Tag: ZLC

It’s RRSP and TFSA season again

Registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) are always topical at the beginning of the year. And, for anyone considering these options, there are two primary considerations right now: what new available contribution room you may have for your TFSA, and that you have the first 60 days of the year to make an RRSP contribution against your previous year’s income.

To help you understand the differences between the two tax-sheltered investment vehicles, we put together a general FAQ. However, before going over the mechanics, we want to stress how important it is to use these programs in your financial plan. There is almost no circumstance where it would make sense to hold investments that generate growth or income in a non-registered account rather than in a TFSA.

As an example of the power of the RRSP, we ran some numbers to consider. This is based on a high-income earner, age 30, and compares saving within an RRSP and investing the resulting tax savings as well, for 41 years, until age 71, and then cashing it all in and paying tax thereon, versus simply saving in a non-registered account.

In the example, the individual invested $24,000 per year in a portfolio that generated an income of 5% per year. We used a tax rate of 50%. At age 71, the after-tax cash savings in the hands of the individual, having used the RRSP program, is $808,000 greater than the traditional non-registered plan.

As you can see, the advantage of the RRSP is extremely significant and cannot be overstated.

TFSA basics

The tax-free savings account program began in 2009 to provide Canadians with an account to contribute and invest money tax-free throughout their lifetime. Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed, as well as any income earned in the account (investment income and capital gains) are tax-free, even when it is withdrawn.

The allowable contribution room for a TFSA has changed over the years, and can be seen in Table 1.

TFSA has many important features:

  • to have one, you must be 18 years of age or older with a valid social insurance number,
  • there is a tax-free accumulation of income and gains,
  • you have tax-free withdrawals – at any time, for any reason,
  • they have no impact on income-tested benefits such as child tax benefits and guaranteed income supplement,
  • you can invest in any RRSP-qualified investment, such as mutual funds, ETFs, stocks, GICs, etc.,
  • the interest on money borrowed to contribute is not tax-deductible,
  • no attribution rules apply – it’s good for income splitting between spouses and can be transferred to the surviving spouse’s TFSA if they are the designated beneficiary,
  • to avoid penalties, you must be careful to not over-contribute, and
  • you can recontribute amounts withdrawn in previous years, and there is a 1% penalty per month if recontributed in the same calendar year.

RRSP basics

The registered retirement savings plan program was introduced by the Canadian government in 1957 to help Canadians save for retirement. All income accumulates on a tax-deferred basis and contributions are deducted against your taxable income in that particular tax year. As of 2020, the RRSP deduction limit is 18% of your earned income, to a maximum of $27,230. You should always check this amount with your accountant and/or CRA.

The important features of an RRSP include the contribution period, which is from Jan. 1 to the 60th day of the following year, and that the maximum age to contribute is 71. There is no minimum age for contributing, but, starting in the year after the year you turn 71, you must start making specified annual withdrawals from your RRSP, which now becomes a registered retirement income fund (RRIF).

The Home Buyers’ Plan (HBP) allows you to withdraw from your RRSP to buy or build your first home. In this case, the money must be in the RRSP for 90 days before withdrawal is permitted, and you can withdraw up to $35,000. Regarding repayment of the withdrawal, participants must repay 1/15th per year (starting in year 2), with the total amount paid off in 15 years.

The Lifelong Learning Plan (LLP) allows you to withdraw funds from your RRSP to finance full-time training or education expenses for you or your spouse or common-law partner. You can participate in the LLP for yourself, while your spouse or common-law partner participates in the LLP for him or herself; you can both participate in the LLP for either of you; or you can participate in the LLP for each other. Withdrawals of up to $10,000 in a calendar year and up to total of $20,000 are permitted, and participants must repay 1/10th of the amount withdrawn per year, with the total amount paid off in 10 years.

Philip Levinson, CPA, CA, and Brent Davis are associates at ZLC Financial, a boutique financial services firm that has served the Vancouver community for more than 70 years. Each individual’s needs are unique and warrant a customized solution. Should you have any questions about the information in this article, visit zlc.net or call 604-688-7208.

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Disclaimer: This information is not to be construed as investment, legal, taxation or account advice, nor as an offer to sell or the solicitation of an offer to buy any securities. It is designed only to educate and inform you of strategies and products currently available. The views expressed in this commentary are those of the authors alone and are not necessarily those of ZLC Financial or Monarch Wealth Corp. As each situation is different, please seek advice based on your specific circumstance.

Financial hopes

In a Temple Sholom webinar May 6, ZLC Financial’s Garry Zlotnik, left, and Jon McKinney spoke on the topic Financial Planning in a Pandemic. (photos from Temple Sholom)

Reflecting on previous financial downturns – in 1987, 2000 and 2008 – Garry Zlotnik, chair and chief executive officer of ZLC Financial, admitted he felt worse now, during the COVID-19 pandemic, than in earlier recessions – not because of the economic implications but rather the health issues currently confronting the world.

“A year from now, two years from now, we’ll look back on this time and say, ‘Wow, that was just the most ridiculous, crazy thing in our lifetimes.’ But things will move forward in a positive way, with all the ingenuity that our population has,” Zlotnik said, adding that, as in any market, there are winners, such as Zoom, the web conferencing platform on which the webinar – called Financial Planning in a Pandemic – took place May 6.

Zlotnik was joined by Jon McKinney, ZLC’s president and portfolio manager, in the hour-long discussion, which was part of Temple Sholom’s Let’s Talk About It series.

McKinney holds overall responsibility for client relations, business development and administration at ZLC and has almost 30 years of financial sector experience in both portfolio management and accounting. Zlotnik, who has close to 40 years of experience as a chartered accountant and formed ZLC Wealth in 2000 – ZLC Financial was established in 1946 – also has served in numerous positions within the Jewish community, including as board president and chair of the Jewish Federation of Greater Vancouver, co-chair of the Vancouver JCC Maccabi Games, co-president of Vancouver Talmud Torah, treasurer of B’nai Brith Canada and president of the Richmond Country Club.

Though the spread of the virus has been flattening lately, the economic statistics – jobless claims, consumer spending – have been grim, with Canada’s economy further challenged by tense U.S.-China trade relations and a downward turn in the price of oil. According to McKinney, a silver lining has been the stimulus and bond buying by governments and central banks to prop up markets.

McKinney cited a Warren Buffett maxim from the midst of the 2008 recession: “Be fearful when others are greedy and be greedy when others are fearful.” If one had heeded that advice in late March of this year, he said, then April would have seen the best returns for equities since 1987, particularly as the U.S. Federal Reserve had been displaying its willingness to pump liquidity into the markets. The S&P 500 index, for example, gained 12.7% last month.

A principal message of the discussion was for investors to take a broad, long-term view. “Market timing is impossible,” McKinney cautioned. “But we can tell you there will be a bottom, and holding investments in companies that can weather this storm will be profitable long-term.”

In outlining ZLC’s own investment strategy, McKinney said, “We have reasonable diversification across different holdings and we pick good managers. We don’t just buy the index, and we look for companies that fly under the radar. We also invest in long/short funds and real estate.”

However, ZLC is concerned that there may be a retreat from the level the market is at now, as more bad news could filter through the system. Short-term, they believe, there could be a pullback and, if it comes, it will provide a great opportunity for investors.

“There are going to be some fairly volatile times ahead,” Zlotnik predicted, mentioning that it will take some time for people to get used to spending as they once did in pre-coronavirus times.

Oil and gas is one sector that has been beaten up in the past three quarters. It is, according to McKinney, contingent on the economy whether it rebounds, but many companies in the sector have seen strong gains through April and May.

“Every asset class has taken a hit,” Zlotnik said, though he sees opportunities in corporate bonds, which operate like a bond when a company’s price goes down and like equity when its price increases.

As for the Canadian dollar, McKinney forecasted the loonie either staying where it is or moving slightly higher after the recent rush to U.S. dollars, which tends to happen during economic crises.

For those with some money to put into the market, Zlotnik spoke of “dollar cost average strategy,” which means placing a fixed amount into a given investment on a regular basis. For example, if someone has $100,000 to invest, then they would place $10,000 in a given investment once a month for 10 months.

“It is important to know what one’s risk tolerance is and having a plan based on that,” he noted. Since March 2009, investment risk, for Vancouverites especially, has not been a factor, as both the equity and real estate markets have headed in an upwards direction.

A video of the webinar can be found on the Temple Sholom website: templesholom.ca/video.

Sam Margolis has written for the Globe and Mail, the National Post, UPI and MSNBC.