Most people know that by naming beneficiaries for their life insurance policies, RRSP’s, RRIF’s and TFSA’s, the proceeds of these assets on their deaths fall outside their estates, avoiding probate fees.

A better alternative for TFSA’s is to name your spouse as a successor holder. This allows the TFSA proceeds on your death to pass directly to your spouse’s TFSA. If you name your spouse as the beneficiary, there’s no direct transfer of your TFSA to your spouse’s TFSA. A form has to be filed with CRA, and any gains from the time of your death until the proceeds are transferred to your spouse’s TFSA are taxable.
You should contact your investment advisor and check if you’ve named your spouse as a successor holder.

Over the last few months during meetings with my clients and their investment advisors, some of the clients have been advised not to make further contributions to their RRSPs. I don’t understand the rationale for this advice.

The investment advisors are telling the clients they’ve built up large amounts in their RRSPs and when they’re forced to start withdrawing funds at age 71, the income will be taxed at the highest rate of tax.

When people make their RRSP contributions, they’re usually saving tax at a high tax rate. Once the funds are inside the RRSP, there’s no tax on the income until amounts are withdrawn. This means all the income can be tax sheltered until age 71. Once a person turns 71, the statutory amounts required to be withdrawn are relatively low. The remaining amount in the RRSP will continue to earn income on a tax deferred basis.

Given how long people are living, you could defer taxes on the income generated in the remaining RRSP for twenty to thirty years after you’ve turned 71. I’ve always told clients to maximize their RRSP contributions for as long as they can. I can’t see any reason to change that advice.

I’ve never written about managing your income before. Most people’s idea of a financial plan is to spend everything they earn and “hope everything will turn out OK.” It’s hard to have the discipline to save money and pay down debt. It’s a bit like controlling your eating habits and exercising regularly. We all know it’s good for us, but it’s very difficult to do.

Initiate a plan to live off less than 100% of your income. Decide how much you can cut back and manage on e.g. 85%, 90% or 95%% of what you earn. Have the money you won’t be spending transferred directly from your bank account. We always find ways to spend the money in our bank account, so remove it.

Most people will usually say they can’t live off less income. If this is how you feel, start by living off 95% of your income. Once you’ve made your decision, restrict your spending to your available cash flow. When you receive a bonus or an increase in your income, don’t automatically increase your spending habits. Try the alternative route of increasing your saving habits and increase the percentage of your income you’re saving!

Try it. It will feel awful at first, but it works!

Last month I wrote about investing in alternative investments.  Over the last few years there’s been an increasing amount of product introduced to the market.  These investments differ greatly in quality. One such tool that traders may use to find value stocks is the stock screener penny stocks. It selects from among the thousands of equities that are tradeable on the market the tickers that match your filter criteria. This generates a list of several stocks, which you may further investigate to determine their valuation.Careful consideration must go into investment decisions. Here are some questions you should consider before investing in private Mortgage Funds:
 
1.  Are any mortgages held on properties in the US?  If there are, how much of the exposure to US currency has been hedged.  Do you want exposure to foreign exchange risk with this type of investment?
 
2.  Are any mortgages held on properties that are pre-construction or in construction?  In a downturn in the real estate market, these types of mortgages would be more illiquid and vulnerable to collectability.
 
3.  According to companies like Braga Buildings NJ, typically, mortgages on pre-construction and in construction properties yield a higher rate of return than mortgages on homes and commercial properties because of the risk.  If investors only receive the “the standard 7%” from the Mortgage Fund, where has the extra yield on these types of mortgages been spent?
 
4.  What is the default rate on the mortgages in the Fund.  If the default rate is high, for any reason, it should cause alarm bells to ring.  You should be concerned about what could happen when a correction occurs in the real estate market.
 
5.  Do the financial statements of the Mortgage Fund clearly disclose the loan to value? The loan to value compares the total of the mortgages to the total value of the properties the mortgages are held on.  Obviously, the higher the loan to value, the greater the risk. 
 
I suspect very few investors read financial statements before making an investment or review them annually.  In fact, many people don’t have the financial acumen to understand the nuances of financial statements.
 
Don’t make an investment because your friends and colleagues are making similar investments.  It’s up to you and your advisors to do due diligence before investing, and to review financial information on a regular basis.  Only invest with people you have complete confidence in.  Don’t invest in alternatives with money you might need within the next two years.
 
This is not an all-encompassing checklist.  It includes a few questions to consider.  There are many more.  Ask your accountant/financial advisor to review the financial information of the Fund before making an investment.

I’m sure you’re aware of the severe decline in the equity markets in the last quarter of 2018. In mid-December I was involved in numerous meetings with investment advisors. Each of them had a rationale for what had happened and why their clients should be pleased they lost less than the benchmark!

The advisors got paid and the investors lost money. Sounds like a good deal for the advisors! I’ve grown increasingly skeptical about the public markets over the last couple of years. Consequently, I’ve significantly increased the percentage of our investible assets in alternative investments for which we recommend this guide on how to generate w7 form to handle taxes.

Alternative investments are not publicly traded. Examples are mortgage funds, syndicated mortgages, real estate development projects, real estate limited partnerships that own rental properties, and limited partnerships that own operating businesses. Many of the alternative investments provide an attractive annual income.

These investments aren’t impacted on a daily basis by Brexit, Trump and the crazy world we live in. The general view is that the biggest negative of alternative investments is that they aren’t liquid. Actually, as long as I don’t need the liquidity, I see this as a positive. I accept my funds are tied up for a number of years and don’t waste time and energy checking the latest prices.

I’m not suggesting you sell your entire equity portfolio. Consider reducing your exposure to the public markets through purchasing some alternative investments. Before making a purchase, as with any investment, you need to do your due diligence on the product and the people behind it.

Over the last few years we’ve experienced increasing personal tax rates in Canada and significant tightening of tax planning opportunities. The personal tax rates are the highest I’ve experienced over the last forty years.

The government continue to allow private companies to establish health spending accounts. These vehicles allow a company to deduct medical expenses it reimburses it’s employees for. Different levels of reimbursement can be set, depending on the seniority of the employee.

These plans are particularly attractive to entrepreneurs and their families. Frankly, the medical tax credit isn’t worth much and the expenses which qualify are restricted. A health spending account permits the reimbursement for a broader list of medical expenses, which the company can deduct for tax purposes.

A health spending account isn’t for everyone. Each person’s situation is different. If you own a company, I recommend you discuss the benefits of the company having a health spending account with your professional advisors.

I’ve written before about checking insurance premiums when they’re due for renewal. I recently received a renewal notice and challenged my insurance advisor to review it. I thought the premiums were too high.

Insurance advisors are very busy with many clients. They don’t have the time to review each policy when it’s up for renewal. They don’t know if your circumstances have changed. The result of challenging my insurance advisor was that I switched insurance companies and obtained a significant reduction in my annual premium.

You need to take responsibility to review your policies every year. Too many people don’t even look at the renewal notice when they receive it and pay it automatically.

Happy New Year and best wishes for 2019.

Why don’t you make a new year’s resolution to take an in depth look at the fees being charged by your investment advisors? At this time last year we heard these fees were going to be more transparent. My experience has been that you still need to obtain a complete understanding of the fees you’re charged.

I recently met with a new client and one of her investment advisors. We were told the fees were based on 1% of the value of the portfolio. Her portfolio included individual shares and investment funds. When I asked whether there were fees within the investment funds, I wasn’t surprised to hear there were.

By adding the fees charged within the investment funds and the fees charged by the investment advisor, the fees totaled 1.5% of the value of the portfolio. My client was under quoted by 50% on the fees she was being charged! I wasn’t impressed.

You should find out, and quantify, exactly what fees you’re being charged by your investment advisors. Then reflect on whether you’ve received value for money.

This Tip will be of interest to those of you who own companies that have earned passive income in prior years. Passive income consists primarily of interest, dividends and rental income.

Some technical tax changes will be introduced in the near future, and it might be beneficial to withdraw funds from your company through a dividend.

The bottom line is that if you haven’t been contacted by your accountant, you should speak with her/him before the end of the year and ask if these changes impact your company.