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Spousal RRSPs are often an overlooked account when in comes to investments or savings for retirement. This is mistake. Spousal RRSPs are one of the most powerful ways that Canadians can achieve income splitting. Let’s dive in.

What are Spousal RRSPs?

A spousal RRSP is similar to a regular RRSP, except that instead of the account being for the beneficiary of the contributor, it is for the benefit of the spouse. The contributor still receives the tax deduction for any contributions made to the account up to their personal CRA limit.

The primary benefits of spousal RRSPs is that a higher earning taxpayer can contribute to the RRSP of the lower income earning spouse or common law partner and claim the tax deduction. When amounts are later withdrawn, they will be taxed at marginal tax rate of lower income spouse.

Pension Splitting Rules

Back in 2007, the government introduced significant tax changes to income splitting rules that allowed retirees the option to allocate up to 50% of their pension income to their spouse on their tax return to help reduce overall taxes. For Canadians that have defined benefit pension plans, this splitting can start at any age once payments from the plan start. For all other pension income (e.g. including RRIF’s and spousal RRIF’s), income splitting can only occur at age 65 or older.

Prior to these new rules, the main way retirees could income split was through spousal RRSPs. Although these changes have cause spousal RRSPs to lose some of their importance, there are still benefits of utilizing them as part of your overall financial plan.

Why spousal RRSPs still make sense?

      • Income splitting before age 65 – if you retire early and need income, you could start withdrawals from the spousal RRSP because RRIF income cannot be split prior to age 65.
      • Leverage the Home Buyers or Lifelong Learning Plans in your spouse’s name to pay for education or the purchase of a home
      • Allows you to continue making RRSP contributions past age 71 if your spouse is under the age of 71. You can continue making contributions on their behalf if you have contribution room
      • They can be used for planned leaves (sabbatical or parental leaves) of absence or low income years. With proper planning you can withdraw from spousal RRSP to pay expenses during periods of low income and pay taxes at the rate of the lower earning spouse
      • For estate planning, you can make contributions after death. In the year of death, you cannot contribute to your own RRSP, but you can still contribute to a spousal RRSP if your spouse is under the age of 71.

Bottom Line

It is important to think ‘outside the box’ when it comes to setting up a spousal RRSP.  Some key benefits to remember:

      • It creates an additional emergency fund or liquidity for your family
      • You can access spousal RRSP funds in a way that make sense from a tax perspective
      • It provides you with more flexibility
      • It allows for tax efficient retirement income to start earlier than age 65

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Direct Indexing is quickly emerging as the new shiny investment vehicle for individual investors. Similar to how ETFs disrupted the financial industry two decades ago, Direct Indexing is set to follow a similar path.

Most of us are familiar with index funds, a mutual fund or ETF that replicates the performance of an index by owning each of the individual stocks/components in the same weighting as the index (e.g. TSX 60 or S&P 500). Direct Indexing is similar, but instead of owning the mutual fund or ETF, the individual investor own all the individual components as well. Now you might think why would anyone want to do that, instead of owning the ETF or mutual fund. The answer lies the ability of the investor to manage tax more efficiently, incorporating Environmental, Social and Governance (ESG) into even the smallest portfolios and customize based on their goals or investment ideas.

In the past two decades, consumers have learned to love customization. Music streaming supplanting CDs and Netflix tailoring of movie recommendations are just some of the new ways consumers have been given the power to choose. It is likely these same trends will hit the investment industry. It started with ETFs and Direct Indexing could be next. Individual investors have always been able to pick out a handful of individual stocks, but for people aiming for broad exposure, prepared products such as mutual funds or ETFs have been their only option.

Although still in the early stages, Direct Indexing is here, and recent acquisitions in the fund management industry shows that companies believe this is the next big growth area. Just last year, Blackrock and Morgan Stanley placed bets on mass-market offerings: BlackRock Inc. bought Aperio Group LLC, while Morgan Stanley bought Eaton Vance Corp. and its subsidiary Parametric Portfolio Associates LLC, by far the largest player in the Direct Investing space.

Direct Indexing gives investors the ability to pick and mix their stock holdings as easily as they select songs for their playlist. So, if individual investors wanted to obtain broad exposure to the U.S. market, they could choose a direct indexing product that gives them ownership of each of the individual stocks in the S&P 500, or a fraction of each share. Thanks to new technology, fractional shares and commission-free trading, customizable funds are becoming much simpler to roll out to the masses. With software, it becomes easy to maintain thousands of portfolios and rebalance them to whatever suits the investor.

Managing Tax

For investors, managing the tax implications of their investments with mutual funds and ETFs has always been a challenge. With Direct Indexing, the process of tax-loss harvesting (selling holdings to incur a capital loss that can be used in the future to offset capital gains) can be incorporated to pick and choose which gains or losses to recognize within their Direct Indexing portfolios. As well, investors can now control the timing of taxable gains. Previously, investors in mutual funds would be at the mercy of mutual fund managers buying and selling decisions that could impact their taxes payable. Consider the scenario where an investor purchases a mutual fund on Wednesday, and the fund sells one of is holdings on Thursday for a large capital gain. The new investor would have to pay taxes on his or her por-rated percentage dating back to when the mutual initially purchased the stock even though the investor did not benefit from holding the stock.

Incorporating ESG

Direct Indexing also solves the difficult problem for sustainability-minded investors. There is no shortage of environmental, social and governance funds on the market, but investors and asset managers may not always agree on what counts as green or responsible. With direct indexing, investors do not have to go out and select a whole new fund, they can just drop and add whatever stocks they want. Perhaps you want to invest in the S&P 500 but wish to exclude weapons manufacturers.  Instead of buying 490 or so S&P stocks that don’t sell weapons, which would be time-consuming and expensive, you would leverage technology to quickly create an index that excludes these stocks based on pre-screened research done by the Direct Indexing providers.

Customization

Perhaps the most appealing dynamic of Direct Indexing is the flexibility of customizing an index to meet an individual’s investment criteria or even personal values — such as the ability to exclude fossil fuels from a portfolio or to support companies with female leaders. Other use cases involve investors building investment strategies that invest in an entire index, but exclude companies or sectors that are expected to underperform. Also, for those executives that hold large amounts of their company stock, they might want to exclude that stock from their own investment holdings to ensure they have more diversification.

The costs of Direct Indexing portfolios will be key to their growth and be a determining factor in their adoption. Current offerings are not as cheap as basic, vanilla ETFs that track a major index like the S&P 500, but they are more competitive against ETFs or funds that have a more strategy-based approach.

Direct Indexing will not be for all investors. It is hard to discredit the simplicity of receiving a monthly statement with one holding (of say an index fund or S&P 500 ETF) and gauging performance of that one security. With a Direct Indexing strategy, an account holder receives statements with information about every security owned, which can count into the hundreds for a widely held index.

These drawbacks may result in direct indexing seeing a more gradual uptake than ETFs, however, the benefits are compelling and would seem to outweigh the negatives over the long run.


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Once someone or a couple together reach the age of 72, the flexibility to reduce your taxes paid becomes more difficult. At this point you are already collecting CPP and OAS, you are making your minimum withdrawals from your RRSP/RRIF and you no longer have the ability to make contribution to tax-sheltered accounts. Nonetheless, there are tried and true strategies that people can use in retirement to maximize their after-tax retirement income.

  1. Spousal RRSPs

The higher earning spouse can contribute to an RRSP of the lower earning spouse and still receive their full tax deduction. The lower earning spouse can then withdraw the money in retirement and pay tax at their marginal tax rate, lowering the overall effective tax rate for the couple.

  1. Order of Withdrawal

Following a tax efficient withdrawal strategy can lower your taxes payable. General guidelines include making withdrawals in the following order:

  1. Required Minimum from Matured Registered Accounts (RRIFs, LIFs and LRIFs)
  2. Liquidate Losses in Non-Registered Accounts
  • Liquidate Non-Appreciating Investments and Cash Balances
  1. Draw Down TFSAs
  2. Trigger Capital Gains in Non-Registered Accounts
  3. Withdraw from Registered Accounts

Any withdrawal strategy needs to be customized to the client situation and it should not change a client’s overall investment strategy.

  1. Asset Location

Where you hold investment assets matters! For example, if someone has both registered and non-registered accounts, they should consider purchasing investments that earn Canadian dividend, capital gains or return of capital income in a non-registered account. This income is taxed more favourable by the CRA than other investment income.

  • Fixed income
    • Interest-bearing investments have the least favorable tax treatment
    • Should be in tax deferred or tax-free accounts
  • Canadian stocks (and foreign stocks with low or no dividends)
    • Dividends from Canadian stocks and realized capital gains are the most favorably taxed kinds of investment income.
    • Non-registered accounts

Note: Owning individual securities allows for high diversification, lower transaction costs and the ability to control the size and timing of taxable events

  • Preferred Shares
    • Considered a fixed income investment, but payouts are eligible for the dividend tax credit
    • Non-registered accounts
  • REITs
    • They pass along most of their cash flow to investors, making them attractive to income-oriented investors.
    • Mix of capital gains, interest/rental income and return on capital. Income and deductions retain their character as they flow through to the investor
    • Tax deferred or tax-free accounts 
  1. CPP Sharing

You can share up to 50% of your CPP income with your spouse. The amount of the benefit depends on the number of years the spouses have been married and the number of years they have contributed to the CPP. Both spouses must be at least 60 years old and have elected to begin their CPP benefit.

  1. Utilizing Surplus Assets

If you have enough assets to meet your retirement income needs, then consider directing the surplus to either a Tax-Exempt Life Insurance Policy or giving a Gift to family members.

    • Tax Exempt Life Insurance Policy – Investment income can grow tax free and death benefits can flow tax free to beneficiaries.
    • Lifetime Gifts – there is no attribution on income earned on the gifted funds if the family member is 18 years or older
  1. Prescribed Annuity

If you are not satisfied with your income in retirement, you can immediately increase it by purchasing a prescribed annuity. You will pay less tax on the monthly annuity payments because a portion of it will be considered a return of capital.

Note: it is not advisable to invest all savings into an annuity, as the decision is irrevocable, and you cannot access the capital during your lifetime.

  1. Planning Your RRIF Minimum Withdrawals

    • Base your minimum withdrawals on the age of the younger spouse to minimize the annual percentage withdrawals amount
    • Convert your RRSP to a RRIF at 71, but don’t make your first withdrawal until the year you turn 72
    • Withdraw the annual required minimum from the RRIF as a lump sum at the end of each year

 

 

 


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Resistance has been the common theme from industry players in their response to the proposed title reform legislation that is working its way through the new Financial Services Authority of Ontario (FSRA) regulator. This important regulation to ensure that only financial professionals with appropriate credentials be able to call themselves “financial planners” or “financial advisors” will ensure that consumers are better served and protected.

If this self-centred push is successful, it will only benefit the least-qualified providers of financial services and be another setback for professionalization and transparency in the investment industry. Currently, financial professional’s titles (outside of Quebec) are meaningless and do nothing to inform consumers of financial services as to what the financial professional they deal with actually does. Possibly, these titles could mislead consumers into expecting a level of service and credibility that may be completely unwarranted.

Some of the industry submissions received are arguing that the rules are planning to set the bar too high and would exclude people who are using either title now from continuing to do so without achieving further designations or credentials. As well, the MFDA and IIROC organizations who are having their submission provided by the Investment Association of Canada (IIAC) who is arguing that any financial professional regulated by these two bodies should be exempt from any further educational requirements. The main issue with these arguments, is that most of the education provided to the financial services industry is focused around the licensing to sell products. However, financial planning and advice are not solely focused on products and in fact may result in no product sales at all. Financial planners and financial advisors synthesize information to make well-educated, informed recommendations; product selection and sales are only a small portion of the total value proposition provided.

Keeping the status quo, will simply be validating that the financial services industry is sufficient to meet consumers needs in today’s increasing complex economic environment. It could be argued that it would prove that this entire exercise was failed from the beginning due to regulatory capture by the industry.

Many people already are wary of financial services, and their ability to meet their specific needs and goals. Helping title reform fail will simply provide one more reason for people (especially Millennials and Gen Z) to move away from traditional financial provides altogether.


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“The incentives offered by CPP/QPP – combined with the strength of these programs – have made delaying CPP/QPP benefits for as long as possible is the safest, most inexpensive approach to get secure, worry-free retirement income that lasts for life and keeps up with inflation.” – Bonnie-Jeanne MacDonald

Today, the National Institute of Ageing (NIA) released the Get the Most from the Canada (CPP) & Quebec (QPP) Pension Plans by Delaying Benefits research paper, which has outlined the significant benefits of delaying pension benefits until age 70.

The paper has shown that Canadians can significantly increase their income security in retirement by delaying their CPP/QPP benefits; however only 1% of Canadian currently delay CPP/QPP pension until 70. For example, a monthly benefit of $1,000 at at 60, if delayed grows to $2,218.75 by age 70. It is clear that with fewer resources to build up retirement savings in today’s low interest rate environment, one of the best ways to maximize retirement income is to delay CPP/QPP benefits.

As CFPs and QAFPs, when meeting with clients over the next couple of months for year-end client discussions, this research and the accompanying examples should help your clients better understand both the options for starting CPP/QPP and the significant benefits to their retirement income of delaying to age 70.

Source: FP Canada Research Foundation


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A recent study from Investment Planning Council (IPC) found that almost 75% of Canadians believe they need financial planning advice to be successful in the future. The appreciation for planners is on the rise amid the uncertainty stemming from the COVID-19 pandemic. Not only are individuals leaning more on their planners, but they believe the fees they are paying are worth it.

Some of the survey’s findings included:

  • Participants said they have increased their communication with their planners since the pandemic started.
  • 93% said it was important to work with an advisor who is familiar with their personal needs
  • 75% who work with an advisor were prepared for retirement

 Chris Reynolds, the CEO of IPC noted in the report that “people want someone who knows them, their family, their unique situation and what they want to accomplish”. It is clear that “this cannot be solved by a robo-advisor or some algorithm”.

Other reports are showing similar findings, where the willingness to pay for advice has been growing and the desire of individuals to increase the amount of planning advice they are receiving.

Encouraged by the positive sentiment, planners are taking advantage to develop and deepen long-term, trusted relationships with clients that prove their worth, especially when compared to robo-advisors and other DIY investing options. Planners should look for opportunities to expand the role of truly comprehensive financial advice relationships. Planners have never been more valuable than in the midst of COVID-19, and individuals are realizing that value goes beyond simply selecting and managing investments.

 Whether it’s the technology crash of the early 2000’s or the 2008 global financial crisis, markets at times can get very volatile as they did this year with COVID. Even though the event is different, the markets reaction isn’t, and this is where a planner can offer tremendous value.


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Last month, FP Canada released its Annual Report for 2019 and 2020.

Highlights:

  • Progress on the policy front with the new Financial Professionals Title Protection Act passed into law in Ontario.
  • Launch of the Qualified Associate Financial Planner certification on Jan 1, 2020. There are already 4,300 QAFP professional in Canada.
  • 50% increase in the number of candidates sitting for both the QAFP and CFP exams. Exam numbers have now increased for five consecutive years with the biggest growth occurring in 2019.
  • Beginning April 1, 2022 new applicants for CFP certification must hold a post-secondary degree from an accredited college or university.

Numbers

  • 16,948 CFP professionals, with 949 new certifications
  • 3,985 QAFP professionals, with 2,623 new certifications

New Programs

  • Introduction to Professional Ethics (IPE)
    • Prepares candidates for an understanding of the ethical obligations owed by all professionals and the application of these obligations to the financial planning practice
    • It is an online program that takes about 2 hours to complete
  • CFP Professional Education Program
    • Helps students succeed in the new world of technology change by helping them apply their technical knowledge to real world client situations.
    • Program covers the principles of human behaviour and professional skills in the areas of communications, critical thinking, relationships and ethics.
    • It is an online program with a live instructor and equivalent to a full semester university course.

Source: https://fpcanada.ca/annual-report


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This month, the Ontario government continues to move forward with new standards for people using the financial planner and financial advisor titles in the province. The key takeaway from the latest report from the Financial Services Regulatory Authority of Ontario (FSRA) is that those individuals currently using either title will not be “grandfathered” from the new rules that establish the minimum standards for their use.

Canada currently does not have any legislated national standard for those who offer financial planning or advice, thus anyone can call themselves a financial planner or advisor regardless of their designation, certification or educational background.

Last year, the Financial Professionals Title Protection Act was passed in Ontario to enhance oversight of qualifications and credential being used in the financial services sector. The government appointed FSRA to develop the specific rules and decide which designations would qualify. This rule is expected to be finalized by 2021.

Minimum standards will not require a credential that has an educational component related to financial planning, such as retirement planning, estate and tax planning, technical knowledge and ethics. FSRA’s recent report advised that individuals will have three years after rule implementation to acquire any credential or educational requirement needed to use the title of financial advisor; and five years for the “financial planner” designation. The complete list of designations that will be approved under the rule is still being finalized.

One of the most widely known credentials is the certified financial planner (CFP) designation administered by the professional body FP Canada (formerly the Financial Planning Standards Council). More than 16,900 people in Canada hold it, about 9,000 of them in Ontario. FP Canada believes that their designations will be approved under the new FSRA rule and will help to remove confusion around the use of these titles, especially the distinction between advisor and planner.

As the regulatory momentum continues to move in the direction of minimum standards, it is all the more important for new and existing practitioners in financial services to begin getting their QAFP and CFP designations.


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FP Canada announces a new exam cycle:

In 2021, FP Canada’s exam cycle will change to be held in May and October. And in 2022, they will transition towards three dates in January, May and October. This is to provide additional space and more flexibility as more individuals pursue their CFP and QAFP certifications.