Managed Money Reporter Newsletter — Issue 124, May 1997

Editors: Carl Spiess & Allan McGlade

Better Rates, Improved Statements and How to Protect Your RSP/RIF from Revenue Canada

By Carl Spiess

Looking for Higher Rates?

Many analysts are suggesting that we are now in a prolonged period of lower interest rates. While the nominal rate of interest is now as low as 20 years ago, inflation is even lower, resulting in a rather decent real rate of return. We continue to recommend stripped bonds for the conservative portion of your portfolio, and now have another bond alternative for your portfolio - the High Yield or High Income bond fund.

Generally we advise against bond funds, since government bonds are one type of investment that can be bought directly, in smaller amounts, without significant costs. As one government bond is as secure as the next, guaranteed regardless of how much you own, there is no need to diversify by using a bond fund. In fact, due to the management fees on bond funds of 1% - 2% per year, if the fund manager buys the same 7% 10 year government bonds you can, your return drops to 5% or 6%. If we had bought the bond directly for you, you would keep all 7% every year for the 10 years. (Of course if you are making small monthly contributions, a regular bond fund is still a good option.)

As mentioned, there is one kind of bond mutual fund that we do recommend for all investors. These are high yield or high income bond funds. You may know that many companies offer bonds, as well as government issuers. These companies have to offer higher rates on their bonds than the governments, because they have slightly higher risk. Because the risk is different for each company's bond, we have the need to diversify the corporate bonds in a mutual fund. The high yield bond fund offers the same advantages as a stock fund: low investment minimums on investments which are usually unaffordable to individual investors, diversification to avoid risk, and professional management researching which company's bonds are good investments.

There are several high yield funds available. O'Donnell High Income and Trimark Advantage Bond fund are two good examples where the fund managers use their experience in picking good companies for their stock funds, and then buy the bonds issued by the same companies for the bond fund. If you have questions on these investments or wish to place an order, please e-mail us or give us a call at 416-863-7777 or 1-800-387-9273.

New Statements on Their Way

Our information systems department has now confirmed that, barring a postal strike or other natural disaster, you should see their new format statements printed on May 31st (or June 30th for those who have no account activity in May). ScotiaMcLeod will be the only brokerage firm on the street listing the total value of contributions into registered plans, as well as book value and of course, market value. A complete brochure outlining the improvements and how to read the new statement will also be included.

Reminder - Invest that Tax Refund

Just a reminder to use your tax refund to pay down next year's RSP or set up a non-registered savings plan.

A Great Idea for Protecting your RSP/RIF from Taxes

This month, Allan McGlade describes a way to minimize the tax bite that Revenue Canada will eventually take from your RSP/RIF (see below). Especially for those turning 69, 70 or 71 this year, you will want to discuss your options with us in the next few months.

Estate Planning

By Allan McGlade

Insuring Your RSP/RIF

You are doing everything right. You make your annual maximum RRSP contribution, using the tax refund to make the current year's contribution or pay down the mortgage. The registered assets are growing at a steady clip thanks to the asset allocation you implemented several years ago. Retirement is still a few years away but it looks like you will be able to retire comfortably. As a matter of fact you may defer drawing down on your registered assets until age 69 and even then you will only withdraw the minimum required as per Revenue Canada's RIF payment schedule.

So what else is there to do? More and more as Canadians retire they are realizing that it is highly unlikely they will outlive their RIF assets. The good news is they will have enough income to live comfortably while retired. The bad news is their estates will be subject to a significant tax bill.

The Problem

On the death of the first spouse Revenue Canada permits a rollover of the registered assets to the surviving spouse. However, when the surviving spouse passes away the RSP/RIF capital is added to the deceased's earned income for the year and taxed at their highest marginal rate. If the remaining value is six figures you can expect the tax bite to be in the area of 50%. In other words if you have $500,000 remaining in your RIF at death, the executor/executrix will write a cheque for $250,000 to Revenue Canada.

The Solution

The question I ask our clients when the realization of the tax implications has set in is, "If you could pay the taxes with discounted dollars, would you be interested in doing so?". Invariably the answer is yes. The solution is to use a joint and last to die insurance contract that is purchased for the estimated future liability. The annual premium will range from .5% to 2% of the tax liability and based on average life expectancies the total outlay will represent 50 to 60% of the liability. This type of contract insures two lives and pays out the benefit when the second insured dies. The premiums depend on the ages and overall health of the couple being insured. Single people and widowers can purchase single life coverage, however, the premiums are not quite as attractive. The end result of this strategy is that your estate keeps more of your hard-earned dollars (40 to 50% more) than if you did nothing. It should be noted that there is a break-even point, but it is usually not until someone hits his or her mid-nineties that the insurance would not have made sense.

In summary, as the charts depict, an option to pay fifty cents on the dollar in small installments to cover a tax bill is well worth investigating. At some point in your life there comes a time when investing to preserve your net worth is as important as investing to increase it.

For a proposal tailored to your specific situation contact Allan McGlade at 416-862-3066 or 1-800-387-9273.


Contact Us

T.  416.863.RRSP (7777)
F.  416.863.7479

ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.

Security | Privacy Policy | Legal Information | Important Information | Site Map




® Registered trademark of The Bank of Nova Scotia, used under licence. ™ Trademark of The Bank of Nova Scotia, used under licence. Scotia Wealth Management™ consists of a range of financial services provided by The Bank of Nova Scotia (Scotiabank®); The Bank of Nova Scotia Trust Company (Scotiatrust®); Private Investment Counsel, a service of 1832 Asset Management L.P.; 1832 Asset Management U.S. Inc.; Scotia Wealth Insurance Services Inc.; and ScotiaMcLeod®, a division of Scotia Capital Inc. ("SCI"). Wealth advisory and brokerage services are provided by ScotiaMcLeod, a division of SCI. Insurance services are provided by Scotia Wealth Insurance Services Inc., the insurance subsidiary of SCI. When discussing life insurance products, ScotiaMcLeod advisors are acting as Life Underwriters (Financial Security Advisors in Québec) representing Scotia Wealth Insurance Services Inc. SCI is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.

The Spiess McGlade Team is a personal trade name of Carl Spiess and Allan McGlade.