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My email box is full of reader questions, so let’s see what’s on people’s minds.
Q – When the Bank of Canada increases their target rate, can we expect that, subsequent to the announcement, there would be a comparable increase to GIC rates? Or are there other factors involved in determining GIC rates? It seems to me that when the last increase of 75 basis points was announced, there wasn’t a comparable increase to GIC rates. I ask as I am on the cusp of retiring and want to ladder some GIC investments out over five years and of course am looking for what might eventually be the top end of GIC rates. – Harry S.
A – There is obviously a correlation between the Bank of Canada rates and market interest rates, such as prime, mortgage rates, and GICs. But it’s not a direct relationship – GIC rates didn’t go up 75 bp when the BoC moved. In fact, some actually retreated.
Financial institutions make their own decisions as to how much they’ll pay depositors or charge in loans. That’s why you see such a wide disparity on all commercial rates. For example, you can find five-year GIC rates as high as 5% at a few smaller institutions like Achieva Financial and Steinbach Credit Union. The major banks don’t offer as much, but if you shop around, you’ll find some good deals. Right now, for example, Royal Bank has a special offer on a five-year GIC paying 4.5%.
As for how high rates will go, everything depends on how successful the central banks are in taming inflation. They don’t want a repeat of the 1970s, so they’ll keep raising aggressively until they see positive results. – G.P.
Q - My husband and I always do income sharing when we file our taxes. A few years ago, his Old Age Security (OAS) was clawed back. We expected this because of his RRIF and LIF income that he now has to use.
I began RRIF withdrawals this year and find my OAS was clawed back by $148 a month. I was quite surprised by this as my income is not nearly $81,000. We are thinking it is due to the income splitting with his income adding to mine. Am I correct and is it worth it really? What’s the point of income splitting? – Kathie S.
A – Without knowing the actual numbers I can only guess, but it appears your supposition is correct. The clawback kicks in this year if your income exceeds $81,761. If the income splitting with your husband pushes your taxable income higher than that, you have to pay back some of your Old Age Security.
The Canada Revenue Agency allows up to 50% of pension payments to be split with a lower income spouse. Your husband’s RRIF and LIF qualify as pension income. The result is that between you, total taxes should be reduced. But if you throw your OAS clawback into the mix, are you still saving? I suggest you consult your tax preparer or, if you do it yourself on line, run both scenarios through the program and see which works best for you. – G.P.
Q – I feel my investment firm is just after my monthly fees. I retired in October 2021. My employer pension of $34,800 is a third of what I previously took home in pay.
From age 19 I paid the minimum amount to avoid paying tax into my RRSP. I asked my advisor to start paying me $800 monthly from my RRSP. He’s saying not to take it out of the RRSP. Create a RRIF instead and leave it invested.
I do not need the $800 to live. I was going to move it to a fee-free investment. I fear they are just trying to keep my money so I continue to pay their fees.
Should I be taking withdrawals to the lowest tax bracket rate? I have room to take $10,000 per year. My hope is to invest a portion of that income into GICs and reduce fees. – Neela D.
A – Based on what you say, I assume you have a fee-based account so, yes, it would be in your advisor’s interest to keep you as a client. But his advice may be based more on convenience. RRIF withdrawals can be made automatically. That’s not the case with RRSPs – a special form must be prepared each month. Plus, the first $2,000 of RRIF withdrawals are eligible for the pension income tax credit, if you’re 65 or older. RRSP withdrawals are not.
GIC rates have moved up to as high as 5% in a few places, but they’re still low by historic standards. It remains to be seen how much higher they’ll go.
Here is what I suggest. Ask for a review of your account for the past five years and request the broker provide an average annual compound rate of return, after fees. If that beats what you’d get from a GIC, the money you’re paying is well spent. If it doesn’t, proceed with your withdrawal and GIC investment plan. – G.P.
Q – My financial advisor advised me not to participate in Imperial Oil’s (TSX: IMO) share buyback. IMO paid $77 per share, which is much higher than current valuation. Interestingly, only 5% of general shareholders participated. Was this a good move? – Kerry G.
A – In early May, Imperial announced details of a substantial issuer bid to buy back up to $2.5 billion worth of shares in a modified Dutch auction. Interested shareholders were instructed to tender their shares at prices ranging from $62 to $78. On June 15, the company said it had taken up and paid for 32,467,532 common shares at a price of $77 per share.
At the time of writing, the stock was trading at $64.27, so it appears those who did not participate missed out on a big gain. But wait, there’s a catch – there always is. The company said it estimates that a deemed dividend of $75.25 per share was triggered on the repurchase, based on the estimated paid-up capital of $1.75 per share as of June 10.
In other words, unless the shares were held in a registered plan, all sellers are going to be hit with a massive tax bill. The dividend will be eligible for the dividend tax credit, but it’s still going hurt. That’s probably why your advisor suggested you stand aside. – G.P.
Q – I’ve recently sold my business and have a small profit to invest (about $100,000). As I’ve been self-employed most of my life, my RRSP is small, and I have no TFSA as of yet. I have an outstanding mortgage loan against the business of $65,000 at 2.39% fixed for two more years. Our $500,000 total mortgage is our only personal debt.
As my husband and I approach our retirement years (about five years to go) we are trying to determine the best course of action for these funds during this market turmoil. He currently earns $135,000 a year and I now earn $50,000. Do we invest it in a spousal RRSP to take advantage of my husband’s much higher income? He has a work pension and $180,000 in an RRSP with approximately $150,000 in RRSP room. Or do we pay down the loan and invest the difference?
I understand every circumstance is different and a lot of information is left out. I feel quite comfortable investing all of it. (Dividend and growth ETFs are my preferred vehicles.) He’s leaning toward paying down the mortgage and investing the difference.
Pros and cons? Any advice is appreciated. – Tanya M., Scarborough, ON
A – I’ve always been a firm believer in paying off debt. This is especially true in the years leading up to retirement. It becomes more difficult to make debt payments after stopping work because in most cases family income drops. You already have a hefty debt load in your personal mortgage. Getting rid of the business loan will make life a little easier.
You might consider using the balance to open your own TFSA. Your husband appears to be financially well positioned, with his pension plan and his RRSP. You should be building your own asset base. – G.P.
If you have a money question you’d like answered, send it to me at gordonpape@hotmail.com and write Fund Library Question in the subject line. I can’t guarantee a personal response, but I’ll answer as many questions as possible in this space.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website. To take advantage of a 50% saving on a trial subscription and receive the special report “The Tumultuous Twenties,” go to https://bit.ly/bwGP20s.
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Notes and Disclaimer
Content © 2022 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
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