The tax-free First Home Savings Account (FHSA) is a new registered plan that allows qualifying prospective first-time home buyers the ability to save $40,000 on a tax-free basis toward the purchase of a first home in Canada.

The FHSA can remain open for up to 15 years or until the end of the year in which you turn 71 years old. The FHSA must be closed by December 31 of the year following the year of the first qualifying withdrawal, and thereafter you are not permitted to have another FHSA in your lifetime.

Qualifications

You may qualify to open an FHSA if you are resident in Canada, you are at least 18 years old, and you are a first-time home buyer. For the purposes of opening an FHSA, a first-time home buyer is defined as someone who has not inhabited, in the current or any of the four prior calendar years, a qualifying home that was owned by the individual or a person who is the spouse or common law partner (partner) of the individual. This mirrors the definition of a first-time home buyer for the purposes of the Home Buyers’ Plan (HBP).

Contribution limits and rules

You may contribute up to $8,000 annually, subject to any available carryforward room, and up to a $40,000 lifetime contribution limit to an FHSA. Like a Registered Retirement Savings Plan (RRSP), contributions to an FHSA will be tax deductible, but all withdrawals to purchase a first home would be non-taxable, like a Tax-Free Savings Account (TFSA). Indeed, an FHSA essentially combines the benefits of an RRSP and a TFSA in one account. Unlike an RRSP, contributions you make within the first 60 days of a subsequent year cannot be deducted against your income in the previous tax year, as FHSA contributions are deductible on a calendar year basis.

Like RRSP contributions, you will not be required to claim the FHSA deduction in the tax year in which a contribution is made. The amount can be carried forward indefinitely and deducted in a later tax year, which may be beneficial if you expect to be in a higher marginal tax bracket in a future year.

The maximum amount of unused FHSA contribution room that can be carried forward to a subsequent year is $8,000, which means that for any year after the year in which you open an FHSA, the maximum FHSA contribution room may be upwards of $16,000 ($8,000 carried forward contribution room plus $8,000 current year contribution room).

An FHSA is permitted to hold the same types of qualified investments that are currently allowed in an RRSP and TFSA, including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates.

You may open multiple FHSAs, but the total amount you can contribute to all your FHSAs cannot be more than your FHSA contribution room for the year.

Unlike RRSPs, you cannot contribute to your partner’s FHSA and claim a deduction. However, you can give your partner the funds to make their own FHSA contribution without the normal spousal income attribution rules applying.

Over-contributions

A 1% penalty tax on over-contributions to an FHSA will apply for each month (or part of a month) to the highest amount of such excess that exists in that month.

When your annual contribution room is reset at the beginning of each calendar year, over-contributions from a previous year may cease to be an over-contribution. You would be allowed to deduct an over-contributed amount for a given year in the tax year in which it ceases to be an over-contribution, but not earlier. However, if a qualifying withdrawal is made before an over-contribution ceases to be an over-contribution, no tax deduction would be allowed for the over-contributed amount.

To ensure you do not overcontribute to your FHSA, you may find the details about your FHSA contribution room on your Canada Revenue Agency (CRA) notice of assessment or reassessment.

Withdraws and transfers

Funds withdrawn to make a qualifying home purchase are not subject to tax if certain conditions are met. First, you must be a first-time home buyer at the time of withdrawal.

Interestingly, the definition of a first-time home buyer for withdrawal purposes does not take into consideration your partner’s home ownership, which is different from the definition for the purposes of opening an FHSA, as explained above. So, even if you lived in your partner’s home before your FHSA withdrawal, you may be considered a first-time home buyer and benefit from the tax-free withdrawal to help purchase your new home.

You must also have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal, and you must intend to occupy that home as your principal place of residence within one year after buying or building it. The home must be in Canada.

If you meet these conditions, the entire balance in the FHSA can be withdrawn on a tax-free basis in a single withdrawal or a series of withdrawals. The FHSA must be closed by December 31 of the year following the year of the first qualifying withdrawal, and you are not permitted to have another FHSA in your lifetime.

Any funds not used toward a home purchase can be transferred to an RRSP or Registered Retirement Income Fund (RRIF) penalty-free and tax-deferred. These transfers will not affect your RRSP contribution room, nor will they reinstate your $40,000 FHSA lifetime contribution limit. Funds transferred to an RRSP or RRIF become subject to the rules applicable to those plans. Funds can also be withdrawn from an FHSA on a taxable basis if not required for a first home purchase.

You will also be permitted to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits. These transfers would not be tax deductible and will not reinstate your RRSP contribution room.

Other important considerations

You may be able to use both the FHSA and the HBP toward the same qualifying home purchase. The HBP allows qualifying individuals to withdraw up to $35,000 from their RRSP to buy a first home. Combining the two programs, you may be able to access up to $75,000, plus growth in the FHSA, for use as a down payment on a qualifying home purchase.

Like RRSPs and TFSAs, interest on money borrowed to invest in an FHSA will not be tax deductible, and you cannot pledge FHSA assets as collateral for a loan without punitive income tax implications. In addition, FHSAs will not be given creditor protection under the Bankruptcy and Insolvency Act.

Death of an FHSA holder

As with TFSAs, you can designate your partner as the successor account holder, in which case the FHSA can maintain its tax-exempt status after death. The surviving partner would then become the new holder of the FHSA following the death of the original holder. The surviving partner must meet the eligibility requirements to open an FHSA. The surviving partner may also transfer the FHSA on a tax-deferred basis to their RRSP or RRIF or receive the assets in the FHSA as a taxable distribution.

If the surviving partner has been designated as a beneficiary (not the successor holder) of the FHSA, they cannot become the new holder of the FHSA. They may either make a direct transfer of the FHSA on a tax-deferred basis to their FHSA, RRSP, or RRIF or receive the assets in the FHSA as a taxable distribution.

Alternatively, if anyone other than the surviving partner is designated as the beneficiary, they must include any funds received from the FHSA in their income. Finally, where there are no designated beneficiaries, the amounts from the FHSA will be distributed and taxed as income to the deceased’s estate.

Inheriting an FHSA will not generally affect the surviving partner’s FHSA contribution room. There is an exception if the deceased taxpayer was in an overcontributed position at the time of passing. In this case, the surviving partner is deemed to have contributed to the deceased’s FHSA, thereby reducing their contribution room and potentially putting the surviving partner in an overcontributed position. If the beneficiary of an FHSA is not the deceased account holder’s partner, the funds would need to be withdrawn, paid to the beneficiary and be taxable to them.

Summary comparison: FHSA vs. HBP (RRSP)

Planning

If you are eligible to contribute to an FHSA and an RRSP, you may consider contributing to an FHSA first, up to the annual contribution room of $8,000. Even if you have no intention of purchasing a home in the future, contributing to an FHSA rather than an RRSP maintains your RRSP room for future use. If you decide not to buy a first home in the future, you may transfer your FHSA contributions plus growth to your RRSP without affecting your RRSP contribution room. Alternatively, if you contribute to your RRSP first, you can only transfer the RRSP contributions to an FHSA up to your available FHSA contribution room, and you do not get that RRSP contribution room back in the future. The FHSA may be the preferred savings vehicle if you are eligible, even if you do not plan on purchasing a first home.

If you do plan on purchasing a first home, you may consider waiting before opening an FHSA since the 15-year time limit begins upon opening the account, which may put you in a position in the future where you are required to close your FHSA before finding your first home. Notably, the maximum annual contribution you can make to your FHSA is $16,000 if you have available carryforward room. So, if you plan to one day become a homeowner, carefully considering the account’s 15-year time limit should be factored into your home-buying planning.

In conclusion

Everyone’s situation is unique, and not all general tax planning opportunities may benefit every person. Speak with your own tax advisor about the FHSA for further discussion and analysis and prior to implementing any tax planning strategies.

¹ Please refer to the most recent version of Scotia Wealth Management’s Financial planning facts and figures on Enriched Thinking for the current year’s annual maximum RRSP contribution limit.

source https://rosenbergdri.ca/first-home-savings-account-2/

Like all wealth planning, tax planning is not simply a one-and-done exercise. Instead, it involves ongoing annual planning and review with the Rosenberg Dri Team and your tax professionals, considering your particular facts and circumstances as they change and evolve.

The fourth quarter of the year is generally a good time to review your annual tax planning, especially as certain deadlines approach. Here are some tax planning tips to consider:

Important year-end deadlines

Keep these important dates in mind through the remainder of the year and into early 2024.

If the deadline falls on a Saturday, Sunday, or holiday, taxpayers have until the next business day to file.

For further information on important tax due dates, please see our article 2023 Tax due date calendar.

Tax-loss selling

If you realized capital gains this year or during the prior three years, it may be beneficial to sell investments with accrued losses held in your non-registered investment account(s) before year-end to help offset the capital gains. An accrued loss occurs when the investments have a fair market value (FMV) less than their adjusted cost base (ACB).

The last trading day to realize losses for Canadian and U.S. securities is December 27, 2023, to ensure settlement of trades occurs in 2023. You must apply your current year’s capital loss against your capital gains realized in the year. Any excess net capital losses can reduce your capital gains in the three prior years or any year in the future.

It is important to ensure that, if securities are sold at a loss, identical securities are not repurchased by you or an affiliated person within 30 days before or after the sale. Affiliated persons include your spouse or common-law partner (partner), corporations or partnerships controlled by you and/or your partner, or trusts where you or your partner are majority beneficiaries, such as your RRSP or Tax Free Savings Account (TFSA). These rules are known as the “superficial loss rules” – the loss incurred on a security sale is considered a superficial loss, which will result in the capital loss being denied. Instead of being able to claim the capital loss, it will be added to the ACB of the identical securities that were purchased, which may reduce your future capital gain or increase your capital loss when you sell those repurchased securities.

For further information on tax-loss selling, please see our article Tax-loss selling planning considerations – turning a negative into a positive.

Deferring capital gains

If you plan to realize capital gains before the end of the year, you may wish to review your marginal income tax rate for 2023 as compared to 2024. If your tax rate is likely to be lower in 2024 because of your personal situation (retirement, maternity/paternity leave, back to school, etc.), you may consider deferring the realization of capital gains until January 2024 or later to reduce your overall tax bill for both years. Not only could you benefit from a lower tax rate next year, but this strategy would also enable a tax payment deferral of a whole year, as the tax on a capital gain generated in 2024 is due by April 30, 2025.

As explained above in “Tax-loss selling,” you may also be able to offset any capital gains triggered next year with capital losses carried forward from previous years, reducing your tax obligation even more. However, given potential changes in the value of investments, you should consult with your investment advisor before implementing such a strategy.

Donations – cash and in-kind

Donating to registered charities can help reduce your potential income taxes payable. The federal donation tax credit of 29% applies to donations over $200 (33% if you have income over $235,675), and there is an additional tax credit available provincially or territorially, with rates varying by province or territory. Top combined donation tax credit rates range from 44.5% to 58.75%. Useful planning tips can include pooling donations with your partner, resulting in one partner claiming all donations. These can be made up to and including December 31, with the donation receipt dated accordingly.

You may choose to donate in-kind publicly listed securities with an accrued capital gain. Your tax credit is based on the FMV of the shares when donated, and any capital gain triggered on the disposition has a zero percent inclusion rate, rather than the normal 50% inclusion rate, which essentially yields a tax-free charitable donation. An in-kind donation of publicly listed securities may enhance the tax efficiency of your charitable giving. There is an increased complexity when making donations in-kind, so it is important to discuss these with your investment and tax advisors well before the December 31 deadline.

Proposed changes to the Alternative Minimum Tax (AMT) in the 2023 federal budget may impact your charitable donation planning after 2023.

AMT is an alternative way to calculate Canadian income tax when you earn preferentially taxed income, such as capital gains, and dividends from Canadian corporations, in excess of an annual exemption. AMT may also arise when you claim preferential tax deductions to reduce your taxable income, such as the lifetime capital gains exemption (LCGE), and certain credits to reduce your tax liability.

As its name implies, AMT is a “minimum” or “floor” amount of tax that you may be subject to. Essentially, it is an “alternative” tax calculation that runs parallel to the “normal” tax calculation in your annual income tax return; whichever result is greater is your final tax liability for the year.

The federal AMT rate is set to increase to 20.5% (from 15%). The basic minimum tax exemption is also set to increase to the start of the fourth federal tax bracket (from $40,000), which is expected to be approximately $173,000 for 2024, indexed annually for inflation. There will also be an increase in the AMT inclusion rate of capital gains on donations of publicly listed securities to 30% (from 0%) and a decrease of allowable non-refundable tax credits in the AMT calculation to 50% (from 100%) such as the donation tax credit.

So, how might this affect your charitable donation planning in 2023 and the coming years? Because of the proposed changes noted above, which modify the AMT calculation for 2024 and onwards, you may be more susceptible to AMT after 2023 if you are a high-income earner and donate cash or assets in-kind to registered charities. Different planning options may be available to continue achieving your philanthropic goals while limiting your exposure to AMT. It is imperative to consult with your tax advisor to discuss the proposed changes to AMT and how they may impact larger charitable donations if you are a high-income earner.

For further information on the proposed changes to AMT and their potential impact on your charitable giving, please see our article Proposed changes to Alternative Minimum Tax and the potential impact on your charitable giving.

First Home Savings Account (FHSA) contributions

If you plan to become a homeowner, consider contributing to an FHSA before year-end. To open an FHSA, you must be a resident of Canada, at least 18 years old, and be a first-time home buyer. For the purposes of opening an FHSA, you are considered a first-time home buyer if you have not inhabited a qualifying home owned by either you or your partner in the current or any of the four prior calendar years.

Once opened, this account allows you to contribute up to $8,000 annually, subject to any available carryforward room, and up to a $40,000 lifetime contribution limit to an FHSA. Like an RRSP, contributions to an FHSA are tax deductible, but all withdrawals to purchase a first home are non-taxable, like a TFSA. Indeed, an FHSA combines the benefits of an RRSP and a TFSA in one account. Unlike an RRSP, contributions you make within the first 60 days of 2024 cannot be deducted against your 2023 income, as FHSA contributions are deductible on a calendar year basis.

Like RRSP contributions, you are not required to claim the FHSA deduction in the tax year a contribution is made. The amount can be carried forward indefinitely and deducted in a later tax year, which may be beneficial if you expect to be in a higher marginal tax bracket in a future year.

Are you contemplating whether to contribute to an FHSA or an RRSP? Even if you have no intention of purchasing a home in the future, contributing to an FHSA rather than an RRSP maintains your RRSP contribution room for future use. If you decide not to buy a first home in the future, you may transfer your FHSA contributions plus growth to your RRSP without affecting your RRSP contribution room. Alternatively, if you contribute to your RRSP first, you can only transfer the RRSP contributions to an FHSA up to your available FHSA contribution room, and you do not get that RRSP contribution room back in the future. The FHSA may be the preferred savings vehicle, even if you do not plan on purchasing a first home. Notably, you should be mindful of the 15-year time limit of an FHSA account.

For further information on the FHSA, please see our article First Home Savings Account.

TFSA contributions and withdrawals

Canadian residents aged 18 and older may contribute to a TFSA. Unlike an RRSP, TFSA contributions are not tax-deductible. Instead, all investment income and returns earned within a TFSA are tax-free. The annual maximum TFSA contribution limit is $6,500 in 2023 – potentially rising to $7,000 in 2024 – and any unused contribution limit may be carried forward to future years. There is no deadline to make a TFSA contribution. The accumulated contribution limit since 2009, when the TFSA was introduced, and if you were 18 and older at that time, is currently $88,000.

TFSA withdrawals can be made at any time tax-free. Generally, the withdrawn amount may be re-contributed to the TFSA in the following calendar year unless you have unused TFSA contribution room in the year of withdrawal. Therefore, if you are considering a TFSA withdrawal in early 2024, you may wish to consider doing so in 2023 so that you will not have to wait until 2025 to be able to re-contribute the withdrawn amount.

RRSP contributions

RRSP contributions are another way to manage your effective tax rate and liability. Contributions are tax-deductible against income up to your contribution limit. The maximum RRSP contribution limit in 2023 if you do not have any carryforward room is $30,780. RRSP contributions must be made by February 29, 2024, to be deductible on your 2023 personal income tax return. Any undeducted contributions may be carried forward to future years to deduct against your income when your tax rate may be higher.

Another option is contributing to your partner’s spousal RRSP to facilitate income splitting. To accomplish this, the higher-income partner contributes to the spousal RRSP of the lower-income partner. The higher-income partner can claim the tax deduction. Despite being contributed by the higher-income partner, withdrawals are taxed in the hands of the lower-income partner, allowing you, as a household, to take advantage of the lower-income partner’s marginal tax rate. Notably, if the lower-income partner withdraws a contribution from their spousal RRSP in the year a contribution is made, or if a contribution had been made in either of the two previous years, the withdrawal might be attributed back to the higher-income partner, meaning it will be taxed in their hands, rather than the lower-income partner’s.

Convert your Registered Retirement Income Fund (RRIF) and get access to the eligible pension income tax credit

If you are between age 65 and 71 and are considering or are currently taking withdrawals from your RRSP, you may consider converting a portion of your RRSP to a RRIF to take advantage of the non-refundable Federal pension tax credit. This tax credit, applicable up to the first $2,000 of eligible pension income, may be available if you are not already receiving eligible pension income. There is also an applicable provincial/territorial tax credit, except in Quebec, which varies by province. Eligible pension income for purposes of the pension tax credit generally includes annuity and RRIF (including Life Income Fund) payments, the taxable part of life annuity payments from a superannuation or pension fund or plan, and RRSP annuity payments (not withdrawals) if you are age 65 and over.

The Federal tax credit rate of 15% applies to the eligible pension income. By transferring $14,000 from an RRSP to a RRIF at age 65 and withdrawing $2,000 per year from age 65 to 71, you are ultimately saving $2,100 (15% x $14,000) of Federal income tax over seven years by claiming the pension tax credit, as compared to withdrawing the same $2,000 from an RRSP. There would be additional tax savings with the provincial/territorial tax credit, except in Quebec. For couples, this amount can be doubled to $4,200 of Federal tax savings over seven years when each partner converts $14,000 of their RRSP to a RRIF, and each withdraws $2,000 per year.

RESP contributions

For new parents or grandparents, setting up and contributing to an RESP before December 31 is a smart way to save early for your (grand)child’s post-secondary education. RESP contributions are not tax-deductible but grow tax-deferred in the RESP. Withdrawals to pay for your child’s education costs will be taxed in their hands. Depending on your children’s marginal income tax bracket, this may yield non-to-low-taxed education savings if they do not have other sources of income. If your child ever decides not to continue education after high school, there are ways to transfer the funds to another qualifying child or your RRSP, subject to your contribution limit, in a tax-efficient manner.

Contributing to an RESP allows you, or rather your child, to benefit from the Canada Education Savings Grant (CESG) equal to 20% of the first $2,500 in contributions per year, or $500 annually, up to a lifetime maximum CESG amount of $7,200 per child. There may be an acceleration to receiving the CESG, depending on your family income. A CESG exceeding the $500 limit could be received in the following year if sufficient carryforward room exists, up to a maximum of $1,000 (20% of $5,000 in contributions). Although there is no annual contribution limit for an RESP per se, there is an annual CESG limit of $1,000. There is also a lifetime RESP contribution limit of $50,000 per beneficiary.

If you have the available funds, consider front-loading a new RESP with $16,500 ($2,500 + $14,000) to receive the annual maximum CESG and to maximize tax-deferred investment growth on contributions that will not generate CESG payments. Indeed, because the contribution limit is $50,000 and contributions of up to $36,000 will generate the maximum amount of CESG payments (20% x $36,000 = $7,200), the additional $14,000 may be contributed as early as possible to maximize investment growth. Speak to your investment and tax advisors for further details if you wish to use the benefits of an RESP.

Pay investment expenses

Certain investment-related expenses must be paid by year-end to claim a tax deduction in 2023. Generally, these expenses include interest paid on money borrowed to earn income from property or investment advisory fees paid for non-registered accounts.

Commissions and transaction fees paid for the purchasing and selling of securities in non-registered accounts are not deductible on your income tax return. Instead, the commissions paid are added to the securities’ ACB or claimed as a selling cost of the security, which may lower your capital gain or increase your capital loss when you sell the security.

In conclusion

This article is only a reminder of general year-end tax planning considerations and deadlines. Everyone’s situation is unique, and any general tax planning opportunity may not benefit every person. Speak with your own tax advisor for further discussion and analysis and before implementing any tax planning strategies.

source https://rosenbergdri.ca/2023-year-end-tax-planning-tips/

Aggressive monetary policy tightening that began in 2022 across major developed economies precipitated considerable fluctuations in asset class performance. Consequently, we are often asked about our projections for specific asset classes and whether deviation from established investment strategies to exploit emerging trends is recommended. Such shifts could entail reducing fixed income allocations due to diminishing returns driven by rising interest rates, augmenting cash positions, or transitioning to Guaranteed Investment Certificates (GICs) in a favourable yield environment. However, the challenge posed by these alternatives lies in altering your investment strategy which, even if done with perfect market timing, can significantly impact the terminal value of your portfolio.

A key benefit of working with a financial advisor is their ability to understand your longer-term wealth goals as well as their dedication to consistent strategy focused on maximizing your terminal portfolio value. Delegating day-to-day portfolio management decisions can help foster strategic discipline which can often be challenging for individual investors to maintain, particularly during times of market uncertainty or emerging trends. Thus, it can be helpful to have someone assist with navigating uncertainty while capitalizing on opportunities to increase risk adjusted returns. In this report we detail how deviating from a pre-established investment strategy can adversely impact the terminal value of a portfolio.

IN DEFENSE OF A DIVERSIFIED PORTFOLIO: THE BENEFITS OF NON-CORRELATED ASSET CLASSES

Before central banks began raising interest rates in 2022 to quell inflation, fixed income and equity investments mostly displayed a negative correlation (Figure 1). This meant that when equities were losing value, fixed income investments were gaining value, and vice versa. This benefitted investors by providing important diversification benefits to a portfolio where one asset class would help stabilize the overall portfolio if the other was down.

The benefits of holding non-correlated assets in a portfolio include, but are not limited to:
• Risk reduction
• Enhanced returns
• Income generation
• Capital preservation
• Flexibility and rebalancing
• Reduced volatility

The recent pace of interest rate hikes in response to a surge in inflation has caused a divergence from this historical trend and led to a situation where the two asset classes were more positively correlated. Why has this occurred though?

INFLATION EXPECTATIONS

If there are concerns about inflation, both fixed income and equity investments can decline simultaneously. Inflation erodes the purchasing power of bond coupon payments, making them less attractive. Persistently high inflation can also raise input costs for businesses, weighing on profit margins and potentially leading to a decline in stock prices.

INTEREST RATE EXPECTATIONS

When investors expect interest rates to rise, it can negatively impact both fixed income and equity assets. Higher interest rates can increase borrowing costs for companies, which can weigh on equity valuations. At the same time, bond prices typically fall when interest rates rise.

As both asset classes are negatively affected by these factors, it can cause them to move in tandem, reducing the diversification benefits traditionally expected from holding a mix of equities and fixed income. However, as these forces diverge – inflation is slowing while monetary policy seems to have peaked – we may see a re- emergence of the traditional benefits offered by non- correlated asset classes.

TIME IN THE MARKET VERSUS TIMING THE MARKET

We are often asked what direction a particular asset class is heading. The response to this is, inevitably, that a disciplined investment process is much more important than correctly predicting a price level or even direction. To highlight this, the following is a short case study that looks at various examples of market timing in an effort to support a process-driven approach to investing. For this analysis, consider four investor types (Figure 2) to broadly represent the extreme ends of market timing.

First, there is perfect timing, where an investor is able to perfectly time the bottom of major troughs and deploy cash. Second, there is the worst timing, where cash is consistently deployed at market peaks. Then, there is consistent investing, where an investor ignores the direction of the market and consistently deploys cash every month. Finally, there is not investing and waiting for the perfect time but never finding it. All four investors have $500 each month that they can either put into savings and earn the U.S. 3-month T-bill rate – a rate commensurate with a money market fund or GIC – or invest in the stock market.

In this scenario the perfect and worst market timers save until either a major peak or trough is reached, at which point in time they would deploy all their accumulated cash (Figure 3). This process repeats itself throughout time and, thus, these two investors would have a mix of cash and equities. The consistent investor is fully invested in stocks at all times while the investor who waits on the sidelines earns the rate of interest on a 3-month T-bill.

The investment time frame is 40 years, a reasonable horizon for long-term investing. The S&P 500 composite.

While there are many peaks and troughs over this time frame, the six major ones indicated in figure 3 represent the timing opportunities. With the parameters set out, what were the results of this exercise? Can perfect market timing negate time out of the market?

The best outcome of the scenarios that were looked at is consistent investing (Figure 4). Consistent monthly contributions while remaining invested provided even better returns than perfect market timing, while perfect market timing easily surpassed the worst timing. All three handily beat not investing where the accumulated savings earned only the 3-month T-bill rate.

All four investors had the intention of making money, they just had different opinions on how to do it. This also means that there were actually three investors trying to time the market; not investing was in essence trying to time the market, but the time simply never came. The negative consequence for this lack of participation is a terminal wealth value that is less than 1/5th of the worst timing that invested at every major market peak. Put another way, even with the worst timing, an investor will still do better by simply remaining invested. It may seem like a poor time to deploy cash when major indices appear to be near a top, leading investors to wait on the sidelines until they believe it is opportunistic to reinvest in the market. However, this type of waiting can be very costly over the long run. Looking at the best market timing, it shows that an investor would accumulate ~57% more wealth than the worst market timer, a substantial amount for the effort that would be required. However, even with perfect market timing, the portfolio’s terminal value was ~3% lower than one that opted for the consistent investment strategy.

The main takeaway from this exercise is that trying to time the market, even if done perfectly, can be costly. An investor might win the battle (potential for better near- term returns) but lose the war (lower terminal portfolio value over the long run). Therefore, following an investment plan accordingly without deviating significantly is the optimal strategy. If the long-term goal requires 60% in equities and 40% in fixed income, then the optimal strategy is to strictly hold that percentage consistently and not try to significantly modify that allocation at supposed tops and bottoms.

THE POWER OF CONSISTENCY OVER TIME

The global economic environment since 2022, characterized by significant interest rate hikes and market volatility, poses new challenges for investors. The historic correlation patterns between fixed income and equity investments have shifted, causing both to be negatively affected by rising interest rates and inflation concerns. This change has led many to question whether adjusting established investment strategies in response to emerging market trends is wise.

A detailed case study examining various investment approaches over a 40-year period underscores the advantages of consistent investing. The findings revealed that even with perfect market timing, consistent investing outperformed all other strategies, yielding returns superior to even perfect market timing. On the other hand, adopting a passive, wait-and-see approach, akin to attempting to time the market without ever taking action, led to significantly reduced wealth accumulation.

While the allure of capitalizing on short-term market trends can be strong, the evidence suggests that a disciplined, consistent investment approach, rooted in a pre-defined, well-thought-out plan, is the most effective means to achieve long-term wealth objectives. Deviating from such a strategy, even with the benefit of being able to perfectly time the market, could be detrimental to the terminal value of an investment portfolio. Therefore, maintaining a strategic discipline and resisting the temptation to make impulsive decisions is paramount for optimal long-term wealth accumulation.

UNLOCKING WEALTH: THE VALUE OF SOUND ADVICE

source https://rosenbergdri.ca/unlocking-wealth-the-value-of-sound-advice/

Financial abuse can take many forms. Recognize the different types that target seniors.

Did you know fraud is the number one crime committed against older Canadians?¹ It’s true—and sadly, financial abuse is more widespread than ever among vulnerable seniors. Here’s how you can help protect yourself and your loved ones.

Types of financial abuse

Financial abuse involves one party unjustly trying to take money, property, or information from another. Anyone can perpetrate this type of abuse, but often it is someone close to the victim, like a family member, friend, or caregiver.

Here are a few common examples of financial abuse that targets seniors:

Financial scams

These usually occur over the phone or online and involve a fraudster impersonating a trusted person or entity, like a bank, government agency, company, or family member. The fraudster then attempts to persuade the victim to send them money or gain access to the victim’s personal or financial information.

Power of Attorney abuse

While Powers of Attorney are typically a valuable estate planning tool, there is the potential for them to be abused. The person appointed as your loved one’s Attorney (not to be confused with a lawyer) may take advantage of their position and try to control your loved one’s finances for their benefit.

Undue influence

This occurs when individuals take advantage of their relationship with the victim to persuade them into making decisions against their wishes. This can include withdrawing money from bank accounts, changing official documents to the fraudster’s name(s), or changing the victim’s will in a self-dealing manner.

Red flags

Several warning signs may indicate your loved one is being financially abused:

• Increased dependence on one person, such as a friend or caregiver
• Abrupt increase in spending activity or withdrawals
• Unexplained charges on credit cards
• Newly created joint accounts
• Sudden changes to legal documents, including wills and Powers of Attorney

Prevention strategies

Secure personal information

It is crucial to keep personal and financial information safe and secure. This includes name, address, birth date, Social Insurance Number (SIN), and bank information. Ensure your loved one does not give this information to anyone over the phone or online that they have not directly contacted. Also, shred and dispose of any documents containing personal information.

Power of Attorney

Ensure your loved one appoints (a) trustworthy Attorney(s) for Property who will act in their best interests. You may suggest they appoint several people or a trust company to ensure their affairs will not be mismanaged.

Name a Trusted Contact

To help protect investors, particularly older and vulnerable individuals, from financial abuse and exploitation, the Canadian securities regulators recently introduced the Trusted Contact Person (TCP) initiative. If you have an investment account, you may be able to name a TCP. This individual cannot be involved in making financial decisions for you but is identified to your investment advisor as someone who can provide objective information if specific concerns are raised related to your overall personal and financial well-being.

Don’t be afraid to say no

Remember, your loved one should never be afraid to say no if they feel pressured or coerced into making unwise financial decisions.

1 https://www.canada.ca/en/employment-social-development/corporate/seniors/forum/fraud-scams.html

source https://rosenbergdri.ca/protecting-seniors-from-financial-abuse-2/

In today’s environment, financial fraud is more prevalent than ever.

While financial fraud can happen to people of all ages, seniors are particularly vulnerable. In fact, fraud is the number one crime committed against older Canadians.¹ Some key reasons are because seniors may be home more often during the day to answer the door or the telephone, they may also be more trusting and may not have family or friends nearby to ask for a second opinion.

It is important to know how to keep your personal and financial information safe and secure. Learn how to recognize, reject and report common scams to help protect you and your loved ones from fraud.

Phishing

Fraudsters impersonating government agencies, banks, communication providers, or other companies contact potential victims to lure them into providing personal or financial information, such as usernames, passwords, credit/debit card numbers, PINs, and other sensitive data, that can be used to commit financial crimes.

Phishing typically occurs in an email but can also come as a text message (smishing)—or fake phone call (vishing).

Extortion scams

Impersonating Canada Revenue Agency (CRA) employees, fraudsters will call unwitting victims to falsely claim there are discrepancies from past tax returns and that payment is required immediately. They threaten that failure to do so will result in additional fees and/or jail time.

The CRA would never phone, email, or text you to ask for information. If you are concerned, you can always call the CRA directly at 1.800.959.8281.

Romance scams

Unscrupulous individuals will create fake profiles on dating or social networking sites to seek out potential victims and gain their trust over some time. Once the perpetrator has gained their confidence, they will eventually ask the victim to send them money.

Mail scams

Victims receive unsolicited mail advising they are the beneficiary of an inheritance or have won a prize. The fraudster states the victim must pay upfront fees before the funds can be released.

Service scams

Imposters call and identify themselves as representatives of a well-known technology company, such as Microsoft or Windows. They claim that your computer has been hacked and must be serviced for a fee payable by credit card or money transfer. These individuals will remotely access your computer, run malicious programs, alter settings, or steal personal information.

Bank investigator scams

Consumers are contacted by phone and asked for assistance to catch a bank employee who has been stealing money. The victim is instructed to visit their bank branch and make a cash withdrawal from their account without disclosing the reason, as the teller may be involved in the scam. The victim is then directed to place the cash in an envelope and meet the “investigator” or send the money through a wire service, such as Western Union.

Loan scams

Consumers seeking loans may stumble upon offers through advertising or websites designed to resemble legitimate lending institutions. Once the victim has provided their personal information, they are informed their loan will be deposited into their account within 24 hours of sending an upfront fee. Once the payment is received, the fraudster ends communication, and no loan money is provided.

How do I report a suspected scam?

If you or someone you know has been the victim of a scam, contact the Canadian Anti-Fraud Centre at 1.888.495.8501 or visit their website at antifraudcentre.ca.

Remember to: Recognize, Reject, Report.

Quick tips to prevent financial fraud

¹ https://www.canada.ca/en/employment-social-development/corporate/seniors/forum/fraud-scams.html

source https://rosenbergdri.ca/how-to-protect-yourself-from-financial-fraud-2/

The introduction of the new First Home Savings Account (FHSA) on April 1, 2023, provides another way Canadian residents can potentially grow their wealth tax-free in Canada.

Principal Residence Exemption (PRE)

Possibly one of the most cherished tax benefits by Canadian residents, the PRE provides for tax-free growth on the value of one real property, which for many Canadians is their principal home.

The PRE may eliminate or reduce a capital gain realized on the disposition, such as a sale, or deemed disposition, such as at death, of a property you own designated as your principal residence. If any capital gain realized is eliminated by claiming the PRE, this provides for tax-free growth on the value of your principal residence.

For a property to qualify as a principal residence, it must generally meet the following conditions:

• it is a housing unit, which can include a house; an apartment or unit in a duplex, apartment building, or condominium; a cottage; a mobile home; a trailer; or a houseboat; among others,
• you own the property (either solely or jointly with another person),
• the housing unit must be “ordinarily inhabited” in the year by you, your current or former spouse or common-law partner, or any of your children, and
• you designate the property as your principal residence for the year, and no other property has been so designated by you or any member of your family unit for the same year.

If you own multiple properties, such as a house and a cottage, and both properties otherwise meet the criteria noted above for being your principal residence, you may only designate one property per year as your principal residence. Generally, in years where you own more than one property, it is typically more advantageous to claim your PRE on the disposition of the property with the higher capital gain per year.

Tax-Free Savings Account (TFSA)

Canadian residents aged 18 and older may contribute to a TFSA. Unlike a Registered Retirement Savings Plan (RRSP), TFSA contributions are not tax-deductible. Rather, all investment income and returns earned within a TFSA are tax-free. The annual maximum TFSA contribution amount is $6,500 in 2023 and is indexed to inflation and rounded to the nearest $500 annually. Any unused contribution limit may be carried forward to future years. There is no deadline to make a TFSA contribution. The accumulated limit since 2009, when the TFSA was launched, and if you were 18 and older at that time, is currently $88,000.

TFSA withdrawals can be made at any time tax-free. Generally, the withdrawn amount may be recontributed to the TFSA in the following calendar year unless you have unused TFSA contribution room in the year of withdrawal.

TFSAs may be used for short-term or long-term savings. Typically, when you are younger, you may benefit from using TFSAs for saving for life events such as a new vehicle, vacations, weddings, or as part of a down payment on a first or new home. As you get older, you may benefit from using TFSAs to help fund your retirement or as a strategy to transition your wealth to the next generation tax-free.

First Home Savings Account (FHSA)

Canadian residents aged 18 and older who are qualifying prospective first-time homebuyers may open and contribute to an FHSA. The FHSA, new as of 2023, provides for the ability to save up to $40,000 on a tax-free basis towards purchasing a first home in Canada.

Like an RRSP, contributions to an FHSA are tax-deductible, but withdrawals, including all investment income and returns, to purchase a qualifying first home are non-taxable, like a TFSA. An FHSA essentially combines the benefits of an RRSP and a TFSA in one account.

The annual maximum FHSA contribution amount is $8,000, and any unused contribution limit may be carried forward to future years. Notably, any carryforward amount only accumulates after you open an FHSA for the first time. This attribute leads to a planning consideration for the FHSA – even if you cannot contribute, you may consider opening an FHSA as an early first step in your home buying planning to begin accumulating carryforward contribution room. The maximum amount of unused FHSA contribution room that can be carried forward to a subsequent year is $8,000, which means that for any year after the year in which you open an FHSA, the maximum FHSA contribution room may be upwards of $16,000 ($8,000 carried forward contribution limit plus $8,000 current year contribution limit). The FHSA can remain open for up to 15 years or until the end of the year when you turn 71 years old. The FHSA must be closed by the end of the year following the first qualifying withdrawal, and you are not permitted to have another FHSA in your lifetime.

You may only use an FHSA if you qualify as a prospective first-time home buyer saving for your first home. Notably, any funds not used towards a qualifying first home purchase can be transferred to an RRSP or Registered Retirement Income Fund (RRIF) penalty-free and tax-deferred without impacting the taxpayer’s RRSP contribution room. Funds transferred to an RRSP or RRIF become subject to the rules applicable to those plans. Funds can also be withdrawn from an FHSA on a taxable basis if not required for a first home purchase. These transfers will not affect your RRSP contribution room, nor will they reinstate your $40,000 FHSA lifetime contribution limit.

Permanent Life Insurance

There are two types of life insurance – term and permanent. Term life insurance provides financial protection from premature death for a specific duration. It may be equated to car or home insurance: if you pass away during the coverage period, your death benefit will be paid out; if you do not pass away during the coverage period, the premiums paid provide financial peace of mind for only that time.

Alternatively, permanent life insurance may be equated to an investment. Generally, every dollar invested in permanent life insurance, plus investment income and returns, is paid out as a tax-free death benefit upon your passing. Permanent life insurance, whether whole or universal life, may be considered an alternative investment class as part of your investment portfolio. It provides two unique features – a tax-free death benefit and a tax-free investment account held inside the policy.

Permanent life insurance may be used to tax-efficiently save for a projected income tax liability resulting on the deemed disposition of all your assets upon your passing. In addition, it may be used as a tax-efficient means of transferring wealth intergenerationally, both personally and corporately. It may also be used as an estate equalization strategy when transferring a business or illiquid assets to your heirs.

Once you have taken advantage of your FHSA, if applicable, own a principal residence in Canada and have fully maximized your TFSA, permanent life insurance is another wealth planning strategy to grow and transfer your wealth in a tax-free manner.

Summary

Everyone’s situation is unique, and not all general tax planning opportunities may benefit every person. Speak with your own tax advisor for further discussion and analysis and before implementing any tax planning strategies.

source https://rosenbergdri.ca/four-ways-to-grow-your-wealth-tax-free-in-canada/

North American equity markets finished mixed on Monday as investors worked through mixed economic data and focused on upcoming earnings announcements this week. By the close, the Dow gained 66, the S&P 500 rose by 4, and the Nasdaq lost 35 points. In Canada, the TSX declined by 16 points led by the Information Technology sector.

On Tuesday, U.S. equity markets fell sharply amid a negative reaction to mixed earnings results. By the day’s close, the Dow lost 345 points, the S&P 500 dropped by 65, and the Nasdaq dropped 238. In Canada, the TSX fell by 237 points.

North American markets finished mixed on Wednesday as investors remained concerned about the banking sector, while the technology-related stocks were boosted by strong earnings from Microsoft Corp. and Alphabet Inc. The Dow lost 229 points by the close, the S&P 500 fell by 16 points while the Nasdaq gained 55 points. In Canada, the TSX saw a 73-point fall led by the Industrials sector.

U.S. equity markets surged higher on Thursday as weaker-than-expected U.S. economic growth suggested the U.S. Federal Reserve Board might be nearing the end of its rate-hiking cycle. By the close, the Dow climbed by 524, the S&P 500 by 79, and the Nasdaq by 288 points. In Canada, the TSX gained 156 points led by the Health Care sector.

North American Indexes end the week mixed

For the four trading days covered in this report, the Dow gained 17 points to close at 33,826, the S&P 500 rose by 2 points to settle at 4,135, and the tech-heavy Nasdaq gained 70 points to close at 12,142. In Canada, the TSX fell by 171 points to end at 20,523.

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source https://rosenbergdri.ca/corporate-earnings-influence-investors-decisions-3/

North American equity markets ended the session relatively flat on Monday. Actions by regulators over the weekend helped alleviate investor concerns about the U.S. banking system following the failure of First Republic Bank. By the close, the Dow lost 46 points, the S&P 500 fell by 2 points, while the Nasdaq lost 14 points. In Canada, the TSX finished 21 points lower, with Energy the weakest-performing sector.

On Tuesday, U.S. equity markets fell as investors awaited the U.S. Federal Reserve Board’s interest-rate decision while weighing U.S. Treasury Secretary Janet Yellen’s comments that the U.S. could reach its debt ceiling by June. By the day’s close, the Dow lost 367 points, the S&P 500 dropped by 48 points, and the Nasdaq dropped 55 points. In Canada, the TSX fell by 208 points, weighed down by the Energy and Real Estate sectors.

North American markets finished lower on Wednesday after the U.S. Federal Reserve Board raised interest rates by 25 basis points, the tenth consecutive rate increase. Fed Chair Jerome Powell said that the recent instability in the Financials sector may lead to tighter lending standards that impact hiring and inflation. The Dow lost 270 points by the close, the S&P 500 fell by 29 points, and the Nasdaq declined by 55 points. In Canada, the TSX saw a 53-point fall, with Health Care the strongest performing sector on the day, while Consumer Discretionary was the weakest.

U.S. equity markets ended Thursday’s trading day lower as investors remained cautious about the health of the Financials sector. In Europe, the European Central Bank raised its interest rates by 25 basis points. By the close, the Dow declined by 287 points, the S&P 500 declined by 30 points, and the Nasdaq by 59 points. In Canada, the TSX fell 116 points.

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source https://rosenbergdri.ca/corporate-earnings-influence-investors-decisions-2/

North American equity markets finished higher on Monday as investors considered mixed financial results from financial institutions, with more earnings results expected this week. By the close, the Dow gained 101, the S&P 500 rose by 14 points, while the Nasdaq gained 34 points. In Canada, the TSX added 62 points led by the Health Care sector.

On Tuesday, U.S. equity markets ended mixed as investors considered the potential impact of more rate increases by the U.S. Federal Reserve Board (“Fed”). By the day’s close, the Dow lost 11 points, the S&P 500 gained 4, and the Nasdaq dropped 4. In Canada, the TSX gained 43 points.

North American markets finished mixed again on Wednesday as investors parsed through corporate earnings reports and economic data to predict how far the Fed will lift rates. The Dow lost 80 points by close, while the S&P 500 ended flat and Nasdaq rose by 4 points, respectively. In Canada, the TSX saw a 4-point fall led by the Materials sector.

U.S. equity markets fell on Thursday due to weak economic reports, which caused concerns about global economic activity. By the close, the Dow lost 110, the S&P 500 fell by 25, while the Nasdaq shredded 98 points. In Canada, the TSX lost 50 points propelled by weakness in the Energy sector.

North American Indexes end the week mixed

For the four trading days covered in this report, the Dow lost 100 points to close at 33,787, the S&P 500 fell by 8 points to settle at 4,130, while the tech-heavy Nasdaq dropped 64 points to close at 12,060. In Canada, the TSX climbed 51 points to end at 20,631.

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source https://rosenbergdri.ca/financial-results-dictate-investor-sentiment/

North American equity markets finished mixed on Monday as investors considered the U.S. Federal Reserve Board’s (Fed) next steps and the likelihood of a recession. By the close, the Dow lost 56 points, the S&P 500 went up by 2 points, while the Nasdaq gained 22 points. In Canada, the TSX finished 43 points higher, with Information Technology as the strongest-performing sector.

On Tuesday, U.S. equity markets fell as investor sentiment worsened with the U.S. debt ceiling impasse and declining trade activity in China. By the day’s close, the Dow lost 57 points, the S&P 500 dropped by 19 points, and the Nasdaq dropped 77 points. In Canada, the TSX went up slightly by 0.6 points, benefiting from the strong performance of the Energy sector.

North American markets finished mixed on Wednesday. Despite a slowdown in U.S. inflation that raised expectations that the Fed would pause interest rate hikes, investors still took a cautious approach. Easing food price growth and falling energy prices drove the slowdown. The Dow lost 30 points by the close, the S&P 500 went up by 18 points, and the Nasdaq increased by 127 points. In Canada, the TSX saw an 86-point fall, weighed down by the Materials sector.

U.S. equity markets ended Thursday’s trading day lower as investors considered the potential for a global recession. In Europe, the European Central Bank raised its interest rates by 25 basis points. By the close, the Dow declined by 222 points, the S&P 500 declined by 7 points, and the Nasdaq increased by 22 points. In Canada, the TSX fell 82 points.

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source https://rosenbergdri.ca/corporate-earnings-influence-investors-decisions/