Lifelong Learning Plan that allows you to withdraw up to $20,000 ($10,000 per year) to fund the pursuit of your education and repay it over a 10 year period. More information can be found here. 

Flexibility of the TFSA

The TFSA is a much more flexible savings vehicle as it allows you to withdraw funds without worrying about the tax consequences. This can be great for emergencies, large purchases and in your retirement. Since TFSA withdrawals are not considered income they also do not affect eligibility for federal income-tested benefits and credits, such as GIS and OAS clawback.

Withdrawals from the TFSA are added back onto the contribution room the next year. This is not the case with the RRSP as withdrawals do not affect contribution room. This allows you to withdraw money from the TFSA and then reinvest that same amount back into the TFSA in the future.

Conclusion

The TFSA should be the first stop savings vehicle for investors unless they are in a high tax bracket now and expect to be in a lower one when the funds are withdrawn. The flexibility of the TFSA and ability to withdraw without worrying about taxes makes it a more useful vehicle. 

On the other hand, if you have trouble leaving your savings alone, maybe the tax payment on RRSP withdrawals will stop you from withdrawing and spending your savings. 

If you have questions about your specific situation please send us an email or give us a call.

July 2021 Quarterly Investment Update

Crowds Slowly Building Again

The long-anticipated 2020 Summer Olympics will finally take place starting on July 23 in Tokyo. Crowds around the world are slowly building again as the organizers announced that 60,000 fans will be allowed into Wembley Stadium for the Euro Cup finals in July (Source: The Guardian). Foo Fighters, an American rock band, played to a full-capacity audience at Madison Square Garden on June 2. In a sign of what may be to come, attendees had to show proof of vaccination in order to gain entry to the concert.  

Strong Investment Returns Tempered with Higher Inflation

The value of the businesses in your mutual fund portfolios generally increased over the quarter. In our view, these higher values are to be greeted with caution because at the same time the values of our investments were increasing the prices we pay for things was also increasing. Year-over-year inflation in Canada was 3.6% in May (up from -0.4% a year earlier) and 5% in the United States (Source: Trading Economics, Statistics Canada, U.S. Bureau of Labour Statistics). The US Federal Reserve, who had previously indicated that they would leave interest rates alone until the end of 2024, now suggest that interest rates will be lifted twice in 2023 (Source: Economist).  If our main objective is to maintain and grow purchasing power over time, these inflation numbers remind us that this is not an easy task.

It Pays to be an Owner

Oil prices are up by over 53% since the start of 2021 (Source: Yahoo Canada Finance).  It should come as some consolation for you to know that when we invest in Canada through Canadian equity mutual funds, we benefit from these higher prices through ownership of energy businesses such as Enbridge, TransCanada, Canadian Natural Resources and Suncor.  Another reminder that ownership is a good thing – and potentially takes some of the pain away when the price of gas creeps up above $1.30/litre.