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December 1, 2019 | Dr Garth

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.

“Unsure of whether an MSU is appropriate or patronizing, so I’ll just state I’ve been an avid reader and occasional commenter for 12 years, and your advice has saved this Alberta cowboy from himself many a time,” says Thomas, guaranteeing my attention. “I’ve never sent in an email, but puzzling through this one and thought if it was lucky enough to make the blog I’d get some free advice”

Shoot, cowboy. And don’t worry about Wexit, some lameass Alberta Pension Plan or the Barbarian premier. It shall all pass. Now tell us about you.

“I’m in my late 30s, make $200k taxable including bonus and vehicle in the private sector, and for the first time in my 20 year career with the company I’m very concerned about job security. I have P&L responsibility for a large O&G multinational that is struggling to make ends meet in Alberta, and I look every month at the numbers and wonder how much longer they’re going to be willing to bleed before it’s time to try a different strategy. I have a flexible skillset, but if it comes to a pink slip chances our my next gig will halve my income or worse, at least temporarily. I also wouldn’t mind a year or two out of the rat race and high pressure to decide what I should really do now that I’ve grown up.

“Question is this: I have about $60k of RRSP contribution room and $50k in my TFSA. Given my years ahead may not be quite as high earning as I am today, I’d like to max out my RRSP contribution this year while my marginal rate is still around that 42% mark, and use it as a safety net in the case that I find myself unemployed. Do I a) borrow to invest, using the refund to pay down part of the loan or b) take the safe route and cash out my TFSA and dump in in my RRSP, then use the refund to build my TFSA back up? Leaning toward option ‘b’ given the lower debt/risk factor, but curious to know if I’ll be granted the full $50k TFSA contribution room back, since only about $35k was contributions, the rest is gains.  Hope all is well with you and your family. Merry Christmas to Dorothy, Bandit, and yourself my friend.”

Sorry to hear about the job insecurity, Tom. It’s a confusing world at the moment. The feds are anti-carbon. Our pipeline failure has Canadian crude prices in the dumpster. The EV push is upon us. The US is a net energy exporter now for the first time in 70 years. Not good for AB. And the Wexit thing will just make it worse – advocating for a tiny, landlocked country of four million people divorced from the very structures and stability that attract investment capital. What a deceitful fiction.

Regardless, yeah, it’s option B. Cash the TFSA and put the fifty grand in the RRSP. That will give you a refund of twenty to use for the tax-free account, with no debt. The rules allow you to maintain $50,000 in contribution room for the TFSA, plus add another six thousand for 2020. That money can be deposited on the first business day of the new year. Do what you can while the job is still there to rein in spending, sock away more and top up that vehicle. By the way, the more Jason Kenney plays footsie with the separatists, the greater the jeopardy your employment’s in. You might wish to tell him: [email protected].

And now to Ontario, where all the money flows downhill to.

“My husband and I are 56 and 58 years old and have 2 adult children living at home,” says Janice. “They are planning on moving out in the next couple of years (if not sooner).  Our combined income is approx. $110K and we plan on working for at least the next 5 years.”

“We own a modest sized home and still have a substantial mortgage.  Our home value is approximately $1 million and our debts, including mortgage, are $380k.  We have RRSP’s/LIRA valued at approx. $260K in total.  We don’t have any TFSA’s.  My husband does not have a pension plan.  My pension will be small as I have only been at my current job for 6 years.

“We have toyed with the idea of selling our house while house prices are still high and renting something smaller so we can invest our money. We would need to remain in our area as my husband works near the airport. So rent would be approx. $2500. Any advice is appreciated.”

What a common tale these days. Yearning for retirement, net worth mostly in a house, moocher children, no corporate pension and seriously inadequate savings. It’s a recipe for decades of unhappiness. After all, $260,000 in registered savings will deliver a grand or less in disposable income monthly. Add in CPP and eventually OAS, then subtract debt servicing costs, and it’s thin. If the kids don’t launch, Janice, even worse.

Sounds like you have seven hundred thousand in home equity, however. Liberating that and adding it to your existing savings would change everything. If you grew it in a balanced portfolio for the next five years, liquid assets could hit $1.5 million. That would throw off $90,000 a year, or about $7,500 a month, and do it more tax efficiently than your current employment income. Lots of money to pay the rent and enjoy retirement. Just lease a place without multiple bedrooms. You know why.

“I love your blog, and I read it daily,” says David in Toronto. “Keep up the great work, and don’t let the small fraction of people who comment get ya down. :)”

Easy to say, D. Hard to do. Whazzup?

“I have a question I’m hoping you can give some insight on. Lately, a lot of the economic news seems to indicate Canada would be close to a recession (or in one) if it were not for the housing market. As a long time renter, I’ve begun to wonder whether the government is TOO reliant on maintaining the status quo, that should the housing market drift south, they would be forced to step in and prop it up. How likely is it that the government would offer a “bail out” so-to-speak for the housing market in the event of a major downturn? I’d personally be pretty upset if the people that got the market to the insane heights it’s at now were doubly rewarded with a bailout, simply because we’ve been unable to stimulate the economic growth we need to balance things out. What do you think is the likelihood of a scenario along those lines?”

Zero, David.

Already the feds are planning on a massive $28 deficit in 2020, and the economy is doing just fine. In a recession costs go up and revenues go down, making national finances even worse. Bailing out underwater homeowners would be massively expensive, patently unfair and – based on US experience – a failure. Rent, wait and watch.

Finally, here’s Curtis. Suck-up, then query: “I’ve read the blog daily for years and you’ve shaped the way I think about personal finances immensely. Can’t thank you enough!”

“I’m wondering: how do spousal loans work in practise? My wife and I deposit all of our income into a shared chequing account. All of our living expenses and monthly deposits to investment accounts stem from there, regardless of whose name is on the investment account. With all of our income mixed in together, what does one of us loaning money to the other for the purpose of investing practically look like? What does the 2% interest look like? I’m really curious about this one. Any insight you can provide is much appreciated!”

Spousal loans are great for income-splitting and tax reduction in a household where you and your mate earn widely differing amounts. By making the less-taxed person the investor, more of the gains can be kept, so loaning that partner money makes sense. The loan rate has to be at least 2% (the current CRA level) with interest paid annually, added to the taxable income of the lending spouse. The costs are deductible, however, in the hands of the borrower. There will be no attribution of investment gains back to the lender – which is the whole point of this exercise.

So if there’s an income disparity in your house, Curtis, you should stop co-mingling your net incomes, pay all of the household expenses yourself then loan her a pile of cash for a non-reg account. And, of course,  be a model husband. That may involve flowers and manners. Be prepared.

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December 1st, 2019

Posted In: The Greater Fool

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