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Davies Otwell

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In Ontario, a couple we’ll call Hank, 55, and Judy, 56, have built their lives with a lot of assets — and a lot of debt. They take home $11,463 per month from their jobs, his with a transportation company, hers with a petrochemical firm. They’ve lived in Canada for 20 years, raised two children to their mid-20s. Now they want to plot their retirement in 10 years.

Their problem is the debt. They must slash it if they want afford to move to someplace warm year-round for their retirement.

They have loans of $789,200 including a home mortgage of $452,000, a mortgage on a rental unit for $225,000, $12,000 for RRSP loans, an unsecured $35,000 line of credit, and $48,200 for car loans. Their $1,955,000 of assets less $789,200 liabilities leaves them with net worth of $1,165,800.

E-mail andrew.allentuck@gmail.com for a free Family Finance analysis.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Hank and Judy. His plan — make their portfolio more tax efficient, cut risk and redirect savings to get to a goal of $80,000 in after-tax retirement income (or between $100,000 and $110,000 before taxes).

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Victoria, for her part, makes her qualifications clear. “In terms of my credentials, I’m a financial coach, not a financial advisor. So my goal is to help you find the resources around topics, but I do not provide individual investment advice.”

Victoria later said her social media manager took down the video about how to invest $1,000 because it could potentially be misconstrued as giving advice.

“It (was) a fine line between showing people what is available and what I personally like versus what people could take as advice,” she wrote in a follow-up message.

Fulmore said she is currently working towards getting certified as a financial planner.

Heath, for one, takes no issue with the lack of credentials.

“Just because somebody is older or even holds a certain regulated financial title, it doesn’t mean their advice is necessarily good or is necessarily better,” he said. “There are plenty of baby boomer financial planners, with plenty of experience, who give bad advice.”

As well, he was impressed by Victoria’s video on how to invest $1,000.

There are plenty of baby boomer financial planners, with plenty of experience, who give bad advice

Jason Heath

“A lot of people in the financial industry do a poor job of communicating complex topics to consumers and that creates a void that these TikTokers are filling,” he said.

Relying on generic advice when personal finance is supposed to be, well, personal is a drawback, but not one unique to TikTok.

“Nobody should be getting all their financial advice from any one source,” Heath said.

Oriana Gomez, a 23-year-old barista at an upscale Italian cafe in Toronto, heeds that message. TikTok, for her, became one of the many tools in her arsenal she uses to achieve financial security.

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The stats released also show a breakdown of TFSA holders by income level, with 52 per cent of TFSA holders reporting a total income of under $50,000 on their 2018 return. The average TFSA balance at Dec. 31, 2018 of $20,300 was pretty consistent across all income brackets from $20,000 up to $90,000. For those with total income above $90,000 and up to $250,000, the average balance was slightly larger at about $27,000. For the highest income-earners, or those Canadians with an income of over $250,000, the average TFSA balance was just shy of $43,000.

Of course, with all this talk of TFSAs, let’s not forget that we are in the middle of RRSP season, as you only have until March 1, 2021 to contribute to your RRSP to be entitled to claim a deduction on your 2020 return. For 2021, the new RRSP dollar limit is $27,830 or 18 per cent of your 2020 earned income, whichever is lower, less any pension adjustment from your employer. (You have until March 1, 2022 to make this year’s contribution.)

When asked whether someone should contribute to an RRSP or TFSA, my standard reply is: “Both!” But for most people, that’s simply not an option due to a lack of funds, so it’s important to point out a few critical differences between the two savings plans.

First, with a TFSA, there’s no maximum age limit to contribute, unlike an RRSP, to which you can only contribute up to, and including, the year in which you turn 71 (unless you have a younger spouse or partner). This makes the TFSA an ideal vehicle for seniors over the age of 71 to continue to shelter their investment income or even to contribute the after-tax value of their mandatory annual RRIF withdrawals. The newly-released stats show that nearly 19 per cent of all TFSA account holders in 2018 were age 70 or older.

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“A potential explanation for this phenomenon is that consumers with mortgages in areas with high house price growth have been shielded from insolvency over the past few years by the growing value of their home (e.g. the ability to extract home equity to consolidate their debts or sell their home to pay their debts),” it states. “Conversely, non-mortgage holders in hotter housing markets have missed out on the benefits of house price appreciation, while still bearing the costs associated with living in affordability-challenged areas (e.g. higher rents).”

In line with this possible explanation, the memo says, is that in British Columbia and Ontario, home to the pricey real estate markets of Vancouver and Toronto, the share of insolvencies filed by mortgage-bearing consumers had fallen sharply. Meanwhile, in the rest of Canada, those insolvencies had remained steady.

Recent public-opinion surveys have suggested that consumers have not forgotten about the risks posed by rising rates either.

A Royal Bank of Canada “Home Buying Sentiment Poll” found 45 per cent of those polled were concerned about interest rates in the coming year. And a recent poll conducted by the Credit Counselling Society, a non-profit that aims to help consumers manage their finances better, found that 31 per cent of Canadians it surveyed were having trouble paying down their debt, even with interest rates so low.

“If consumers don’t make a concerted effort to reduce their … non-mortgage debt over the next two to four years, and then rates start to go up — that could have a material impact on mortgage rates, which could have an impact on rental rates — then consumers will put themselves in difficulty,” said Scott Hannah, chief executive of the CCS, in an interview. “So that’s the challenge that we throw out there for consumers is, if you don’t get your financial house in order over the next three to five years, pay off your consumer debt, set aside three to six months’ worth of living expenses for emergencies, you’re going to be susceptible to the next thing, whatever that is.”

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Nevertheless, the husband persevered. A little more than two months later, he brought yet another application seeking severance and also asked the court to dismiss the outstanding claim by his wife for spousal support for delay, since she had not proceeded with her claim.

On the husband’s fourth attempt, he told a new judge that he actually did not need to comply with many of the disclosure requests, and, to the extent he would comply, as his wife’s lawyer’s refusal to meet with him in person to review the documents, he had been unable to do so.

After hearing arguments from the wife’s counsel, the judge ascertained that much relevant disclosure remained outstanding.

The judge agreed that if severance was granted and a divorce followed, the husband was unlikely to deal with spousal support and the remaining property claims. Not surprisingly, the judge also determined that the wife could not proceed with her spousal support claim because the husband had not provided disclosure.

The judge dismissed the motion for severance as well as the husband’s request to have the wife’s spousal support claim dismissed for delay.

The court also ordered the husband to pay costs of more than $6,700 within two weeks and refrain from making personal attacks and derogatory statements when communicating with the wife’s lawyer. Finally, the husband was not allowed to bring a further severance application without first obtaining leave of the court.

It seems obvious if the husband had put as much effort into fulfilling his disclosure obligations as he did in trying to divorce his first wife, he would long ago have been married to his new love.

Laurie H. Pawlitza is a senior partner in the family law group at Torkin Manes LLP in Toronto.

lpawlitza@torkinmanes.com

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As well, Anita can sell her cottage for $280,000 after fees and selling costs. That would provide $22,800 per year or $1,900 per month for 15 years.

Excluding any tax-free withdrawls, the pretax amounts add up to $7,833. After 20 per cent average tax, that will leave her with $6,266 per month, still a little short of her goal.

Her tax-free holdings can close the gap. First, her TFSA of $69,500 after top up will generate $5,650 per year or $470 per month for 15 years while the remaining $100,000 she has as a shareholder loan would produce $8,132 per year or $680 per month. That would make her total spendable income $7,416 per month, a little over her her $7,000 target.

In about 15 years at age 81, she will lose many of these sources of income, leaving her with only her government benefits and registered accounts. At that time, she plans to sell her principal residence and invest the funds to support her income needs. Assuming the property price only keeps pace with inflation she would net about $620,000 of capital after the sale. If invested to her age 95 and used as income she could expect this capital to add another $53,289 per year before tax, ensuring her comfortable retirement lifestyle can continue.

If Anita lives beyond age 95, with all of her financial assets spent, her house and cottage sold and their proceeds spent, she would have to rely on CPP and OAS which, using 2021 values, would add up to $1,656 per month. It is unlikely that this income would provide the late life retirement she imagines.

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At this point, the taxpayer retained a tax lawyer to deal with the CRA, who in February 2016 requested that the CRA reconsider its decision to refuse administrative relief. The CRA again denied his request but suggested that the taxpayer apply for a remission order. So, in January 2017, the taxpayer’s lawyer did just that, requesting relief of taxes, interest and penalties related to the 2005 and 2006 tax years.

In his request, the taxpayer argued that the reassessments were inaccurate because, due to circumstances beyond his control, the taxpayer had not been able to respond effectively to the concerns raised by the CRA’s auditor or to contest the reassessed amounts. Specifically, the taxpayer had relied on tax professionals to deal with the matter for him because he was unable to do so at the time, but the first accountant was unable to respond to the audit and the second accountant inexplicably failed to pursue the matter. As he explained, “If he had been able to respond effectively, he would have been able to show that the income and expenses he reported were as filed. He remains able to show that the income and expenses he reported were as filed and that the Reassessments were incorrect.”

In 2019, after reviewing the background to the matter and examining the merits of the request, the CRA concluded that remission was “not recommended as none of the criteria apply and there are no other circumstances which would support relief.” The taxpayer appealed the CRA’s decision to the federal court which heard the case by videoconference in August 2020, with the judge in Ottawa and the taxpayer in Toronto.

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These lending rates create what is sometimes called a barbell, where borrowing costs for individuals are very far apart from borrowing costs for many businesses.

What is important is that these aren’t particularly risky businesses, and those that are lending to them have exceptional security on the loans. As a result, the historical loan losses on these business loans have been extremely low.

This brings us back to the question of what you can or should be doing with this access to cheap money.

In our view, if you can match up the cheap borrowing and invest it into secured lending that pays a high rate of return, you are getting close to the security that banks feel when they match GICs with mortgages.

Fortunately, there are now many options to invest with companies that have very strong risk and operational procedures to lend to businesses. These investments have generally had returns for investors in the 6.5 per cent to 8.5 per cent range on a steady basis. We have been using this as part of our investments for clients for about seven years. Even in 2020, the returns stayed very much in line with their historical returns.

This investment strategy will not be for everyone. There is some risk here, but meaningfully less than borrowing to invest in the stock market. In addition, only some people will have the ability to borrow funds.

One example of how this can potentially be used is to create a new monthly cash flow. In some respects it is like creating rental income without the bother of actually having a tenant.

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Her initial request was denied and her “reward” for coming forward was a CRA assessment totalling $27,641 in tax, penalties and interest for her excess and non-resident TFSA contributions, effectively wiping out her retirement savings. The taxpayer then requested a second, independent review by the CRA of her request for a waiver, which was also denied on the basis that she “continued to make excess and non-resident contributions to her TFSA after she was notified that she had over-contributed in 2009.”

As the harshly worded CRA letter stated, “(T)here are no circumstances that would support the cancellation of the tax on excess and non-resident TFSA contributions. It is the individual’s responsibility to educate themselves about the TFSA rules after being notified.”

The taxpayer appealed the CRA’s second-level decision to the Federal Court and the case was heard in August, via teleconference, by a judge sitting in Toronto, and the taxpayer being represented by Dentons Canada LLP in Edmonton, where she used to live.

In court, the taxpayer argued that the CRA’s decision was “unreasonable” because she was a Canadian resident in 2009, and she, therefore, did not “repeat the same mistake” when she contributed to her TFSA as a non-resident after 2009. Therefore, she believed that the CRA’s decision was not justified by its reasons.

Fortunately for the taxpayer, the judge agreed. Discretionary decisions by the CRA refusing to waive taxes and penalties are reviewed on the “reasonableness standard.” In addition, a reviewing court must determine whether the decision bears the “hallmarks of reasonableness: justification, transparency and intelligibility.”

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Furthermore, the largesse of the federal government might have helped many Canadians from packing on more debt, but any savings could be used to pay those liabilities down.

CIBC on Dec. 29 released the findings of a survey that found paying down debt was the top financial priority for Canadians for the 11th straight year, at 20 per cent, with “keeping up with bills/getting by” coming a close second, at 18 per cent.

A spending boom driven by savings could also have consequences beyond the immediate gains realized by certain businesses, such as an increase in prices.

Pedro Antunes, chief economist at the Conference Board of Canada, likened the increase in disposable income to a “slingshot” that’s being pulled back. Some of that money will be saved and some of it will be spent elsewhere, he said, since travel restrictions remain in place and COVID-19-caused economic uncertainty lingers.

Yet when the world changes, so, too, will people’s spending plans. This could boost some businesses, such as those in the travel industry, but weigh on others that have gained from the stay-at-home trend, like those specializing in home renovations.

“But nonetheless … that slingshot that’s been pulled back, there’s a lot of capacity for continuing to spend into 2021, and even in the year after,” Antunes said in an interview. “As things normalize, people are going to, I think, open their wallets a little bit more.”

The federal government certainly wants Canadians to spend some of their savings, as part of its intention to pump $100 billion in stimulus money over three years into the economy.

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