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TAX-SHELTERED SAVINGS VEHICLES PAGE 06
MORTGAGE INVESTMENT CORPORATIONS: WHY INVEST? PAGE 08
HENSON TRUSTS – AN IMPORTANT DISABILITY-RELATED ESTATE PLANNING TOOL PAGE 10 1 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
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LL 2 019
YOUR MORTGAGE INVESTMENT CORPORATION
ACCOUNTING, AUDIT, TAX & ADVISORY SPECIALISTS
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300
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Year Founded
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Kathy Steffan, CPA, CA Partner, Toronto ksteffan@welchllp.com
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MORTGAGE INVESTMENT CORPORATIONS: WHY INVEST?
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Elliott Bourgeois, Manager, Family Wealth Management Group at Welch LLP, discusses nuances of Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA).
Sanjay Ramwani, Chief Operating Officer at Indigoblue Group of Companies, explains why investors should consider Mortgage Investment Corporations and what distinct advantages they offer.
HENSON TRUSTS – AN IMPORTANT DISABILITY-RELATED ESTATE PLANNING TOOL Elisa Mangina, Trusts & Estates lawyer at PooranLaw Professional Corporation, outlines the fundamentals of Henson Trusts, which can help ensure a secure financial future for loved ones dealing with disabilities.
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It’s the most wonderful time of the year! The holiday season is around the corner and amongst all the festivities, some key deadlines usually get overlooked. Indeed, this is the most opportune time to review our savings plan. With Feb 29th, 2020 deadline for RRSPs for 2019 tax year, most of us forget the earlier deadline of Dec 31st for TFSAs and RDSPs for 2019 tax year. We have dedicated this issue of Private Matters Today to savings with a key emphasis on registered savings plans. With many Canadian families dealing with disabilities, the importance of financial tools that provide for the disabled loved ones in the long run has never been more critical. Investors from all walks of life are searching for better returns and can’t afford to subject their life savings to volatile capital markets globally. In light of an alarming debt to income ratio that plagues an average Canadian, the importance of savings
ART DIRECTOR / DESIGNER Nina Salehpoor PRODUCTION MANAGER Sanjay Ramwani FOR EDITORIAL & ADVERTISING PLEASE CONTACT: Prakash Bector, VP Sales & Marketing Tel: 416-400-3977 x 20
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EDITORIAL Harry Singh CONTRIBUTORS Elliott Bourgeois Sanjay Ramwani Elisa Mangina
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couldn’t be overstated. The most common reason that people cite when justifying missing deadlines in regards to RRSP, RDSP and TFSA contributions is that they simply ran out of time. While there will be many priorities in life, planning for retirement and the education and well being of our loved ones should be on top of the list. As always, we have reached out to subject matter experts in the industry to provide educational content that should guide our readers in the right direction when it comes to various savings plans. We highly encourage our readers to seek out experts that can further assist in getting a savings plan in place that will provide the foundation for a financially prosperous future.
Happy reading!
Harry Singh MBA, CRM
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Private Matters Today Inc. is a national publishing company. We produce a national print and digital publication to providing educational content surrounding the alternative lending and investments industry. Copyright is reserved throughout. No part of this publication can be reproduced in whole or part without the express permission of the editor. The opinions expressed in articles are not necessarily those of the publisher. Information presented is compiled from sources believed to be accurate; however, the publisher assumes no responsibility for errors or omissions.
MARKET INTELLIGENCE
1
2
BOC OVERNIGHT RATE
1.75%
1.54%
5 YEAR BOND YIELD
3.95%
INFLATION RATE
1.60%
ANNUAL GDP GROWTH RATE
3
BANK PRIME
1.90%
BANK OF CANADA BENCHMARK
5.19%
DEBT TO INCOME RATIO Q2 2019
174%
HOUSING STARTS
221
(THOUSAND UNITS MONTHLY)
Source: www.tradingeconomics.com/indicators . Effective as at October 24, 2019
INDIGOBLUE MIC VS. S&P/TSX COMPOSITE INDEX $120.000
6.2%
$113,695.76
$115.000 $110.000
6%
IC
LUE M INDIGOB
$105.000
5.8%
$100.000 $95.000
UNEMPLOYMENT RATE
5.8% 5.8% 5.8% 5.6% 5.6%
$102,408.52
5.7%
S&P/TSX COMPOSITE INDEX
$90.000
5.8%
5.7% 5.7%
5.4%
5.5%
5.5%
5.4%
$85.000 $80.000 2018
Q1
Q2
Q3
Q4
Q1
Q2
Oct 2018
Q3 2019
Nov
† S&P/TSX Index performance data is adjusted for splits & dividends. Indigoblue MIC actual performance is based on an annualized dividend rate of 7% until Nov 30 and at 7.75% from Dec 2018 onwards. Indigoblue MIC monthly dividends are reinvested as part of the DRIP program.
Dec
Jan
Feb
Apr
May Jun
Jul
Aug
Sep 2019
5.2%
Source: www.tradingeconomics.com/canada/unemployment-rate
MORTGAGE ARREARS RATE
CREDIT CARD ARREARS RATE
0.6%
5%
0.5%
4%
0.4%
3%
0.3%
2%
0.2%
1%
0.1% 2009
Mar
5.6%
0 2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2008
2009
2010
2011
2012
2013
2014
2015
Source: www.cba.ca
600,000 550,000 500,000 450,000
Source: www.creastats.crea.ca/natl For information purposes only. Private Matters Today is not responsible for accuracy of the information above. Subject to change. 5 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
2019-Q3
2019-Q2
2019-Q1
2018-Q4
2018-Q3
2018-Q2
2018-Q1
2017-Q4
2017-Q3
2017-Q2
2017-Q1
2016-Q4
2016-Q3
2016-Q2
2016-Q1
2015-Q4
2015-Q3
2015-Q2
2015-Q1
2014-Q4
2014-Q3
2014-Q2
400,000
2014-Q1
Number of Transactions
NATIONAL RESIDENTIAL REAL ESTATE SALES ACTIVITY
2016
2017
2018
T
X-SHELTERED A SAVINGS VEHICLES Article by Elliott Bourgeois, Manager, Family Wealth Management Group, Welch LLP
Stashing cash under the mattress or burying it in the back yard likely isn’t the best approach to savings. Canadians have access to some exceptional registered savings plans, so let’s put the fun in fundamentals as we compare the two most common tax-sheltered savings vehicles: the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA).
Registered Retirement Savings Plan (RRSP) In the simplest terms, the RRSP allows investors to defer paying taxes on contributions until they’re withdrawn. For example, if you earn $100,000 this year and deposit $18,000 into your RRSP, you would be taxed on the difference of $82,000. Tax on the $18,000 contribution, along with any investment return, is deferred until retirement. Because you’ve likely already paid tax on the $18,000 you’ve invested in the RRSP, you probably get a tax refund. The philosophy is this: deposit into the RRSP during years of higher earnings, and a higher tax bracket, and withdraw funds to help support retirement when in a lower tax bracket. There is a limit to how much can be deposited into your RRSP annually. Every year income is earned and a tax return filed, RRSP contribution room is generated. This amount is found on the yearly Notice of Assessment from the CRA and is calculated as 18% of last year’s earned income, up to a limit of $26,500 (in 2019). If a company pension plan is present, RRSP contribution room will be reduced by the total of the employee’s and the employer’s contributions to the plan, known as the pension adjustment. A Spousal RRSP is a special RRSP that can provide an attractive income splitting opportunity between married partners. It allows the higher-income spouse to use their RRSP 6 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
contribution room and contribute to an RRSP in the name of the lower-income spouse (the annuitant). Upon withdrawal, amounts are included as income for the lower-income earner and taxed in their hands. Funds can be withdrawn at any time from an RRSP, subject to a withholding tax dependent on the size of the withdrawal. Clearly, the benefits of the RRSP are more pronounced the longer funds remain in the in the plan but the CRA will not allow the tax owing on this income to be deferred in perpetuity. At some point, the funds must be withdrawn and tax must be paid. Before the year in which the plan holder turns 71, funds in an RRSP must be either withdrawn, used to purchase an annuity, or most commonly, converted into a Registered Retirement Income Fund (RRIF). Depending on your age, there are forced minimum withdrawals from a RRIF free of withholding tax, withdrawals in excess of the minimum are subject tax. Importantly, all withdrawals from either RRSPs or RRIFs are considered regular taxable income, meaning that 1) if your marginal tax rate is greater than the withholding tax, expect a tax bill at year end, and 2) any preferential tax treatment of capital gains or dividends is lost. Funds can be temporarily withdrawn tax-free under the Lifelong Learning Plan (LLP) and the Home Buyer’s Plan (HBP). Temporarily, because these amounts need to be repaid in 10 or 15 years, respectively, but repayments do not count as contributions.
Tax-Free Savings Account (TFSA) The TFSA allows age of majority Canadians to invest and have the returns grow tax-free throughout their lifetime. Contributions to the TFSA are not tax deductible, however gains in all forms (interest, dividends, and capital gains) are not taxed. Funds can be withdrawn at any time, for any purpose, and are not
subject to taxes or penalties upon withdrawal. The TFSA is an amazingly versatile vehicle with the main limitation being the maximum amount that can be deposited. Introduced in 2009, yearly deposit limits, generally ranging between $5,000-$6,000 (2015 saw the deposit limit increase to $10,000 only
to fall back to $5,500 in 2016), have muted the benefits of the account. Thankfully, if you’ve missed out on contributing, the yearly deposit maximums are cumulative. As such, if you were 18 in 2009 and have yet to make any TFSA contributions, you could deposit up to $63,500 today. Withdrawn funds can
be re-deposited into the TFSA, although be cautious to no overcontribute as there is a 1% per month tax on the highest excess amount for that month. Presuming you’ve contributed the maximum amount, if you’ve withdrawn funds, you must wait until the next calendar year to re-contribute.
RRSP
TFSA
Plan owner
The annuitant (person named on the plan)
The taxpayer
Plan contributor
Annuitant or spouse
The taxpayer
Minimum age
None
Age of majority
Maximum age
Required conversion in year annuitant turns 71
None
Based on previous year’s earned income. Unused
Dollar amount determined yearly by Federal government.
contribution room carried forward.
Unused contribution room carried forward.
Re-contribution of withdrawals
Contribution room lost when withdrawn
Withdrawals can be re-contributed the next calendar year
Tax treatment of contributions
Contributor claims tax deduction for amount of contribution
Contributions are made with after-tax dollars
Tax treatment of investment growth
Amounts grow tax deferred
Not taxable
Amounts can be transferred to a surviving spouse’s RRSP.
Amounts can be assumed by a surviving spouse if assigned
Other beneficiaries receive amounts after being taxed on
as successor holder. Other beneficiaries receive full account
the deceased terminal return
balance, but no longer tax-free growth
Maximum annual contributions
Tax treatment on death
Where should you contribute? Presuming you have the contribution room; your savings are undoubtedly better positioned in a RRSP or TFSA over a nonregistered savings account. The best vehicle, or mix thereof, for your savings goals will depend on the specific financial situation of yourself and your household. With this in mind, here are some questions to ask yourself:
What are you saving for? If you’re saving for a vacation, a vehicle, or an emergency fund, the answer is easy: TFSA. The question becomes more nuanced when the savings goal is a home, as the HBP option of the RRSP becomes enticing, especially if you’re shrewd enough to re-invest the return you receive from savings into the RRSP. Considering home prices and the ideal down payment of 20% to avoid costly mortgage
Rental Properties Bridge Financing Condominiums Interest Only Payments Fully Open Terms Available Quick Closings
default insurance, the answer will likely be both: a 20% down payment on a $500,000 home is $100,000, while the maximum HBP withdrawal is $25,000.
What are you projected to earn? If your savings goal is retirement, the best choice for savings is largely dependent on your projected future earnings. If your earnings are greater now than anticipated in retirement; the RRSP is probably a good choice. If you foresee your income to increase substantially before retirement, but to fall to lower levels in retirement, it may be best to save the RRSP contribution room for when it will have a larger effect. In Ontario, a $5,000 contribution while earning $80,000 leads to refund of $1,531, while the same contribution if earning $150,000 leads to a refund of $2,240.
As mentioned, the most efficient strategy to achieve your financial objectives is unique to you. A myriad of factors, both current and projected, will dictate the best savings approach for you and your household. That said, with no background information the RRSP v TFSA question can be simply answered: sometimes the RRSP is the better option, but contributing to a TFSA is never a bad choice.
Elliott Bourgeois Manager, Family Wealth Management Group Welch LLP
INDIGOBLUE MIC WILL DELIVER WHEN YOU NEED IT MOST!
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RTGAGE O INVESTMENT CORPORATIONS: WHY INVEST?
Article by Sanjay Ramwani, Chief Operating Officer, Indigoblue Group of Companies
A mortgage investment corporation or MIC raises capital by issuing various classes of shares that provide a targeted return to shareholders. MICs usually engage an administrator for a fee to lend out and manage the funds raised with a set criterion to maintain its MIC status and to manage the risk. MICs were originally introduced in 1973 by the federal government with a goal to stimulate investments in residential mortgages by the private sector.
STMENT C VE O IN
ATION OR RP
Mortgage Loan
MORTGAGE PORTFOLIO
MORTGA GE
How Does A MIC Work?
Mortgage Interest
Share Capital
INDIVIDUAL INVESTORS
Fees & Penalties
Management Fee
Dividends
MANAGER
What’s in it for an investor? An investor can benefit from the following distinct advantages when it comes to investing:
Income Tax: A mortgage investment
corporation doesn’t pay income tax on the income that it generates, provided that it maintains its MIC status. Therefore, the immediate benefit to investors is that they end up with more money in their pockets. However, investors will still have to pay income tax on income they have generated, depending on whether the investment is registered or non-registered.
Return on Investment: Most MICs
provide annualized returns that range from 8 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
5% to 10%, depending on the riskiness of the portfolio. By and large, the credit risk is dictated by underwriting practices of the MIC, which include factors such as location of the property, the borrowers’ credit, type of properties, the borrowers’ income and professional background, and general real estate market conditions.
Regular Distributions: Most MICs pay
monthly dividends to investors and provide for registered and non-registered accounts. Therefore, if the goal is monthly income, then monthly distributions help. On the other hand, if the goal is to grow the investment, most MICs offer Dividend Reinvestment Programs (DRIP) to further enhance return on investment in the long run.
Profits Must be Distributed: Under
foreclose to satisfy the debt outstanding.
the Income Tax Act (Canada), MICs must pay 100% of its annual net income to the shareholders. While most MICs set their target returns conservatively, should the MIC
Risk Diversification: Investing in a MIC
better diversifies the risk in contrast to an investor providing a mortgage to a single borrower. While in both cases the investor is concentrated in the real estate sector, a MIC can spread the concentration over many properties given its scale. As far as concentration is concerned, investors are well advised to consult an Exempt Market Dealer (EMD) to establish a risk profile to optimize their exposure.
Expertise in the Market: Investors will
be left over with additional net income, it is distributed to shareholders as bonus income.
Asset Based Investment: Investors can
take comfort that when they invest in a MIC, the funds are being lent to a borrower while holding real estate as collateral. Should the borrower default on the mortgage, the MIC has remedies available to it to sell or
enormously benefit from the MIC and its administrator’s expertise in underwriting risk and understanding the real estate markets. Furthermore, the size and scale of the MIC allow it to garner expertise from other professionals, such as appraisers, lawyers and insurers to better protect the portfolio from credit and other market risks.
above, in conjunction with the low yield environment in the capital markets, certainly explain the popularity. As with any investment option, there are risks that investors must consider. Exempt markets dealers specifically focus on alternative investments and understand Mortgage Investment Corporations. An investor is highly encouraged to discuss her financial situation, goals and objectives with an EMD to better understand the credit, liquidity and other risks. Providing the risks are understood, investment in a MIC could be a productive strategy that will bolster your own personal portfolio.
Sanjay Ramwani Chief Operating Officer Indigoblue Group of Companies
Conclusion Over the last 10 years, Mortgage Investment Corporations have become quite popular with investors. The advantages outlined
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H
NSON E TRUSTS
AN IMPORTANT DISABILITY-RELATED ESTATE PLANNING TOOL Article by Elisa Mangina, Trusts & Estates lawyer, PooranLaw Professional Corporation
Henson Trusts and ODSP Many people with disabilities and their families have heard the term “Henson trust,” which is synonymous with “absolute discretionary trust.” Henson trusts are most often used when parents or other relatives want to leave something in their Will for a person who receives Ontario Disability Support Program (“ODSP”) benefits. In order to be eligible for ODSP, a person may not have assets in his or her own name that exceed a certain amount – currently $40,000.1 Anything left directly to the ODSP recipient in a Will is likely to count towards that limit and risks making him or her ineligible for benefits. However, if the Will sets aside the person’s inheritance to be held in what is known as a Henson trust, ODSP does not consider the inheritance to belong to the person. Regardless of the value of the trust assets, they do not count towards the $40,000 limit and thus do not prevent the person from receiving ODSP.
How Is a Henson Trust Created? Like any trust, a Henson trust must have a settlor (the person setting up the trust) and a beneficiary (the person whom the trust is intended to help). There must also be a trustee, who manages the trust assets for the beneficiary. Typically, a family member of a person with a disability sets up a Henson trust in his or her Will. In this case, the testator, or person signing the Will, is the settlor. The person with a disability is the beneficiary, and the 10 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA
trustee will be someone selected by the settlor and named in the Will. The trust does not exist until the testator has died, and as a result, it is called a “testamentary Henson trust.”
What Is – And Isn’t – a Henson Trust? The central feature of a Henson trust is that the trustee must have absolute discretion over how the trust assets are used for the beneficiary. The Will cannot include any requirements about how much will be paid to the beneficiary, or when, or why. The trustee is even free to use nothing from the trust for the beneficiary, ever, and nobody may second-guess that decision. People may conclude incorrectly that this means the trustee can “do anything” with the trust assets – including using them for himor herself. This is false. If the trust assets are used at all, they can only ever be used for the beneficiary’s welfare. The trustee cannot treat them as his or her own. In my practice, I regularly encounter clients who believe that “Henson” is some sort of required magic word that automatically confers protection for ODSP purposes. This is also false. A correctly drafted Henson trust need not contain the word “Henson” in order to be valid. Conversely, just stating that the trust is a Henson trust will not be sufficient, if the language in the Will fails to accord with the legal requirements for a Henson trust. On the testator’s death, ODSP will scrutinize the Will to determine whether the trust qualifies as a Henson trust, so the use of correct wording is essential.
Who Should Be The Trustee?
It can be hard to find just one person who possesses all these qualifications. Sometimes, the answer is to name several people, each with different skills, to be trustees jointly. Another option is for the trustees to seek professional advice related to taxes, accounting and legal issues.
It should be obvious from the above that the trustee has very significant responsibilities, including: • Managing the trust assets; • Deciding how and when to use trust assets for the beneficiary;
Finally, the Will may name a “corporate trustee,” meaning a trust company that will be the trustee. This can be helpful in situations where there are few appropriate individuals for the role, or where the amount held in trust will be very large and require professional management. Trust companies charge fees for their services, and the trust may need to be fairly substantial in order for the cost to make financial sense.
• Keeping detailed financial records; • Complying with ODSP requirements; and • Filing tax returns for the trust. The ideal trustee of a Henson trust will have a firm grasp of financial matters, including disability-specific issues such as ODSP. He or she should be a person of the utmost integrity who knows the beneficiary well. If possible, he or she should live near the beneficiary and be around the same age, or even younger.
banks, and others that are smaller and more independent; your lawyer can help you find a trust company that meets your needs.
Conclusion If you are thinking of setting up a testamentary Henson trust, professional legal advice is essential to ensure that your Will is drafted correctly and that your wishes are carried out. With proper planning, a Henson trust can help ensure a secure future for your loved one in the long term.
Elisa Mangina Trusts & Estates Lawyer
However, this approach can provide peace of mind because the trust company has professional-level expertise and can be relied on to act impartially. There are trust companies associated with each of the major
PooranLaw Professional Corporation
INV ES
1. There are some exceptions that do not count towards this amount, but enumerating them in detail is outside the scope of this article.
7.75% ANNU A RETU L RN
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OPEN A RRSP-TFSA ACCOUNT WITH US TODAY!
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* Target return of 7.75% is annualized for Indigoblue Mortgage Investment Corporation (“IB MIC”). Past returns are not indicative of future returns. IB MIC is a related entity to Indigoblue Capital Corporation (“IB Capital”) which is an exempt market dealer registered in ON, AB and BC.
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