Whenever the investment ride gets bumpy, as it was through parts of 2011, it’s important to step back and keep volatility and emotions in perspective. Regardless of what markets are doing from day to day, the long-term trend has historically always been upward.

And in any kind of market — rising, falling or staying steady — it is important to keep in mind the principles of sound investing. A well-structured, diversified portfolio that’s based on a long-term strategy can often be the foundation of investment success.

Focusing on the long term

For long-term performance, consider a mix of assets from the three main asset classes — cash or cash equivalents, fixed income, and equities — for your portfolio. Each can bring important qualities to your portfolio.

• For security: Cash, GICs, Money Market funds, Savings accounts. These investments provide a stable base for your portfolio as well as liquidity so you can get your money out on short notice. But the low returns generated by interest earnings may not outpace inflation over the long term.

• For income: Bonds, Bond Funds. Fixed-income investments such as bonds and bond funds generate cash flow and are less volatile than growth-oriented investments. However, they can still fluctuate in value, decrease in value when interest rates rise and increase when rates go down.

• For growth: Equities, Equity Funds. This asset class is the most volatile over the short term but has historically provided better performance than guaranteed and fixed income assets and outpaced inflation by the widest margin.

Remember inflation

Don’t forget about the effects of inflation. Over the long term, secure guaranteed investments that pay interest and protect your principal may not provide sufficient returns to keep you ahead of increases in the cost of living. For example, if invest in GICs and they are earning 3% and inflation is running at 3%, you’re just breaking even.

While it’s important to have an element of safety in your portfolio, too high a concentration could hinder your ability to reach your long-term growth objectives.

If you have any questions or would like a review of your current investments, please call 778-478-9759, or email information@northbayfinancial.com

This column is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, or life insurance, and should not be taken as providing, investment, financial, legal, accounting or tax advice. All services provided through NorthBay Financial Services. Mutual funds are provided through Sterling Mutuals Inc. Insurance is provided through multiple carriers. The opinions expressed are those of the authors and do not necessarily reflect the views or opinions of Sterling Mutuals Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds and Segregated funds are not guaranteed, their values change frequently and past performance may not be repeated.

Yesterday’s budget seemed to be a little bit for everyone with no new taxes or tax increases, increased duty free limits and the eventual elimination of the penny to mention a few things. Depending on how you view it, it was either good or not so good. The one change that has the attention of most people is the changes to the OAS and GIS benefits which are two government social programs.

As expected, the age of eligibility for Old Age Security and the Guaranteed Income Supplement benefits increased to 67 from 65. This change will start in April 2023 and will occur gradually over a six-year period, with full implementation by January 2029.

So what this means is that Financial Advisors will need to rework retirement plans for those clients that were planning on collecting OAS at age 65 as part of their retirement income.

A bit of history about the OAS as the legislation was introduced in 1952, replacing legislation from 1927. The act has been amended many times with one of the most notable being the drop in age eligibility from 70 to 65 which was phased in between 1965 and 1969.

The budget also introduces a new option for individuals who wish to work longer, and begin taking their OAS benefits beyond age 65. Starting on July 1, 2013, individuals can voluntarily defer the OAS pension for up to five years, and subsequently receive a higher, actuarially adjusted pension.

These changes aim to ensure the sustainability of the OAS and GIS programs as the Canadian population ages and the cost of the program surges.

The plan to increase the age of eligibility for OAS and GIS benefits will not affect anyone who is currently receiving benefits, nor anyone who is 54 years of age or older as of March 31, 2012. People born between April 1, 1958 and January 31, 1962, will become eligible to receive their OAS benefits and GIS between the age of 65 and 67, depending on their birth date.

The 11-year notification period, followed by the six-year phase-in period, is being provided to ensure that individuals have time to adjust their retirement plan accordingly, the government said.

The voluntary deferral of OAS pension is part of an effort to increase flexibility in the OAS program. Those individuals who choose to defer their OAS will receive a higher pension, calculated on an actuarially neutral basis, as is done with the Canada Pension Plan. As a result, individuals will receive, on average, the same lifetime OAS pensions whether they choose to take it at the earliest age of eligibility or defer it to a later year.

For example, someone who defers the OAS pension for five years and begins taking it at age 70 would receive an annual pension of $8,814, instead of the $6,481 they would receive if they began taking it at age 65.

Also in the Budget, it aims to make it easier for seniors to apply for OAS and GIS, through a "proactive enrolment regime" that the government plans to phase in between 2013 and 2015. This new system will eliminate the need for many seniors to apply for OAS and GIS reducing the burden on seniors and reducing the government's administrative costs.

If you have any questions or would like a review of your current investments, please call 778-478-9759, or e-mail information@northbayfinancial.com

This column is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, or life insurance, and should not be taken as providing, investment, financial, legal, accounting or tax advice. All services provided through NorthBay Financial Services. Mutual funds are provided through Sterling Mutuals Inc. Insurance is provided through multiple carriers. The opinions expressed are those of the authors and do not necessarily reflect the views or opinions of Sterling Mutuals Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds and Segregated funds are not guaranteed, their values change frequently and past performance may not be repeated.

In Canada, we have a progressive tax system which means individuals are taxed according to the level of their taxable income. As taxable income increases, we are taxed at a higher rate, up to each point. Each increment of taxable income that is taxed as a specific rate is referred to as a marginal tax bracket.

Tax rates vary by province and different tax rates apply to different types of income. Salaries and professional income, for example, are taxed at different rates than Canadian dividend income or capital gains.

• Your Marginal Tax Rate

Your marginal tax rate is the rate applicable to the next dollar of taxable income you earn. Knowing your marginal tax rate is important for minimizing the tax you pay on additional income.

• Understanding How Your Investment Income Is Taxed

Different types of income attract different rates of taxation. One of your considerations when buying investments should be the amount of taxes you will pay on income from these investments.

The types of income you could earn include regular income from business, employment, pension and retirement; and income from investments, including interest, rents, dividends, foreign income and capital gains.

Regular income and interest income are the highest taxed types of income in Canada. Interest income is earned from banks accounts and from fixed income investments, such as Canada savings bonds, guaranteed interest contracts (GIC’s) and government treasury bills (T-bills).

Dividends are distributions paid by corporations to their shareholders from after0tax earnings. You may also receive dividends from segregated fund contracts or mutual funds that you own if the funds own shares of corporations that pay dividends.

Canadian dividends generally attract a far lower level of taxation compared to interest income and salary earnings. However, because of the way dividend income is taxed—the gross up amount is reported on the tax return, it can be disadvantageous to Canadians 65 and older that qualify for valuable government benefits such as Old Age Security and the Age Credit. If the income reported on one’s tax return is too high, these benefits can be clawed back, or forfeited altogether.

Canadian dividends are broken down into both “eligible” and “non eligible” dividends.

Eligible dividends are taxed more favorably at the personal level and typically will be received from larger publicly traded corporations in Canada. Non-eligible dividends are taxed less favorably and generally would be received as a distribution of corporate income that has been taxed at lower corporate rates, such as income from a corporation entitled to the small business deduction.

Capital gains arise when you sell a capital asset for more than its purchase price. The increase in value is a capital gain and 50 percent of the gain (called taxable capital gain) is included in your taxable income.

There are two types of capital gains: realized and unrealized. An unrealized capital gain consists of the accrued gain on an asset before the asset is sold or deemed to be sold. A realized capital gain generally results when the asset is actually sold or deemed to be sold, as is the case on death.

Foreign income consists of income, such as dividends from foreign investments, whether owned directly or through a segregated fund contract or mutual fund. Foreign income receives no special tax break, making it undesirable as interest income in terms of the higher rate of tax that it attracts.

Interest income usually is taxable annually as earned, whether or not it’s actually received. Dividends are generally taxed when received. Capital gains, however, are taxable only when realized. This means that you can minimize your tax bill by rejecting speculative investment practices and investing with a long term buy and hold strategy.

• Understanding the Taxation of some Common Assets

So far, we’ve discussed how individual assets are taxed, along with the taxation of certain types of income. Now let’s look at the taxation of specific types of assets that are owned in non-registered accounts.

• Mutual Funds

The increase between your purchase price and the market value of your mutual fund units is taxed as a capital gain when the units are sold or deemed to be sold. Distributions from a mutual fund are taxed according to the nature of the distribution (dividends, interest, etc.). This distribution is taxable to you whether you receive the distribution in cash or reinvest it in additional units. If you reinvest this distribution to purchase additional units of the same fund, the amount of the reinvested distribution as added to your adjusted cost base (ACB) of the funds.

A common mistake for investors is forgetting to keep a record of these reinvested mutual fund distributions. The reinvested distributions are added to their ACB, thereby reducing the amount of any capital gain that arises when the fund is ultimately sold.

• Market Traded Bonds and Bond Mutual Funds

Bond mutual funds and other bonds that are actively traded in the market are taxed according to the type of return they generate. Since these bond investments are market traded, their values can rise and fall according to economic conditions. Consequently, as they are bought and sold in your portfolio, capital gains or losses can result. Other income generated from these investments is taxed separately as interest.

• Segregated Fund Contracts

Segregated fund contracts offer protection features only available through an insurance company including death benefit and maturity guarantees, income guarantees, potential creditor protection and the ability to bypass your estate.

From a tax perspective, a segregated fund contracts increases in value over its original purchase price is taxed as a capital gain when sold. Allocations received from segregated fund contracts are taxed according to the nature of allocation (dividends, interest, etc.). The amount of the allocation is added to your ACB and tracked by the insurance company. Furthermore, allocations cannot be paid in cash like mutual fund distributions.

• Stocks

The increase between your purchase price and the market value of your stock holdings is taxed as a capital gain when the stock is sold or deemed to be sold. Any dividends received from the stock are taxed at rates applicable to the Canadian or foreign dividends.

• GICs and Canada Savings Bonds

Non-market traded fixed income investments, like GICs and Canada Savings Bonds, are not taxable on the principle amount. Only the interest earned on this investment is taxable.

Because we pay so much in tax, every precaution we can take to minimize tax counts!

Investment taxation is often overlooked but a very important are of personal financial planning. If you have any questions on this topic or would like a review of your current financial plan, please call 778-478-9759, or email information@northbayfinancial.com
 

This column is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, or life insurance, and should not be taken as providing, investment, financial, legal, accounting or tax advice. All services provided through NorthBay Financial Services. Mutual funds are provided through Sterling Mutuals Inc. Insurance is provided through multiple carriers. The opinions expressed are those of the authors and do not necessarily reflect the views or opinions of Sterling Mutuals Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds and Segregated funds are not guaranteed, their values change frequently and past performance may not be repeated.

The right Registered Retirement Savings Plan moves now could be worth thousands of dollars later. This RRSP season, as we face continued economic and market uncertainty, smart strategies can make a huge difference in how much benefit you derive from the tax-deferred investment growth that your RRSP offers.

Here are five strategies for making the most of your contributions.

1. Review before investing

Uncertainty in the markets means that having a good grasp of where you are with regard to your retirement portfolio has never been more critical. These questions can serve as a guide before you make your annual contribution.

• Have your retirement plans changed?
• Is your RRSP’s performance meeting your expectations?
• Is your asset mix still on track, in accordance with your goals, your time horizon, and your tolerance for risk?
• Are you still comfortable with the current risk level of your investments?

2. Don’t pay more tax than you have to

Ensuring that you’re not paying more tax on your investment growth than you should means more money in your retirement pocket. Remember that different investments receive different tax treatment outside your plan. By carefully considering which investments to hold inside and outside of an RRSP, you may be able to increase overall after-tax investment returns.

3. Invest Regularly

Consider working your RSP contribution into your monthly budget by setting up a pre-authorized monthly contribution (PAC). By investing regularly each month you will remove the need to make larger lump sum contributions at the end of the year. As well by investing on a regular basis you are investing smaller amounts over a longer period of time. This spreads the cost basis out over several years, and also provides some insulation against changes in market price.

4. Make volatility your friend

Financial market ups and downs can be unsettling, but there is a positive side to price dips: They provide an opportunity to invest at more attractive prices. But if you’re still uncertain about entering the markets, consider dollar-cost averaging through a regular investment program. It’s a structured way to buy more when prices are low and less when they’re high and it could be a good way to contribute to your RRSP throughout the year, instead of waiting for the annual RRSP “season.”

5. Don’t let uncertainty hold you back

Waiting until you think markets have bottomed to invest, or trying to sell at their peak, can be a mistake. Most investors are terrible at “timing the market,” often buying and selling at the wrong times. And don’t be tempted to “park” your entire RRSP contribution in safe, low-return investments while you wait for a clearer market direction. You may end up still parked while rising financial markets leave your investments in the dust.

6. Consider the benefits of borrowing

In some cases, borrowing to invest in your RSP so that you can take advantage of your contribution room makes sense. Increasing your RSP contributions now offers immediate tax savings this year and tax-deferred growth for many years to come.

If you would like more information or would like a review of your investment portfolio and current financial plan, please call 778-478-9759, or e-mail information@northbayfinancial.com

This column is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, or life insurance, and should not be taken as providing, investment, financial, legal, accounting or tax advice. All services provided through NorthBay Financial Services. Mutual funds are provided through Sterling Mutuals Inc. Insurance is provided through multiple carriers. The opinions expressed are those of the authors and do not necessarily reflect the views or opinions of Sterling Mutuals Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds and Segregated funds are not guaranteed, their values change frequently and past performance may not be repeated.