By Jonathan Chevreau,
Financial Independence Hub
At least one of Canada’s big banks is giving clients the go-ahead to top up their Tax-Free Savings Accounts by the extra $4,500 amount specified in Tuesday’s federal budget.
CIBC Wealth’s Jamie Golombek says the Budget included draft legislation that allows for an increased TFSA dollar amount for 2015 to $10,000, up from $5,500, the current 2015 TFSA dollar amount. But critically, he added:
“We have received confirmation from the Canada Revenue Agency that, while the legislation is subject to Parliamentary approval, consistent with its general approach for proposed income tax changes, it is administering the measure on the basis that $10,000 is the new TFSA annual contribution limit. Clients may therefore proceed to contribute to their TFSA based on this proposed law.”
On Wednesday, sister site Financial Independence Hub ran an (since updated) blog that suggested investors contemplating such a purchase hold off a few days, pending comment from the Canada Revenue Agency and Department of Finance. When I made inquiries at my friendly local financial institution (RBC), I was initially dissuaded from this course. I was told I could do the transaction at the discount brokerage but it would be at my own risk until the proposal is formally enshrined in legislation later this summer.
In the original blog, Golombek said that “In the event the legislation is not ultimately finalized, in my view, it is unlikely that the CRA would penalize taxpayers for acting on draft legislation.”
This morning, I pressed Golombek further with these questions:
So CIBC is saying we can proceed with the extra contribution now? Even if it got reversed, what would the worst-case consequences be? 1% per month on $4500?
Jamie’s reply (via email):
Yes. If the draft rules aren’t finalized, in CIBC’s view, it is unlikely that the Canada Revenue Agency (CRA) would penalize taxpayers for making these additional contributions.
Sheryl Smolkin: Make the transfer now
After the first version of yesterday’s blog was published, I had an email and Facebook exchange with pensions expert @SherylSmolkin of the RetirementRedux website.
Even before the CRA’s clarification via Golombek, Sheryl said she and her husband planned to make a $4,500 additional TFSA contribution now. Here’s what she said on Facebook:
“Majority government. it will pass for sure. I say make the transfer now.”
Based on Golombek’s statements above, it appears that while possibly risky to those wary of CRA recriminations, the likelihood is minimal that Canadians will be severely punished by the agency in the event of the measure being revoked after an election that removed the Conservatives from power.
It occurs to me that maybe we should all follow Sheryl’s lead and contribute the $4,500 NOW. Can you imagine the furor if the 10 million or so Canadians already with TFSAs were confronted with punitive retroactive penalties and interest?
In that spirit, and subsequent to the initial draft of this blog, I made this transfer myself this morning (in-kind, see bottom of blog for details), as well as my spouse.
TFSA lifetime caps and other threatened reversals shaping up as Election issue
It seems clear from the second-day newspaper coverage of this, that super sized TFSAs are shaping up to be an election issue. The Opposition parties appear bent on reversing the TFSA expansion. In particular, Liberal leader Justin Trudeau has vowed to reverse it if he wins power. Read Garr Marr’s (@dustywallet on Twitter) piece on possible TFSA lifetime caps in the Financial Post.
Some of the “Double Trouble” reports in February talked about a lifetime $800,000 cap as a possible future measure but Garry’s piece mentions a much lower $100,000 cap, which would be ridiculous, given that many TFSAs are already past that amount based just on the $5,000 and $5,500 limits already in place. MoneySense’s annual Great TFSA Race feature was showcasing individuals with $200,000 or $300,000 TFSAs more than a year ago.
Heck, once upon a time we had a $100,000 lifetime capital gains exemption which most Canadian baby boomers were deprived of just as they were starting to build non-registered wealth. And not to mention, the annual hassle of computing capital gains tax liability for preparing tax returns this time of year.
I once wrote an editorial in FP Comment explaining how TFSAs really just eliminate double or even triple taxation (first, income tax to come up with the capital in the first place; then annual taxes on interest, dividends and capital gains associated with what’s left of that capital, and arguably a third round of tax called consumption taxes [HST] once the remaining money is eventually spent on goods or services.)
Remember, TFSAs are Tax PRE-PAID
Remember, the original name for TFSAs was “Tax-PREPAID” Savings Plans. The Liberals and NDP don’t need to get voters riled up over the poor government being deprived of tax revenues for their wealth redistribution schemes. Ottawa gets its tax hit right upfront with TFSAs, and will eventually get a second whack when the money is spent. Seems good enough to me!
Also, remember that if — as outlined at the top of this blog — near-retirees and seniors start to convert non-registered savings in droves in order to fund these super-sized TFSAs, that will be a fantastic source of revenue for Ottawa. Every time you trigger a capital gain in order to move securities from taxable accounts to the TFSA, the cash register will ring in Ottawa.
Ottawa will also reap a tax bonanza as seniors start doing the same with their RRSPs and RRIFs. Justin Trudeau may say that “only the rich” have $10,000 lying around to fund TFSAs but seniors have much more than that in RRSPs, RRIFs and taxable accounts and need to move those funds into TFSAs just as soon as they are permitted to do so.
Why TFSAs upset the Left
But the piece I really think TFSA believers need to push today on social media is by the Post’s @KellyMcParland. My Twitter feed is full of this article, entitled Harper’s winning the wallet war. I highlighted in particular the sentence below. (Kelly is a feisty guy: I used to play hockey with him and he was a tough customer in the corners, let me tell you!)
“TFSAs upset the left because they violate the notion that governments are responsible for people, rather than the people themselves.” — Kelly McParland, National Post
Consider transfers in kind and taking a one-time tax hit
Of course, even if you don’t fear CRA reprisals, coming up with the $4,500 at tax time is another issue, if an ironic one, depending on whether you expect a tax refund or have to pay taxes for the looming tax filing deadline. Keep in mind that you don’t have to fund TFSAs with new cash: if you have significant non-registered investments you can “transfer them in kind” into the TFSA.
This may and probably will entail tax consequences (chiefly capital gains) for securities that have appreciated over time. Ironically, not crystallizing capital gains has been a sort of tax shelter of its own but to transfer them into a TFSA (or indeed an RRSP) it will be deemed a disposition for tax purposes. Ideally, you find securities that are close to their original purchase price, or find pairs of securities where gains in one offset losses in another.
The great thing, however, is that by taking that tax hit once, in the future the transferred securities will generate dividend and interest income that is almost totally tax free for the rest of your life.
Incidentally, I found the whole process relatively painless at my discount brokerage, although the in-kind transfer is not easily accomplished online: you may need to talk to a representative, as I did.
Who’s contributing more now?
I’m curious whether this blog’s readers intend to contribute the extra $4,500 now or plan to wait until the coast is 100% clear.
Feel free to comment on this blog below, or email me at firstname.lastname@example.org for possible inclusion in further blogs or columns.
My friend the inimitable Norman Rothery posted a blog at MoneySense.ca Thursday that was inspired by a Twitter exchange last weekend: the post is titled Apple Watch Delays Findependence.
On Twitter, I had publicly disclosed that I had pre-ordered the new Apple Watch, even though delivery is several weeks away. Norm made a query about the possible impact on Findependence, then followed up in his blog by suggesting that young people buying these gadgets might seriously be delaying the arrival of their Findependence Day (that is, the day they reach Financial Independence) by 17 days for the cheapest model and for as much as two years for the expensive glitzy gold model.
I have no great problem with the blog, a typically contrarian piece by a great value investor: it’s all grist for the mill, as they say and I’m happy to see an influential writer like Norm use the term Findependence. Even so, let me assure readers out there who may have fancied me to be a frugal kind of guy that I quite definitely did NOT purchase the expensive gold-banded version. For the curious, I picked one of the simple entry-level models with a black band and the smaller watch-face, roughly the model illustrated above.
I entirely agree with Norman that the first generation of technology tends to have kinks and it’s never a bad idea to wait for a few releases and let the pioneers suffer the slings and arrows of outrageous technology fortune.
Three reasons why I pre-ordered
By Jonathan Chevreau
One of the more entertaining financial presentations at this week’s BMO investing conference in Chicago was a keynote talk by author and broadcaster Andrew Busch on who killed the global economy. (I qualify this with the phrase financial presentations because Rick Mercer’s talk was also highly entertaining but could hardly qualify as being financial).
By contrast, Busch had worked at BMO Capital Markets for 22 years earlier in his career and grew up in Chicago. His financial research is available free here.
Billing his talk as a “Murder Mystery,” he ran movie clips from various Film Noirs to illustrate his points.
Among his suspects; the ECB’s Mario Draghi, Japan prime minister Shinzo Abe, China president Xi Jinping and the Federal Reserve’s Janet Yellen. Busch played the role of “Private Economic Investigator.”
Resemblance to Greece?
Starting with Yellen, he submitted clue number 1 as the unemployment rate. With 3 million Americans underemployed, this fact shows up in sluggish wage increases so “we’re not seeing an acceleration in wealth gains so are not seeing inflation.” What jumps out from the latest job numbers is where they are located; 14 million Americans are employed in local government, another 2.7 million in the federal government and 5 million more in the states. “Now we know why it’s important to look at government spending,” Busch said, “We have to pay tax to have them employed.” Sequing to Greece he asked rhetorically “Are we more like them than we realize?”
Clue # 2 pointing to Yellen is GDP, which slowed down from 5% in the third quarter to 2.3%. “This quarter will be bad and earnings won’t be good.” So far, markets are ignoring pre-warnings as the S&P500 stalls around 2100 but the earnings hit will be “substantive,” Busch said. However, “Most are ignoring it for good reason: we will snap back in the second quarter with GDP growth close to 3% as warm weather comes and things return to normal but we will hear lots about potentially negative GDP in the first quarter.”
The slump in energy prices has curbed inflation, which is “short-term bad but medium-term good because of more money in consumer’s pockets.” Cheap oil helps middle-income earners heat their homes and fill their cars’ gas tanks. That should translate into a pickup in consumer spending and accounts for the recent strength of consumer discretionary stocks.
The Fed’s motive is to normalize interest rates and its first opportunity to raise them will be in June. But the Fed itself is still not sure when inflation and average hourly earnings will go up. “We don’t know what the Fed will do because they don’t know.” The process has begun with hikes in the minimum wage at major retailers like Walmart, Target and even McDonalds. “At some point the Fed will act and I believe it will be in June.”
Dead Man Walking
Busch then moved to Suspect #2 (Mario Draghi) by rolling another film clip. Clue #1 in Europe is that employment rates are just starting to tick down. Clue #2 is the GDP growth rate, which is above zero. “We’re starting to see some acceleration. That’s great but I’m not sure it will last.”
Clue #3 is a major problem: the “sinking feeling” on Europe’s inflation numbers. To avoid Japan’s fate of 15 years of deflation, Europe has mimicked the Fed’s Quantitative Easing program by launching its own QE program in March, lowering rates to zero. It’s bought 60 billion worth of Euros and added 1.1 trillion Euros to the balance sheet, moving beyond 3 trillion. The difference is that when it started its program, the Fed only had US$800 billion on its balance sheet, with QE eventually taking it to US$4.4 trillion. “I expect the ECB will mimic that and do it in three or four tranches.”
Suspects 3 & 4: Japan & China
Busch moved on to Shinzo Abe and Xi Jinping, showing a photograph of the two shaking hands and clearly uncomfortable with each other. Clue 1 is their unemployment rates but these can be safely ignored because the numbers are clearly unknowable. China’s unemployment rate has “magically” stayed at almost exactly 4% since 2012. Japan has horrendous productivity numbers and are “like zombies in the Walking Dead: they should be firing people.”
Clue #2 is GDP. China can force its banks to lend, which it did in 2009, when its high-velocity money stimulated economic growth in areas like infrastructure and housing. This resulted in inflation heating up and commodity inflation but the country is attempting to shift to more US-like consumer spending.
In the US, consumer spending accounts for 70% of GDP, while it’s only 40 to 45% in China. “They want it higher,” Busch said, so it relies less on infrastructure spending. In both countries, politicians “tell central banks what to do.” Abe shot the three arrows of huge fiscal stimulus, massive QE and economic reform in a bid to generate 2% inflation within two years. But last month inflation in Japan was “zero, so they missed the target. It’s vastly different from QE in the ECB and US. … It’s not surprising to see their (Japan’s) stock market reach 15-year highs this week as they reaffirm the QE path, and it won’t end any time soon.”
China wants to keep its currency weak relative to the US dollar and has cut rates twice. The results have been dramatic: Chinese stocks have been on fire since September.
And the murderer is:
In his finale, Busch concluded “the dame did it.” (Yellin). While he expects the Fed will start to raise rates in June, “Nothing is going to happen.” Busch said what happens next may be similar to the 1930s, when the Fed moved rates up several times aggressively. At first, nothing happened but they kept doing it until “eventually they killed the recovery. That’s analogous to what will happen here.”
Here, Busch ran a movie clip from Sunset Boulevard. “The first time the Fed shoots the guy nothing will happen. He’ll keep walking. But the third time they shoot you, you end up face down in the pool.”
So far, they’ve not yet killed the global recovery but central banks everywhere “want all of us in this room to go as far out on the risk curve as possible.” The Fed “won’t screw up this year or the first half of 2016,” Busch predicted, “My guess is that by the second half of 2016 or first half of 2017, as Europe and China stabilize they will feel good enough to act more aggressively.”
Here’s my latest MoneySense blog. Now that it’s April and Easter is almost here, you know what that means! It’s tax-filing time: April 15th for Americans, April 30th for Canadians.
As the piece recounts, even if you’ve been staying on top of inputting tax slips and receipts, if you have taxable income you’re better off waiting a few days before filing.
But the good news is that once you file, the onerous task is over for another year, and many can also expect a refund. Plus, of course, winter is finally all but over. Read more
Its headline is Can the Family Tax Cut Entice Families to Work Less? Read more
The Single Best Investment: Creating Wealth with Dividend Growth, is the title of a classic investment book first published in 2006 by Lowell Miller, who heads Miller/Howard Investments.
It came to my attention via Wes Moss, who I interviewed for an upcoming MoneySense column, whose book You Can Retire Sooner Than You Think we reviewed here at the Hub. I mentioned the book in passing last week in this MoneySense blog last week. That blog focused on asset allocation but provided a big hint about Miller’s philosophy: there’s no place for bonds in Lowell’s investment worldview.
The book’s first chapter sets the tone in its title: Say goodbye to bonds and hello to bouncing principal. Like many stock believers and bond haters, Miller takes it as a given that the investing environment generally includes inflation. Since “safe” investments like t-bills, bonds, money market mutual funds and CDs (Certificates of Deposits in his native USA; known as GICs in Canada) are all “poor investments because what they give is less than inflation takes away.” Read more
Here’s my latest MoneySense blog, which they’ve titled Working to Live Better, Longer. Since it’s based on a reading of books about Longevity and even Immortality, we’re housing it in the Reviews, Encore Acts and Longevity & Aging blog categories of our sister site, the Financial Independence Hub.
Click on the blue link above to reach the MoneySense version or if you want to see images of the book covers discussed, they are in the version posted below. (The two sites tend to use different images to illustrate):
By Jonathan Chevreau
Whenever I suggest in a blog that investors might want to rethink Early Retirement, I usually hear from a few readers who insist that after 30 or 40 or more years in the workforce, they have a “right” to spend their last decade or so in the pursuit of leisure.
Readers are of course perfectly free to reject exhortations to “just keep working” but if I end up in email correspondence with them, I may reply that my stance is not predicated on the desire to give the financial industry still more assets to place under management.
Rather, it’s based on my growing perception that life expectancies are on the rise and the pace of medical breakthroughs in biotech and gene therapy does not appear to be slowing. Read more
Happiness, longevity, health and money are all (as you might expect) intertwined. In his book, You Can Retire Sooner Than You Think (also reviewed at the Hub), Wes Moss focuses on the five money secrets of the happiest retirees.
One of the books he mentions is Dan Buettner’s The Blue Zones: Lessons for Living Longer From the People Who’ve Lived the Longest. We will review that book, first published in 2008, in due course.
In the meantime, we’re going to look at Buettner’s followup book on happiness: Thrive: Finding Happiness the Blue Zones Way, originally published by National Geographic in 2010.
To research the book, Buettner travelled to four of the world’s allegedly happiest countries, two of which I’ve visited myself: Denmark and Mexico, and two I haven’t: Singapore and San Luis Obisco (in California). In each locale he contacts local elders known for their wisdom about happiness and how the city or country built its infrastructure to maximize it.
He then wraps it all up by summing up what these nations have in common with a chapter entitled Lessons in Thriving.
He concludes there are six “life domains” that can be shaped to boost one’s chances for happiness. These six “thrive centers” are:
Where you live is hugely important to happiness and the happiest spots tend to promote economic freedom, a high employment rate, tolerance, quality government, more community space, limited shopping hours, a limited workweek (37 hours in Denmark), support for the Arts, walkability, quiet surroundings and plenty of sidewalks and bike lanes.
The happiest workers are in jobs that don’t have long commutes, limit the workweek to 40 hours, take six weeks of vacation a year, socialize with co-workers and have the right boss. However, the self-employed and business owners report higher levels of well-being.
3.) Social Life
The wider your social network, the happier you’re likely to be. Buettner suggests joining clubs, creating your own Moai (a group of mutually committed friends), reconnecting with your faith, marrying the right person (someone similar to you with similar tastes and earning ability).
4.) Financial life
The book quotes Ed Diener to the effect “the key to greater well-being is to have money but not to want it too much.” (author’s emphasis). He recommends paying off your house (consistent with the Hub’s stance that the foundation of financial independence is a paid-for home, something Wes Moss also advocates), enrolling in automatic savings programs, avoid credit cards, create a giving account and invest in experiences rather than stuff. (also consistent with the motto in Findependence Day: “Freedom, Not Stuff!”).
The happiest homes have fewer television screens, ideally only one, they cancel their cable TV, own a pet, create a meditation space, create a “pride shrine” of family awards and trophies, grow a garden, maximize sunlight and reserve bedrooms for sleep, not electronic distractions.
6.) Self & Purpose
To yield well-being benefits for the long run, the book suggests you “recognize your values, strengths, talents, passions and gifts.” Once you do, this should help you realize your life purpose: determining “your reason for getting up in the morning.” He mentions Richard Leider’s bestselling The Power of Purpose, which uses the simple formula G+P+V=C. That is, Gifts plus Passion plus Values equals Calling.
Here’s my latest MoneySense blog, which bears the headline When dividend investing trumps a balanced portfolio.
That’s an accurate depiction of the content but here at the Hub we’re sticking with the more offbeat headline used above. Because this column really does begin with a true story about harness racing in Florida.
How can that possibly relate to asset allocation and dividend investing? Click the above link to find out, or the Hub’s version below. And yes, the happy winner depicted below clutching a winning ticket is my wife, Ruth Snowden.
She’s known in her industry by that name. When we got married more than a quarter century ago she was concerned I might take offence that she didn’t want to use my surname in business circles. My response won’t surprise those who know us: “Honey, you can call yourself whatever you want as long as you pay half the mortgage!”. Of course, the mortgage has long been paid off, consistent with the Hub’s philosophy that “the foundation of Financial Independence is a paid-for home.” Read more
I’ve been reading several books on Encore Careers, second acts and the like. A few weeks ago, we reviewed Marc Freedman’s The Big Shift. Over a one-week break in Florida, I read Freedman’s earlier book, Encore, subtitled Finding Work That Matters In the Second Half of Life.
Work that matters
If you believe that living to 100 is a distinct possibility rather than a one-in-a-thousand outlier event, then it follows that financial planning needs to take these extra years into account.
All these books start with the premise that the baby boom generation may end up living a lot longer than they may have once imagined, which goes double for their own children and the generations coming after them.
Freedman’s Encore does suggest that a lot of American boomers (that’s the book’s focus) may need to keep working in part because of limited financial resources, but as the subtitle suggests, it’s mostly about finding “work that matters” in the second half of life.
There’s a lovely quote Freedman uses at the outset, attributed to Marge Piercy in the book “To be of use”:
The pitcher cries for water to carry and a person for work that is real.
A new stage of life
Freedman suggests there’s an entire new life stage between MidLife and what used to be called Full Retirement. This phase may begin after either an involuntary or voluntary departure from paid employment in giant corporate or government organizations. It could last 20 years, meaning there’s enough time to reinvent oneself and find an entirely new career, even if that means going back to school to qualify for it.
“The emerging reality looks like this: Retirement as we have known it is in the midst of being displaced as the central institution of the second half of life. It is being supplanted by a new stage of life opening up between the end of midlife and the arrival of true old age, a period that essentially amounts to the second half of life, at least adult life. And that’s just the half of it: The new phase under development is every bit as much a new stage of work.”
Funding Encore Careers
Freedman describes some Encore acts that were funded by raiding 529 plans, which are the equivalent of Canadian RESPs (Registered Education Savings Plans). Canadian RRSPs (like IRAs in the US) are similarly well-suited since the government has made it possible to tap retirement savings for higher education, as long as the money is eventually repaid.
All this also is strongly connected to the other blog category over at our sister site, The Financial Independence Hub, which we call Longevity & Aging. Read this post from last week on Why Longevity Changes Everything: Why you should think twice about Early Retirement.
Great online resources
But back to Encore. This is one book I’d suggest buying as an e-book because the appendix contains many pages of useful web links to useful resources in government, education, health, the non-profit sector and much more. I’ve touched on a few here:
Retirement Jobs: http://www.retirementjobs.com
Nonprofit Times: http://www.thenonprofittimes.com
Exploring Careers in Aging: http://www.exploringcareersinaging.com
Troops to Teachers: http://www.proudtoserveagain.com
The American Medical Association: http://www.ama-assn.org/ama
The Career Key: http://www.careerkey.org/