19 February 2016

Roller Coaster Market and Debts

Roller Coaster Ride


Do you sometimes feel the stock market is like riding a roller coaster? Because that’s exactly how it felt like the last few weeks. It’s like how you feel during the Christmas season. All the highs of the season, the Christmas jingles, the lights, the cold winter air, the parties, everyone greeting Merry Christmas to each other. Then after Christmas, comes the crash, the quietness and the realization that you have a ton of credit card bills to pay when it arrives in January.

It’s certainly has been an interesting January we’ve had so far with the stock market. The S&P500 was down 5.07% for the month of January. It came crashing down until the 3rd week of January then started going up until the end of the month. Then suddenly, it started going down again until it hit bottom on February 11 and is now almost back to the high of February 1, 2016.

I normally write a something to my clients whenever I see s big market drop. However, I sort of hesitated writing this because every time I sit down to write it, the market has turned (either up or down). This kind of market reminds me of something I read from one of Warren Buffett’s letter for shareholders. It goes like this.

“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.”

It take a lot to ignore the news on the media about the stock market. But most successful long term investors ignore the short term noise and concentrate on their long term goals. Another way investors are successful is making sure they have the proper asset allocation in their portfolio. This means they have the proper mix of stocks and bonds.

One thing I think to most of my client’s portfolio is to reduce the volatility.

Volatility is defined as the degree of variation of a trading price series over time as measured by the standard deviation of returns. That’s quite a mouthful isn’t it? But I guess the simplest way to explain volatility is how much the price goes up and down over a period of time.
For example, we have ABC Corp. whose stock price over 1 year may range from +30% to -40% and for XYZ Ltd, it may range from +10% to -5%.

So in this situation, ABC Corp. is more volatile because the there’s a 70% range from the highest it normally goes to the lowest it can go over a period of time. XYZ Ltd on the other hand only has a 15% range.

Over a long period of time, say 10 years, you may earn a higher rate of return on ABC Corp. compared to XYZ Ltd. So your $10,000 investment in ABC Corp may turn out to be worth $500,000 in 10 years while your XYZ Ltd investment could only be $100,000.

When someone is asked to choose which investment they would prefer, one that gives you $500,000 in 10 years or $100,000 in 10 years without showing them the volatility, most people would choose ABC Corp.

However, there is a saying that volatility is only good, as long as it’s going up. What most people forget is that volatility also goes down. So they’re ok with high volatility, as long as they see their investment go up. But once it starts going down, they suddenly realize they don’t like volatility.

I’ve seen this happen several times and I know this as well from my own experience. Ever since the Financial Crisis of 2008, I have taken steps to reduce the volatility of my client’s portfolios. In some cases, the volatility of a client’s portfolio is half to less than half of the general market. So if the market is up 10%, their portfolio may only be up 5%. But if the market is down -20%, their portfolio may only be down -10%, sometime less.

This eliminates the need to keep a close eye on the market every day and helps my clients sleep better at night knowing their investment is somewhat safer than the gloom and doom you hear from the media about the stock market.

Of course, there is no guarantee this will always be the case, as we have all learned from 2008, if all hell breaks loose, there is no safe place to hide other than being in 100% cash. But by the time you hear about it in the news, it’s probably too late to do anything other than wait.

What happened in 2015?

The Canadian market (S&P/TSX) was basically down the whole 2015. Down -11.81% for the year.

Because of the drop in oil prices, it dragged the Canadian dollar down with it since we are a major oil exporter. You may find it confusing as to why gas prices is still high even though oil prices is down. While Canada is an oil exporter, we do not refine the oil into gasoline. It has to be transported to the US or other countries where it is refined and turned into gasoline and then sold back to Canada in US Dollar. Since the US Dollar is high, our gas prices still remains high.

Most equity funds invested in the Canadian market was either flat or down in 2015. If your Canadian investment did better than -11.81%, your investment did well even if it went negative since you didn’t lose as much. Even if your return on your Canadian based investment was -5%, then it means that your fund manager was doing his or her job protecting your wealth.

Consequently, the US market (S&P 500) was flat for the year, returning only 0.69% in 2015. However, most global, international and U.S. equity funds did very well. Some even returning over 15% in 2015. You may think your fund manager did really well. However, you have to remember that the Canadian Dollar went down -15% against the US Dollar in 2015. You would have made 15% return on your fund even if it was all invested in cash.

Funds that are invested internationally or in the US have to convert your Canadian Dollar investment into US Dollars before they can invest it. Then it is converted back into Canadian Dollar when it is sold.

There are basically two ways a fund invests in the US or International markets. One is called Hedged where they buy options to remove or reduce the currency fluctuation in your fund. The other is Unhedged, where there is no protection on currency fluctuation on the funds.

So your Unhedged investment in an American fund would probably have made around 10 to 18% in 2015 just because of the exchange rate. If you happen to have a Hedged American Fund, your return would probably be flat. This is not necessarily mean your fund manager is good or bad, it’s just something they have no control over.


So what can we expect in 2016? Probably more of the same as 2015. Some economist and fund managers say that we may see the Canadian market start to bounce back since it was one of the worst performing market in 2015. This was due mostly to the low price of oil. Alberta is the province that’s hurting the most as it lost a lot of jobs because of that.

Some report say we may be in a bear market this year, while others say the economy is strong. As always, it’s better to ignore the noise in the market and make sure you have a portfolio that is properly allocated to your situation.

The recent report states that Canadian credit card debt is rising, with an average debt load of $3,610. That’s not very good.

While interest rates are still low, rising home prices makes mortgage balances higher as well. Which will take the average Canadian a long time to pay off that mortgage. Basically, not very good news if you’re in debt.

Meanwhile, reported inflation is 2%, but a report came out today that the cost of vegetables went up 26.2% last year. I don’t know about you, but the way prices are rising now, it doesn’t feel like the cost to live in Vancouver is only up 2%. MSP premiums alone went up by 4.17% compared to 2015.

The government reported inflation or CPI is what the government uses to determine how much your CCP, OAS, GIS and other government benefits goes up to. But the best way to determine inflation is to look at what you spend your money on.

My advice to my clients this year is to make sure they pay off their debts and mortgages while the interest rates are low. That way, you don’t get caught off guard if interest rates suddenly have to go up. At this low interest rate environment, the money lent to you by the banks is practically free money to buy your home. Don’t waste this opportunity by using the money to buy unnecessary things. Pay it off as fast as possible.

If you have some credit card debts, you may even want to consider consolidating your debts into one with low interest payments.

Finally, keep your expenses low and save any extra dollar you can. Make sure you have a lot of cash or emergency fund saved up. In case we do see a bear market somewhere, this could be a great opportunity to buy up some good bargains.

22 April 2015

TFSA, RRIF and other changes from the 2015 Federal Budget

Here are the personal tax changes from the Federal Budget yesterday.


The TFSA was introduced in 2009 as a way to save and invest for your future on a tax exempt basis. Contributions to a TFSA is not tax deductible but gains, income and withdrawals are tax free. Originally, the TFSA started with a $5,000 limit subject to inflation adjustments of $500 increments. Because of this, the TFSA limit from 2009 to 2012 was at $5,000, but changed to $5,500 from 2013 to 2014.

The new 2015 budget proposes to increase the TFSA annual contribution limit to $10,000 effective immediately and going forward. However, the annual contribution limit will no longer be indexed to inflation but will be increased only if legislated.

So if you have never contributed into a TFSA, you can now contribute up to $41,000 as long as you have been 18 years old since 2009.

You can invest your TFSA into a variety of investments like stocks, bonds, GICs, mutual funds and segregated funds.


A RRIF is the reverse of an RRSP wherein you're supposed to start withdrawing from your RRSP once you retire or reach age 71, whichever comes first. When you withdraw from your RRIF, there is a required minimum that you need to take out. This is because after years of deferring your taxes, the government now wants to tax those money.

However, Canadians are living longer and have been delaying retirement as well. Some are working past 71 years old or have other income and are forced to withdraw from their RRIF. Currently, you are required to withdraw 7.38% of your income from your RRIF when you reach age 71. Their income plus their RRIF withdrawal could bump them up to their next tax bracket.

The new budget proposes to adjust the RRIF minimum withdrawal from age 71 to 94. The proposal will lower the required minimum from 7.38% at age 71 to 5.28%. This will allow people to preserve more of their RRIF assets while they age as well as continuing to benefit from tax deferred growth within the plan.

Employment Insurance (EI) Premium Relief

The budget estimates that by 2017, the EI employee premium rate will reduce to $1.49 per $100 of income from $1.88, a 21% reduction. This will benefit employees and employers on EI contribution.

This will occur as a result of the sever-year break even EI premium rate setting mechanism. This mechanism ensures that EI premiums are no higher than what is needed to fund the EI program.

T1135 Reporting-Foreign Income Verficiation Statement

If you own foreign investments whose total cost exceeds $100,000 at any point in the year, you need to complete and file form T1135 *Foreign Income Verification Statement* when you prepare your tax return.

Foreign property that's reportable includes money in foreign bank account like in the US, Singapore, etc. It also includes rental property in the US or other countries. Also included are foreign stocks like Apple or Google that are held in your Canadian, non-registered brokerage account. It excludes foreign securities held in a Canadian mutual fund or inside an RRSP, RRIF, RESP or TFSA and personal property such as a vacation home.

There is a simplified reporting system where the foreign property is over $100,000 and under $250,000. For foreign assets over $250,000, a more complex reporting system is required.

Check out this link for more details

Other Changes

  • Expansion of the Universal Child Care Benefit as of Jan 1, 2015. Increasing it to $160 per month for each child under 6 years of age and creating a new benefit of $60 a month for children aged 6 to 17 to replace the Child Tax Credit.
  • Introduction of the Family Tax Cut which allows the transfer of up to $50,000 of taxable income to a spouse for a family with children under 18 -- but the tax credit is capped at $2,000.
  • Child Care Expense Deduction limit raised in 2015 to $8,000 for children under 7 and $5,000 for children aged 7 to 16.
  • Doubling of Children's Fitness Tax Credit to $1,000.
  • Canada Student Grant will be made available to low and middle income students enrolled in educational programs with a minimum of 34 weeks.
  • Reduction in the expected parental contribution under the Canada Student Loans Program and elimination of "in-study student income" so that students can work while attending school without having to worry about a reductio nin their financial assistance.

19 December 2014

Registered Disability Savings Plan (RDSP)

There’s a good chance that you are related to, or know someone with a disability. There are 3.8 million Canadians or 13.7% of the Canadian population aged 15 or older that are reported to having some form of disability.

Canada has a good savings and benefit program in the form of government grants and bonds, but many people who qualify for the disability program are not aware that Canada has a Registered Disability Savings Plan (RDSP).

While we are all probably familiar with Registered Retirement Savings Plan (RRSP) and Registered Education Savings Plan (RESP), very few have heard of the RDSP.

The RDSP is a vehicle for tax-deferred growth and a “matched” savings plan for people with a severe and prolonged disability. For Canadians who qualify, the RDSP is a great way to achieve long-term financial security.

Who qualifies?

To qualify for the RDSP, the beneficiary of the program (the person with the disability) must meet four criteria. He or she must:

- be under the age of 60
- be a Canadian resident
- have a valid Social Insurance Number
- be eligible for the Disability Tax Credit (DTC)

The best way to find out if you or someone you know might be eligible for the Disability Tax Credit (DTC) is to see your doctor who can fill out a CRA form (T2201) to make that determination. If a person meets the other three criteria listed above but hasn't done the DTC paperwork, he or she can still open the RDSP while the DTC paperwork is in progress but if CRA denies the DTC application, the RDSP will have to be closed and any bond or grant received will have to be returned to the government.

The Bonds and Grants

Just like an RESP, there are bonds and grants available in an RDSP. As of 2013, here is what's available:

The Canada Disability Savings Bond

If the family income of the beneficiary is $25,356 or less, the government deposits $1,000 bond each year to the RDSP. The government will deposit the bond into the RDSP without the beneficiary having to contribute anything.

If the family income is between $25,356 and $43, 561, a prorated bond is available. CRA has a formula based on the age of the beneficiary to calculate the amount.

For families with income of more than $43, 561, no bond is available.

The Canada Disability Savings Grant

If the beneficiary's family income is $87,123 or less, the government will match 300 percent of the first $500 contributed to the RDSP up to $1,500 per year.

For the next $1,000 contributed to the plan, the government will match 200 percent up to $2,000 per year.

For example: If $1,500 is contributed to the RDSP and the beneficiary's family income is under the threshold of $87,123, the government will give a grant of $3,500.

     $  500 contribution x 300% = $1,500 grant
     $1,000 contribution x 200% = $2,000 grant
     Total                        $3,500 grant

If the beneficiary's family income is over $87,123, the government will match 100 percent of the first $1,000 contributed up to $1,000 per year.

Family income is based on the household income if the beneficiary is under 18 years of age. If the beneficiary is 18 or over, the family income is based on his or her income, and that of their spouse, if any.

Limitations of the RDSP

There are a few limitations and restrictions to know about with the RDSP. First, there are the contribution limits:

Maximum Disability Bond is $1,000 per year
Maximum lifetime Disability Bond that can be received is $20,000

Maximum Disability Grant is $3,500 per year
Maximum lifetime Disability Grant that can be received is $70,000

Maximum lifetime contribution limit is $200,000

There is no limit to the amount that can be contributed to the plan in a year.

If a person has qualified for the RDSP since its inception in 2008 but hasn't started one yet, it may be possible to 'catch up' on missed bonds and grants. If you're starting an RDSP and want to find out about how much you're eligible to catch up, call the government's RDSP hotline at 1-866-204-0357.

Unused Grant and Bond entitlements: “The carry-forward measure”

Unused Grant and Bond entitlements from the past 10 years (starting in 2008) can be claimed for existing RDSPs, or RDSPs opened in January 2011 or later.

To apply for unused Grant and Bond entitlements, the beneficiary must currently be eligible to receive the Grant and the Bond. Applications can be made until the end of the calendar year in which the beneficiary turns 49.

The amount of Grant and Bond eligibility depends on the beneficiary's family income in those years. The Grant amount received also depends on how much is contributed to one's RDSP. The matching rate will be the same as the one that would have applied if the contribution had been made in the year in which the Grant entitlement was earned. Matching rates will be paid on RDSP contributions using up any Grant entitlements at the highest available rate first, followed by any Grant entitlements at lower rates.

Grants and bonds will be paid on the unused entitlements up to an annual
maximum of:

• $10,500 for grants; and
• $11,000 for bonds

The maximum amount of Grant paid over the beneficiary's lifetime is $70,000.

The maximum amount of Bond paid over the beneficiary's lifetime is $20,000.


Here’s an example of how the carry forward measure works. Let’s assume the family income for the beneficiary is below $25,356. If you start an RDSP on 2014 (which is after January 2011), you can carry forward unused grants and bonds starting in 2008. You can deposit $3,500 and get all the maximum grants and bonds, here’s the breakdown:

2008 to 2014 is 7 years

$500 per year x 7 years = $3,500 contribution

You can get $1,500 (300%) of grants for every $500 you contribute

$1,500 grants x 7 years = $10,500 (annual maximum)

Plus $11,000 bonds (annual maximum)

     Contributions  $3,500

     Grant         $10,500 ($1,500 x 7 years) annual maximum
     Bonds         $11,000 annual maximum
     Total         $21,500

So by putting in $3,500 on the first year, the beneficiary can potentially get a total of $21,500 of grants and bonds.

On the 2nd year of the plan, you can put around $5,000 to get another $21,500 of grant and bonds. It will not be $3,500 because the way the grant works for the carry forward is they will use all the 300% match first. Since you’ve already used them up on the first year on the 2nd year it works this way.

First $500 gets $1,500, the balance of $4,500 ($5,000 - $500) gets a match of 200% or $9,000. The outcome is

     Contribution   $5,000

     Grant         $10,500 ($1,500 + $9,000) annual maximum
     Bonds         $11,000 annual maximum
     Total         $21,500

This is just an example of someone whose family income is below $25,356. The person’s individual grant and bond entitlement will be different depending on their family income as they are calculated based on their income in each year going back to 2008. So if at any time from 2008 to present, the beneficiary’s income goes over the minimum, then the bond entitlement is adjusted accordingly. The grant doesn’t get adjusted until the family income goes over $87,123.

Time Limitations

Registered Disability Savings Bond and Grants can only be received up to the end of the year the beneficiary of the plan turns age 49. Any contributions after that will not receive any grant or bonds.

The last day to contribute to the RDSP is the end of the year the beneficiary turns 59.

Like the Registered Retirement Income Fund (RRIF) which must be withdrawn no later than age 71, the RDSP must also be withdrawn at a certain age. The beneficiary of the RDSP must begin collecting from the plan at age 60.

The biggest restriction on the RDSP is the penalty for withdrawing the money early. A beneficiary can request a payment from the RDSP at any time in the form of a Disability Assistance Payment (DAP) but if the beneficiary withdraws money from the plan prior to age 60, there is a claw back of three times the amount of the withdrawal or to the maximum Assistance Holdback Amount (AHA). The AHA is the total amount of Disability Bonds or Grants received in the 10 years preceding the date of the DAP withdrawal.

When it's time to take out the money


Contributions are not tax deductible like an RRSP. It’s more like a TFSA where money invested into the RDSP is after tax dollars.

At age 60, when it's time to start receiving income from the RDSP, the money will be taxed in the hands of the beneficiary, who presumably will be in a low tax bracket. The payments will be received in the form of Lifetime Disability Assistance Payments (LDAP) and will consist of three parts: contribution, bonds & grants, and growth.

When the beneficiary withdraws from the RDSP, contributions or money invested are not taxable or added to the income of the beneficiary.

Only the Canada Disability Savings Grant, Canada Disability Savings Bond and the investment earnings portion of the LDAP in the plan are included in the beneficiary's income for tax purposes when they are withdrawn out of the RDSP.

Each withdrawal is a blend of taxable and non-taxable amounts.


In summary, you can contribute to an RDSP until Dec 31st of the year the beneficiary turns 59.

The beneficiary can only open an RDSP if they qualify for the Disability Tax Credit (DTC).

You will only get the grant and bonds until Dec 31st of the year the beneficiary turns 49.

Contributions made are not taxable

Grant, bonds and investment growth is taxable to the beneficiary.