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Too late to sell before budget?


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I agree with the folks that believe taxes are important. IMO society may not function as well if wealth continues to accumulate to the few. Eventually it may lead to revolutions. However, getting the amount and type of taxation right is difficult.

 

I do think they should get rid of things like the principal-residence exemption. Even up the playing field instead of favouring one asset-class over another. Especially when that market is clearly overheating.

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The balance must be somewhere in the middle.

 

I actually agree with you 100%.  I think capitalism is great, and anyone who would want to do away with it hasn't really though about it much.  I don't think the investment tax rates should be raised, and I don't support lowering the contribution amount in TFSAs (they should've changed RRSPs before mucking with TFSAs).  I think unions have some positive attributes, but are a net negative by far.

 

I agree that spending other people's money is insidious.  I'm not happy with Trudeau--we suddenly have huge deficits, and it's unclear to me where that extra money is going (yeah, I should probably find out. :)).  I probably would've voted Conservative last election if the leader had been anyone other that Harper, but I can't vote for someone who attacks science and evidence-based reasoning.

 

I believe in single-payer healthcare because the real world seems show that it has the best balance between outcomes and costs (but I also recognize that the rest of the world is freeloading off of USA--because Americans are willing to grossly overpay for their healthcare relative to the rest of the world, treatments are developed that wouldn't otherwise be developed, benefiting everyone in the first world.)

 

The main reason I show up as leftist here is because I'm always responding to someone on the right saying something is "obvious", when it's anything but.  I'd probably never do another political post here if it weren't for people taking some unsupported ideological rhetoric and saying "It's as simple as that."

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It truly is as simple as that. You will have less capital to deploy on your next profitable sale. And less capital deployed into profitable ventures in the system leads to less wealth for the country overtime.

 

The current system is fair and logical and glad that you recognized that the taxation of capital gains vs other investment incomes is aligned to the risk curve. It is also aligned with job creation and was designed by a very smart Liberal or Paul Martin 17 years ago. Canada has done very well in that period. It wasn't the only factor but, it surely did contribute.

 

Some may remember the terrible recession of the early 90's, large pension and budget deficits, Canadian dollar at $0.60 to the USD, Canadian trained doctors (read subsidized) leaving in large number for the States, GST, etc. This was not our finest moment.

 

So why messing up with something that works right now? There has to be other levers? And many loopholes will remain available to the truly rich even if this is raised. So it is going to be the middle and upper middle class that will end up suffering the most from this or people investing their savings in the system and already paying high tax rates on their salaries.

 

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So why messing up with something that works right now? There has to be other levers? And many loopholes will remain available to the truly rich even if this is raised. So it is going to be the middle and upper middle class that will end up suffering the most from this or people investing their savings in the system and already paying high tax rates on their salaries.

 

Agreed.  The other factor is that government policies (i.e. stupidly low interest rates) have encouraged Canadians to take on massive amounts of debt and have discouraged savings and investment.  Do they really think the best path for Canada is to further discourage savings?  Do they really want to create a society where everyone is dependent on a government handout for their retirement?  Seems like a terrible idea to me.

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Good point jeffmori7.

 

For our international friends, The TFSA is an individual tax protected account with rules. This is specific for Canada but many countries have them. My understanding is that for the US, the Roth program is similar.

Interesting though how initial intent (announced intent anyways) was to give an opportunity for all adults (from the richest to the poorest) to amass sums for whatever, be it big ticket items, special family trips, down-payment for a house or retirement.

If you look at official government statistics and some studies, those who benefit from these accounts are those who don't really need them! ie the high wealth households.

 

 

Like you say jeffmori7, it is possible to benefit from the deferred tax advantage especially if you save and invest with a plan already.

 

If you look at the statistics, the high wealth household effect is even more marked when you take into account the spousal contribution of those with no or minimal real earnings (ie the contribution is really derived from the spouse having earning power).

 

Over time, it can really add up. Snowball.

 

The disappointing revelation though is that many of those (my take: the majority) who would benefit from saving and compounding end up using the account mostly as a short term savings account. Also, some have shown that the contribution to the TFSA mirrors a smaller contribution to other tax deferred accounts (RESPs).

 

So yes, this is an advantage to the high wealth households that is relatively new and compounding. But isn't it available to all and isn't it a matter of choice to a certain degree?

 

Some suggest that the government should try to convince people that it is a good idea to save... really?

 

Delayed gratification is not fashionable these days.

 

Carpe diem?

 

 

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The TFSA is illustrative of how most things work in Canada.

Everybody gets the same shot, but it's up to the individual as to how they choose to use it; hence over time, there will be significant differences between individuals - reflecting their actual practice.

 

Seldom fully appreciated, is that the TFSA permits the use of options (RRSP's do not) - and it doesn't have a sunset date (age 71 for RRSP's). An enterprising lad need only get lucky on options a very few times - to do very well (& tax free), then use the proceeds (inside the account) to buy a portion of a property; anywhere in the world  ;) 4-5 accounts acting together to make the down-payment on a property being rented, & all it requires is that each TFSA holder have a valid Social Insurance Number.

 

TFSA holders are also allowed to be dual nationals  ;)

 

SD

 

       

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Perhaps people have heard about TFSA stories like this one: (2013)

http://business.financialpost.com/personal-finance/tfsa/how-about-a-big-bet-on-the-u-s-housing-market-for-your-tfsa?__lsa=dde9-c7fe

 

Then you say that he is a gambler. But: (2017)

http://business.financialpost.com/personal-finance/tfsa/not-for-the-faint-of-heart-the-500000-tfsa-and-whether-its-right-for-you?__lsa=1bb1-7f23

 

Maybe the investor is on this board as I gather that a lot of people liked/like Fannie Mae stuff.

 

I understand that CRA (CDN IRS) may have an eye for outliers. We're egalitarian, aren't we? Or perhaps they believe in efficient markets!

 

The other point I'd like to make is about the other side of the sunset provision. I recently discussed with my two older children (turning 21 and turning 20 in 2017) about the effect of compounding on the maximum possible contribution (they both got the 10k bump in 2015) over a period of 30-40 years and +. It helps to restrain yourself from keeping up with the Joneses.

 

And from Bloomberg today:"Prime Minister Justin Trudeau will try to convince Canadians he’s just as good at generating growth as he is at handing out checks".

I agree with basic distribution but the wording unfortunately reveals the underlying subtle pervasiveness associated with the Robin Hood etiquette.

 

One of my interests is exercise physiology. At some point, if you want to shine, you simply can't improve endurance AND strength. At some point, one has to compromise, ie the "improvement" obtained on one side is made at the expense of the other.

 

I suggest that the automatic stabilizers may offer better protection than some arbitrary choice.

 

Today, no change has been announced for investment taxation but it is in the air.

 

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They're just softening us up for when they do it.

 

The thing I'm curious about is whether the electorate would see an increased inclusion rate as a good or a bad thing.  The world, and the Liberals in particular, are certainly regressing to class-warfare rhetoric.  So does the electorate overall buy into the argument that increasing taxes on savers and investors is good?  (Essentially, "we spent so much on our overpriced house that we need to take money from anyone who actually invested their money prudently to pay for our retirement?")

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The thing I'm curious about is whether the electorate would see an increased inclusion rate as a good or a bad thing.

 

Read an article the other day somewhere that mentioned how the capital gains rate was one of the perks designed for the “rich” or “wealthy”. I certainly do not consider myself in either of those categories or even close, but I have built up substantial unrealized capital gains over the years and any increase in the tax rate would be very painful.

 

 

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They're just softening us up for when they do it.

 

The thing I'm curious about is whether the electorate would see an increased inclusion rate as a good or a bad thing.  The world, and the Liberals in particular, are certainly regressing to class-warfare rhetoric.  So does the electorate overall buy into the argument that increasing taxes on savers and investors is good?  (Essentially, "we spent so much on our overpriced house that we need to take money from anyone who actually invested their money prudently to pay for our retirement?")

 

It's true and it's not true.  I think the rhetoric is just manna for their electorate.  At the end of the day they are running a fairly modest deficit when you compare to the US or countries in Europe.  They didn't touch the capital gains tax.  TFSA is still there.  They increased EI but that hit's lower incomes more than higher incomes since it maxes out.  All in all I am pleasantly surprised.  The differences fiscally between them and the conservatives seems subtle.

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TFSA/RRSP accounts are just tax free/tax deferred accounts.

The disadvantage of the RRSP is that if it's very large - the forced withdrawals starting at age 71 will result in the clawback of pension income (OAS, etc.). The $ come out at a very high effective tax rate.   

 

The intent of the TFSA is to foster overall savings, the intent of the RRSP is to foster retirement saving. Timeframe.

Both applications are valid for the bulk of people using them, but there are always going to be outliers. Obviously we want to encourage the good, & discourage the bad - but to do well in a TFSA, you must be comfortable taking on risk. Hard for an adviser to recommend.

 

Young people have long runways (plus), but no expertise (negative); resulting in a neutral exposure. Replace the expertise, and you magnify the impact with a long period of compounding. Use options, or cheap stock with high optionality; and you ramp this up still further. At the extreme; a 60 year old wizard contributing 5.5K every year, to the TFSA of a 2 year old grandchild. Life options.

 

More importantly, options have the huge advantage of capping the downside to the premium paid. If the wizard gets it wrong the loss is limited to the contribution made; but if he/she gets it right - the upside is unlimited. If option premiums never exceed the wizards cumulative TFSA contribution, from inception to current date; the recipient also takes on zero downside risk.

 

Should options be permitted in these accounts? I would suggest 'Yes'.

If you will not allow a meaningful contribution, & the intent is growth - you must allow the TFSA holder exposure to quality equities. If I'm not allowed to contribute enough to buy 100 shares of Royal Bank, then at least allow me a large enough contribution to able to buy a one year, at the money call, on 100 shares of Royal Bank.   

 

SD

 

 

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RRSP’s are awful with a few exceptions.

 

Does anyone really think that tax rates will not increase over time? Then to add insult to injury, there is the OAS clawback.

 

At one time when RRSP’s came into being, interest rates were high and many people had invested in GIC’s. But in recent years people have had their RRSP funds invested in mutual funds or the stock market and have been accumulating capital gains rather than interest. But under an RRSP you are taxed on 100% of your capital gains, not 50% as are gains outside the RRSP.

 

So your capital gain taxes are doubled,  you will likely lose some or all of your OAS, and then you may be pushed into a higher tax bracket and the tax rates are probably much higher than they were back when you put the money in the RRSP.

 

TFSA’s are much better - as long as you don’t suffer losses.

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Totally disagree with you on RRSP's.

 

You get an immediate full tax deduction on any money that you put in. So on a DCF over decades that is worth a lot. Then all the money inside the RRSP can compound tax free for decades. If you have a decent rate of return, this is a huge advantage. For example, Seymour Schulich has accummulated something like $250 million in his account.

 

Sure you will be taxed as income when you take it out but, you can use to your advantage the progressive tax system to lower your tax rate. And tax rates overall have not moved much over a very long period of time and they can't keep on moving higher since eventually the government gets less money with higher tax rates. To push it to the extreme, if tax rates are 100%, government revenue goes to $0.

 

Moreover, when you get to the point of pulling money out of your RRSP, you will likely not need as much funds as you need now. And if you want to make donations with these funds, it will be a taxable deduction.

 

TFSA's are great too since money also compounds tax free. The difference is that you don't obtain a tax benefit when you put money in and there is no tax when you take money out.

 

Either way, I don't see how one is penalized from investing in these vehicles vs trying to save and compound money in non-registered accounts.

 

Cardboard

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I agree with most of what Cardboard said. RRSP can be very useful. Just to add a little bit to it. Through different tax treaties that Canada has, generally you don't pay withholding tax on income/dividends coming into the RRSP but you pay it for cash accounts and TFSAs. So there's another tax deferral benefit of RRSPs.

 

In addition, it's been a while since i looked at it but as I remember the OAS clawback starts in the 70s. So a married couple can have 150k worth of income before any OAS claw back. Not exactly the stuff of horrors and probably affects very few people.

 

The way I look at them RRSPs and TFSAs are like 2 different tools in a toolkit like hammer and pliers. They have different features and they do different things. Both are helpful tools.

 

SD, I like you commentary about long runways and having an old experienced person investing for a young one. There's one little problem with that: For a bunch of really annoying legal reasons in Canada you can't own equity if you're under 18 years of age.

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Savers in Canada today have many great options. RRSP's are great for high income earners. TFSA's are great for everyone. RESP's are a great way to save for kids post secondary education.

 

As an example, I have three kids. When the third was born I set up a group RESP and made an initial contribution of $2,000 for each child ($6,000 total). The government kicked in 20% ($1,200). My starting total was $7,200. Today (13 years later) the total is north of $75,000. The power of compounding over many years.

 

Each vehicle (RRSP, TFSA and RESP) has its strengths and weaknesses. I use all three vehicles and am very happy with them all.

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Would add that you can open a TFSA account only when you turn 18. For RRSPs, your contribution is tied to a fraction of work income, perhaps not significant when still in high school.

I would add personal experience for others if you decide to help your kids this way. You can, in a relatively simple way, open an "in trust" account at a discount broker in the name of your child. I did that for all my kids. The nice thing is that capital gains are taxed at the child level (think about that for a minute). Second generation income is also taxed at the child level. You need to really follow the attribution rules. I must say that, for 4 or 5 years in a row, I had to submit documentation showing the allocation process. The last year I did this, my document was about 20 pages long. They stopped bothering me after. You need to, if you go that route, follow the rules and be ready to justify. Otherwise no mercy. I understand that this is no longer permitted in my province but, from what I hear, it is still allowed elsewhere. Of course, you have to remember that the funds actually belong to your offspring when they reach 18. Harvest what you sow maybe.

Hope this can be helpful.

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Couple of  comments :

 

“...they can't keep on moving [taxes] higher.”

 

Agreed but could you be sure to explain that to Justin, just in case?

 

“Moreover, when you get to the point of pulling money out of your RRSP, you will likely not need as much funds as you need now.”

 

Let’s see, if I’m working, I have the weekends, maybe, and a couple of hours every evening in which I spend money. But when if I am retired, essentially 100% of my time is leisure so I have 2 or 3 times the amount of time in which to spend money. And people think they will spend less money when they retire? That's like when I'm fully invested and the market tanks and my broker tries to tell me its really good news because its a 'buying opportunity'.

 

I also still have trouble with the government taxing me on 100% of capital gains in an RRSP vs 50% of my gains outside an RRSP - and THEN on top of that they claw back another $6-7 K OAS.

 

Also remember that after age 71 you do not have a choice as to the minimum amount or timing of withdrawals from that RRSP/RIF.

 

Take the example of an individual selling a summer cottage and incurring a one time substantial capital gain while drawing down a RIF. Not only does he lose his OAS but it also gets reduced for several years after that.

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To build a little on my previous RRSP post. The biggest drawback of an RRSP is not a situation when you draw a lot of money from the RRSP and loose some relatively small amount of OAS. The biggest drawback is the opposite. When you draw too little out of an RRSP and then upon death the whole amount becomes part of the terminal tax return and gets taxed all at once under a progressive tax system.

 

Now of anyone has any ideas of how to defray that risk I'm really, really interested.

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rb,

I would like to provide a better answer but...the best I can come up with is: in the long run, we are all dead.

Sure but then why bother using an RRSP in the first place? By that mentality, if I have enough money to live, pay taxes now, pay taxes later, who cares....

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