Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

Tax season doesn’t have to be taxing with proper and timely planning

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By Aurèle Courcelles

Special to Financial Independence Hub

Tax time can be overwhelming, but a financial advisor can help simplify the process and ensure you’re maximizing all the credits and deductions available to you and your family. While financial planning should take place year-round, there are important considerations, strategies and dates that should be top of mind at year-end to help reduce your taxes and keep more of your hard-earned money in your pocket.

 

Year-End Tax Planning Checklist for Individuals 

 

      • Saving for retirement with a Retirement Savings Plan (RSP)

Most of us know making an RSP contribution is generally a sound decision if you have unused room available. Once you’ve decided to contribute settled on how much, you should then determine whether it’s best to contribute to your own plan or a spousal RSP for your spouse or common-law partner. Making a spousal contribution before the end of the year rather than waiting until the first 60 days of next year could affect who pays tax on eventual withdrawals.

  • Planning your retirement income

Speak with a financial advisor to discuss retirement income options, including basing your Retirement Income Fund (RIF) withdrawals on the age of your younger spouse or common-law partner. Determine if you qualify for the pension income credit, which may allow you to significantly reduce federal taxes (provincial credit amounts vary) on the first $2,000 of your pension or RIF income. If you have or will reach age 71 this year and have unused RSP contribution room, you should make your RSP contribution by December 31 or you may lose that option.

  • Tax-Free Savings Accounts (TFSAs)

You should always consider contributing to a TFSA to take advantage of tax-sheltered savings. The contribution limit for 2023 is $6,500 and rising to $7,000 for next year, but don’t forget about any unused contribution room that is carried forward from year to year. Gifting money to your spouse or common-law partner to make their contribution can also provide additional tax advantages. The sooner you contribute to a TFSA, the faster your investments can grow tax-free. Meanwhile, if a TFSA withdrawal is in your plans, doing so before year-end rather than early in the new year gives you back your contribution room a lot sooner.

  • Registered Education Savings Plans (RESPs)

Contributions to an RESP entitle you to a Canada Education Savings Grant (CESG) of up to $500 per year, or $1,000 if there is unused grant room from previous years. If you’ve accumulated even more than $1,000 of room, making an RESP contribution prior to year-end will allow for more combined grants this year and next. Speak with a financial advisor to help you maximize your CESG.

  • Home Buyers’ Plan (HBP)

The Home Buyers’ Plan allows you to borrow funds from your RSP to purchase your first home, so long as you purchase the home before October 1 of the year following the withdrawal and all withdrawals are made in the same calendar year. Repayment of the withdrawals begins two years following the year of the withdrawal. Delaying your withdrawal to next year rather than late this year will allow more time to purchase a new home, make more withdrawals if necessary and delay the start of required repayments.

  • Considering taxes when realizing gains or losses on your investments

If you have or will realize capital gains in 2023, consider triggering capital losses prior to the end of the year. Losses can offset gains, reducing any taxes that could otherwise be associated with those gains.  If your 2023 capital losses exceed your capital gains, they can be applied against gains in any of the previous three years to help you recover taxes paid on those gains.  Speak to your financial advisor prior to repurchasing any investment you sold at a loss, as doing so too quickly puts the loss at risk of being denied.

Key Strategies to Enhance Charitable Giving

December is synonymous with the season of giving, but many Canadians miss out on giving in the most tax-efficient way. Whether it’s a continuation of donations made throughout the year or an initial donation, there are several strategies to consider when donating prior to year-end.

  • Maximize the value of donation tax credits

The first $200 of donations you claim on your tax return receive a lower donation tax credit rate than donations claimed above $200 (except in Alberta). To limit donations subject to the lower $200 credit rate outside Alberta, consider bringing forward donations planned early in the new year and make them prior to December 31st.  Not only will the charity get the funds sooner, but you’ll get the tax benefit a full year earlier. Continue Reading…

The Revival of the Balanced Portfolio

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Photo via BMO ETFs: AI generated by Pixlr

By Alfred Lee, Director, BMO ETFs

(Sponsor Blog)

The 60/40 portfolio has been long considered the prototypical balanced portfolio. This strategy consists of the portfolio investing 60% of its capital to equities and the remaining allocation of 40% in fixed income.

The two segments in the portfolio each have its unique purpose: equities have provided growth and fixed income has historically provided stability and income. When combined, it allowed a portfolio to have stable growth, while generating steady income.

In the last decade, however, the 60/40 portfolio has been challenged on two fronts. The first has been due to the lack of yield available in the bond market, as interest rates have grinded to all-time lows. As a result, many looked to the equity market to generate higher dividends in order to make up for the yield shortfall left by fixed income.

The second shortcoming of the 60/40 portfolio has been the higher correlation between bonds and equities experienced in recent years, which has limited the ability for balanced portfolios to minimize volatility.

However, the resurgence of bond yields in the recent central bank tightening cycle has breathed new life into the 60/40 portfolio. Suddenly, bonds are generating yields not seen since the pre-Great Financial Crisis era. A higher sustained interest rate environment also means a slower growth environment; that means equity risk premiums (the expected excess returns, needed to compensate investors to take on additional risk above risk-free assets) will be lower. This means fixed income may look more attractive than equities on a risk-adjusted basis, which may mean more investors may allocate to bonds in the coming years. Fixed income as a result, will play a crucial role in building portfolios going forward and its resurgence has revived the balanced portfolio.

Investors can efficiently access balanced portfolios through one-ticket asset allocation ETFs. These solutions are based on various risk profiles. In addition to the asset allocation ETFs, we also have various all-in-one ETFs that are built to generate additional distribution yield for income/dividend-oriented investors. Investors in these portfolios only pay the overall management fee and not the fees to the underlying ETFs.

How to use All-in-One ETFs  

  • Standalone investment: All-in-one ETFs are designed by investment professionals and regularly rebalanced. Given these ETFs hold various underlying equity and fixed income ETFs, they are well diversified, and investors can regularly contribute to them over time. Continue Reading…

Retired Money: Some upsides of inflation for retirees

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My latest MoneySense Retired Money column looks at one unexpected upside of inflation; the government’s indexing to inflation of tax brackets, retirement savings limits and OAS thresholds. You can find the full column by clicking on the link here: Inflation a scourge for retirees? Ottawa’s silver lining(s)

TFSA room rises to $7,000

Fans of the popular Tax-free Savings Account (TFSA) will experience this as early as Jan. 1, 2024, when the annual maximum contribution room rises to $7,000, up from $6,500 in 2023. As of January 2024, someone who has never before contributed to a TFSA now has cumulative contribution room of $95,000.

In November Kyle Prevost’s weekly Making Sense of the Markets column included an item titled Make inflation work for you.  “We shouldn’t ignore or discount the more advantageous aspects of inflation, such as increased government benefits and more contribution  room in our RRSPs and TFSAs.”

Prevost linked to a spreadsheet posted on X (formerly Twitter) by financial advisor Aaron Hector, posted late in October, after the CPI announcement that Ottawa’s official inflation indexing rate for 2024 would be a sizeable 4.7%. While below 2023’s 6.3% indexation rate, it’s well above 2022’s 2.4% and 2021’s 1%.

Also quoted in the MoneySense column is Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial. “One of the main benefits is paying less taxes.” Income tax brackets increase with inflation each year. For example, in 2021 the lowest tax bracket in Ontario ended at $45,142 of income. “Starting in 2024, this lowest tax bracket now ends at $51,446. This is a 14% increase over just a few years.” Continue Reading…

Don’t take Buffett Literally but take him Seriously

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Image Creator: Fortune Live Media Credit: Fortune The Most Powerful Women

By Noah Solomon

Special to Financial Independence Hub

Warren Buffett is widely regarded as one of the best stock-pickers in history. Among the Oracle of Omaha’s most famous pieces of investment advice is “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”

It goes without saying that when it comes to investing, it is impossible never to lose money. Even the longtime Berkshire CEO has occasionally taken his lumps. This begs the question of what Buffett meant by his statement. To best interpret the Oracle’s words, I took an actions speak louder than words approach and analyzed his historical returns over the past 30 years ending December 2022.

Unsurprisingly, Buffett & Co. trounced the S&P 500 Index, delivering a 13.1% compound annual rate of return vs. 9.6% for the benchmark. Had you invested $1 million with the Oracle rather than in the Index, your investment would have grown to $39,883,361, exceeding the benchmark investment’s value of $15,843,412 by a whopping $24,039,949 (it’s with good reason that people call him the Oracle!).

Moving beyond the headline numbers, the specific pattern of Berkshire’s returns is highly anomalous. In years when the S&P 500 Index had a positive return, Buffett’s performance tended to be undifferentiated. On average, for every 1% the index rose, Buffett’s holdings gained almost exactly the same amount. Clearly, the Oracle’s massive outperformance doesn’t come from knocking the lights out in good times.

In stark contrast, in years when the S&P 500 Index fell, Buffett gained 4.2% on average (no, that’s not a mistake!). This does not mean that the Oracle never loses money. In 2008, Berkshire declined 31.78% vs. 36.0% for the S&P 500. However, in down markets he has either tended to lose far less than the Index or not suffer any losses. The latter occurred during 2000-2002, when the Oracle gained 29.7% vs. a decline of 37.6% for the Index.

John Kelly & Fortune’s Formula: An Unsung Hero of Investing

Very few business school graduates or investment professionals have heard of the Kelly Criterion, which was developed in 1956 by American scientist John Kelly. Despite its relative obscurity and lack of mainstream academic support, the Kelly Criterion has attracted some of the best-known investors on the planet, including “Bond King” Bill Gross, Renaissance Technologies’ James Simons, Warren Buffett, and Charlie Munger (may the great man rest in peace).

The first well-known user of the Kelly Criterion is legendary investor and grandfather of quantitative finance Edward O. Thorp, who referred to it as “fortune’s formula.” He used Kelly’s theory to develop a system for calculating the odds and altering one’s bets accordingly in blackjack, which forever changed the game. Thorp then launched investment firm Princeton Newport Partners (PNP), which produced an annualized return of 15.8%, as compared to 10.1% for the S&P 500 Index. PNP achieved this return with 75% less volatility than the market and lost money in only three of its 230 months in operation.

The Kelly Criterion seeks to maximize long-term wealth by optimally adjusting the amounts of capital to commit to investments as their expected returns and risks fluctuate. Importantly, the formula dictates that you should increase your allocation when the odds are more favorable and curtail your commitment as the odds deteriorate. The imperative of adjusting one’s stance in response to changing circumstances was also espoused by the father of modern macroeconomic theory John Maynard Keynes. When criticized for being inconsistent during a high-profile government hearing, Keynes responded “When the facts change, I change my mind. What do you do, sir?”

Interestingly, this premise stands in stark contrast to the traditional approach to money management, whereby client portfolios maintain a fixed allocation to stocks, bonds, etc., regardless of changes in the market environment or economic backdrop.

What Does John Kelly Have in Common with Warren Buffett?

Having stated that “Our favorite holding period is forever,” Buffett is well known for buying quality companies and holding them for the long term. However, there is another, lesser-known side to the Oracle’s approach which harbors a more than subtle resemblance to Kelly’s.

In her book, “The Snowball: Warren Buffett and the Business of Life,”  author Alice Schroeder explains that Buffett’s best opportunities have always arisen during periods of crisis and uncertainty. In Buffett’s view, the opportunity cost of holding cash is low when compelling investment opportunities are few and upside is limited. Conversely, when downside is limited and compelling prospects are abundant (typically during the uncertainty that reigns during or after a market crash), the opportunity cost of holding cash becomes unjustifiably high. At such times, investors should aggressively deploy their cash holdings into assets that offer higher returns. This sentiment is well-summarized by Buffett’s assertion that “Cash and courage in a time of crisis is priceless.” Continue Reading…

Interac predicts busiest shopping day of the year next Friday, as holiday gifting stress looms

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Image by Pexels, Jill Wellington

By Nader Henin, Interac Corp.

Special to Financial Independence Hub

As Canadians shop for last-minute gifts and search for deals, our Interac transaction data predicts that the busiest shopping day of the year will fall this year on December 22nd.

According to the transaction data, nearly 27.8 million purchase transactions are expected to take place next Friday (Dec. 22), representing roughly 2.7 million more transactions than the same date last year.

While Canadians are still planning to partake in gift giving, hosting, and more this holiday season, they’re feeling the constraints of today’s economic climate. Recent Interac survey* findings reveal that nearly four in ten Canadian shoppers (38 per cent) say they are feeling the pressure to spend during the holiday season even though their finances are tight.

Our survey revealed this phenomenon is felt as well among newcomers to Canada. Nearly seven in ten newcomers (69 per cent) say they feel more pressure to spend money around the holidays now that they live in Canada. What’s more, 71 per cent say their financial stress during the holidays has grown since moving to this country.

Amid rising prices, the holidays can be a stressful time of year. More than two thirds of Canadians (68 per cent) say they’re stressed about at least one aspect of spending during the holiday season and some sources of stress beat out others. Among those who are stressed, our survey shows us that buying gifts (77 per cent), spending money hosting and entertaining family and friends (41 per cent) and giving money to family members (34 per cent) are the top sources of stress.

For newcomers who are experiencing at least some holiday spending stress (82 per cent), spending money travelling to visit family and friends (48 per cent) is a prominent stressor.

As stressful as holiday spending can be, there are ways to make things a little easier:

Plan ahead

Try creating a gifting budget well in advance of any spending plans to help stay on track. Where possible, you can also look for a sale, consider a refurbished item or tap into purchases that make you and those around you feel good. You can also lean on Interac Debit to track your payments easily and take charge of your own money

Share the love, split the cost

When purchasing gifts for loved ones, organizing festive outings or hosting your family and friends, split the cost using Interac e-Transfer. Sharing the cost is one of the best ways to make sure you’re maximizing fun while staying in control of spending.

Embrace experiences

The holidays are a time to get together with friends and family and enjoy one another’s company. Consider sharing in an experience, rather than giving a physical gift. Interac research shows us that feel-good experiences are more likely to deliver happiness than material goods.

Continue Reading…