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July 14, 2019 | The Fail

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Eli may not be with us for long. And he needs help.

He’s considering exiting Canada to land somewhere in Central America. Why? To work “as a nomad, earning USD remotely, doubling my income living abroad, inspired by your posts about the Italian Canadian expats.” It’s an interesting thought, given that hundreds of thousands of migrants – chased away by violence and failed economies – are streaming north to test the US border.

So, being a studious little beaver, he went to see an accountant (CPA) dude to learn the tax implications of leaving Canada to work elsewhere. “Unlike the Italians, I plan to retain Canadian citizenship and pay the CRA taxes on my income for now,” he says. Now, the interesting part…

“When the topic of tax avoidance came up he told me that an RRSP allows you to pull money out later tax-free, and a TFSA is best used as a short term savings account. He said with a TFSA you’ll pay some amount of taxes when you pull money out. From my understanding, this all backwards!

“I’m not sure what advice is right after today. If a well-paid tax geek struggles to advise clients on investment vessels that are available to every single Canadian, what chance do I have to make the most of my hard earned income? Can you (once again) summarize the general use cases for both types of accounts, and the tax implications of dipping into them? Should I find a new accountant?”

You bet. The guy’s CPA certification must have come in a box of Cap’n Crunch. Punt him!

By the way, anybody earning income abroad still has to file a Canadian tax return if deemed to be a resident of Canada for tax purposes. That means maintaining “significant residential ties” to the mudderland. That could range from owning real estate in Canada, to having a spouse or kids here, a car, social ties, driver’s license, passport or valid health insurance card.

If you give up on Canada, become a non-resident and emigrate to another country to work (if they’ll let you) expect to face a one-time departure tax on assets left here, like a rental property or investment portfolio (but principal residences, RRSPs and TFSAs are exempt). The day you leave these assets are considered to be sold at market prices, then reacquired, triggering capital gains. So long. Pay up.

Well, back to the failed accountant and Eli’s basic questions.

RRSPs were invented in the 1950s and have worked the same way ever since. Contribute up to 18% of a year’s earnings (maximum $26,500) and deduct this from taxable income in that year or a later one. So, the more you make and the higher your marginal tax rate, the bigger the savings. The money should be invested for growth, all of which accumulates free of tax. Keep the account in place until you hit 71, then a small amount must be claimed as income each year, whether you want it or not. Money can be taken out at any time, but it’s always added to income in the year of the withdrawal – and taxed. The biggest benefit of an RRSP is shifting taxation, therefore. Contribute lots during high-income, high-tax years and suck it out when income is lower. That could be retirement, a mat leave, job loss or screw-this-I’m-going-to-Nicaragua.

The tax-free account (TFSA) is more democratic, – available to everyone regardless of income, and clocks in at a max of $6,000 a year. Like the RRSP, the ‘room’ you earn to contribute never goes away and, similarly, everything you invest inside the plan grows without being taxed. But contributions cannot be deducted from taxable income. Nor are withdrawals taxed. In fact, money taken from a TFSA is not counted as income, even if it is entirely the proceeds of growth. That means in retirement none of the cash flow coming from this account will hike your marginal tax rate nor diminish government pensions. That could be a huge boost.

There’s much more to learn. Contributions to either plan, for example, can be made without cash – by flipping over assets you currently own. An RRSP can be set up for a spouse who earns less, giving you a tax break and splitting income. And virtually any financial asset can be held inside either, yielding taxless gains. So neither should be used as a savings account, holding cash nor low-yield losers like GICs. Plus, everyone should strive to have a non-registered account as well, where gains are taxed annually but capital gains and dividends are given preferential treatment.

You’re right, Eli. Investing’s complicated. Most people suck at it. Moronic accountants don’t help. Don’t forget to write.

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July 14th, 2019

Posted In: The Greater Fool

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