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Does Your Money Have A Job? Janet Gray Page 23
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JULY/AUGUST 2018
SPECIAL FEATURES BTSX – Then, Now, And In The Future - Part 1 David Stanley, Ross Grant & Matt Poyner 6 Leave To Grow Or Withdraw Some Dough - Factors To Consider When Pondering Early RRSP Withdrawals – Part 3
Colin Ritchie 9
Millennial Introduction To Investing - Part 1 The Learning Curve In The New Era
Barkha Rani 12 Don MacKenzie 15
Debunking Lease Renewal Myths – For Commercial Tenants Jeff Grandfield and Dale Willerton – The Lease Coach 17 “FLEX”ing For Profits
Benj Gallander 18
Pipeline Pessimism Looks Overdone Enbridge, Transcanada Still Pumping Out Profits
Richard Morrison 20
Does Your Money Have A Job?
Janet Gray 23
Renewable Energy
Michael Patenaude 25
Why U.S. Stocks Belong In A Canadian’s Portfolio
Nick McCullum 30
EDITOR-IN-CHIEF: Lana Sanichar EDITOR: Peter Hodson CONTRIBUTING EDITORS: Ed Arbuckle, Margot Bai, Robert Barney, Dan Bortolotti, Ian Burns, Bruce Cappon, John De Goey, Donald Dony, David Ensor, Ken Finkelstein, Derek Foster, Benj Gallander, Robert Gibb, Andrew Hepburn, Shelley Johnston, Robert Keats, Cynthia Kett, Ken Kivenko, Camillo Lento, Marie-Josée Loiselle, Alan MacDonald, Brenda MacDonald, Gina Macdonald, Robert MacKenzie, Ross McShane, Ryan Modesto, Caroline Nalbantoglu, Tim Parris, Peter Premachuk, John Prescott, Kyle Prevost, Brian Quinlan, Wynn Quon, Rino Racanelli, Colin Ritchie, Scott Ronalds, Norm Rothery, Stephane Ruah, Allan Small David Stanley, John Stephenson, Brian Tang, Angelo Vicere, Becky Wong. MEMBERSHIP RATES: All rates for Canadian residents are printed on the inside back cover. Non-residents of Canada may purchase the online edition only – at $26.95 for one year’s service. Canadian MoneySaver (CMS) is published by The Canadian Money Saver Inc., 55 King Street West, Suite 700, Kitchener, ON N2G 4W1 Tel: 519-772-7632. Office hours: 9:30 am to 1:30 pm EST Website: http://www.canadianmoneysaver.ca E-mail: moneyinfo@canadianmoneysaver.ca PRIVACY POLICY: CMS may make its members’ mailing list or e-mail addresses available to carefully screened companies or organizations offering products or services that may be of interest to you. If you prefer not to receive these offers, send us your mailing label with “Do Not Rent” written on it. (Required statement. We do not rent addresses.) Canadian MoneySaver publishes monthly with three double issues (July/Aug, Nov/Dec and March/April). Canadian MoneySaver is an independent, totally membership-funded magazine. The information contained in Canadian MoneySaver is obtained from sources believed to be reliable. However, we cannot represent that it is accurate or complete. The views expressed are those of the writers and not necessarily those of The Canadian Money Saver Inc. Neither the information nor any opinion expressed constitutes a solicitation by us for the purchase or sale of any securities or commodities. Canadian MoneySaver is distributed with the explicit understanding that Canadian MoneySaver, its publisher or writers cannot be held responsible for errors or omissions. Shareholders of The Canadian Money Saver Inc, editors and contributors may at times have positions in mentioned investments/securities.
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ShareClubs Join any of the listed ShareClubs by contacting your local volunteer. Like-minded members get together to share financial information. No cost. No obligation. Just an inquiring mind. The agenda for each group is shared by all group members, i.e. it is not just the responsibility of the contact person. ShareClubs are unlike investment clubs because they are meant to share investing information only. Contact MoneySaver and volunteer to start a ShareClub in your area. When ShareClubs are filled, they are delisted. VOLUNTEER REGION CONTACT ONTARIO Blake Hoo Ajax/Pickering blake.hoo93@gmail.com John Mayo Aurora johnmayo@sympatico.ca Frank Attobelli Bolton 905-857-6527 James Bolen Caledon 416-617-7311 Ken Kyer Cornwall kyerk@hotmail.com Kaye Canada Etobicoke kaye.canada@yandex.com Al Piccoli Georgetown alpiccoli@outlook.com Ron Sneltjes Guelph guelphshareclub@gmail.com John Hyslop Hamilton john.hyslop@sympatico.ca Matthew Moore Kincardine/Port Elgin 519-371-6592 Irving Freilich Kingston 613-544-3257 Richard Gerson Kitchener-Waterloo gerson@kw.igs.net Bob Gauld London 519-657-4393 Dipen Parekh Milton 647-745-2420 Linda Sopoco Delfin Mississauga 905-858-5555 Jim Ashley Newmarket cjimashley@gmail.com Peter Matsdorf North York I matsdorf@rogers.com Dominic Pun North York II dpun@uwaterloo.ca Gerry Hogenhout Orangeville 519-942-0220 Tom Loftus Oshawa 905-725-1979 André Albert Ottawa OttawaShareClub@gmail.com Walter Rinzema Peterborough 705-748-2824 Paul Mintha Port Hope 905-885-8659 Volunteer needed Scarborough moneyinfo@canadianmoneysaver.ca Jeff Danby St. George 519-753-7414 Gary Poxleitner Sudbury gmpoxleitner@gmail.com Luke Zhang Toronto-Central ellensdegenerates@hotmail.com Ron Closs Thunder Bay classicitems42@gmail.com Henry Lamasz Unionville/Markham hmlsz@rogers.com Leif R. Montin
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ell, here we are at the start of another summer. We hope you enjoy it, and here's to better weather (in Ontario at least) than last year. The economy is strong. Jobs are plentiful. Stock markets continue to do well. For investors, not much is going wrong these days, or this year. Sure, we had the quick correction in February, and the Canadian market continues to lag world markets. Diversification—where have we heard that before?—continues to be your friend. Yet, everywhere we see, investors are pessimistic: 'the bull market CAN'T continue', they say. 'Trump is going to kill the market', others will chime in. 'Interest rates will destroy the housing market', more will opine. We never have figured out why most investors are typically pessimistic. Sure, everyone has been burned on a lousy stock, or two or three, in their investment career. But just because you owned one loser doesn't mean 'everything' needs to be suspect. Companies such as Shopify, Constellation Software, Great Canadian Gaming, The Stars Group and Dollarama continue to show that money can be made, even after a nine-year stock market run. And these are the Canadian examples. In the US, we could give hundreds of examples of companies that continue to reward investors with great investment returns, even when many think the market is 'overvalued'. It's summer. It's sunny out. The market is strong. Maybe just enjoy it for awhile. Sure, there will be a correction one day. But it doesn't need to be this month, this week, or this year. Even if it is, if you have chosen your investments well, you need not panic. You have invested well: stress less, and have some fun.
Peter
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Peter Hodson 902-569-3601
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MoneySaver DIVIDEND& COMPANY NEWS In this column we list recent news, events, dividend income news and any other relevant information for MoneySavers. News items are those received after our last publication date. • Andrew Peller (ADW.A) raises dividend by 14% • National Bank (NA) raises dividend by 3.3% • BMO Financial (BMO) raises dividend by 3% • Activist fund Clearwater Capital urges AutoCanada to undergo strategic review • Canadian government blocks the takeover of Aecon Group • Kinder Morgan Canada TransMountain Pipeline is taken private by Canadian government
Canadian MoneySaver MODEL ETF PORTFOLIO SYMBOL
CATEGORY
PRICE
# OF UNITS
iShares 1-5 Year Laddered Corporate Bond
CBO
Fixed Income
18.33
506
9,274.98
6.6%
iShares DEX Universe Bond
XBB
Fixed Income
30.59
166
5,077.94
3.6%
iShares S&P/TSX Canadian Preferreds
CPD
Fixed Income
14.13
460
6,499.80
4.7%
ETF
TOTAL
% OF PORTFOLIO
iShares S&P/TSX Capped Composite
XIC
Equity: Canada
25.60
980
25,088.00
18.0%
iShares S&P/TSX Cdn. Div Aristocrats
CDZ
Equity: Canada Div.
25.57
613
15,674.41
11.2%
iShares U.S. High Yield Bond Index ETF
XHY
Fixed Income
19.05
350
6,667.50
4.8%
Vanguard FTSE Emerging Markets Index
VEE
Equity: Emerging
34.81
194
6,753.14
4.8%
Vanguard FTSE Developed Europe All Cap
VE
Equity: Interntional
29.62
304
9,004.48
6.5%
SPDR S&P 500
SPY
Equity: U.S.
270.94
29
10,179.87
7.3%
Vanguard Div. Appreciation Index
VIG
Equity: U.S. Div.
101.88
74
9,767.68
7.0%
iShares Russell 2000 Growth
IWO
Equity: U.S. Growth
202.88
45
11,828.31
8.5%
BMO Covered Call Utilities
ZWU
Equity: N.A. Div
12.41
437
5,423.17
3.9%
Vanguard Information Technology Index
VGT
Equity: U.S
183.01
27
6,401.91
4.6%
Consumer Discretionary Select Sector SPDR
XLY
Equity: U.S
105.76
43
5,891.97
4.2%
Cash
Cash
Cash
6,034.24
4.3%
Total Portfolio Exchange Rate Inception value: Inception date:
139,567.40 1.30
$ Gain/(Loss):
39,567.40
100,000.00
% Gain/(Loss):
39.57%
October 18, 2013
% Annualized:
8.25%
Prices are at market close on May 31, 2018. Individual prices are in USD$. Portfolio values, $Gain/(Loss), % Gain/(Loss), % Annualized all reflect USD$ values are converted to CAD$ CURRENT NOTES: none OTHER NOTES: Keep in mind all investors are different. This portfolio is designed as a guide in setting up your own personal portfolio. Unique considerations and adjustments need to be made to reflect your personal situation. Please perform your own due diligence before making investment decisions. For use by Canadian MoneySaver subscribers only. Not for redistribution. Please direct portfolio questions to moneyinfo@canadianmoneysaver.ca
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Beating The TSX
David Stanley
Ross Grant
Matt Poyner
BTSX – Then, Now, And In The Future – Part 1 –
I
am Dave Stanley back from retirement to share with you some great results from our BTSX experiment and mention some changes the column is undergoing. We now have 30 years’ worth of data and I hope it will excite you as much as it has us. First, though, I think it might be worthwhile to go back over the history of how this all developed. I wrote the first BTSX column in 1996, a year after I took advantage of an early retirement package. A friend had given me a subscription to the CMS as a gift which led me to contact the Editor, Dale Ennis, with some criticisms on an article dealing with dividends. He asked me if I thought I could write on this subject and I accepted Dale’s offer, leading to 20 years of columns and a great deal of learning on my part. In the beginning I knew virtually nothing about investing other than buying savings bonds and mindlessly handing my money to mutual funds salespeople. What I hoped to do was to be able to construct some method that would allow me to control my own investing. Given my lack of knowledge in the area it would have to be simple to understand, easy to implement, inexpensive, and offer the hope of sustainable above-average results. So, when I read ”Beating The Dow” by Michael O’Higgins it struck a receptive chord. Mr. O’Higgins wrote that simply by selecting on a yearly basis the top ten yielding stocks in the blue-chip Dow 30 Industrial Index an investor consistently could achieve higher results. Amazing! He produced convincing
data as well as having skin in the game, making his work very believable (as an aside I agree with Nick Taleb that with most things, but especially finances and investing, if someone tries to persuade you of a particular course of action and cannot cite honest data as well as having some skin in the game then you are listening to or reading just another opinion with no reason to think it is superior to your own.) I could think of no reason why O’Higgins’ approach should not work with our Canadian stocks and so the BTSX system was born by pure plagiarism. As I look back now it was mistake to assume this perfect compatibility; U.S. and Canadian blue-chip indices are very different and I should have allowed for that. In any case, no matter how flawed, BTSX worked for more than 20 years and worked well. Let’s look at our results. Figure 1 shows total return data for the full 30 years in two segments: the oldest data is mine and the newer part is Ross Grant’s. Note how the two segments overlap quite well. What strikes me about this graph is the large change in amplitude from year to year. As investors we must get used to such gyrations since, although in general the overall trend of the market is upwards, taken on a yearly basis we see great and unpredictable variations. So, did we beat the TSX? Yes, and quite convincingly. Over our first 30 years the average yearly return for BTSX was 12.4% compared to 9.6% for the index, an almost
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30% difference. If an investor could beat the index by this wide a margin over a 30-year time period I predict a quite pleasant retirement would lie ahead. Over the years we have had to use several indexes for comparison to our results and it was only when the iShares S&P/TSX 60 ETF (XIU) appeared that we could access reliable data that was not considered by the provider to be proprietary. But all the data we used were total returns of a Canadian blue-chip index. It is important when viewing investing results, especially marketing-based information, to verify that proper comparisons are made. Fig. 1. Results (% Total Return) of BTSX from1987 to 2017. First segment 1987-2014; Second segment 2001-2017.
Fig. 2. Value of $1000 invested in BTSX, or the blue-chip total return index (several were used, most recently XIU), or the TSX Composite Index (dividends included but not reinvested) from 1987 to 2017. Where BTSX data overlapped (see Fig. 1) an average of the two was used.
Fig. 3. Ratio of the cumulative returns of the BTSX portfolio to that of the total return index.
While our results are gratifying, the whole emphasis of BTSX throughout its existence has been long-term success. In Figure 2 we present data showing how a $1000 investment grew over 30 years. Immediately it is apparent that BTSX produced over twice the wealth as the index. It is also obvious that the larger TSX Composite Index, with dividends included but not reinvested placed a distant third. I am going to predict that there is not a mutual fund or ETF that invests in Canadian large-cap, bluechip stocks that can match our record over this time period. The most important aspect of Figure 2 is that we can see clearly the advantages of compounding dividends. Never have I found a better example of compounding that used real data. Canadian investors need to understand the value of compounding and how it can work in their favour. What this means in practice is that BTSX is just a workable methodology to be used in order to build up, over time, a portfolio of high-dividend paying, blue-chip Canadian stocks bought at a reasonable price. Let’s say you purchase an initial ten stocks; the next year several drop off the list, maybe some of them because the price has gone up, meaning the yield has gone down, but the price going up is a good thing! If you like the stock and have done your research there is no real reason to sell it. Rather, why not keep it as part of a long-term portfolio, DRIP the dividends into new shares, and let compounding work for you. The final graph, Figure 3, is based on a suggestion from Jack Bogle, the founder and former CEO of the Vanguard Group. He says that in order to determine whether there are real practical differences between two data sets you should simply divide one set by the other and graph the result. Figure 3 convinces me that there is indeed a true advantage to the BTSX approach to investing. However, it also
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shows a big flaw; around the turn of the decade a large drop in the curve can be seen. At the time I was on the verge of abandoning BTSX until it dawned on me what had happened. The indices we deal with are market-cap weighted, meaning that the higher the share price and the more shares that are issued the greater weighting the company has in the index. Around 2000 Nortel’s share price was soaring until, at its highs, Nortel, which didn’t pay a significant cash dividend, represented more than 40% of the S&P/TSX 60 index. There was no way a BTSX portfolio could offset the Nortel effect, but after the stock crashed and burned (sadly leaving many investors and employees in the lurch) the problem solved itself.
David W. Stanley, Guelph, Ontario Matt Poyner is a DIY investor based in Whitby, ON. matt.poyner@gmail.com Ross Grant is the e-book Author of Destination: Early Financial Independence, available on Amazon and Kobo for $5.99. Free e-reader software is available for PCs, MACs, etc. to view the book. Please email Ross if you need the links. You can reach him at RossGrantEFI@gmail.com
Book Excerpt
Use Of Trusts In Disability Ed Arbuckle
• To retain social assistance benefits (Henson trusts) • To manage ownership of property for a person who is not legally able to do so • To make distributions to a beneficiary for day to day living costs • To accommodate favourable tax treatment including the transfer trust assets to others when the trust is no longer needed • To hold a residence for a person with a disability in a trust • To receive RRSP and RRIF plan proceeds on the death of a parent or grandparent (Lifetime Benefit trust) • To hold inherited assets as exempt assets under provincial social assistance rules (inheritance trust) • To receive life insurance proceeds on death (Life insurance trust) • To have access to graduated tax rates (qualified disability trust)
the trust (settlor). Beneficiaries enjoy the assets of the trust through distributions they receive from the trust. Trusts are effective vehicles for managing the distribution of your wealth according to your rules when you are unable or no longer wish to do so or after you die. In disability planning, trusts are usually discretionary— this means that trustees have full power to decide, if, when and how much will be distributed to a beneficiary. The beneficiaries have no absolute rights to distributions nor are any trust assets set aside for them. Once the trust has fulfilled its mandate to supplement the income of a beneficiary with a disability, the trust is usually terminated and any remaining trust assets are distributed to surviving family members or sometimes to a charity. It is sometimes thought that a Henson is unique to disability, but this is not the case. A Henson trust is simply a discretionary trust with the core purpose of preserving social assistance for a beneficiary. Although a Henson trust is primarily used to fulfill that mandate, it can be used for many other purposes such as owning a home, avoiding the Public Trustee or getting better tax treatment.
There is a serious lack of knowledge about trusts by families involved with disability. In the end, trusts are flexible vehicles for holding property that will be managed by trustees under rules in the trust document as dictated by the person who established
Excerpted from The Family Guide to Disability and Personal Finances (Page 92) by Ed Arbuckle, CPA, FCA, TEP Copyright © 2018. All rights reserved. www.thefamilyguide.ca
Trusts have several purposes when it comes to disability, as shown in Figure 5.1. Figure 5.1: The Purpose of Trusts Relating to Disability Trusts
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Legal And Big Picture Planning
LINDA MACKIE PHOTOGRAPHY
Leave To Grow Or Withdraw Some Dough –
Factors To Consider When Pondering Early RRSP Withdrawals – Part 3 Colin Ritchie
I
n this article, I’ll pick up where I left off at the end of my last article, fleshing out some of the things to keep in mind when deciding what to do with your Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). For those of you coming late to the party who have not read the first two parts of this series, I suggest doing just that. Part 1 does some basic mathematical calculations showing how early RRSP withdrawals can mean big savings later in the right circumstances, while Part 2 starts explaining why. For those of you who have been with me since the beginning, the end is now in sight. Let’s cut to the chase.
• Guaranteed Investment Supplement (GIS) and Other Benefit Planning. People expecting to have very little taxable income during retirement may end up paying a lot more tax on the RRSP withdrawal by way of lost government benefits and government subsidies. If you expect to earn GIS benefits in future, each $2 in RRSP withdrawals can cost you about $1 in GIS benefits. Likewise, some provinces offer subsidies on drug costs during retirement based on income levels. Perhaps most importantly to some Canadians, the cost of public retirement facilities is based on income levels. Accordingly, reducing your tax hit prior to moving into an assisted-living facility may reduce your care costs later. These are just some potential examples.
• Poor Health or Life Expectancy. One of the biggest factors against withdrawing money early from your RRSP can be the lost profits you would have received on the money that you have to pay now in taxes that would have remained
invested inside your RRSP if you do nothing. Although those lost profits will also eventually be taxed, some of them would still find their way into your back pocket. The less time between when you trigger taxes early compared to when you would have had to otherwise pay them anyway, the less time these extra profits would have had to grow inside your RRSP. For example, if you withdraw $50,000 from your RRSP a year earlier than necessary at a 30% average tax rate rather than waiting and paying 50% on the same dollars the next year, although you’d only have $35,000 to work with initially, you’re probably still farther ahead of where you’d be if you let it ride for an extra year. Even assuming your investments grew at 20% and were taxed completely as interest at 50% in both cases, I’d much rather settle for getting $3,500 after taxes on the $35,000 I withdrew early (or $37,500 after taxes) than paying 50% tax on $60,000 in my RRSP a year later and keeping only $30,000 after the Canada Revenue Agency (CRA) gets its cut. Of course, the benefits of early withdrawal are far more pronounced if the non-registered money is invested more tax-efficiently. For example, if the $35,000 went into a Tax-Free Savings Account (TFSA) and still made 20%, the early withdrawer would earn $7,000 after tax that year while procrastinator would only make $5,000 after tax despite having $15,000 more before tax to sink into the market. Ultimately, if you knew when you were going to pass on or that you wanted to use more than just the minimum amount you’d need to withdraw from your RRIFs in a few years, can get it out at a low tax rate, and can invest it tax-efficiently, it might make sense to bite the bullet.
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• Tax Deductible Investment Fees If you pay investment fees inside your RRSP or RRIF, you can’t deduct them each year. Although you still pay them from inside your accounts and will get the same thing as a deduction eventually since you won’t have as much money to be taxed on, you need to wait until withdrawal to get this benefit. If instead, you have a non-registered portfolio and pay a percentage annual or monthly fee to your broker, you can deduct this fee each year. This works particularly well if you are earning dividends, capital gains or return of capital, which are taxed at lower rates than the deduction you receive from paying your fees. Thus, you get to deduct your fees now if in an open account rather than later and get to deduct them against investment income that likely won’t be taxed as heavily as it would if invested inside your RRSP.
• Potential Estate Disparity When Using Beneficiary Designations. If naming multiple beneficiaries on an RRSP or RRIF, the survivor gets the whole thing if the other(s) don’t outlive you. This can be a problem if you name your children jointly but would want grandkids to inherit in their parents’ place. To make things even worse, the surviving children would get the money tax-free most of the time and your estate would be the one paying the piper. That would mean that if your grandkids inherited their deceased parents’ share of the rest of the estate that they would get a smaller piece of that pie as well, as their share of the estate would be net of the tax bill on the RRSPs that went to their aunts and uncles. Obviously, you can update your beneficiary designations if necessary if you are still healthy, but if you are not, this cannot usually be done through a Power of Attorney. Thus, if you are sick for many years, you are banking on the fact that nothing happens to any of your children during that time. An easy solution is leaving the RRSPs etc. to your estate and accepting that this means probate fees and exposure to will and estate issues. For larger registered plans, consider leaving them to a trust that can stipulate what happens to a deceased child’s share while still avoiding probate fees and estate challenge issues. Unfortunately, many people just rely on the simple beneficiary designations for their registered plans. Accordingly, I wanted to make sure my readers are aware of this problem.
Factors Discouraging Early Withdrawals Most of the considerations mentioned in this and my first two articles in favour of pulling your RRSP money out early suggest keeping your RRSP intact should the necessary conditions not apply. For example, you might be better off taking some money out now if you are in a lower tax bracket, love dividends, have poor health and don’t expect to draw down your RRSP before death. Conversely, if you are in great health, may use all your RRSPs during your lifetime and love interest-based investments, you might be better off leaving things alone for now. Here are a few other things to keep in mind that might suggest you keep your RRSPs intact for as long as possible: • RRSPs and RRIFs have creditor protection, which might be useful for those unlucky few facing bankruptcy or a nasty lawsuit; • The first $2,000 of RRIF money for those over 65 qualifies for the pension income credit. Accordingly, some of us with smaller RRSPs might be better off (depending on whether they are getting GIS or other income-based benefits) to take their RRIF money out $2,000 at a time. Assuming that it all comes out this way over time, it essentially means you can get your RRIF money out with little tax owing. As well, your money gets to compound for longer as you wait, which can mean more money to you over the long term; • RRSPs and RRIFs have beneficiary designations, which is an easy way of avoiding probate and potentially estate creditors. You can get this protection within TFSAs, segregated funds or other planning techniques if owned outside of your RRSP or RRIF, but it might also require a bit more effort and work on your part to put this in place; • If you have a financially dependent, disabled child or grandchild, you may be able to roll over up to $200,000 of your RRSP or RRIF to that person at your death, minus any other contributions made to their plans during their lifetime; and • It is easier for you to budget when inside your RRSP / RRIF. Some of us, such as those who are spenders or have a hard time saying no when children ask us for money, may benefit from keeping the cash in the RRSP / RRIF as long as possible if it helps with budgeting or makes it a bit harder to write that cheque for a child that is not truly in need.
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