The National Post asked me to share my insights on the smartest, most tax-efficient strategies for young Canadians looking to build wealth.

This article is part of a special series aimed at Millennial and Gen Z investors who are focused on long-term financial growth.

Some key points that are covered in the article:

• The power of starting early & compounding.
• Why you should prioritize investment quality over tax efficiency.
• Using registered accounts strategically.
• How do RRSPs, TFSAs and First Home Savings Accounts (FHSAs) work?
• Should you prioritize RRSP, TFSA or FHSA if your income is modest or low?
• Is the First Home Savings Account (FHSA) a good option for first-time buyers?
• How can you invest to both minimize taxes and maximize long-term growth?
• Why does a financial plan make you wealthier?

CLICK THE LINK BELOW TO READ THE ARTICLE BY MARY TERESA BITTI:

How to take a tax-smart approach to long-term savings

Ed

The post National Post Article: How to take a tax-smart approach to long-term savings appeared first on Ed Rempel.

A couple are about to buy a house in the next couple of months, but their money is in their First Home Savings Account (FHSA).

They are not sure when to withdraw their money.

They are worried that if they keep the money in the FHSA until they have a deal, it might cause a delay in getting the full downpayment and closing.

On the other hand, they don’t want to withdraw before they have a home, as they’re afraid the withdrawal may not count for the FHSA if they don’t close.

As a financial planner for Global News’ Money123 online email newsletter, I answer reader questions about investing, managing your finances, and planning for your future.

In the latest email to subscribers, I give this couple my advice on the best timing to withdraw from the FHSA, so they don’t incur any penalties.

By the way, my answer is at the bottom of the email newsletter.

Here’s a link to the Global News Money 123 email newsletter with what I recommend: https://globalnews.ca/newsletter/10690531/

The Question:

“I have a question about withdrawals from the first home savings account. My wife and I are in the market for a home and hope to buy in the next couple of months. I’m worried that keeping the money in the FHSA until we have a deal might cause a delay in getting the full downpayment and closing? But then I’m worried about withdrawing before we have a home and running into an issue where we end up waiting longer and the withdrawal not counting properly if we don’t close. Is there any wiggle room on when we can withdraw from the FHSA before knowing when we close on a home? What penalties would there be if we miss that window?”

— A Money123 reader 

Ed’s Answer:

“It is worthwhile for you to wait until you have a finalized agreement to buy your home before withdrawing from your FHSA. If you do not have a written agreement to buy, then the amount you withdraw is all taxable to you. The entire purpose of an FHSA is to get a tax refund when you contribute, but then withdraw tax-free to buy your home.

You should not have to worry about getting your withdrawal out on time. You only need to have your financial institution fill out the withdrawal form. Unless you have investments that are locked in, you should be able to do a qualifying withdrawal from your FHSA as quickly as a normal withdrawal from any registered account.

Possession date on a home purchase is usually a couple of months or more after you finalize the purchase, which gives you lots of time for your withdrawal. Your lawyer will want a minimum two to four weeks before possession for his legal work, which should be more than enough time for a withdrawal.

The rules are quite flexible in the timing of your withdrawal. The possession date can be any time up to Oct. 1 of the year after your withdrawal and you can withdraw up to 30 days after possession.

Make sure you are confident your home purchase should go through. If you withdraw from your FHSA and then the purchase falls through, you cannot reverse the withdrawal.

Once your agreement to buy your home is finalized and all conditions are waived, then you should be fine doing your withdrawal.”

Ed

The post Money123 Article: Buying a House? Timing Your First Home Savings Account (FHSA) Withdrawal appeared first on Ed Rempel.

Many people today feel they have no choice but to be a tenant, however, what if you actually choose this? 

You can choose to be a tenant forever and it can be a great life!

I’m going to introduce you to the concept of “Tenant Freedom,” to show you how great of a life it can be.

Watch my latest YouTube video and listen to my podcast episode to find out:

• The advantages of owning vs. renting your home.
• What you need to buy a home.
• How to be much wealthier as a tenant.
• 5 steps to a great life with Tenant Freedom.
• What is the “Tenant’s RRSP”?
• Do tenants have a Smith Manoeuvre option?
• The growth mindset for Tenant Freedom.

Advantages of Owning a home

Owning a home offers stability and peace of mind, providing autonomy over renovations, decor, and building equity over time. However, the financial barriers to homeownership can be daunting, requiring substantial down payments and high-income qualifications.

• Stability. Peace of mind. Can’t be kicked out.
• You decide about renovations & yard.
• Build equity. Eventually have a paid-off home. (Forced savings).
• Grows in value tax-free.
• Leveraged investment (mortgage for 80%).

Advantages of Being a Tenant

On the flip side, renting offers unparalleled freedom and flexibility. Tenants enjoy the ease of relocation, especially in the era of remote work, and often pay lower monthly expenses compared to homeowners. With no responsibility for maintenance or repairs, tenants can easily pursue career opportunities in different cities without being tethered to a single property.

• Freedom. Easy to move. Live anywhere. (Work from home from anywhere).
• Don’t need to save a huge down payment.
• Lower overall payments. (Rent is usually lower than mortgage. property tax, utilities, condo fees & maintenance).
• Not responsible for maintenance or repairs.
• Easier to take better jobs in other cities. (Studies show tenants get more promotions in other cities).
• Buying a home can be impossible for many.

Challenges of Homeownership

The path to homeownership is laden with financial hurdles, including saving for a sizable down payment and qualifying for a substantial mortgage. With rising real estate costs outpacing income growth, many aspiring homeowners find themselves priced out of the market.

What You Need To Buy A Home

1/ Large down payment.

Should be at least 20%: $150,000-$200,000 or more.

2/ Qualify for a large mortgage.

• Mortgage $500,000-$1 million or more.
• High income to qualify.
• Credit rating.

You Need 5x Average Income To Buy A House!

Average Canadian earns $54,000.

Stats by National Bank & Sean Cooper, personal finance journalist & mortgage broker.

Is Canada Becoming A Nation of Renters?

Introducing “Tenant Freedom“

Tenant freedom is about embracing the choice to rent for life and leveraging it as a wealth-building strategy. By redirecting the funds earmarked for a down payment into diversified stock investments, tenants can potentially outpace the growth of real estate equity.

“Tenant Freedom”

Tenant for life by choice.
Live a great life!

New advantage of Tenants

Tenants can be much wealthier than homeowners!

Real Estate Growth is lower than stock market

Average Annual Growth (since 1975)

Growth

•Real estate (Toronto)    6.4%

•Stocks (Canada)    9.4%

•Stocks (Global)  10.1%

•Stocks (US)  11.0%

For growth investors, real estate is dead equity.

5 Steps To Tenant Freedom

1/ Save the 20% down you for a home, but invest it in stocks.

In 25 years, have 1.5 or 2 times the equity of a paid-off home.

2/ Rent for less than the total cost of owing a home.

• Rent usually less than mortgage, property taxes, utilities, condo fees & maintenance.
• Rent condo for $500-$1,000/month less than owning.

3/ Freedom. Rent wherever you want.

• Rent the home you would want to buy.
• Close to work. No commute.
• Amenities.
• Close to entertainment.
• Close to family or friends.

4/ Financial independence/Retire early (FIRE).

Retirement nest egg far larger than homeowners.

5/ Tenant Freedom growth outlook.

• Have a growth mindset.
• Open to better jobs in other cities.
• Work from home in fun cities.
• Retire anywhere – Low tax country or vacation destinations.

Other Issues

• Many people feel you should buy a home.
• Solid way to build wealth.
• Tenant Freedom: You can have much higher wealth.
• Home is forced savings & forced discipline.
• With Tenant Freedom, you need your own discipline.
• Homeowners have leveraged growth.
• 20% down & 80% mortgage is 4:1 leverage.
• Tenant Freedom: Can do a 3:1 investment loan.
• Many tenants feel powerless against landlords.
• Tenant Freedom: You have money. You have the power!

Tenant Investment Strategies

Tenants can utilize investment vehicles like the “Tenants RRSP” (FHSA) to accumulate wealth tax-efficiently. Additionally, tenants can explore leveraging investment loans to amplify their portfolio growth, akin to the homeowners’ Smith Manoeuvre.

Where to invest your “Down Payment” portfolio?

1/ “Tenants RRSP” = FHSA

• FHSA: First Home Savings Account.
• Designed to save for down payment.
• For tenants: $40,000 free RRSP room for life.
• $40,000 tax-deductible contributions then move to RRSP
• $40,000 RRSP room that homeowners do not get.
• FHSA is perfect for tenants for life.

2/ RRSP Home Buyer’s Plan (HBP)

• Borrow from RRSP for down payment.
• For tenants: Leave in grow in your RRSP.

3/ TFSA. Tax-free Tenant Freedom.

Can’t homeowners use their dead equity?

Growth investors have higher growth strategies: for homeowners or tenants.

Yes. Homeowners can do effective strategies like Smith Manoeuvre.

• Use their dead equity to grow more wealth.
• Convert mortgage to tax-deductible credit line over time.
• Great wealth-building strategy:
• For the right people done the right way over the long term.

Tenant Freedom – Tenants can also use leverage to grow larger wealth over time.

• Use your lower monthly payments for an investment loan.
• Or have investments pay interest.
• Or pay tax-deductible interest yourself as a super RRSP alternative.
• Up to 3:1 investment loan. Triple your “down payment” portfolio.
• Tenant Freedom 3:1 loan. Great wealth-building strategy:
• For the right people done the right way over the long term.

Embracing a Growth Mindset

A growth mindset is pivotal for long-term financial success. By thinking long-term, having a financial plan, and embracing risk tolerance, tenants can navigate market fluctuations and capitalize on buying opportunities.

What People with a Growth Mindset Do

1/ Think long-term.

2/ Have a Financial Plan. Live on purpose.

3/ Learn the skill of a higher risk tolerance.

4/ High equity allocation. Usually 100% equities.

5/ Consider leverage.

• Great wealth-building strategies. Not for everyone.

6/ All market declines are buying opportunities.

7/ Faith. Patience. Discipline.

Choosing to be a tenant for life by choice unlocks a world of financial possibilities and lifestyle flexibility.

By reframing renting as a strategic decision rather than a compromise, individuals can embark on a path to tenant freedom—a life enriched by financial abundance and personal autonomy.

Ed

The post Tenant for Life by Choice: 5 Steps to “Tenant Freedom” appeared first on Ed Rempel.

Nina Dragicevic from The Canadian Press recently interviewed me about renting for life as a real option and what it means for your financial planning. 

In today’s housing market, many young people and even people in their 40s see purchasing a home as unattainable.

I work with high-income clients who don’t always own their home, and instead put their money into investments.

For instance, I advised a successful actor who was considering buying a condo in Toronto to rent for now, as it gives him the flexibility and freedom to move around for work.

Financially, if you only take the 20% down payment for a home and invest it in equities, it grows to more than the full value of the home after 20 years. 

This means a disciplined renter can be more wealthy than a homeowner.

Other points you’ll learn:

• Why the financial benefits of homeownership are almost entirely leverage. 
• Why paid-off homes are a low return investment. 
• How renters can leverage through investment loans. 
• How a renter could potentially become more wealthy than a homeowner.

CLICK THE LINK BELOW TO READ THE ARTICLE BY NINA DRAGICEVIC:

Renting for life? Here’s what that means for your financial planning

Exploring saving targets for people who don’t expect to own a home.

If someone is in their 20s and 30s now, how much should they expect to save, anticipating a retirement in 2060? And how to set that up now.

Renting is up in every age group.

Save for retirement:

Get a Financial Plan to define the life you want and know exactly how to achieve it.

• How much to invest, how to invest, how to minimize tax, & what strategies to do.
• Financial Plan should be custom. Same process for renters as owners.
• Renters need more investments at retirement to pay for their rent rising by inflation.
• For owners, their home is not a retirement asset and not part of the retirement plan, unless they will sell & move to a much less expensive place. Many homeowners talk about downsizing, but within the same city, the proceeds are a rounding error. Reducing your house size by 50% to buy a bungalow might clear $200,000.

Need growth in investments. Equities. Young with a long time horizon.

• Save like you are buying, but invest it instead.
• Save the 20% down for a home urgently, but invest it.
• Renting is usually cheaper per month, plus you don’t have repairs or renovations. Invest that difference monthly.
• Toronto condos cost $300-500/month more than rent before the interest rates tripled last year.

No loss of future net worth: Investing just the 20% down payment in global or US stocks typically takes 20 years to grow to the full future value of a home. 

Based on actual stock market returns & actual Toronto house prices.

• Homeowners tend to spend a lot on renovations over the years, which typically add only  30-50% to the value of the home. Renters can save all that money.

Benefits of homeownership:

• Forced savings. You must make payments every month.
• Leverage. Mortgage of 4x down payment. Real estate with no mortgage is usually a low return, barely higher than GICs.
• You can get a 3:1 investment loan on your equity portfolio. Then it grows your net worth far faster than owing a home. You have to pay the interest + your rent, but the interest is tax-deduction, while home mortgages are not.

Freedom vs. security 

Renting offers freedom to live anywhere any time. Owning gives you more of a feeling of security, but makes you less flexible.

• Homeowners get stuck living in an expensive city. Renters can move anywhere, find a growing city with good jobs and far lower rent.

Career

Studies show renters tend to get promoted faster, especially in large companies with offices in many cities. 

Homeowners often decline or are not offered promotions in other cities. You can look for better jobs anywhere.

Ed

The post Canadian Press Article: Renting for life? Here’s what that means for your financial planning appeared first on Ed Rempel.

You should open up an FHSA Account this year!

This is for you if you don’t own a home now or in the last four years and are age 18 – 71.

You get contribution room starting the year you open your FHSA, but if you wait until next year you lose that room.

The deadline is December 31.

An FHSA Account is the # 1 way to save for a home down payment if you buy within the next 15 years. You get a tax deduction for contributions, and withdraw tax free to buy your home and you don’t have to repay it.

Just open it. You don’t have to contribute.

More reasons in this post.

Watch the YouTube #short and listen to the podcast for more.

I hope you enjoy it!

Ed

The post Why You Should Open an FHSA This Year appeared first on Ed Rempel.

Want to get serious about your finances?

Every day I talk to people who come to see me for financial advice because they’ve come to a point where they realize – “I should probably do something smarter with my money, but I’m not quite sure what.”

When you get to that point, what do you do? 

What are the most important things to know about investing?

How do you manage your money based on your life goals and priorities?

My latest blog post, YouTube video and podcast episode is an overview of financial planning to help you figure out where to start, so you can spend and invest your money in smart places based on your values, and what’s going to give you the best leverage for the future.

1/ Spend less than you make.

• Not a budget. Just understanding your income & what your lifestyle costs.
• Decide on your cash flow – You are not on a treadmill. Control.
• Live intentionally.

2/ Pay yourself first.

Try to save at least 10-20% of your gross income.

3/ Understand your values. What’s important about money to you?

Freedom. Security. Independence. Self-confidence. Control. Fun.

4/ You have many goals. Decide on your priorities. Focus on 1 or 2.

• Move out and get your own place – Freedom.
• Buy a car – Freedom.
• Buy for 50% less.
• Spend money enjoying life with friends. – Fun.
• Pay off student loan. – Usually lowest priority. – Security.
• Buy a home. – Security.
• Start long-term retirement savings. – Security, independence, freedom.

5/  Manage debt wisely.

• Your credit rating is an important asset. Equifax or TransUnion.
• Avoid high interest debt. Credit cards have hidden “Gotcha!”
• Low-rate debt that finances growth can be good – mortgage or investment loan.

6/ How to save for & buy your home. Security.

•  Avoid being “house poor”. Buy home that allows you to still save 10-20% of your income.
• Try to avoid CMHC with 20% down.
• For example, condo for $500,000, $100,000 down.
• Get mortgage preapproval to see what you qualify for.
• FHSA first. $8,000/year. Save $40,000, or $80,000 for a couple.
• Then HBP. Save $35,000, or $70,000 for a couple.

7/ Magic of compounding. Rule of 72.

8/ Have a retirement goal. Financial independence.

• Make it Your goal. Not what other people might want.
• Interactive Financial Plan.
• Sample retirement plans.
• Bad news – You need a lot more than you think.
• Good news – You can get there by investing a lot less than you think.

9/ Invest effectively. Learn to have a higher risk tolerance.

•  Asset allocation – Stocks, bonds, cash. Define.
• Risk tolerance questionnaire is not who you are. It is a learned skill.
• Risk tolerance – Ability to do nothing when your investments go down.
• Most people buy after investments are up & sell after they are down.
• Markets move in cycles. Trends always reverse.
• You need 7-8%/year long-term to retire comfortably.
• Equities are the highest return asset class.
• Equities are reliable long-term. Learn about it.
• Avoid “home country bias”.
• Invest in global or US equities – broad indexes (S&P500 or MSCI World Index) with low-cost ETFs or index funds OR invest with All Star Fund Managers.
• Most fund managers lag the market – Mostly because of trying to get “reasonable returns with less risk” and not trying to beat the index.
• Some fund managers have 15-30-year track records beating the index. We think it’s skill.

10/ Borrowing to invest is the secret to major wealth. “Leverage”.

• Amount of dollars invested is the secret.
• Leverage is risky.
• You have to pay loan even if investments go down.
• Only do it if you commit to 20+ years to have a very high chance of success.
• Smith Manoeuvre
• Lifecycle Investing
• Rempel Maximum

Ed

The post Top 10 Things to Know to Be in Control of Your Finances appeared first on Ed Rempel.

What’s new for your 2022 tax return?

In my blog post I’m going to give you insight into what’s happening in the Canadian tax world.

Get the inside scoop on the “new” items from CRA and those being discontinued.

If you haven’t done your taxes yet or you’re thinking ahead to next year, find out how to get the best tax refund.

You will learn:

• How today’s high inflation affects your taxes.
• How the work from home (WFH) trend affects tax returns.
• How to save tax on Covid-19 benefits you had to repay.
• New tax credits & deductions this year.
• What deductions & credits are discontinued in 2023?
• What’s the difference between a tax deduction and a tax credit?
• How to estimate your tax refund from a deduction or credit.
• How to avoid CRA scams.
• Effective use of the FHSA – the “Renter’s RRSP” coming in 2023.
• Why are Ed’s clients getting such huge tax refunds this year?

Here are the important changes:

Inflation:

Most tax brackets & limits have been increased by 6.3% for inflation.

It was 2% from 1992-2020.

Higher tax brackets mean you can get a raise for inflation and stay in the same tax bracket.

• Deductions give you a refund based on your marginal tax bracket.
• Tax credits give you a refund based on the lowest tax bracket – 20%.

Repaying Covid-19 benefits (deduction):

Most of these benefits continued into 2022. 

You should receive a T4A for any of the benefits you received and a deduction for amounts you repaid.

• There was little or no tax withheld from these benefits or from EI, so if you received them, you should expect to owe some tax or get a smaller tax refund.
• If you repaid federal COVID-19 benefits (CERB, CESB, CRB, CRCB, or CRSB) in 2022 that you received in 2020 or 2021, you can:
• Claim the deduction on line 23210 of your 2022 return.
• Claim the deduction on your return for the year that you received the benefits. Decide which year to claim the deduction on form T1B. Claim the deduction in the year that you have the highest taxable income or are in the highest tax bracket.

Home office expenses (deduction):

You have always been able to claim employment expenses that are detailed on a T2200 form signed by your employer. You can claim any expenses that your employer specifically allows on the T2200.

For 2022, there are 2 options available, like last year. If you worked from home because of Covid for at least 4 consecutive weeks, each spouse can claim one of these or the T2200:

• Flat rate method: Claim up to $500 each with no employer form or need to keep receipts. Claim $2/day for up to 250 days when you worked more than 50% from home. Enter # of days on our Tax Summary Sheet.
• Detailed simplified method: Claim detailed expenses with simplified T2200S form signed by your employer. Fill out Work-space-in-the-home and Work from Home sections of the Business or Employment Expenses Worksheet. You can only claim space in the home, office supplies and cell phone with this simplified form. If you have more expenses, you will need the full T2200 from your employer to detail them.

There are no proposals to extend the flat rate method or the T2200S simplified form for 2023.

For 2023, likely only the full T2200 form will be available. It asks many questions and some employers hesitate to fill them out.

Many people are still working from home (WFH) and this has become long-term in many cases. The T2200 form will likely be used extensively for 2024 and future years.

If you work from home, talk to your employer now to make sure they will fill one out for you – and that they will include all the expenses you pay, such as space in your home, car expenses, cell phone & internet.

If your main office is at work, then driving to work is considered personal. If your main office is at home, then driving to work now & then can be tax-deductible.

Get your employers HST or GST number. It gives you a larger refund, because you can claim the HST or GST on work from home expenses.

New tax credit for disabled:

Lots of tax credits for disabled. Many people don’t know about them.

One of the most under-claimed credits is the caregiver tax credit. If your spouse, child, grandchild, parent, grandparent, brother, sister, uncle, aunt, niece, or nephew has a physical or mental impairment (not clearly defined) with day-to-day living such as food, shelter or clothing and their income is below the basic personal exemption ($14,000), you can claim the caregiver credit between $2,350 and $7,525.

Home Accessibility Tax Credit (HATC): If you’re 65 or older, are eligible for the disability tax credit, and have remodeled your home for safer access, the tax credit has been increased to $20,000 of your expenses.

New deduction for tradespeople & construction employees:

Labour Mobility Deduction (LMD): New deduction. Allows tradespeople, apprentices, and employees working in construction to claim meals & lodging expenses paid to earn income at a temporary work location.

Limit $4,000/year or 50% of earnings at that location.

3 new Tax Credits for Ontario (most provinces have other ones):

Ontario Staycation Credit: A one-time tax credit for Ontario to claim 20% of your stay in an Ontario hotel, cottage or campground during 2022 up to $1,000 individually or $2,000 as a family.

This credit was for 2022 only for the pandemic reopening. Gone for 2023.

Ontario Seniors Care at Home Tax Credit: A refundable personal income tax credit to help seniors with eligible medical expenses that support aging at home. The credit is equal to 25% of your eligible medical expenses up to $6,000, for a maximum credit of $1,500.

Variety of other provincial tax credits:

First-time home buyer’s tax credit: The tax credit has increased to $10,000.

Sign-up for CRA My Account: It is worthwhile to be set up with CRA My Account. It allows you to see the figures & slips CRA has for you.  If you are missing any T-slips, such as T4s, T4As or T5s, you should be able to download and print them from the CRA site.

• You might get free money if they ever sent you a cheque that got lost. Check “Uncashed Cheques”.
• Avoid CRA scams by logging into My Account instead of clicking on any links in emails you receive.

Tax-Free First Home Savings Account (FHSA). We call it the “Renter’s RRSP”: 

Expected to be available by mid-2023. Contribute up to $8,000/year for up to 5 years ($40,000 total) if you do not own a home. 

Contributions are tax-deductible in addition to your RRSP room. If you use it to buy a home, you can withdraw tax-free (in addition to the Home Buyer’s Plan for RRSPs). 

If you don’t buy a home or ever intend to, you can keep the tax deductions and merge your FHSA into your RRSP. Best account to save for a home. Free RRSP room for renters.

Huge refunds for our clients. 

Our clients are paying more in tax-deductible interest with interest rates rising 7 times last year, especially the clients with large investment loans. Many refunds between $20,000 and $90,000!

How do you get a huge tax refund?

• Refinance your home and make a huge RRSP contribution.
• Smith Manoeuvre + large investment loan, such as $1 or $2 million.

If you get a large tax refund, do something smart with it. Don’t just spend it.

Ed

The post What’s New for Your 2022 Tax Return appeared first on Ed Rempel.

A financial plan is really a life plan to think through what you want to do with your money and life. This is why the wealthy need a Financial Plan, just like everyone else.

What lifestyle do they want to live and what do they want to do with their money? How comfortable of a lifestyle can they afford?

The only difference between a financial plan for the middle class versus wealthy investors is the numbers are bigger and their ideas may be bigger.

You will learn:

• Why wealthy people still need a Financial Plan.
• How are financial plans for wealthy people different?
• How to pass money to your kids in a sensible way.
• Should you use life insurance policies to shelter you from tax?
• How to invest in a fee-efficient way.
• How should wealthy people think about GICs?
• How should wealthy people think about speculative investments?
• How to split income in your holding corporation with your spouse after retirement.
• Why thinking about your entire portfolio & withdrawal rate is more effective than looking at the parts.
• How should the wealthy most effectively manage a lot of investments?

CLICK THE LINK BELOW TO READ THE ARTICLE BY MARY TERESA BITTI:

B.C. couple has plenty of money, but even the wealthy need a coherent financial plan

JACK is 57 years old, married with three adult daughters in British Columbia.

Spending about $300,000/year now, which should drop to about $210,000/year when his mortgage comes due and he pays it off from his bonds. Retirement lifestyle is today’s lifestyle minus the mortgage & kids’ costs, plus a bit more for buying a car every few years & travel (longer trips they want to do in addition to the family trip). They will need about $300,000/year before tax to provide the $210,000/year after tax retirement lifestyle.

At the end of 2019, he sold his interest in a professional services firm he and his business partners had built over the course of 20 years generating a one time $20m pre-tax gain.  Tax’ in the amount of $4m have been paid.

As an owner in a private company Jack created a separate holding company and trust structure to separate his personal assets from those of the business. The family’s investments are spread across three corporate entities. Now that he’s exited the businesses, segregating holdings into multiple entities is more complicated than necessary.  Jack has a plan to amalgamate the three companies into a single holding company, which will generate mostly passive income from investments and consulting/contracting fees he and his spouse/ partner earns.

Questions for the planner:

Do we have enough money to keep us going in a comfortable lifestyle based on the things we want to do?

Yes. Need retirement income about $300K/year. Need about $8.5 million investments. Have $11.8 million. Ahead of goal by $3.3 million or 40%.

This is based on balanced investments averaging 5%/year long term.

Risk: If they lose $4 million or more from their private & early-stage investments, then they may not be able to fully support their desired retirement.

How can I pass some money to my three kids before I die in a sensible way?

Yes. Suggest $8,000/year to each of their FHSAs to help them with a house. Possibly max their TFSAs as well. $14,000/year x 5 = $70,000. They should each get about $8-12,000 in tax refunds they should save. Total $80,000 down payment for each. Plus anything they save.

Warren Buffett: “Give kids enough so they can do anything, but not enough that they can do nothing.”

Worthwhile having the kids learn to save. Financial independence is about learning money skills. Possibly offer to match their TFSA contributions.

If Jack wants to control the investments, contribute to an “In Trust For” (ITF) account in parents’ names ITF the kids. If they invest for growth, there is little or no tax, because capital gains are taxable to the kids. Then give it to them when he thinks they are ready.

Should I fund the life insurance policies to shelter some investment income and use them to protect the value of my estate that will transfer when I pass?

No. Paying for life insurance they don’t need with after-tax corporation income. Not for paying tax – just a larger estate. Net worth today is $20 million, so his wife or the kids would already get this. It is large enough already and could be more than $40 million if he lives a normal life.

$1.5 million life insurance is insignificant & expensive.

Premium at least $2,000/month just for the insurance. He needs to make about $43,000/year before tax to pay the premium. If he lives to age 85, he will have to earn $1,250,000 to pay the cost of insurance portion of the premium. That’s more than the benefit.

Premium in a universal life policy is the cost of insurance + investment all with the same insurance company (therefore probably lower return than if he can invest anywhere).

Insurance salespeople like to focus on tax-free growth & tax-free estate as a good sales pitch. However, insurance policies have disadvantages:

• They have to pay 2% tax on the premium (all contributions).
• You can defer tax in other ways with buy-and-hold investments focused on growth.
• Returns inside a policy are probably lower because of limited choice.

Insurance policies that are not needed are usually only beneficial for very conservative investors and for money that they definitely will never want to use during their life.

Is there a more fee efficient way to invest the proceeds of the business sale than mutual funds, given the amount of investible assets?

Mutual funds = hiring a fund manager. Fees can be worthwhile if the fund manager has enough skilled.

Inefficiencies that drag down their returns are in GICs & tax-efficiency, balanced mutual funds, bank (large institution) mutual funds that may not have top managers.

They will probably be in a 45% marginal tax bracket, even with effective income splitting, so trying to avoid the highest taxed interest income is a good tax savings.

Either invest with top fund managers or buy broad index ETFs.

Recommend: Invest with an independent portfolio manager (ICPM). They are elite investors. Only people in investment industry with a fiduciary duty to do what is in your best interest. Most investment choices. Look for a PM with track record outperforming the index that appears to be skill to be able to pay for their fee.

Investments now are spread with a few advisors and some self-managed. It’s a bit of a hodgepodge.

Wealthy people should focus on top investment management, not low fees. It is return after fees that matter – not the fees themselves.

Really, where should I park the capital that’s currently sitting in GIC’s, other than the $1m laddered which I think of as a base of fixed income in the overall portfolio to offset the high-risk early-stage investment funds.

Mental accounting. He can access cash for short-term cash flow from any of their investments.

Fixed income is lower income. Fixed income is what seniors complain about. Cost of living is likely to at least triple in their lifetime. A fixed income is not adequate & highly taxed (45% for them).

Pay out capital dividend of $3.5 million by moving some investments to personal. Pay out least tax-efficient investments, which are the GICs, because of passive income tax inside corporation.

Pay out total corporate investment income every year to avoid passive income tax of 50%.

RBC Income Builder GIC is just return of capital – really a SWP. It’s a GIC that gives you a part of your principal back every month. This is not a return. Not efficient. Can do this with any investment – just sell some investments every month.

Reliable income from withdrawing 3.5%/year, given balanced investments. (A bit less than 4% Rule, which requires 70-100% equities.)

Investments are mostly balanced or income-focused & Canadian dividend-paying stocks. Appears to own quirky investments that advisors like to make sales pitches about. Not top fund managers. Best to invest based on sound, long-term investments, not trendy concepts.

Decide on risk tolerance and related sustainable withdrawal rate for their entire portfolio.

Hire top ICPM (investment counsel portfolio manager) (PM) & decide on overall portfolio target investment return & risk level. He is doing it piecemeal. One PM can most effectively invest entire portfolio.

Other recommendations:

Split investment income inside his corp with his wife. If it’s a holding company only, then there is no issue with the TOSI rules (tax on split income to family members). Is his wife a shareholder of the corporation?

They need to make a return of at least 5%/year long-term to live well. Don’t get too conservative.

He is comfortable & somewhat knowledgeable about growth, so investing for reasonable growth can make sense.

Have an independent portfolio manager look at his overall portfolio. Stop doing it piecemeal.

A financial plan and estate plan can help them think through the big picture:

• How comfortable of a lifestyle do they want in retirement?
• How much do they want to leave for their kids?
• What do they really want to do with their money not needed for their existing lifestyle?
• Their estate in 30-40 years could be $30-50 million.
• They have more than they need and would have even more if they invest more effectively. What do they want to do with it? Travel a lot more? Luxury travel? Give more to kids? More angel investing? Donate to worthy causes?

A Financial Plan is really a life plan to think through what they want to do with their money and their lives. The only difference between a financial plan for the middle class versus wealthy investors is the numbers are bigger and their ideas may be bigger.

Ed

The post Financial Post Article: B.C. couple has plenty of money, but even the wealthy need a coherent financial plan appeared first on Ed Rempel.

There is a brand new type of account in Canada coming out in April 2023.

It’s called Your First Home Savings Account (FHSA) aka The “Renter’s RRSP”.

You may know about RRSPs & TFSAs, well this is the third one, and it’s worth knowing because for many people, this is going to be the best place to put your money.

It’s also the # 1 way to save for a home.

In my latest video, I give you the top 15 hacks to get the maximum benefit from this new account, so that you can save money not just for a home, but for other purposes as well.

Watch this video & you will be an FHSA expert. Find out:

• What is an FHSA?
• Why were FHSAs created?
• The #1 way to save your down payment.
• Why are FHSAs called the “Renters’ RRSP”?
• Why you should open one this year even if you are not yet saving for a home.
• What’s the difference between an FHSA and the RRSP Home Buyer’s Plan?
• Should you contribute to your FHSA, RRSP or TFSA?
• Should you claim or defer the deduction for your FHSA contribution?
• What’s the difference between an FHSA and a virgin? (1^st FHSA joke)
• Why FHSAs make a great gift for your spouse or kids.
• FHSA uses for self-employed business owners with a corporation.
• The FHSA hack for the GIS Strategy for retirees.
• FHSA uses for non-residents.
• How to contribute $2,500 more to your FHSA with “FHSA Top-up Strategy”.
• What to do if you have no extra cash flow to invest.

I hope you enjoy it!

Ed

The post Top 15 Hacks for Your First Home Savings Account (FHSA) aka The “Renter’s RRSP” appeared first on Ed Rempel.