Fort Mcmurray Today

In an ongoing series, the Financial Post explores personal finance questions tied to life’s big milestones, from getting married to retirement.

COVID-19-related burnout is still dominating many industries, with employees coping by taking, or hoping to take, some time off to mitigate their stress, enjoy life or even work on a different project in an effort to rejuvenate themselves before returning to work.

Cue the sabbatical, an extended work-leave that can stretch from mere months to several years (the average being six months), traditionally the purview of academics, but now gaining favour in all kinds of work environments as a way to keep employees healthier, happier and less likely to jump ship.

“The past couple of years have inspired people to think outside the box and live more of life instead of sticking to the status quo,” said Justin Fraser, a senior wealth adviser at Meridian Credit Union in Toronto.

Fraser is seeing an uptick in new parents taking advantage of extended time off work to be with young children (his wife, a registered practical nurse, is currently in her last stretch of an 18-month maternity leave), but he said sabbaticals are becoming more enticing across the board.

“I have been seeing it among both empty nesters where kids are away at university or finally self-sufficient, and millennials looking at taking time to recoup and make sure all the things they want in life still align,” he said.

From an employer’s perspective, accommodating employees in their quest for more “life” time makes sense from an operational and financial perspective if it keeps their staff from quitting. Employee turnover costs companies an average of $22,279 in recruiting costs and lost productivity each year, according to a 2021 survey commissioned by Express Employment Professionals, and places a heavy burden on those left behind to pick up the slack.

This past January, Connecticut-based financial services firm Synchrony Financial was one of several companies to introduce some unique options to accommodate employees seeking time off. Those with two or more years of service can request up to 12 months leave, while hourly staff qualify for a reduced (20-hour-a-week) schedule for up to a year.

In both cases, employees receive 10 per cent to 15 per cent of their base salary to cover their benefits and are guaranteed to come back to the same job or one at the same level.

So far, the company has received 15 sabbatical requests and 40 from hourly employees, and expects that these initiatives will significantly reduce turnover rates while increasing the applicant pool.

Tara Steele, Synchrony’s vice-president of Healthcare Marketing, will be starting her year-long sabbatical this July to focus on her well-being, spend quality time with her kids and family, and volunteer at a local non-profit.

“This is exactly what I need and I appreciate that Synchrony anticipates what its employees need before they even realize it,” she said, noting that the past few years have been particularly challenging because she’s had to deal with her mother’s death while adjusting to working at home with small children. “I’m excited to take this time for myself, but also eager to return to the company with fresh perspectives and ideas.”

As enticing as a work break may seem, financial planners say budgeting is essential given that most sabbaticals come with a reduction in pay.

“The best thing is to start planning ahead of time so you don’t have to be reactive when the money runs out,” Fraser said.

He suggests putting money aside from every paycheque well in advance of your decision to take a leave and, if feasible, securing a low-interest home equity line of credit to fall back on.

“A lot of people are sitting on a little more equity in their houses now and it’s given them that luxury of being able to do this,” said Fraser, noting that non-homeowners may have to look at an unsecured line of credit or loan as their fallback. “In an ideal world, you make a budget to determine what you need for expenses week to week and then leave yourself a nice buffer for when unexpected costs come up.”

Jennifer Reynolds, chief executive of the Women’s Corporate Directors Foundation, the world’s largest network of women board directors, said it makes sense companies are offering sabbaticals now, since many women were working less or switching jobs to accommodate child-care and family issues during the pandemic.

“I’ve done that with my own employees and they’ve come back energized and more committed because they got the flexibility,” she said. “If employers can structure this so there are no penalties (in coming back), I think we’ll get real uptake.”

Reynolds said in order for sabbaticals to work optimally in terms of improving retention and keeping employees happier overall, they shouldn’t be seen as a benefit primarily for women either.

“The real success will be in seeing men take them as well, because both men and women recognize they need breaks, whether that’s for family or to pursue other goals in life,” she said. “We need to encourage all our employees equally to do that.”

A couple we’ll call Richard, 50, and Marianne, 51, live in B.C. with their two children ages seven and nine. Richard handles transport tasks in the oil and gas industry. Marianne is a homemaker. Their combined annual after tax income has recently been $96,000.

Richard and Marianne look forward to retirement within a year, but their cash and investment savings in RRSPs total just $187,000. A few years ago, they made a big bet on property, improving their home to make it a showplace. The result:

A couple we’ll call Richard, 50, and Marianne, 51, live in B.C. with their two children ages seven and nine. Richard handles transport tasks in the oil and gas industry. Marianne is a homemaker. Their combined annual after tax income has recently been $96,000.

Richard and Marianne look forward to retirement within a year, but their cash and investment savings in RRSPs total just $187,000. A few years ago, they made a big bet on property, improving their home to make it a showplace. The result: their residence has soared in value. Now they want to cash in their wealth in B.C. property to finance a retirement under the palms. As we’ll see, it is a complex and risky venture.

They consider selling their B.C. home and its rental unit and moving far south. They think of countries where everything is cheap by Canadian standards. The incentive is wealth they have built in B.C. property.  The cost, if their move is permanent, will be curtailment of OAS benefits — one needs 40 years after age 18 for the maximum, and cessation of accumulation of CPP benefits, though what has accumulated in both plans will still be payable subject to withholding.

Email andrew.allentuck@gmail.com for a free Family Finance analysis.

Their house has recently been appraised at $2.4 million. They owe $820,934 on their mortgage, leaving their equity at $1.58 million, which is 87 per cent of their net worth. They figure that if they sell the house and move south, they could live as a family on $60,000 per year including $12,000 for private schools in their new country.

Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based investment advisory firm Exponent Investment Management Inc., to work with Richard and Marianne. “It’s feasible, he explains, but the length of time and the costs of shifting their lives to a different country add risk to their plan.”

The trade-offs

A life of warm beaches under the palms has costly downsides. It is true that their heating bills will be less than in Canadian winters, but they will give up the medical and social services that their Canadian taxes buy. Some warm countries have advanced medical and hospital services, some do not. Some are politically stable with safe streets. In some, foreigners are well advised to live in gated communities and pay for their own security. They would probably have to allocate money for medical care, buy an insurance-based pension plan and save diligently if state-paid plans are thin or unavailable.

At present, they spend all of the $8,000 in after-tax income from Richard’s job. There is nothing left for savings. Their house, $175,000 in RRSPs, $12,000 cash on hand, $26,000 worth of vehicles and $58,500 in RESPs, total $2,671,500 of assets. When it comes to debt, they have the mortgage, $15,000 on credit cards and $15,000 on a line of credit for their home renovations: total $850,934. Their net worth is thus $1,820,566. That is a fortune in some warm places.

Richard and Marianne figure they could find $1,435,000 for investment after selling their home and paying closing costs and the mortgage penalty. They could add $26,000 by selling their vehicles. That’s a total of $1,461,000. If that theoretical capital were invested to generate three per cent after inflation for the 39 years to Marianne’s age 90, it would pay them $62,190 per year, assuming consumption of all income and capital. Added to their RRSPs, from which they could conservatively withdraw $7,500 per year, they would have total pre-tax income of $69,690 per year. After splits of eligible income and 10 per cent average tax in their choice of jurisdiction, they would have $5,227 per month to spend. In some countries of their choosing, that would buy splendid accommodation.

Far from Canada, education is problematic. They are contributing nothing to RESPs at present. However, if the $58,500 in the accounts is left to grow at three per cent per year after inflation, it will rise to $74,115 in eight years at three per cent and then support distributions of $9,265 per child per year for four years for post-secondary education. In countries where university education is paid by government, that would be sufficient, Einarson estimates. If the kids physically attend a Canadian institution, living at a foreign home would be impossible. Supplemental summer employment would be essential.

A balance of benefits

There would be other costs such as airfares back to Canada for the family once or twice a year, a good car refreshed every five to eight years, and health insurance for services at a Canadian level. On the other hand, Richard could work a few months a year to bring in $10,000 to $15,000 to ensure costs are covered. Even that, given that he is in a licensed profession, could require continuing work or refresher courses.

The strategy of selling the house in Canada and then living abroad is feasible. But it is risky over the four decades Richard and Marianne would have up to their respective age 90s. Living abroad, they would have at most 80 per cent of the 40 years residence in Canada after age 18 required for full OAS. They could get CPP, but skipping 1.5 decades of contributions before 65 would cut benefits drastically. They would stop contributing to their own TFSAs and RRSP plans. Whether they could replace any government pensions in a tropical country is questionable. Few countries provide them for foreigners, even those that set up long-term residence. Lack of these resources would mean the couple and their kids would be entirely on their own in a financial sense.

Decision

“The plan is plausible, but awfully risky, even if we include Richard’s potential part-time income,” Einarson explains. “That they could do it does not mean they should do it. Staying in Canada, saving aggressively and planning long stays abroad in retirement after their kids complete post-secondary education, which is a Canadian norm, is the safer and perhaps wiser course.”

Retirement stars: 3 *** out of 5

Financial Post

Email andrew.allentuck@gmail.com for a free Family Finance analysis.

Despite expectations that the Bank of Canada was poised to increase interest rates this year, a 10-year record was broken when Canadians borrowed an additional $2 billion on home equity lines of credit (HELOC) in February 2022 — the highest one-month increase since 2012.

Before we discuss the ramifications of this, let’s first back up a bit and explain what a HELOC is and how it works. A HELOC is a line of credit secured to your house. It’s like a second mortgage that, once in place,

Despite expectations that the Bank of Canada was poised to increase interest rates this year, a 10-year record was broken when Canadians borrowed an additional $2 billion on home equity lines of credit (HELOC) in February 2022 — the highest one-month increase since 2012.

Before we discuss the ramifications of this, let’s first back up a bit and explain what a HELOC is and how it works. A HELOC is a line of credit secured to your house. It’s like a second mortgage that, once in place, costs you nothing if you don’t use it. Upon qualification, a homeowner can borrow up to 80 per cent of their property’s value, including any outstanding mortgages currently in place.

For example, if your house is worth $500,000 and you currently owe $300,000 against it, the remaining equity you could access via a HELOC is $100,000 ($500,000 x 80 per cent minus the $300,000 mortgage). If a homeowner doesn’t have a mortgage, then the maximum amount for a HELOC is 65 per cent of the home’s value.

The advantage of HELOCs is that a homeowner can access their equity anytime they choose, without having to repeatedly apply for financing for vehicles, home repairs and vacations. Payments are low, based on an interest-only amount, but, just like a credit card, it’s also a revolving form of credit. That means these lines of credit come with the risk of potentially never being fully paid off.

HELOCs are also usually at a variable interest rate, which means they are subject to interest-rate fluctuations. This isn’t a bad thing when rates are falling. But it can be a risky product in our current economic climate. Every time interest rates increase, so will the required payment on a HELOC.

Why then would so many Canadians choose to access their home’s equity in such uncertain times?

One reason could be that consumers are tapping into their newfound equity to consolidate other higher-interest debts. It’s not a bad decision to move high-interest debt to a lower cost of borrowing, but it can put your house at risk if rates continue to rise and payments become unaffordable.

Some Canadians may also have found themselves owing Canada Emergency Response Benefit (CERB) repayment at tax time and decided the best way to avoid Canada Revenue Agency’s imposed interest was to use their convenient, lower-interest HELOCs to pay it off.

Another possible cause could be that many homeowners are doing some much-needed work-at-home renovations. There’s nothing like being stuck at home for two years during a pandemic to realize your home is in need of upgrades.

As property values have increased over recent years, so has the amount of equity that can be partially accessed by way of a HELOC. Having a flexible borrowing option such as a HELOC means easy access to funds that can help improve your living space as well as your home’s resale value.

A HELOC can be a valuable borrowing tool as long as it is used correctly. However, access to credit on demand can make it far too easy to spend beyond what we may be capable of repaying. Even though using this credit to do renovations might increase your home’s overall value, it doesn’t mean you can afford to service that additional amount of debt.

How will the recent and impending interest rate hikes affect homeowners who already have debt owing on their HELOCs?

As HELOCs are usually based on a variable interest rate, when the Bank of Canada raises its overnight rate, borrowers can expect to have a corresponding increase in required payments. Every $100,000 of HELOC debt owing results in an additional $500 of interest charged per year when interest rates increase by 0.5 percentage points.

If interest rates rise by a further one to 1.5 percentage points this year, the result will be an annual increase of $1,500 in interest, on top of what you were already paying. For Canadian households struggling with the increased cost of living, this may just be too much for their budgets to handle.

To escape potential variable interest-rate hikes, consider converting lines of credit to a fixed interest rate. Speak to your financial institution or mortgage lender to find out what your options are. Keep in mind that locking in will guarantee your interest rate, but the required payment amount will likely increase.

If an increased payment will put too much strain on your budget, you may find it useful to have a free financial review with a not-for-profit credit counselling agency. A credit counsellor can discuss ways to improve your household budget and free up room to pay down that outstanding debt.

Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 25 years.

_____________________________________________________________

If you like this story, sign up for the FP Investor Newsletter.

_____________________________________________________________

Parents who are separated or divorced and share custody of their kids should be aware that the amount of time the kids spend with each parent can be the determinative factor into how much, if any, of the Canada Child Benefit they may receive. A recent tax case delves into the complexity of this issue. But first, a CCB refresher.

The CCB is a government program that provides low- and middle-income Canadian families with tax-free funds each month to help with the cost of raising

Parents who are separated or divorced and share custody of their kids should be aware that the amount of time the kids spend with each parent can be the determinative factor into how much, if any, of the Canada Child Benefit they may receive. A recent tax case delves into the complexity of this issue. But first, a CCB refresher.

The CCB is a government program that provides low- and middle-income Canadian families with tax-free funds each month to help with the cost of raising children. For the 2022 benefit year, the total CCB estimated payments is projected to be about $26 billion, paid to more than 3.5 million families.

For the benefit year beginning next month, if your family income was less than about $32,800 in 2021, you can get the maximum CCB: nearly $7,000 for each child under the age of six, and almost $6,000 for each child aged six to 17. (The payments gradually decrease once family income is above $32,800.)

The CCB is paid to the parent who is “primarily” in charge of the care and upbringing of the child. For parents who are separated or divorced, however, the rules that determine whether each parent can collect CCB payments depend on whether the parents have shared custody.

New legislation introduced in 2021, but retroactive to 2011, expanded the definition of a shared-custody parent to one who either resides with the child at least 40 per cent of the time in a particular month, or “on an approximately equal basis.”

In a shared-custody arrangement, both parents must be primarily responsible for the child’s care and upbringing when the child lives with them. If this is the case, each parent is entitled to 50 per cent of the CCB payment he or she would have received if the child lived with them all the time (based on their own family income.) Absent a shared-custody arrangement, however, only one parent would be entitled to 100 per cent of the CCB payments.

The recent tax case explored whether a parent who didn’t quite meet the 40-per-cent test in a particular month could still qualify to receive the CCB that month based on the argument that the kids lived with that parent throughout the rest of the year on “an approximately equal basis.”

Mom and dad have three kids. They separated in December 2018. Mom claimed the monthly CCB from January 2019 through June 2021. The Canada Revenue Agency initially paid 100 per cent of the benefit to her, but it later concluded that both mom and dad were shared-custody parents and so dad was entitled to half the CCB (based on his net income).

The key issue before the court was whether mom should have been entitled to claim the full CCB for the kids during the entire period. The CRA took the position that mom was not entitled to the full CCB because she was a shared-custody parent and, therefore, only entitled to half of the benefit.

At trial, the judge explained that entitlement to the CCB is determined on both a child-by-child basis and a month-by-month basis. In reviewing the evidence, the judge found that since the couple’s youngest child wasn’t old enough to attend school during the months in question and the child’s care during the day on weekdays fell solely to mom, it could not be said that the child resided with dad at least 40 per cent of the time.

It was also clear from the evidence that mom was the primary caregiver of the other two kids during the following periods: January to March 2019 (the months immediately following the separation, when dad’s housing was “unstable”), July and August 2019 (when there was no school), and April 2020 to June 2021 (initially, when the schools were closed due to COVID-19; later, when they were off school for the summer of 2020; and from September 2020, when mom began homeschooling them.)

From April to June 2019, mom provided the court with calendars that recorded where the kids slept during those months. Dad, on the other hand, had no records of his time with the children during these months and “little in the way of a specific recollection.” Accordingly, the judge found that dad didn’t meet the 40-per-cent tests during this period.

As for the months from September 2019 through February 2020 (other than December), when mom and dad established a fixed schedule, the judge concluded that the eldest kids were with dad at least 40 per cent of the time. That left only two months in dispute: December 2019 and March 2020.

The evidence was clear that dad essentially never cared for the children during the day on weekdays when they were on school vacation. The care that would otherwise have been provided by the children’s school was, therefore, left to be provided by mom. In each of December and March, the evidence showed that mom cared for the kids when school was out due to the Christmas and spring break holidays.

The judge then turned to the new legislation, which contemplates a situation where a parent who normally meets the 40-per-cent threshold temporarily slips below it in a given month because of, for example, illness, vacation or something similar.

“The addition of the ‘approximately equal basis’ test appears to have been designed to recognize that irregularities in a given month may upset an otherwise established schedule but that, over time, these irregularities will balance out,” the judge said.

But that was not the case here, according to the judge. “School holidays (and the summer months) are not unusual events … These four breaks occur regularly each year and collectively involve a significant portion of the year. They leave parents in a position of either having to care for their school-age children during what would otherwise be the school day or having to find an alternative form of child care.”

Thus, the judge concluded that the kids didn’t reside at least 40 per cent of the time with dad during the months of December 2019 and March 2020, and so mom was entitled to 100 per cent of the CCB in those months.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

_____________________________________________________________

 For more stories like this one, sign up for the FP Investor newsletter.

______________________________________________________________

Monthly child support payments from one parent to the other are one of the most common outcomes of a separation. As time goes by, separated parents often re-partner, and step-parent relationships can become part of the matrix of a blended family. But what happens if the parents in the blended family separate? Is a step-parent required to pay child support for a stepchild? In some cases, the answer is yes.

That was the outcome of a recent twelve-day trial before Justice Dale Fitzpatrick of

Monthly child support payments from one parent to the other are one of the most common outcomes of a separation. As time goes by, separated parents often re-partner, and step-parent relationships can become part of the matrix of a blended family. But what happens if the parents in the blended family separate? Is a step-parent required to pay child support for a stepchild? In some cases, the answer is yes.

That was the outcome of a recent twelve-day trial before Justice Dale Fitzpatrick of the Ontario Superior Court of Justice who was asked to decide if a stepfather had an obligation to support two stepchildren.  The trial focused almost entirely on the binary issue of whether the stepfather should pay child support. The length of the trial made it very clear: determining a step-parent’s, or subsequent parent’s, child support obligation is far more complex than determining a first parent’s obligation.

In the case before Justice Fitzpatrick, the parties lived together for only 22 months, of which they were married for 17 months. The husband did not have any children from a prior relationship. The wife had two children, aged 9 and 11 years at the time of separation. The children’s biological father had a fractured relationship with the children and, when the parties began living together, the children were not seeing their biological father at all. The biological father was in receipt of social assistance and was paying child support of $94 per month.

Following the separation, the wife sought child support from the husband. The husband disagreed. A hard-fought trial ensued. To determine if the husband owed child support, Justice Fitzpatrick had to carefully analyze the relationship between the husband and the two children. The judge had to decide if the husband had stood in the place of a parent since, under the Federal Child Support Guidelines, which apply across Canada to divorcing spouses, child support may be payable by a spouse who takes on the role of a parent.

The judge was guided by number of court decisions which find their roots in Chartier v. Chartier, a 1999 decision of the Supreme Court of Canada. In that case, Justice Michel Bastarache noted that spouses “are entitled to divorce each other, but not the children who were part of the marriage” and that when a spouse stands in the place of a parent, children ought to be able to “count on that relationship continuing.”

To determine if a spouse has stood in the place of a parent, a judge will consider a number of factors. According to Justice Fitzpatrick, those factors include, but are not limited to: a) participation in family events, b) the step-parent’s financial contribution toward the children, c) the step-parent’s participation in duties related to the children, d) responsibility for disciplining the children, e) children’s use of the step-parent’s surname, f) reference to the step-parent as “dad”, g) length of the step-parent’s relationship with the children and h) the nature of the children’s relationship with the biological father.

Over the course of the 12-day trial, the evidence given by both parties was remarkably similar on many of these factors. According to Justice Fitzpartrick, the husband testified that “the children were calling him dad commencing with the first three months” of his relationship with the wife and that “he paid for all of the household expenses without contribution from the (wife) who did not work outside the home during the relationship.”  The evidence also showed that the husband participated in the children’s extra-curricular activities such as swimming, hockey and skating. There was evidence of family vacations together to Mexico, Florida and Muskoka.

Despite the depth and breadth of the evidence, the husband denied that he had any closeness or relationship with the children. The husband’s position was grounded in his belief that he was “dominated by the (wife) and somehow coerced to act like a parent against his will.”  Justice Fitzpatrick dismissed the husband’s claims on the basis there “was no meaningful evidence presented during the trial to support his claim that the (wife) forced this relationship on the (husband) or on the children.”

Notably, following separation, the husband did not have any contact with the children. According to the wife, the husband chose to discontinue any contact. Not having contact after separation does not have any bearing on whether a child support obligation exists.

In the result, Justice Fitzpatrick had “no difficulty” finding the husband stood in the place of a parent and is required to pay child support to the wife for the support of the two children.  Recognizing the short length of the relationship, Justice Fitzpatrick ordered the husband to pay child support for a period of three years.

In determining the amount of the husband’s monthly child support obligation, Justice Fitzpatrick deducted the $94 per month paid by the biological father.

Given the nominal amount of child support being paid by the biological father, it is worth noting that a stepparent may be required to pay the full monthly amount of child support in certain circumstances. That issue was discussed by Justice Erika Chozik in another recent case in the Ontario Superior Court of Justice.  According to Justice Chozik: “When the biological parent is not present, and his support obligation cannot be quantified or enforced, there may be circumstances where the step-parent will have to meet the primary obligation of child support in order for the child to continue to enjoy the standard of living he or she enjoyed while living with the step parent.”

In addition to his obligation to pay time-limited child support, the husband was ordered to pay costs of $135,000 to the wife on account of the trial. According to Justice Fitzpatrick, the trial “was a winner-take-all 12-day trial made longer by the (husband’s) incredible denials of any emotional relationship with the children.”

Given the length and costs of a trial to determine if a parent has stood in the place of a parent, separating spouses would be wise to consider settlement options early on in such a dispute.

Adam N. Black is a partner in the family law group at Torkin Manes LLP in Toronto.ablack@torkinmanes.com

In an ongoing series, the Financial Post explores personal finance questions tied to life’s big milestones, from getting married to retirement.

Standing at the altar, nobody thinks they’ll be sitting in a divorce lawyer’s office one day, yet that’s the reality for millions of Canadians each year, and managing the resulting financial hellscape is likely near the top of a divorced couple’s stress list.

“There’s a lot of divorce happening, 2.74 million people applied for divorce in Canada in 2021, 1.88 million in 2020,” Jeanette Power, senior wealth adviser at the Canadian Imperial Bank of Commerce, said. “Divorce is all around us. Everyone goes into relationships hoping for the best, but you do really need to prepare for it.”

Canadians also now have the additional strains of worrying about inflation and rising interest rates when going through a divorce. Never mind the pressure from real estate investments. Yet, according to a recent Love & Money survey by Toronto-Dominion Bank, it may not be all bad news.

“After a couple becomes divorced and are a single-income household, more than half, at 54 per cent of respondents, said it’s easier to manage their finances than it was prior to the divorce,” Michael Nitz, district vice-president at TD Canada Trust, said.

But getting to that point is the hard part. That’s why both Nitz and Power recommend meeting with a professional financial adviser as one of your first steps when going through a divorce.

“Canadians going through divorce need a team of professionals around them. They need their emotional support team, and their financial support team,” Power said. “If they have a good team around them and that team can provide checklists, education, webinars in some cases or refer a client to different applications, that’s a good start.”

Professionals will also inform you about some of the upfront costs associated with a divorce. An uncontested divorce costs an average of $1,860 in Canada, according to the 2021 Canadian Lawyer Legal Fees Survey. That jumps significantly to $20,625 for a contested divorce.

Canadians going through divorce need a team of professionals around them

Jeanette Power

“If taken to court, it could be over $50,000, depending on the complexity,” Power said. “I have clients who are still dealing with divorce through the courts and it’s three or four years later.”

There are also costs that need to be managed right away. For example, if there are children involved, you may have to pay child support. But two separate homes mean two computers, two internet services, and so on. These everyday costs add up, which is why getting your finances in order and creating a budget and personal financial goals with your adviser are a few good first steps.

“There’s a difference between what you need and what you want,” Power said. “So often when we’re budgeting, we have to remind clients that those are two different things.”

In many cases, real estate becomes the largest asset for people going through a divorce. It usually has the largest emotional attachment, too. But again, people need to figure out what they need, and what they can afford.

“Housing and where they live is usually the highest expense, so it’s important Canadians don’t spend beyond their means,” Nitz said. “We suggest you find the best mortgage solution as typically your income is reduced, so finding a mortgage solution that will support clients in their new way of living is important.”

But if you’re able to come to an agreement, Power suggests holding off on the sale of your home. The Canadian Real Estate Association recently reported a 12.6 per cent decline in national home sales on a month-to-month basis. Until the market stabilizes, it could be a good idea to address this large decision down the road when both former partners have their finances in order.

“Maintain the property even for six months until they can get their heads in a space where they can start downsizing and moving,” she said. “It’s easy to sit there and say you need to sell the house. Emotionally, it’s a completely different conversation.”

Once you’ve dealt with these costs and have a budget underway, it’s time to rebuild. That means building up your own credit without your partner. And this can be quite a different experience depending on the age you get divorced.

Power said there has been an increase in “grey divorces,” couples who have been together for 20 years or more. In this case, their credit history has usually been built together, making it difficult for the newly single to even apply for a mortgage for a new home.

“In a lot of the grey divorces, the credit cards or loans were always in joint, but not always individual where they don’t have their own credit established,” she said.

For younger people going through divorce, Nitz said the Love & Money survey noticed a shift away from this joint-financial thinking. But other issues have come up.

In the survey, 49 per cent of Canadians under 40 said they didn’t have a joint account with their spouse, and 63 per cent said they didn’t have shared credit cards. Furthermore, this generation was less tolerant of “red flag financial behaviours,” Nitz said, with 81 per cent saying they would be concerned if a potential partner was secretive about finances.

“Typically, millennials keep their banking more separate,” he said. “About 60 per cent of Canadians say it’s harder to find true love than financial success. We hope it’s easier to find financial success because they’ve met with an adviser.”

That doesn’t mean future relationships are set up for failure. Both Nitz and Power said couples should meet with professional advisers together as often as they can. This allows for better communication and transparency, creating a more open and honest relationship.

After the emotional stress and financial strain of divorce is under control, people say they have become more financially stable. About 57 per cent said they spend less and are more in tune with their budget, according to the Love & Money survey.

“Nobody knows what’s going to happen. Marriage is expensive, but divorce is even more so,” Power said. “If the time comes, you want to be prepared. You don’t want to make decisions based on emotions.”

According to Statistics Canada, the average retirement age for Canadians in 2021 was 64.4 years old. Retirement has been delayed by almost three years since 2001, when the average was just 61.5 years of age. For some, those extra few years of work can seem like an eternity.

There are, however, strategies that those who are approaching retirement can consider to shave time off their financial independence date so they can afford to retire earlier.

For this exercise, we will

According to Statistics Canada, the average retirement age for Canadians in 2021 was 64.4 years old. Retirement has been delayed by almost three years since 2001, when the average was just 61.5 years of age. For some, those extra few years of work can seem like an eternity.

There are, however, strategies that those who are approaching retirement can consider to shave time off their financial independence date so they can afford to retire earlier.

For this exercise, we will consider a notional 55-year-old Canadian couple living in Ottawa, owning their home with no mortgage, with assumptions inspired by the Canadian Real Estate Association and Statistics Canada data.

The median sale price for a single-detached home in Ottawa during the first quarter of 2022 was $818,000. The median after-tax income of a Canadian two-parent family with children in 2020 was $110,700. Average household expenditures in 2019 in Ontario excluding rent, mortgage, tax, pension and personal insurance was $56,407. Finally, average private pension assets for Ontario families with the primary income earner aged 55 to 65 was $400,919 in 2019.

So, we will assume an $800,000 mortgage-free home owned by a 55-year-old couple planning to retire at 60, earning $75,000 each, spending $60,000 per year on basic living expenses, and with $300,000 in RRSP savings invested in conservative mutual funds.

Part-time work

Some employers are open to having a full-time employee transition to a part-time role. Some employees are able to provide consulting services and work part-time as a self-employed contractor in their field. Other workers might be open to a second career doing something completely different at a lower income.

For our couple, if they work from 55 to 60, they will earn about $120,000 of annual after-tax income for five years — roughly $600,000 in total. If they work at half that income and earn $37,500 each instead of $75,000, working for 10 years from 55 to 65, they would earn about $65,000 after-tax each year. This would cover their $60,000 of annual expenses and they would earn about $650,000 after-tax over those 10 years. This is about the same as their expected after-tax earnings over the final 5 years of their career ($600,000), albeit over 10 years.

The point? There are different ways to get to the finish line. Financially, the two income scenarios have similar present value and may result in comparable retirement funding and future estate value. Using conservative assumptions about CPP and OAS pensions, inflation and investment returns, they can afford to pursue either option.

The benefit is they may have grandkids that need child care, a desire to have more free time to work on their tennis game, or another reason to consider a staggered retirement rather than going full tilt until age 60 and retiring cold turkey.

Higher investment returns

Taking on more risk with your investments should lead to higher returns over a long enough time horizon. That is, by having more exposure to stocks, your long-run returns should increase at the expense of short-run stock market volatility.

Lower investment fees may also increase returns net of fees. Morningstar’s Global Investor Experience Study pegged Canada’s average allocation mutual fund fee at 1.94 per cent.

If our notional couple sold their conservative mutual funds and went all-in on equity mutual funds instead, they may be able to boost their returns by two per cent per year. Likewise, if they decided to ditch their mutual funds and build an investment portfolio on their own with a discount brokerage, where they may be able to boost their returns by reducing their fees by two per cent per year.

A two per cent increase in their net investment returns, assuming an age 95 life expectancy, might mean they can retire a little over a year earlier than their age 60 retirement target, holding other factors constant and conservative.

The point? Higher investment returns might help, and retiring one year earlier is meaningful, but it may not be a game changer for most retirees. On the other hand, an overly aggressive asset allocation or a do-it-yourself approach for a less experienced investor could lead to an investment mistake. For example, panicking and selling stocks at a market bottom. Investors should invest based on their risk tolerance and DIY investing is not for everyone despite the potential cost savings.

Lower expenses

The less you spend, the less you need to have for retirement. If our notional couple could find a way to reduce their spending by 10 per cent from $60,000 to $54,000 per year — a decrease of $500 per month — they could afford to retire earlier. In fact, they may be able to afford to retire more than a year and a half sooner using conservative assumptions.

That said, retirees need to be careful about assuming they can spend less in retirement if they have not been able to cut costs already because doing so may provide them with artificial optimism. Aging also comes with other spending risks such as the potential cost of funding long-term care needs.

Home downsize

The average condo apartment sale in Ottawa in Q1 2022 was $420,000. If our couple could sell their detached home for $800,000 and net $760,000 after selling costs, buying for $420,000 plus $10,000 in closing costs, they could net about $330,000. That is equivalent to about three years of after-tax salary for them and the downsize may also lower their monthly spending on housing costs.

This could accelerate their financial independence by about three years, other things being equal. A move to a lower-cost city or province could be even more meaningful, and that much more so for someone approaching retirement and living in a more expensive city or property than an $800,000 detached home in Ottawa.

Summary

Those who are willing to be a little flexible with their retirement planning may be able to consider changes to their job, investments, expenses, or real estate that can impact their ability to retire. Everyone has different goals for retirement and some people work well past the point that they need to work, choosing to work rather than working because they cannot afford to retire.

Some changes might help someone to retire earlier, spend more in retirement, or give more money to their kids or to charity. Financial independence can be immensely powerful, and some who think that power is beyond their control may be surprised when they consider choices that are in fact available.

Jason Heath is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

In October 1998, the stock market was crashing, but the portfolio managers at Burlington, Ont.-based AIC Ltd. were on the road as planned, travelling across Canada to convince clients that the funds they offered remained good investments, even though some of them had lost half their value.

In the car, the managers clung to their briefcases, looking glum. It had been a remarkable run. They had ridden the wave of the booming wealth management industry so well that they had increased the value

In October 1998, the stock market was crashing, but the portfolio managers at Burlington, Ont.-based AIC Ltd. were on the road as planned, travelling across Canada to convince clients that the funds they offered remained good investments, even though some of them had lost half their value.

In the car, the managers clung to their briefcases, looking glum. It had been a remarkable run. They had ridden the wave of the booming wealth management industry so well that they had increased the value of assets under management to nearly $10 billion by 1998 from $12 million at the start of the decade. But, in a matter of weeks, everything had changed.

CEO Michael Lee-Chin turned to them and smiled. “If this all blows up, we had one heck of a good time,” he said.

It didn’t blow up. Lee-Chin and his fellow asset managers pushed through, and eventually sold the firm to Manulife Financial Corp. for an undisclosed amount in 2009. Three decades and many investments later, Lee-Chin is worth some $1.9 billion, according to Forbes.

Lee-Chin is Canada’s only Black billionaire, and just one of 15 Black billionaires worldwide. He’s associated with 4 “unicorns,” privately held startups that have a valuation of over $1 billion: AIC Ltd., Columbus Communications, InterEnergy Holdings Ltd., and ITM Isotope Technologies Munich SE. He’s also associated with three publicly traded companies worth $1 billion or more, including NCB Financial Group Ltd., Telix Pharmaceuticals, and Guardian Holdings Ltd.

He is known for his philanthropic contributions to the Royal Ontario Museum, the Joseph Brant Hospital, the University of Toronto, McMaster University and more.

Lee-Chin has come a long way from humble beginnings in Port Antonio, Jamaica. His mother sold Avon products and worked as a bookkeeper, while his stepfather ran a local grocery store. Lee-Chin bounced between jobs at a cruise line and aluminum bauxite plant, until he applied to universities in Canada. He set off for McMaster University in Hamilton, Ont., to study civil engineering with $2,000 in his pocket, enough for the first year, and no plans on how to pay for the rest of it.

“Most people make decisions and act on their decisions based on: ‘Ready, aim, aim, aim, aim, aim…,” Lee-Chin said in an interview. “What I do, is I ready, aim, and if I’m in the vicinity, I fire.”

He tried to save money for school by working as a bouncer but he still found himself coming up short. “So, I did what any university student would do,” he said. “I wrote the prime minister of Jamaica.”

Seriously. Lee-Chin said he wrote, “Mr. Prime Minister, you cannot reap what you do not sow.” Then-prime minister Hugh Shearer was impressed enough to grant Lee-Chin a $15,000 scholarship.

Lee-Chin got his degree, and then applied to 100 jobs in engineering, receiving 100 rejections. “That was a low point in my life,” he said, “because when you’re not working, and you’re trying to get a job, and you get rejected, it kills your self-esteem.”

Lee-Chin’s three keys to success

‘Make them wealthy’

He switched careers and became a mutual fund salesman. With no clients, he had no choice but to cold-call and knock on the doors of wealthy Canadians. “In 1977, Canada was not as cosmopolitan as it is today,” he said. Lee-Chin suspected buyers were wary of the tall, Black kid on their doorstep.

But eventually, some people took a chance on him. “I asked myself the question, ‘Mike… What is the highest value-add I can give to these people?’ The answer kept coming back to me, ‘Mike, make them wealthy,’” he said.

He studied some of the wealthiest people in the world, including Warren Buffett, and found that self-made millionaires and billionaires had a few things in common. They tended to own a few high-quality businesses in strong, long-term growth industries. Wealthy people, he noticed, hold these businesses for the long run, for as long as the business remains viable.

Lee-Chin joined the game. In 1983, he took out an investor loan of $500,000 to buy into the company whose funds he was selling: Mackenzie Investments. (When I suggest that some might consider this a “gamble,” Lee-Chin is quick to correct me: “It was not a gamble. This, Miss Marisa Coulton, is investing.”)

He had no interest in diversifying his assets, a bread-and-butter strategy that many portfolio managers follow. “There’s another saying for it: die-worse-ify,” he said. He believed then — and still does — that it is better to invest in a single business you understand, than many businesses you don’t.

Lee-Chin’s 5 common qualities of wealthy people

The bigger mistake he sees investors making, however, is that they don’t understand the power of owning stocks. “Most people see stocks as a piece of paper to be traded, to buy and sell,” he said. “But, a stock is a percentage ownership in the business,” he said. “That’s a big difference.”

He advises investors to take a businesslike stance and immerse themselves in a business, buying into it not simply because the stock is going up or down, but because they have identified it as a great business. “You should ask yourself the question, ‘Do I really want to own a piece of that business, and why?'”

Regarding inflation, he said, “If all these micro, macro situations were pertinent to wealth creation, the wealthiest people in the world would be the economists.”

“(Wealthy people) don’t manage their business based on inflation, deflation. They manage their business by delivering a great product that has utility to society.”

‘On a shoestring’

Lee-Chin’s approach worked. Over the course of four years, his investments appreciated sevenfold, climbing from $1 to $7 per share. His $500,000 turned into $3.5 million, giving rise to his lifelong mantra: buy, hold, and prosper. He used the profits to buy a small, Kitchener, Ont.-based investment firm called AIC Ltd.

Jonathan Wellum was one of AIC’s earliest employees. He met Lee-Chin in the weight room at McMaster University, where they were both alumni. Lee-Chin asked if Wellum was interested in coming aboard at AIC, which, in 1990, had around 100 clients, $12 million in assets, and just a few people on staff. Wellum agreed, and would go on to work with Lee-Chin for 19 years.

“(AIC) was very, very small, but the seeds were there,” Wellum said. “Michael had the building blocks… he had an investment philosophy, he had an approach, he had a passion, and he was prepared to invest to grow the business.”

Wellum was conservative when it came to money and had a low tolerance for risk. He said he was stunned by Lee-Chin’s willingness to put his own money on the table. “We were on a shoestring,” Wellum said. “I always admired that about Michael. If he believed in something, he’d put the money behind it.”

Once, when AIC was struggling, Wellum was approached by Royal Bank of Canada for a job. “I was pretty close to jumping,” he said. “And I thought, ‘You know what? I can’t; I really like working with Michael.’”

In under a year, AIC’s business took off. “If I had made that change then… I wouldn’t have worked with one of the most dynamic businesspeople there is.”

Wellum said he witnessed Lee-Chin’s optimism falter only once, when he sold AIC to Manulife in 2009, amid the financial crisis. “He loved the business, we all did,” Wellum said. “But it was a tough time.”

As Wellum announced the sale to the staff of around 200, and encouraged them to congratulate Lee-Chin, Lee-Chin stood off to the side, a pained look on his face. “I don’t think he really wanted to sell AIC. But there was pressure to do it, just to keep a strong financial position,” Wellum said.

“It was the right decision,” he said, adding that the industry was changing and getting more difficult for niche players such as AIC, “but I think that was very tough on him. That was his baby.”

‘Do well, and do good’

As Lee-Chin’s wealth increased, so too did his desire to give back, said Wellum. “He does have a wonderful heart. He loves to help people,” said Wellum. “When I worked with him, people would say, ‘Michael is a hard-nosed businessman,’ just because he was successful,” he said. “I would say, ‘You don’t really know Michael.’

The motto of Lee-Chin’s current company, Portland Holdings Inc., which manages US$20 billion in assets, is “do well and do good.” Lee-Chin donated $10 million to the University of Toronto, establishing the Michael Lee-Chin and Family Institute for Corporate Citizenship, which helps business leaders use their companies to encourage social change.

“He’s a powerful presence, a fascinating and engaging guy,” said Rod Lohin, executive director of the institute. Lee-Chin, he said, was thinking about philanthropy long before it became a norm in the world of big business. “He certainly stands out as an exemplar of someone who is willing to put his money where his mouth is,” said Lohin. “It just seems to be a fundamental part of who he is.”

Lee-Chin’s philanthropy extends to his home country, Jamaica. He purchased Jamaica’s National Commercial Bank in 2002, a move his investor friends questioned.

“I said to Michael, ‘Why do we want to own a bank in Jamaica?’ I didn’t know the market,” Wellum said. “He was like, ‘Jonathan, there are opportunities there.’”

Lee-Chin used the bank as a tool to promote growth in the country, arranging for all profits from the bank to be kept on the island. The company is now the most profitable business in the country with cumulative profits of US$2.2 billion from 2004 to September 2021. Lee-Chin likes to invest in unlikely places that are perceived to be bad investments. Jamaica’s lack of capital and ingrained inefficiencies make it the perfect place to invest, he said.

The government of Jamaica took notice. If Lee-Chin could grow a business, couldn’t he do the same with a country? Current Prime Minister Andrew Holness appointed Lee-Chin to serve as chair of Jamaica’s Economic Growth Council. Over the course of more than 100 day-long meetings, Lee-Chin flew to the island to brainstorm with stakeholders from all walks of life — farmers, civil servants, construction workers — about how to expedite Jamaica’s development.

The council produced what Lee-Chin calls a “magna carta” for Jamaica’s development, the goal being five per cent growth in four years. It was not achieved. Myriad factors, the COVID-19 pandemic included, slowed Jamaica’s growth. “It’s unfinished,” said Maureen Denton, executive director of the council between 2016 and 2017. “Because both of us are so passionately committed to Jamaica, it hurts.”

It’s the one business venture Lee-Chin hasn’t been able to see to fruition.

Lee-Chin’s criteria for a great investment opportunity

A coming health boom

Lee-Chin remains committed to philanthropy and business, but now, at 71 years of age, his focus has shifted to his family, his health, and well-being.

His days start at 5 a.m. He tries not to check his phone, but gives the screen a cursory glance to see if there are any emergencies at Portland Holdings. Lee-Chin exercises for precisely 60 to 75 minutes and then eats an enormous breakfast, lunch, and dinner to help power him through what is bound to be a long day. When I asked whether this was the key to business success, he laughed and said, “No, it’s just the secret to being nutritionally well-fed.”

As he and other members of the baby boom cohort approach retirement, Lee-Chin expects there will be a spike in interest in health. So that’s where he’s putting his money now. He invested in ITM Isotope Technologies Munich SE, a biotechnology group of precision oncology companies working on perfecting techniques such as peptide receptor radionuclide therapy, a cancer treatment where patients are injected with a cell-targeting protein, combined with radioactive material — a radiopeptide. The radiopeptide binds to neuroendocrine cancer cells and zaps the tumour with radiation. “It’s like magnets and iron shavings,” said Lee-Chin.

When the technique cured his friend of colon cancer, Lee-Chin was sold. He asked for equity in the company, and it offered him a role on the advisory board instead. “I will accept only if you find me some shares!” he said, sticking to his long-held beliefs about the merits of stock ownership. Lee-Chin acquired a minority stake in the company.

As always, Lee-Chin is thinking 10 steps ahead. “You don’t create any wealth by doing what people are doing now,” he said. “You create wealth by doing today, what people will be doing tomorrow.”

• Email: mcoulton@postmedia.com | Twitter: marisacoulton

A woman we’ll call Margaret, 60, works in Ontario in high-tech manufacturing. She earns $169,716 per year and takes home $9,713 per month after tax. She wants to retire no later than age 65 if she can attain sufficient income and financial security.

Margaret sold her three-bedroom condo last year and got $310,000 net as a way of downsizing. She currently rents. She would like to get back to ownership with an 800-square-foot condo that, she figures, will cost her $750,000. But that purchase

A woman we’ll call Margaret, 60, works in Ontario in high-tech manufacturing. She earns $169,716 per year and takes home $9,713 per month after tax. She wants to retire no later than age 65 if she can attain sufficient income and financial security.

Margaret sold her three-bedroom condo last year and got $310,000 net as a way of downsizing. She currently rents. She would like to get back to ownership with an 800-square-foot condo that, she figures, will cost her $750,000. But that purchase would erode her savings. Can she have the condo and a secure retirement, she wonders?

Email andrew.allentuck@gmail.com for a free Family Finance analysis

Family Finance asked Eliott Einarson, a financial planner who heads the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with Margaret. He notes that she sends money to kin abroad and wants to leave an estate for them.

Renting vs. owning

The problem of buying for the long run, say 25 years, during which time home prices are almost certain to rise vs. renting and investing cash that would otherwise go to a down payment and carrying costs is not a fair balance. Canadian tax law allows profits from the sale of a principal residence to be kept without tax. The money that might not go to a down payment and carrying costs would have to match those tax-free gains. We can’t predict property markets or government tax policy, but the odds favour ownership, Einarson says.

Margaret currently spends $2,400 per month on rent, including taxes and utilities. If she buys a condo, the rent she pays could go toward mortgage payments instead. She also budgets $750 per month for gifts to relatives, $1,080 for RRSP contributions, $500 for her TFSA and $1,000 for other investments.

Margaret’s goal is to have $7,000 per month after tax in retirement.

Present investment assets

Margaret has significant investments: $805,400 in her RRSP, $110,000 in her TFSAs and $48,000 in non-registered investments. She has a $325,000 reserve from the sale of her last condo and a $45,000 car. All that adds up to a net worth of $1,333,400.

Margaret will have $26,400 from a defined-benefit pension at 65, $11,232 from the Canada Pension Plan, and $5,800 from OAS based on 30 years residence in Canada after age 18.

With $12,960 annual additions, her RRSP growing at three per cent after inflation will total $1,004,550 in five years at her age 65 in 2022 dollars and then be capable of generating $49,760 per year for the following 30 years to her age 95 with all capital and income paid out.

Her non-registered investments of $48,000, with annual additions of $12,000 for five years and three per cent growth after inflation will rise to $121,266 in 2022 dollars and then generate $6,000 per year for the following 30 years to her age 95.

Adding up these income streams, at 65 she would have $99,192 pre-tax income. The OAS clawback will take 15 per cent of $20,138 income over the trigger point of $79,054. That would add $3,020 to her tax. Her regular income tax at 20 per cent will leave her with $76,300 per year.

She could use her TFSA to supplement that income.

The current $110,000 balance growing with $6,000 annual additions for five years at three per cent per year after inflation to $160,330 could produce $7,942 per year. That would push total monthly retirement income to $84,240 per year, or $7,020 per month.

Margaret wants to buy a $750,000 condo with a $400,000 down payment. She figures she can get a 25-year amortization at four per cent with monthly payments of $1,670. Over 12 months, the mortgage would cost her $20,040 plus potential assessments. That $1,670 is not much for rent in principal cities and towns in Ontario. Her interest rate is likely to rise, but the cost is a ballpark figure.

Yet ownership would be affordable. $20,040 would be 24 per cent of her estimated after-tax retirement income including TFSA cash flow. If she buys a condo, she will build home equity. If she does not buy a condo and continues to rent, to keep her costs fixed until her rent increases, she can use her $373,000 cash and non-registered funds to invest for income supplements. That would mean she could keep her TFSA intact for her estate.

There is an additional source of cash — Margaret has a life insurance policy with cash surrender value of $30,000 and a death benefit of $169,000. She could cash out and spend the $30,000 on a home of her own, but given her concerns for her family abroad, retaining rather than cashing out the policy seems the wiser course.

Alternatives

A final alternative would be to work to 70, defer home purchase, gain 36 per cent in OAS payouts less increased clawback sums, add as much as 42 per cent to CPP payouts and gain perhaps 30 per cent on the sums and yields of RRSP/RRIF, taxable assets and TFSAs. Yet in that five-year period housing prices might rise further. The bottom line is that a low six-figure income doesn’t buy a grand retirement anymore. But home ownership and the capital gains that usually go with it serve the purpose of having shelter now and an estate for family.

We have to caution that home ownership and renting is more than a current cost question. House owners have repair bills, condo owners have assessments. Owners can avoid some costs by doing their own maintenance and cover flood or hail risks with insurance. In other words, ownership gives more control over fate than renting. But renting does free up capital for other uses. In this case, Margaret has a solid portfolio. She needs shelter more than returns on financial assets.

She could move to a small town with lower house prices and avoid the madness of major metropolitan Ontario property markets. She would have more money for travel and gifts for family.

Retirement stars: four *** out of five

Email andrew.allentuck@gmail.com for a free Family Finance analysis

Financial Post

By Julie Cazzin with Brenda Hiscock

Q: I’m 52 years old, married and have a 12-year-old daughter. Our gross household income is $130,000, and I have a $220,000 mortgage at about four per cent. We have not contributed to our registered retirement savings plans (RRSPs) in 15 years and have not started tax-free savings accounts (TFSAs). We only have savings of about $40,000 for emergencies and it’s sitting in a bank savings account in cash, as well as a registered

By Julie Cazzin with Brenda Hiscock

Q: I’m 52 years old, married and have a 12-year-old daughter. Our gross household income is $130,000, and I have a $220,000 mortgage at about four per cent. We have not contributed to our registered retirement savings plans (RRSPs) in 15 years and have not started tax-free savings accounts (TFSAs). We only have savings of about $40,000 for emergencies and it’s sitting in a bank savings account in cash, as well as a registered education savings plan (RESP) that we fully contribute to annually for our daughter. Recently, we inherited $260,000 from my father who died last year. What’s the best thing to do with this money? Should we pay off the mortgage, contribute to RRSPs or start TSFAs? — Reggie in Moncton, N.B.

FP Answers: My sincere condolences to you and your family on your father’s death, Reggie, and thank you for your question.

With an inheritance of $260,000 and $40,000 in cash in a savings account, you have a total of $300,000 in cash to invest. A simple solution would be to pay off your $220,000 mortgage in full. That would leave $80,000 to contribute to RRSPs and TFSAs. The increase in cash flow from no longer making mortgage payments will result in more money to contribute to these accounts going forward if you’re hesitant to invest it all at once.

You mention that your mortgage is at four per cent, so it is likely a fixed-rate mortgage, which tends to have higher penalties if paid off early. That penalty could have been quite high six months ago when interest rates were low, but it is likely much less now.

Fixed-rate mortgages generally have either a three-month interest penalty or an interest-differential penalty (your mortgage rate compared to current mortgage rates, which have now gone up, thus decreasing this penalty). You should inquire with your lender as to what the penalty might be prior to making any prepayments.

If the penalty is too high to pay it all off, you may consider lump sum prepayments (often 10 per cent to 20 per cent of the original mortgage) as well as doubling up on payments (a common mortgage feature), and then paying it off in full at maturity. Your lender will be able to let you know those options. If you have a high tolerance for risk, consider investing the majority of the funds instead of paying off the mortgage.

You indicate that your gross household income is $130,000, but I am uncertain of the income split between you and your spouse. If you earn $65,000 each, then you are both in a modest tax bracket and RRSP contributions could be somewhat beneficial. If one of your incomes is significantly higher than the other, focus RRSP contributions in the name of the higher-income-earning spouse. If income is significantly higher for one spouse, and early retirement is being considered, you may want to consider contributions to a spousal RRSP. This may allow you to better equalize your incomes before age 65.

There are also company savings plans to consider. If they are available to you or your spouse, any company matching plans should be utilized to maximize savings opportunities. In addition, group savings plans often carry low investment fees.

You indicate that you have not contributed to RRSPs for 15 years. Since there may not be a benefit in reducing your incomes below $50,000 of taxable income, because the tax savings may be similar to the tax you will pay on withdrawal, you can use that figure as a rough benchmark when considering how much to deposit.

Keep in mind, you can contribute to an RRSP in one year but you do not need to deduct the whole contribution in that year. Some can be carried forward to deduct the next year, an attractive option if the tax savings will be higher.

Any funds not otherwise contributed to RRSPs should be contributed to TFSAs, including the emergency fund money, so at least the funds are growing tax free.

If you decide to repay your mortgage, the end of those payments means you will have extra cash every month. It will be important to determine how much of that extra money should go to savings, or whether you can afford to spend more in other areas.

In other words, if you and your spouse are on a good trajectory for retirement, maybe this windfall allows you to spend a bit more on yourselves or your kids.

This could also be a good time to consider retirement planning, set some saving and spending targets, and see what is possible for you. The loss of a loved one is a good time to consider your own estate planning.

There is really no bad choice for you to make here, Reggie. Both debt repayment and investing help in building your net worth as you work towards financial independence and retirement.

Brenda Hiscock is a fee-only, advice-only certified financial planner with Objective Financial Partners Inc. in Toronto.

_____________________________________________________________

 If you like this story, sign up for the FP Investor Newsletter.

_____________________________________________________________

Employees are taxable on their salaries, bonuses and any other type of direct compensation they may receive, but they could also end up paying tax on various non-cash employment benefits or perquisites.

Under the Income Tax Act, employees must include in their income the value of any benefits of any kind received by the employee “in respect of, in the course of, or by virtue of his or her employment.” In determining whether an employee must include the value of a benefit

Employees are taxable on their salaries, bonuses and any other type of direct compensation they may receive, but they could also end up paying tax on various non-cash employment benefits or perquisites.

Under the Income Tax Act, employees must include in their income the value of any benefits of any kind received by the employee “in respect of, in the course of, or by virtue of his or her employment.” In determining whether an employee must include the value of a benefit received, the Canada Revenue Agency looks at three determining factors: Does the benefit give the employee an economic advantage? Is the benefit measurable and quantifiable? And does it primarily benefit the employee or the employer?

Two recent CRA technical interpretation letters, each released in the past month, discussed whether certain employer-provided benefits would be considered taxable. The first concerned employer-provided COVID-19 testing, and the second was employer-provided identity theft protection services. Let’s take a look at what the CRA said about each one.

COVID-19 testing

The taxpayer, presumably an employer, wrote to the CRA asking about employer-paid COVID-19 testing, specifically a polymerase chain reaction test where employees mail in the sample to a laboratory for analysis. The results take several days to process and come back. The testing is fully funded by the employer, participation by employees is voluntary, and an unfavourable test result (that is, a positive COVID-19 test result) would prevent the employee from entering the employer’s premises. Notably, the employee would still be able to maintain their employment status through an alternative work arrangement if a positive test result were to occur.

The CRA responded that it was the agency’s “long-standing view” that an employer is considered to be the primary beneficiary of medical testing in situations where such testing is necessary to fulfil a condition of employment. In the situation described in the letter, however, employees are not required to take a COVID-19 test and the test results (whether positive or negative) have no impact on an employee’s employment status. As a result, voluntary COVID-19 testing does not create an employment condition.

That said, in the context of the pandemic, “considerable effort is being made to control the spread of the virus,” with governments encouraging employers to make testing available to employees. As a result, the CRA concluded that where the results of employer-provided COVID-19 testing are mainly for the use of an employer, it is “both unlikely and unintended that an employee would be enriched or considered to have received an economic advantage,” and so the CRA does not view employer-provided COVID-19 testing as a taxable benefit to employees. (Phew.)

Identity theft shield premiums

The second technical interpretation letter was written by an employer asking whether identity theft shield premiums it presumably would pay to a third party on behalf of its employees would be considered a taxable benefit to employees, and whether those premiums would be considered a tax-deductible business expense for the employer.

Identity theft protection services generally provide identity or credit monitoring services to determine if an individual’s personal information has been compromised. According to the details of the plan, the issuer of the policy provides privacy and security monitoring, identity consultation services and identity restoration services. Specifically, the service monitors for matches of an individual’s personally identifiable information: name, date of birth, social insurance number, driver’s licence number, up to five passport numbers, and up to 10 of each of the following: bank account numbers, international bank account numbers, credit/debit card numbers, medical identification numbers, e-mail addresses and phone numbers.

The CRA, after reviewing the details of the plan and services on offer, and in the absence of additional information suggesting a heightened risk of identity theft for the company’s employees or some type of link between the personal information monitored and the employer’s business, determined that the employer-paid plan would appear to provide an economic advantage primarily for the benefit of the employees. As a result, the CRA concluded that employer-paid premiums would, indeed, be included in the employee’s income as a taxable employment benefit.

The CRA then turned to the question as to whether the premiums paid would be tax deductible to the employer as a business expense. Generally, in order to qualify as a tax-deductible business expense, it must be incurred for the purpose of earning business income, must be neither a capital expenditure nor a personal expense, and must be reasonable in the circumstances.

Based on the details of the identity theft protection plan described above, the CRA felt that the services relate to protecting an individual’s personal and financial information, and were not related to either the employee’s employment or business information. That said, the CRA concluded that to the extent the employer-paid premiums are included in the employees’ income as a taxable benefit, the premiums would also be tax deductible for business purposes provided they are also considered reasonable. This conclusion is consistent with most employer-paid perquisites, which are generally tax deductible to the employer.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

_____________________________________________________________

 If you like this story, sign up for the FP Investor Newsletter.

_____________________________________________________________

MONEY MILESTONES: In an ongoing series, the Financial Post explores personal finance questions tied to life’s big milestones, from getting married to retirement.

Parents say having children is among the very best experiences of their lives, but navigating their offspring’s path from infancy to adulthood will put a serious dent in their finances. 

“Don’t kid yourself about the cost of kids,” said Justine Zavitz, vice-president at Zavitz Insurance & Wealth in London, Ont. “You can be a very frugal person, but kids are expensive and you’re going to be allocating more and more of your monthly budget to them than to yourself.”

As interest rates continue to rise, it’s not surprising that many parents are feeling the financial pinch of parenting. According to a survey by PolicyMe Corp., a Toronto-based digital life insurance firm, 70 per cent of parents say Canada is becoming unaffordable, with 47 per cent noting that food is the most expensive and/or challenging child-related spending expense to manage, followed by clothing, shoes and other accessories at 43 per cent.

The financial impacts come even sooner if couples require fertility assistance through medical procedures such as in vitro fertilization (IVF). One IVF cycle can cost from $7,750 to $12,250 plus additional medication costs, and multiple cycles are often required.

“My wife and I struggled to have a child and went through IVF and no one talks about how hard that can be both emotionally and financially,” said Toronto-based personal finance expert Barry Choi, whose IVF journey totalled $20,000.

During the group consultation when the doctor outlined the procedure’s costs, he recalls that some people broke down in tears because they knew they couldn’t afford it. In some provinces, however, some may be eligible for one cycle of government-funded IVF.

My wife and I struggled to have a child and went through IVF and no one talks about how hard that can be both emotionally and financially

Barry Choi

Although there are no definitive numbers on the cost of raising kids in Canada, experts have conservatively estimated it to range from $10,000 to $15,000 a year. If you’re considering private school, bank on another $4,000 to $26,000 per school year.

But Choi said it’s best to consult with experienced family and friends to get a proper handle on what having a child will cost you.

“Everything you read online is subjective, but when you talk to a parent who has dealt with it recently, that’s where you get the real-life information,” he said.

In taking the plunge into parenthood, doing plenty of pre-planning is key. Choi said he and his wife created a budget for the first year, knowing there would be a reduction in income because of maternity/paternity leave. Maternity and paternity benefits allow you to get only 55 per cent of your income up to maximum of $638 a week, unless your company tops them up.

“The nice thing is that we went on that budget even before our daughter was born to feel it out before things got real,” Choi said.

Don’t forget to create some cushioning for some fun stuff either, he adds, so that stay-at-home parents don’t feel guilty spending on occasion even if they’re not “working.”

Zavitz wishes she had done more research on one-off, child-related expenses, such as baby and toddler accessories, early on instead of being backed into finding the fastest — and often more expensive — solution.

We went on that budget even before our daughter was born to feel it out before things got real

“By doing more backward planning and anticipating future needs, you can give yourself time to shop for the best deals,” she said.

Zavitz points to options such as Facebook Marketplace and online community hubs where parents often offload no-longer-needed children’s items at a fraction of their retail price — or for free.

“That’s where I’m buying a lot of my kids’ sporting equipment now, which can save so much,” she said.

Experts also point out that new parents should remember that child-care costs won’t necessarily go down as children get older. After those early years, there are before- and after-school care costs, babysitters, summer camps and extracurricular activities, plus post-secondary education expenses.

Zavitz said government initiatives such as the Canada Child Benefit (CCB) can help offset some of these costs for eligible parents. In 2022, the CCB equals a maximum of $6,997 per year for children until they are five years old, and $5,903 for those six to 17.

For parents who can afford it, she’s also a big fan of the registered education savings plan (RESP) as a tax-efficient way to save for a child’s education. The federal government will add 20 per cent on top of your annual contribution of up to $2,500, though the lifetime contribution limit is $50,000 per beneficiary.

“You can catch up on past grants if you can’t afford it right away, but only to a certain extent,” she said. “It’s also a nice present from grandparents to put money into RESPs.”

Zavitz also advises parents to ensure they put children on their benefit plans within 30 days of their birth to avoid issues around unforeseen medical expenses, and to add children to their wills as soon as possible.

“The trouble is, you don’t fully recognize the pull on the heartstrings until you do meet your kids,” she said. “You’re going to want to give them everything you can to make their life wonderful and that’s going to cost you.”

A couple we’ll call Peter, 41, and Charlotte, 39, live in Ontario with their two-year-old child, Morgan. They bring home $11,200 per month from their jobs, his in corporate development, hers in strategic planning. They have a $2.3 million house, $50,000 in raw land, $65,000 in RRSPs, $20,000 in TFSAs, $25,000 in taxable securities, $37,500 in gold and a $12,000 car. It adds up to $2,509,500. Take off their $820,000 home mortgage and their net worth is about $1.7 million — a very respectable sum.

A couple we’ll call Peter, 41, and Charlotte, 39, live in Ontario with their two-year-old child, Morgan. They bring home $11,200 per month from their jobs, his in corporate development, hers in strategic planning. They have a $2.3 million house, $50,000 in raw land, $65,000 in RRSPs, $20,000 in TFSAs, $25,000 in taxable securities, $37,500 in gold and a $12,000 car. It adds up to $2,509,500. Take off their $820,000 home mortgage and their net worth is about $1.7 million — a very respectable sum.

Email andrew.allentuck@gmail.com for a free Family Finance analysis

Peter and Charlotte, who moved to Canada nine years ago, have succeeded in material terms, but they yearn for the former country with palms, lapping sea shores and no snow at all. Their goal is to achieve a $3,000 monthly retirement income for a retirement spent back home, and they would like to go sooner rather than later.

Investment strategies

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. of Kelowna, B.C., to work with Peter and Charlotte. For now, they put cash in excess of spending into various investments — their TFSAs in particular. At this stage of their lives as parents, they could instead build up a Registered Education Savings Plan for Morgan and receive a Canada Education Savings Plan bonus of the lesser of 20 per cent of contributions or $500 per year to a maximum of $7,200. Alternatively, they can use RRSPs that provide a 29.65 per cent tax refund in their bracket.

They should pursue tax-efficient investments, for their combined annual income, $180,000 before tax, leaves them with $134,400 per year or $11,200 per month after tax. They spend $9,100 per month, leaving $3,500 savings for investments or debt paydown. Making good use of that surplus is the key to quitting work long before conventional retirement.

The idea of a RESP for a child who may not be a resident of Canada when it is time for post-secondary education may seem odd, but it will work, Moran explains. Contributions made as long as the family resides in Canada together with the CESG boost will be payable to Morgan no matter where the family eventually lives or he studies.

Retirement income

Like the RESP, Peter and Charlotte will be able to apply for Canada Pension Plan benefits no matter where they are living when they retire. At this point, they would have accrued nine years times 2.5 per cent of annual maximum benefit of $15,043, a sum that works out to $3,385 per year each. The longer they stay and work in Canada the larger that benefit will become. It will be hard to match in their destination, but aside from a withholding tax, there will be no impediment to drawing the benefit.

When it comes to Old Age Security, however things change.  Given their circumstances, to qualify for Old Age Security while living in another country, they will have to have been residents for 20 years. In their case, that means living in Canada to age 52 and 50, respectively. That’s longer than they want to stay. We’ll assume they do not make it to 20 years residence in Canada.

Each partner currently has $80,000 of RRSP contribution room. If they were to leave Canada permanently, they would probably leave the RRSP accounts in Canada and then draw them down via Registered Retirement Investment Funds (RRIFs) subject to a 15 per cent withholding tax. If they leave them as RRSPs and do not shift them to RRIFs, the withholding tax would be 25 per cent, Moran notes.

If they are subject to tax in their home country, which has a tax treaty with Canada, they would get credit for tax paid in Canada. They need to check their personal tax details with a cross border tax specialist, perhaps in their home country.

Moving home

Should they keep their Ontario house after leaving Canada permanently? They might keep the house and rent it out for $5,500 per month or $66,000 per year. Their house property tax is $6,000 per year. Their equity is $1,480,000. The math, however is not on their side: If they charge $66,000 gross annual rent and deduct $22,878 mortgage interest (this does not include principal repayment which goes out of one pocket and into another), $2,000 of maintenance, $3,390 for a property manager with a six per cent bite, their income after these expenses would be $31,732 per year. That’s a 2.14 per cent return. If they are then stuck paying the present Ontario non-resident speculation tax of 20 per cent of their $1,480,000 equity — that’s $29,600 net, their costs would rise to $61,332. That would leave net rental income of $4,668 or a third of one per cent. If they can’t avoid the non-resident speculation tax, which has many exemptions, retaining the property would be unwise, Moran advises. They would then do well to cash in their interest and take it abroad.

In their home country, they might need approximately $25 capital for each dollar of pre-tax income based on foreign inflation and tax rates. Moran estimates they would need $41,400 per year for living costs so therefore they would need to invest $1,035,000 capital. That’s less than their present net worth of $1,689,500, meaning they could move today and have more than enough income to support themselves, though not extravagantly.

They could work full or part-time to top that off if they so choose, or could continue to work and save in Canada for a number of years, adding to their potential CPP payouts down the road and padding their savings.

Depending on the balance they choose, life insurance could add certainty to their finances. The annual cost of a policy with a face value of $1 million would be $660 for Peter and $415 for Charlotte. Costs vary with details. Like a good suit, policies need to be tailored to the client.

Morgan would be able to draw on his RESP even if living or studying outside of Canada. The sums already parked in their Canadian RESP plus what they can save in their low-cost country would no doubt produce a six-figure kitty in the 15 or 16 years to Morgan’s age 18.

Is it feasible to transfer two accomplished lives and their accompanying savings to another country with parallel but not identical retirement systems?  The short answer is yes. There will be a cost in terms of financial security, stronger social safety net and more opportunities to work and earn in Canada, but it isn’t hard to understand the appeal of a decidedly warmer country that feels like home and the potential for a much earlier retirement.

Financial Post

email andrew.allentuck@gmail.com for a free  Family Finance analysis

Retirement stars:  Five retirement stars ***** out of Five

FP Answers: Personal Finance: