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We welcome you to “Bare With Us,” the podcast where we Bare Out the latest economic and financial questions that matter to you. Mike Robinson, a Chartered Investment Manager (CIM) from Calgary, Scott Richardson, a Certified Financial Planner (CFP) from Edmonton, and Finn McKay, a Chartered Financial Analyst (CFA) from Winnipeg, engage in an unstructured discussion, bringing you a wealth of knowledge and a diverse experience from the world of finance.
Each episode features an unstructured, unscripted and entertaining discussion where we pursue ideas and concepts as they arise naturally through our conversation. We tackle a broad range of timely topics, from economic or market trends and financial planning strategies.
Whether you’re one of our valued clients, or someone new to our insights, our goal is to provide you with valuable information, from diverse perspectives, that can help you navigate the complex world of finance.
We are experts in our field, but we are new to podcasting, so we invite you to Bare With Us, while we learn, grow and share! Please feel free to reach out to us with any feedback, to suggest any topics, or to learn how to work with us. You don’t have to, but you can!
Welcome to the, first season, inaugural season of our podcast. Bear, we've decided to name it Bear With Us. Mhmm. Something like that, you know? I would
Mike Robinson:say just please and make it odd. Like, please bear with us. Mhmm. Because Okay. We're learning and this is our first time.
Finn McKay:Do we wanna say please bear with us as we, like Attempt to uncover
Scott Richardson:because what
Finn McKay:was what was the thing that I was saying? Like, it was like, as we bear because we're spelling it differently.
Scott Richardson:It's bare, but it's un We need to Bear with us. The idea behind it is uncover what Yes. Exactly.
Finn McKay:Yeah.
Mike Robinson:So that's
Scott Richardson:why you keep
Mike Robinson:saying uncover. That's why
Scott Richardson:you keep saying uncover.
Mike Robinson:That's why you keep
Scott Richardson:saying uncover. That's why you
Mike Robinson:keep saying uncover part keeps getting awkward.
Finn McKay:But that's Do we wanna
Mike Robinson:make that connection?
Scott Richardson:That's the idea. Gotcha. Is it's uncover with us.
Finn McKay:Yeah. I think that we should I think you should say that. I think that we should make it make it pretty, like, direct. Direct. That's bear with us.
Finn McKay:Bear with us as we named
Scott Richardson:it that is is we're looking for you to uncover with us. Yes. Bear. And
Mike Robinson:you need to bear with us because we've not done this before and
Scott Richardson:we have no idea what we're looking for. Totally.
Mike Robinson:Yeah. Yeah.
Scott Richardson:So Okay.
Mike Robinson:Right. Yeah.
Finn McKay:Okay. So should we process. We'll start now?
Mike Robinson:I think we already did.
Scott Richardson:Should we just do the Welcome, everybody.
Mike Robinson:It is. It sounds good when you do it. I like it.
Scott Richardson:You do like it?
Finn McKay:Yeah. I like it too. Yeah.
Scott Richardson:Okay. Welcome everybody to the, Bear with Us podcast. This is our inaugural season. Please bear with us, which is meant to be uncover with us. While we attempt to, answer questions that clients ask us.
Scott Richardson:As financial professionals, we are asked these questions all the time by clients. And so this is our attempt to try and answer those in long form. So please bear with us. This is our first time doing this, so it might suck. But, here we go.
Mike Robinson:We're trying.
Scott Richardson:We're trying.
Mike Robinson:We're trying to answer these questions.
Scott Richardson:So we're here in LA recording this one, here for a conference. So, let's dive in.
Finn McKay:Yeah. Okay. So I'm I'm Finn. I'm a portfolio manager at Value Partners Investments.
Mike Robinson:My name is Mike Robinson. I'm a chartered investment manager.
Scott Richardson:My name is Scott Richardson. I'm a certified financial planner.
Scott Richardson:Beautiful.
Scott Richardson:Alright. K. Let's do this.
Finn McKay:Yeah. So we're gonna so it's it's RSP season.
Scott Richardson:Yeah. It's January. First sixty days of RSP season, and we get these questions asked all the time. So I think RSP verse TFSA.
Finn McKay:Yeah. Yeah. And, you know, this is a really interesting topic for me because I haven't done the math on what makes sense, for different people at different stages of their life. But I've also been told by people in the industry who who I think probably hasn't done the math, that it's it that RSPs are kind of a tax scam and that you're, like, shifting income to later and that then they you get to you have to convert, like, capital gains tax and other sort of tax preferred income into, like, an employment tax rate of some sort later on in life, and you don't know what tax rates are gonna be, and you might have higher income, then actually than you expect. So would love to hear your thoughts on on that.
Scott Richardson:Okay. I'm gonna I'm gonna take this. Mike, you good with that?
Mike Robinson:Sure. Yeah.
Scott Richardson:So I've heard a lot of what you said. I I know I've had lots of people tell me that they don't believe in RRSPs, and my answer is, like, they exist. They're not Santa.
Mike Robinson:Not making them up.
Scott Richardson:Not making them up. They're
Finn McKay:real things.
Scott Richardson:They do exist. They're real.
Mike Robinson:Before you give your opinion, I I might have some insight as to why you hear this type of thing and then you can answer.
Scott Richardson:Go for go for.
Mike Robinson:Like, there is some element of truth to what you're hearing And the reason is that things are have just become a little bit outdated. Like, the original theory of RSPs, which mostly still works but sometimes doesn't and needs to be managed, is that you would contribute to an RRSP, get a tax deduction while you're in your prime working years and in your highest tax bracket. And then when you retire, you draw income when you're in a very low tax bracket.
Finn McKay:Right. It is your only source of income in retirement and you, you know, arguably should have lower income when you're retirement because you're not working. And so you're shifting from a higher marginal tax bracket down to a lower one.
Mike Robinson:Exactly. That is the original concept and design. For the most part, it still works.
Finn McKay:And also to encourage Canadians to save money because, saving money for retirement is pretty important. A lot of people don't do it.
Mike Robinson:So That's right. So that's why you get some of this tax scam, which it is not a tax scam. Mhmm. It is, in some cases, hasn't kept up with the rate of growth in in Canada. But but there's still very valid reasons why RRSPs make sense.
Mike Robinson:And so which is why I would turn back to you, and then I'll jump in whenever.
Scott Richardson:So my answer to that question is always RRSP first. Mhmm. Is always do RRSP. And the reason is is because if you're comparing RRSP to TFSA, you are inherently talking about long term money.
Finn McKay:K. Yeah. Right.
Scott Richardson:Yeah. So you're talking really long term.
Finn McKay:Mhmm.
Scott Richardson:And so the mistake that people make, in my opinion, with RRSP versus TFSA is they when you look at a lot of the comparisons that they make, because they're supposed to be pretty much tax neutral. Like, if you look at, like, I'll I'll give you the math on an RRSP versus TFSA that I looked up online. K. And it was a thousand dollar contribution to an RRSP, thousand dollar contribution to a TFSA. K.
Scott Richardson:And then it said, well, there's because, you get a tax deduction, they're saying there's no tax owed on that thousand dollars. And then they say, okay. Well, the TFSA at a 40% marginal tax rate, you have $400 of taxes, so your net invested is $600.
Finn McKay:You're saying right. So it's so so it's it's that I'm I'm investing pretax dollars from my salary, into my RRSP. So there's a benefit of tax of getting pretax dollars there, whereas for a TFSA, it is after tax salary dollars.
Mike Robinson:That's the way that it's illustration of how it's showing.
Scott Richardson:Right. And so if you think about, okay, you get a 10 growth rate in that first year, your RRSP goes to $1,100, your TFSA goes to $6.60, then you withdraw the whole thing. Well, you owe $440 in tax on that RRSP, which would net you $660
Mike Robinson:k.
Scott Richardson:Which is exactly the growth on your TFSA, 600 plus $60 growth. You're Right. You're net at $6.60. So that's the comparison that you see online. The problem is is that's not real life.
Scott Richardson:Like, that's not how it works because you don't control your ability to put pretax dollars into an RRSP. Right. Because when you're making a decision of trying to do a thousand dollar contribution, you've already got after tax dollars in your hand. Mhmm. And so what people don't factor in in that like, if you if you take that same math that I just showed you and said, okay.
Scott Richardson:We put a thousand dollars into an RRSP, thousand dollars into a TFSA, they're both after tax.
Finn McKay:Right. Right. Right. And you get a and you get, like, a refund or whatever.
Mike Robinson:You do get a refund. Yeah.
Finn McKay:But the problem is is Nobody invests that refund.
Scott Richardson:Factor in that refund and that becomes the problem because now they're looking at it. They go, okay. Well, I put a thousand dollars in my RRSP. I withdraw that thousand dollars. Well, I'm netting $600
Finn McKay:Right.
Scott Richardson:Because I gotta pay tax on it. Whereas with my TFSA, I don't. Right. So I'm better off putting it in the TFSA.
Mike Robinson:Mhmm.
Scott Richardson:And the answer is is no. You have to factor in what you do with your tax refund.
Finn McKay:Right. Don't go spend it on a snowmobile. And that's
Scott Richardson:the big argument that I make with people all the time. Like, I live in Alberta and I always joke that, you know, instead of buying a quad, a shotgun, and a case of Pilsner with your tax refund
Finn McKay:Sounds like a fun time. And verify.
Scott Richardson:Actually, do something with your tax refund. Because now if you take that thousand dollars and you invest it in an RRSP and you're in a 40% tax bracket, well, now you've got $400 coming back to you.
Finn McKay:Right.
Scott Richardson:And so if you think of time value of money, more money now
Finn McKay:It's way more valuable.
Scott Richardson:Is way more valuable to you. And so if you do something really smart with that, tax refund, then you can further your situation even more than just putting it in the TFSA. So I tell people, like, use a multi pronged strategy for that all the time. Like, if you get your $400 back in taxes, take the $400 and put it in your TFSA.
Mike Robinson:Mhmm.
Scott Richardson:Because now you've got a thousand bucks in an RRSP. That's an interesting 400 in a TFSA.
Finn McKay:That's a very interesting way to fund both. Exactly.
Mike Robinson:So Yeah. It also answers the question which is slightly off top, but some people say, well, I have extra money. Should I do an RSP contribution or do a prepayment on my mortgage? Well, you do both. You put it into your RSP, take the tax refund Mhmm.
Mike Robinson:And put it in into your mortgage.
Finn McKay:Right. And I guess that's another thing to think about. Like like, when you put it against your mortgage, you're paying your mortgage with pre with, after tax salary dollars. So you have to think about that on your interest rate and the cost of that has. So you you're technically compounding your wealth through doing that.
Scott Richardson:Yeah. And Yeah. If you think about it, if you're using the exact same investment. Mhmm. So you no matter which one you're choosing, as long as you're getting the same rate of return in either one because you're using the same investment, you're you're way better off getting that tax refund.
Scott Richardson:Like, if if you're thinking about, okay, what do I do with this extra dollar that I have?
Mike Robinson:If I
Scott Richardson:put it in a TFSA, all I'm getting is my compounding, my rate of return.
Finn McKay:Right.
Scott Richardson:But in an RRSP, I'm getting the tax refund and I'm getting that exact same rate of return. Mhmm. So I'm way further ahead doing the RRSP. The problem, again, going back to what I was originally saying, is it has to be a long term dollar.
Finn McKay:Yeah.
Scott Richardson:You have to be prepared to part with that dollar
Finn McKay:Mhmm.
Scott Richardson:For a long time.
Mike Robinson:It it does. And so this is where whenever this debate comes up, I think it's important to look at what are the fundamental benefits of an RRSP. And it's two things. One is a tax deduction, and the other is tax sheltered compounding.
Finn McKay:Yeah. Which which over decades Right. Has a like, the the biggest step. Yeah. You need time for it to make
Mike Robinson:So the shorter your time period, the less value in an RSP.
Finn McKay:Right.
Mike Robinson:And the lower your income, the less benefits to a tax deduction. But if you're in a situation where the tax deduction has meaning and you have a long time horizon, you are going to win with an RRSP.
Scott Richardson:But I disagree with that a little bit in the sense that even if you're in a low tax bracket, to you, that tax refund is still meaningful. It can.
Mike Robinson:It can. Yeah. Yeah. Even if
Scott Richardson:it's 30%, like Mhmm. 25, 30 percent on your money Yeah. Yeah. Is still meaningful, especially if like, the one thing that I think that gets missed too is especially if you would have ended up owing tax.
Mike Robinson:Oh, for sure if you're gonna end up owing tax. But don't fret like, I'm thinking this in terms of you have two spouses and one spouse is the main breadwinner and the other spouse have
Finn McKay:two spouses like this is Sorry.
Mike Robinson:There are.
Finn McKay:No. We're we're
Mike Robinson:we're in Manitoba and Alberta here. That's not the case. No. I mean, you know, when we are talking to people and there are two spouses Right. And one is a primary breadwinner and one is, you know, perhaps a part time, part time employee and and, you know, makes $30,000 a year or something.
Mike Robinson:K. Well, you're not getting a big bang for the buck in contributing to that spouse's RFP. Doesn't mean there's no bang for the buck, but but your benefits are diminished. That's all I'm saying
Scott Richardson:is Yeah.
Mike Robinson:Yeah. They are. It's a scale. Right? So the the the higher your tax bracket, the more value the deduction Mhmm.
Mike Robinson:And the longer period of time you have Mhmm. The more valuable is the tax sheltered compounding. Now TFSA is also have tax sheltered Mhmm. Compounding, but you don't get the deduction, and the amounts that you can contribute are smaller.
Finn McKay:Right. Well and I guess I guess the other thing too is, like, the benefits of tax free compounding, I think is something, you know, that's worth talking about because tax is the biggest expense that anyone pays. Yeah. And anything you can do to reduce, that impact on like, think about Exactly.
Mike Robinson:And you it's and even you can say reduce, it's defer. Right. Because you it is going to catch up with you where, you know, you opened with, is this a tax scam? Well, no. It's not a tax scam.
Mike Robinson:Mhmm.
Finn McKay:You
Mike Robinson:are going to pay taxes down the road. Mhmm. So you but you are deferring. You're getting the tax benefits. Oh, and
Finn McKay:you're allowing it to grow without interrupting the compounding every year. So if you if you get, like, for example, if you get, like, a 10% return in your open account and then it's all taxable income, then you have to take that tax out every single year. Whereas if it's in a protected account, you can let that grow at the 10% every single year for decades, and that is how you really compound your wealth.
Mike Robinson:That's right.
Scott Richardson:Well, and to your point with the, the exchange in tax brackets, like, if you have someone who is in a higher bracket now, that difference in the future is significant.
Mike Robinson:So if
Scott Richardson:you're in a 46% tax bracket now, but you're only gonna wind up paying 30 and a half in the future
Mike Robinson:Mhmm.
Scott Richardson:Then that's that's your instant gain right there.
Mike Robinson:Where there is some legitimacy to the pushback that you opened with
Finn McKay:Mhmm.
Mike Robinson:Is in today's day and age, in today's level of wealth, we do need to manage how much you have in an RSP. And the older you get and as those benefits of compounding diminish, you don't wanna put yourself in a position where you have too much money in an RRSP because you could you could end up having a worse tax problem in retirement than before. Well But that's a rare but that's a rare thing, and there's also lots of things we can do. If you are in a position where you don't even really need your RRSP income Mhmm. Well, there's lots of awesome things we can do in terms of helping your adult children or doing charitable contributions which wipes out the tax implication of it.
Finn McKay:Oh, out of your RRSP into Right. Oh, interesting.
Scott Richardson:Like, a lot of
Mike Robinson:our clients defer taking their RRSP even if they retire at, say, 65. Mhmm. You're not forced to take money from your RRSP until you're 71 turning 72. K. And lots of our clients choose to do that because why take income that I don't need?
Mike Robinson:And they'll be in their seventies and go, I don't even really need my RSP income. It's just creating a tax problem.
Finn McKay:Right.
Mike Robinson:Yeah. But that's a great position to be in Mhmm. Because you could do things like charitable contributions and offset the tax implication of that.
Finn McKay:Right.
Scott Richardson:And I think the the window of that being, really effective is is diminishing because of the diminishing amount of defined benefit pensions.
Mike Robinson:For sure. We're in a
Scott Richardson:stage right now where the people who are retiring have the most defined benefit pensions. And so that's not going to be the case down the road because a lot of those are going the way of the total.
Finn McKay:So you're saying is that people have both an RRSP
Scott Richardson:and a defined benefit pension. So their tax bracket right now in retirement is the same as what it was when they were working.
Finn McKay:Right. And and I guess I guess in the future, if you only have an RRSP, you have a lot more ability to control the amount of income that you're getting taxed on every year versus with a defined benefit. Now you're taking, like, the minimum on your RRSP and then also getting the defined benefits. So that becomes kind of a little ugly.
Scott Richardson:Yeah. Yeah. Because they're instantly starting with 40 or $50 of income a year.
Mike Robinson:I wanna go back to, though, you said long term, short term because I think that's really important as well as tying in the practicality of day to day life. Like, when when I look at, doing retirement projections for people, that's all they are is projections. So if you're, you know, 45 years old and we're projecting what your income will be like at age 65, the only way to do that is to say, well, I'm gonna spend $65,000 a year after tax of spending. Mhmm. Okay.
Mike Robinson:Even if we agree that's a reasonable number, it doesn't account for one off expenses. Like, you need a new roof, you need a new vehicle, you're gonna help your children with their wedding, or you're gonna do, fiftieth anniversary, trip to Greece for your you know, one off expenses cannot be accounted for in those types of projections, and I love TFSAs for those one offs. Right.
Finn McKay:You can pull a lot more out of that, and then you can even
Mike Robinson:And then you can replenish it.
Finn McKay:Replenish it, yeah, the next year
Mike Robinson:or whatever. Yeah. So on a practical, real life level, like, yes. I do encourage people to put money in TFSAs. Mhmm.
Mike Robinson:And then I don't even include it in the retirement projection.
Finn McKay:Right. This is your
Mike Robinson:Emerge not emergency, but, like, one off large expenses
Finn McKay:I do love this.
Mike Robinson:Or give it to kids or Right. Things like that.
Scott Richardson:It's your flexibility.
Finn McKay:I I love the the this concept of using all of it, you know, like, and using them to play off each other, where it's like, yeah. Like, you've got a mortgage you wanna pay down, and you've got a TSA, and you've got an RSP, and you can use you can maximize and optimize each one of those, for tax purposes and also for, like, trying to
Mike Robinson:get a Well, and what's your objective? That's what it always comes down to. Whether you're talking about whether it's RSP, TFSA, RESP, or anything.
Scott Richardson:Mhmm.
Mike Robinson:And then the investment selection itself. Well, what are you trying what goal are you trying to accomplish?
Finn McKay:Right. And they should all be aligned.
Mike Robinson:They should be aligned. Mhmm. And you can use RSPs and TFSA's because you have different goals.
Finn McKay:Well and this is actually another thing, not to you know, there's so many things I wanna talk about here. But Yeah. Good. But, like, like, for for, like, for example, for a TFSA, you know, what kinds of investments make the most sense in a TFSA now? You most people would say it's you wanna put your highest, taxable things in there.
Finn McKay:So that would be, like, your bonds and stuff like that, which with interest income. Those have the highest tax impacts. But, also, when you're young, don't you wanna grow it as much as possible aggressively? Yeah. And then you have this beautiful huge because the contribution room moves up with with the gains in the in the account.
Finn McKay:I mean, I hear about I can't remember the guy the guy who was, involved in PayPal, and he put his PayPal shares in his CFSA. And I think he's got, like, a a billion dollar tax free account in the in The US or whatever. And, yeah, like, now you've got this incredible thing where you don't have any tax implications for this massive thing. So so what are your thoughts on what kinds of investments you should put in your TFSA at what different stages of life?
Scott Richardson:Well, I I think TFSA is the most misnamed account ever. I think it's just never TFIA.
Finn McKay:Yes. Well, and and I should say, like, when when I was I must have been 18 because I think that's when they start Oh,
Mike Robinson:I know what you're gonna say.
Finn McKay:Yeah. I go to the bank, and they're like, oh, you don't have a TFSA. You should open up one with us. And then they're like, you'll make 1% a year, and it's That was
Mike Robinson:Yeah. So how much are you really saving? Exactly. That was one of the biggest distributors.
Finn McKay:Zero, but, like, pretty much nothing. Yeah.
Scott Richardson:So it's for me, it's always an investment account. Yeah. And it's always, you know, again, same philosophies that we operate under.
Finn McKay:Yeah.
Scott Richardson:It's, you know, good strong dividend paying companies.
Mike Robinson:Mhmm. Good business. Good price. Good
Scott Richardson:business. Good price. Exactly. So that stuff. I I think the big thing with the TFSA and and the investment and the way that I look at it
Mike Robinson:is
Scott Richardson:your RRSP, like I said already, that's your really long term money.
Finn McKay:Mhmm.
Scott Richardson:And this is that in between account like Mike said. Like, it's your it's not your long long term money, but it's it's medium It could be. It could be. It's medium to long. It can be short depending it's not instant short like savings account.
Scott Richardson:But and actually just to sidebar on that, I think that's one of the reasons why the RRSP gets a bad rap too. Mhmm. Is I think a lot of people had a checking account, maybe a little bit in savings and an RRSP. And so what happened is when life came along and again, like, something bad is always gonna happen. Mhmm.
Scott Richardson:And so what happens is there were a lot of people that the the only thing that they saved in was an RRSP, and they didn't have anything in between a checking account and an RRSP. And so when bad things happened in life and they had to withdraw money from the RRSP, it was taxable. They didn't get as much as they wanted. It was a it was a it and I agree. It's a horrible thing to do.
Mike Robinson:Interrupts your long
Scott Richardson:term dominoes. I joke a lot of the times that withdrawing from an RRSP pre retirement is the cardinal sin. Like, it
Finn McKay:Well, and tell me about that because, like, you know yeah. It's for long term money. It's supposed to be for when you're retired. I think, like, what is the what is the earliest you can start
Scott Richardson:putting money out any time.
Finn McKay:Anytime. And and right. And and the only that the the impact is just that it becomes taxable income.
Scott Richardson:No. But you don't ever get that room back either.
Mike Robinson:Oh, you don't get the room back? No. No. TFSA, you do.
Finn McKay:Okay. Because, yeah, like, if you if you take okay. Like, just as a as a theoretical example, you put in a hundred grand into your TFSA. That's your maximum amount that you can contribute, and then you grow it to a hundred million dollars, something like that. Yeah.
Finn McKay:Now you have a hundred million dollar TFSA. If I take out 50,000,000, I can now put 50,000,000 back in Correct.
Scott Richardson:The next the next year,
Finn McKay:which is critical because if you do it the same year, they'll they'll come after you.
Scott Richardson:Whereas, you're gonna risk.
Mike Robinson:So do it in December. That room back.
Finn McKay:Right. Okay. So so it's it's a room thing.
Scott Richardson:Well, it's a room thing, but it's also a again, you're pulling taxable income in theory when your taxable income is the highest.
Finn McKay:Right. Right. But if you if you get, like, laid off and you don't have any income, that that is money you can access. It's not
Scott Richardson:like Yes.
Finn McKay:It's not like the CRA is gonna come and, like No.
Mike Robinson:No. No. You can access it anytime you want. And if you're in a a low very low tax bracket because you've been laid off or something, then the tax implication will be minimal. A lot lower.
Mike Robinson:But you lose the But it is also income. It is also income, so that withdrawal itself contributes to what is your income level. So if you're getting you might be getting zero employment income Mhmm. But if you pull a hundred thousand dollars out of your RRSP Right. That's a hundred thousand dollars of income.
Finn McKay:Of income. So you now you're you've pushed yourself into one of the highest one
Mike Robinson:of the higher tax brackets in the middle of the lease.
Scott Richardson:And you've destroyed the tax free compounding and all that stuff. So, like, inherently for me, the the question is not RRSP versus TFSA. It shouldn't, like, yes, you should always save long term. But should I also be saving in between? Yes.
Finn McKay:Right.
Scott Richardson:You need something in between checking, savings, and RRSP. So
Finn McKay:When we talk about the buckets. Right? The different buckets you wanna put your money in in terms of, like, you know, your safer investments and then your your longer term growth investments and that
Mike Robinson:kind of thing.
Scott Richardson:So I think it just becomes one of, like, I think savings dollars are limited for people, and so they're trying to maximize what they can get. Mhmm. But they are also trying to maximize flexibility. And so, again, I don't think
Finn McKay:Which is important. You wanna be financially indestructible. And, if you if you can maximize, you know, different accounts for different purposes so you can get there, then that's really important. The flexibility is important.
Scott Richardson:Exactly. So Yeah. That that becomes the question that you're asking. It's not RRSP versus TFSA. If it's long term dollars, RRSP is the way to go.
Finn McKay:Right.
Scott Richardson:But if you need yes. You do need something in between. Something to deal with those medium term goals and that's where the TFSA comes in.
Finn McKay:But generally, like, always, like, if if I if I have a TFSA and I've got an RSP and then I also have an open account, I should be probably maxing my RSP rather than contributing to
Mike Robinson:the open account. Yeah. Generally speaking, again, obviously, like, people's situations can be different. Yeah. But, as a generalization Mhmm.
Mike Robinson:RSP first, TFSA second, open is sort of last resort.
Scott Richardson:K. When everything else is filled up, then you open an open account.
Mike Robinson:Right. There's one there is another one in between, and I didn't think we would go there, but through discussion, like, the other one potentially is our ESP. Right. Because, again, that is another savings goal that is not necessarily long long term Mhmm. And has benefit as well.
Mike Robinson:It depends on how old you are when you're looking at what to contribute to, but you as you said, I forget your phrase, but you have different buckets that you can turn to, not just one. Yeah. And there is benefit in an RESP, obviously, for saving for that goal.
Scott Richardson:Yeah. Anytime you have the ability to enhance your wealth with, like, government grants or or tax dollars, like, the beauty of those is there's not really a chance that you'll see a government, you know, no matter no matter how in shambles they are. I don't see any government getting behind destroying those programs or or taking them away. So the beauty of them is they'll be there. They're entrenched in tax law.
Mike Robinson:Mhmm.
Scott Richardson:So it's the RESP is a great example because you get a guaranteed 20% return on your money.
Finn McKay:Yeah. That's you you wanna take that every time you can. Yeah.
Mike Robinson:It is a there is great value in RESPs. ESPs. I think people in our industry tend to overlook them a little bit because they're quote, unquote low dollar accounts. Right. Well but well, too bad.
Mike Robinson:Like, there's actually a great deal of value
Scott Richardson:Yeah. In that. You don't
Finn McKay:get a tax plan.
Mike Robinson:It's thousands of it's thousands and thousands of dollars. Yep. And then you are getting compounding on your contribution and the grant. Right? And I
Finn McKay:love to compound the government's money for me. That's great. Exactly. Do that. It's beautiful.
Mike Robinson:And then when you take it out, if you do it right Mhmm. You make the growth and the grant taxable to the child, the young person, who is in a zero to very, very low tax bracket. And so you always try to ensure that when you're withdrawing, you use up the grant in growth first. And then if there's money left over at the end, you just get it back because you didn't get a deduction for it when you contribute it.
Finn McKay:Right.
Mike Robinson:So there's no tax implication when you take it out, but it has grown tax sheltered.
Scott Richardson:Yeah. So I had a client Right. With two kids. Yeah. They maxed out RESP for both kids.
Mike Robinson:K.
Scott Richardson:And by the time the kids started going to school, the account was probably a hundred and 30, hundred and $50,000.
Mike Robinson:Exactly. Wow. Yeah. They're way bigger than people realize.
Scott Richardson:And and so with the compounding through the time that again, because we're looking at it was probably a nine year period that it took for both of them to finish school just because the age difference in
Finn McKay:four year Right. So there's the the contribution period and then there's also the kid in school period. They also have
Mike Robinson:to have a child. Because you have different kids at different ages.
Scott Richardson:It it continued to grow while they were withdrawing. And so by the time we withdrew probably $80 Wow. For funding their education.
Mike Robinson:Mhmm.
Scott Richardson:They still had $80 85, 90 grand left over, and we pulled it out and they paid off their mortgage. Right.
Finn McKay:Wow. So okay. So so just to just to get everything clear on this. So so you put money in, and then you get the the government grants, which is 2020% up to a certain amount.
Mike Robinson:20% to a maximum of 500
Finn McKay:Per year.
Mike Robinson:Per year. So For $2,500
Finn McKay:car. Years.
Mike Robinson:So you well, until they're 08/1988 Oh,
Finn McKay:until they turn 17. Yeah. Okay. End of the year.
Mike Robinson:So what we recommend though, the way we use the the vehicle is we I advise clients to only put in the amount that will maximize the grant, which is $2,500 per child. K. So you put in $2,500, the government gives you $500, you now have a $3,000 contribution in your RESP to grow tax sheltered. K. And so To a maximum lifetime maximum of $40,000.
Finn McKay:And do you lose contribution room as the kid ages? Like, if if you don't start the account until they're five, do you lose five years?
Scott Richardson:You can if you if you haven't maxed out
Finn McKay:Yeah.
Scott Richardson:Previous years, you can put 2,500 in for the current year
Mike Robinson:Mhmm. And
Scott Richardson:you can go get 2,500 of a previous year.
Mike Robinson:Yeah.
Finn McKay:Oh, so you only go one one year back?
Scott Richardson:Each year, you get a maximum of a thousand dollars a grant per kit.
Finn McKay:Okay.
Scott Richardson:So you can catch up.
Finn McKay:Yeah.
Scott Richardson:But if you start too late, you'll lose the ability in in years to be able to maximize all the grant.
Finn McKay:So Okay. Is there, like, an age where that starts to you you it's you start
Scott Richardson:to lose breakeven if you haven't started,
Finn McKay:like Okay.
Scott Richardson:Because you're gonna need, seven just over seven years
Finn McKay:Right.
Scott Richardson:To max out a kid. So, like, by ten
Finn McKay:Okay. So around ten one should start it.
Scott Richardson:Okay. You won't be able to max out.
Mike Robinson:But you still you won't be able to max out, but you still you still get benefits. Oh, totally.
Finn McKay:Still still open it. But if you're thinking about opening it for your kid, you probably wanna start doing it.
Mike Robinson:Earlier is better. Earlier is
Finn McKay:a little better. And then also, of course, the the benefits of the tax free compounding as well
Scott Richardson:Exactly. Over time.
Finn McKay:And so and then you get to pull money out, and you can determine, say, like, you know, I'm gonna pull the grant money and the taxable money. And then the the principal, you can just bring back to yourself tax without any tax.
Mike Robinson:That's right. So on your first withdrawal, there's only a limit as to how much you can take out so that you don't abuse the system. But you still kinda can because assuming they're still enrolled after that first withdrawal, when you move into your next withdrawal, you can start pulling down on grant and growth. And so your goal should be let's just say you only have one child. Mhmm.
Mike Robinson:Your goal should be is that while they are enrolled, you have pulled out all of the grant and growth. So the only money remaining is your contributions. Wow. And sometimes we'll see clients go, oh, my son is going to school and there's a hundred and $20,000 in here and they're going to the University of Calgary. Well, you don't need a hundred and $20,000.
Mike Robinson:Yeah. But you can take the remainder out without any tax implication and do whatever you want with it. You can help them pay buy a house. You can take it back yourself. You can put it into
Finn McKay:your TFSA. Ownership of the account. That's the beauty of these. The interesting people forget about So the so your kid doesn't have ownership over it. You have ownership, and
Mike Robinson:you're basically
Scott Richardson:pushing the make a withdrawal, it's taxable in their hands, but they don't get the money. It goes to you.
Mike Robinson:You send it to your bank account.
Finn McKay:It's beauty.
Scott Richardson:And so but you can charge yourself rent for your kid and and pay yourself.
Mike Robinson:Well, and you
Scott Richardson:don't It's just proof of enrollment. It's not proof of tuition, proof of expenses.
Finn McKay:And if you you
Mike Robinson:can use the money for anything you want. There you don't have to
Finn McKay:Okay.
Mike Robinson:Show bills or expenses. Yeah. You don't have to prove money. You don't have to You just give it to yourself. You just have to prove that they're enrolled.
Mike Robinson:Yeah. That's it. I see
Finn McKay:a raise. It was a lot of those podcasts.
Scott Richardson:That are making their kids get student loans even though they have an RESP. And they're maximizing the tax free portion of student loans while they're in school.
Finn McKay:Right. Because that's a tax free loan.
Scott Richardson:Use the money that they've withdrawn over time from the, RESP, which they've then gone and invested, and then they're gonna pay off the loan with it after. Like, there's lots of ways that you can kinda play around.
Finn McKay:Once again, the flexibility of it is is very, very high. So if
Scott Richardson:you think about, like, the beauty of it, if Yeah. Like, I wanna tie
Finn McKay:this back to the RRSP one just
Scott Richardson:for a sec is that you think of the beauty of you put $1 into an RRSP.
Mike Robinson:Mhmm.
Scott Richardson:You get 40¢ back.
Mike Robinson:Mhmm.
Scott Richardson:You take 40¢ and put that into an RESP and earn 20% on that.
Mike Robinson:And now I can't even do that math. Right. Right. Right.
Scott Richardson:But it works. But it works. Yeah. And you still only spent that 1 single dollar. Yeah.
Scott Richardson:And so that's how, like
Mike Robinson:But you have to do it when you get the refund. Right. Don't don't get the buzzer and shotgun. Case of beer. Yeah.
Scott Richardson:And that's, I think, the big key. And, like, the the it's beautiful how you can really compound your money. Like, they say, oh, the rich keep getting richer. Mhmm. The reason is is because they use these systems.
Finn McKay:Right. Right. They want to know about them.
Scott Richardson:They they know about them and they take advantage of them.
Mike Robinson:Yeah. There's no loopholes. There's no It's just that this is the way it works.
Scott Richardson:I'm sure there are. Yeah. It's not that we're speaking about in this context. But but the the idea is you can take these these tools
Mike Robinson:Mhmm.
Scott Richardson:And really compound your wealth. You just have to know when you gotta do it, and you have to commit to not prespending that tax refund on a vacation that you took in January.
Mike Robinson:Mhmm. So let's complicate it further, because I I I think there's value and we should. And that is, for some people, the next question is, okay. Well, I own a business and, the business is profitable and the business sends profit up to a holding company. And now I have money inside a holding company.
Mike Robinson:Should I pay myself dividend income, or seller or any kind of income, but generally be dividend income, and then invest in an RRSP or TFSA, or should I invest money inside the holding company?
Scott Richardson:And now that is k. Correct me if I'm wrong, but that is a big issue too now with a lot of the tax changes that happened.
Mike Robinson:Well, possibly. Depending on how
Scott Richardson:big the holding company gets and passive income rules and stuff like that, like, that that's part of why this becomes some of the debate now too is that
Mike Robinson:Well, there's there's that, but I'm less concerned about the passive rules. But the bigger question starts to be, if the capital gains inclusion rate does pass to be two thirds versus 50%.
Finn McKay:Quite yet. Yeah.
Mike Robinson:Which we don't know about yet. It does not, to me, look likely like it's going to happen. But, anyway, it it still could.
Finn McKay:Yeah. Yeah. It is very clear that they're going to That they are. Yeah.
Mike Robinson:Well Well, and But it becomes another question and debate, and I have some thoughts and opinions, and I have done some of the projections and math using the new inclusion rates. But I don't know if you wanna comment in that first. No.
Scott Richardson:I I haven't done the math on it. The only
Mike Robinson:reason Well, but even just the not just the inclusion rate, but the whole concept of, well, I now have money in my holding company. Should I leave it there or should I withdraw it?
Scott Richardson:So I get into lots of debates with people about this because I think inherently, accountants, their benefit is derived by you paying the least amount of tax.
Mike Robinson:Yeah.
Scott Richardson:And so dividends coming out, which and it a lot of that makes sense. I I like paying some salary Yeah. Out of the company. I I think usually, the argument is they don't wanna have to pay both sides of CPP,
Finn McKay:because Can you explain that a bit?
Scott Richardson:So if you're if you're an employer and you're paying yourself salaried income
Finn McKay:Mhmm.
Scott Richardson:Anything of what is it above $5?
Mike Robinson:Mhmm.
Scott Richardson:Anything above $5 that you pay a salary, you have to pay the personal port part of CPP contributions.
Finn McKay:And then also
Scott Richardson:But you also have to play pay the employer's
Finn McKay:attachment part.
Scott Richardson:So Right. You're looking at, like, 9 what is it? No. It's it's more than that now because of the enhanced. It depends how big it is, but you're, like, nine to 11% of contributions, is employer and employee contributions.
Mike Robinson:Okay.
Scott Richardson:Nine something. I can't remember.
Mike Robinson:But you can also have situations where you have an operating business and you're paying yourself a salary because the only way to generate RSP contribution room is through employment income.
Finn McKay:Right. You need to have build you need to generate a Right. Salary. And what is what is the percentage? It's like 2018%.
Finn McKay:Eighteen %. Yeah. Up to a max of, like, 25, 20 30. 30 or 30.
Scott Richardson:One eight.
Finn McKay:Yeah. And that room grows with historic income or
Mike Robinson:whatever. So typically, what I would see is that if somebody owns and operates a successful business, they are paying themselves a salary that will generate RSP contribution room.
Finn McKay:Right.
Mike Robinson:But if the business, you know, makes another, you know, whatever, say $500,000 of net income after already paying salary, now the money is in the holding company or it should be for liability purposes and whatnot. You can do a tax free dividend from operating company to holding company.
Finn McKay:Right.
Mike Robinson:Now what do you do with the money?
Finn McKay:Lisa Benz. Well, well, so
Mike Robinson:the first part in my experience and in my projections should be, well, it depends on if this is surplus money. Like if you, still have a mortgage or you have other expenses and you have young family and you're gonna spend all that money, there's not really any benefit to holding, to being in a corporation or just paying it out. Like, you're gonna pay this tax or that tax. At the end of the day, you're basically gonna be a wash.
Finn McKay:Right.
Scott Richardson:And they they did that on purpose.
Mike Robinson:And that is on per that is exactly on purpose. I figured what they call it equal not equalization, but, something Yeah. Something like that to make it neutral versus, you know, I could dividend myself and because you're an employee, you can't. Right. Right.
Finn McKay:So then you shouldn't get a tax benefit because you are incorporated. Right.
Mike Robinson:Yeah. That's the theory anyways. You could debate that. But but that's that's the theory is that between my income and your income
Finn McKay:Mhmm.
Mike Robinson:It should be roughly the same. Yeah. Yeah. And, generally, I think everyone would more or less agree with that.
Finn McKay:Well, and I guess I guess you shouldn't be able to give yourself a tax benefit because of some sort of, like, corporate structure that you built for yourself.
Mike Robinson:Well right. But the you can so where this starts to be a a debate or a question is, okay. Well, now I don't need the income that I'm driving because I paid my mortgage. My kids are through school. Mhmm.
Mike Robinson:I am only living on I'm spending a hundred thousand dollars a year Mhmm. On my day to day expenses Mhmm. But I'm making 500,000.
Finn McKay:Right.
Mike Robinson:Now do we get into a situation, well, why would I take money out of my company and pay a personal dividend rate
Finn McKay:Mhmm.
Mike Robinson:To turn around and then put it into an investment?
Finn McKay:So what do you do?
Mike Robinson:Well, you can just leave it inside
Scott Richardson:the old town.
Finn McKay:Free compounds?
Mike Robinson:No. Not tax free.
Finn McKay:Well, right. Right. The the corporation will pay taxes.
Mike Robinson:The corporation will pay taxes on the growth just like a regular non registered
Finn McKay:But it's but it's it's, like, pre salary taxing.
Mike Robinson:It's like pre salary because you haven't paid yourself that money, so you're not paying a dividend Right. Tax rate or or any other kind
Finn McKay:of tax rate. Respect, it is like pre tax salary compound.
Mike Robinson:But what if you turn the capital gains inclusion rate from 50% to to to That
Finn McKay:becomes brutal when you have to
Mike Robinson:Then it becomes an issue.
Scott Richardson:Because that's the thing that a lot of people miss is the the capital gains inclusion rate. Like, everyone looks at the personal side of it. It's two fifty and up. Yeah. But for corporations, it's dollar 1.
Mike Robinson:Oh.
Scott Richardson:Yes. Dollar 1.
Finn McKay:Right.
Scott Richardson:So it's Meaningful. Very, very.
Mike Robinson:You and I as individuals could piecemeal our withdrawals or our sales of our assets to be under $2.50. Right. Corporation's dollar 1. So this is a new topic because it isn't even law yet, but it's being administer as law. And I have done a couple of these projections because I I've
Finn McKay:had to administer things a
Mike Robinson:little bit. So that's another debate. Let's come back to that because I thought the line is crazy too.
Scott Richardson:I listened to Jamie Golombek. He's the he's
Mike Robinson:the big tech guy with CIBC.
Scott Richardson:Yeah. And he said this actually does fall in line with how they historically administer things that are coming into law. They did this
Mike Robinson:Oh, interesting.
Scott Richardson:They did this exact same thing when, the government changed when I think it was when Trudeau first came in and he raised taxes raised all the tax rates. Oh, okay. They administered them that year. It hadn't come into law yet. They had not come into law yet.
Scott Richardson:They had not gone out. But it was going to, and it did. And so it wasn't gonna be preemptively,
Finn McKay:like, it's not actually law, but you're like, well, they're talking about it.
Mike Robinson:So
Scott Richardson:Well, they do it because it most likely always does. He said this is the weirdest situation.
Finn McKay:Right. Because the prorogate argument is that it doesn't go well.
Mike Robinson:It's more it's not so much the proroguing. It's the extreme likelihood that there's gonna be an an election. Yes.
Finn McKay:Yeah. I know of proroguing into an election, so there's no there's no there's no opportunity for the current government to just, like,
Mike Robinson:push it past the party. Does kill it. But if the government didn't change, like, if Yeah. If there wasn't an election Mhmm. Or if they were to win reelection, they could just reintroduce it Right.
Mike Robinson:And would.
Scott Richardson:Right. Yeah.
Mike Robinson:Anyways, sidebar. Yeah. Side sidebar. It's okay. It's a good sidebar.
Mike Robinson:Yeah. Yeah. Yeah. It's a good sidebar. So I did some of the math because I do have some some clientele who are in this fresh position of
Finn McKay:Right.
Mike Robinson:I finished paying off my my former business partner. I now own this business outright.
Finn McKay:Mhmm.
Mike Robinson:It is a very profitable business. I'm already paying myself a hundred grand a year in salary or whatever the number is. Where should I save the money taking into consideration the potential for a two thirds inclusion rate down the road? And my conclusion has been, and this isn't gospel, but this is the work that I've done on it, has been that, it's actually really close. It's you could just dividend yourself out, make sure you're maxed RRSP and TFSA, and then, you know, thirty years down the road measure the difference.
Mike Robinson:The difference is actually really close, but the edge goes to staying inside the holdco. Because, again, the tax deferral, like, you're not giving up today's dollar income to pay taxes.
Finn McKay:Right. Right. You pull you pull a hundred grand out of your corp. Now you have to pay, call it, 40% in or whatever amount it is. You know, 30%, forty % of the tax.
Finn McKay:Yeah. And then now you're now you're start your starting position's a lot lower.
Mike Robinson:Right. But at the end, your tax implication could be less Mhmm. Because you can use the 50% inclusion rate instead of two thirds.
Finn McKay:Right.
Mike Robinson:But it's it's close, and we're talking about projections thirty years from now.
Finn McKay:Yeah.
Mike Robinson:So it's very difficult. So but the edge seems to be, like, you're gonna be better off not paying the upfront income tax today. Mhmm. But your estate down the road will be reduced a little bit because of the massive tax hit all at once at a two thirds rate. But if we're talking about people in this profile, you know, we're still talking about very meaningful estates.
Mike Robinson:So if it's a little less, right. Too bad so sad. Right? The best
Scott Richardson:tax problem you can have is, oh crap, I have a lot of money.
Mike Robinson:Yeah. Exactly. Yeah. Yeah. Yeah.
Mike Robinson:Yeah. Exactly. But it still doesn't change anything in the sense that as an individual business owner like that, you should still be paying yourself enough money to generate RSP contribution rooms so that you can get tax deductions on that fully taxable rate.
Finn McKay:So that you can use that to then contribute to your RES fee and all that. Yeah.
Mike Robinson:And then once you're at this fully surplus, like I'm doing everything, I'm using all the buckets. Mhmm. I've used my RSP, RESP, TFSA. Mhmm. First home buyers or first home savings account, which we haven't gotten done.
Mike Robinson:Yeah. If you're doing all those things and you have money in a holding company, well, you you should probably just invest it there. Right. But we're talking about a small number of people who just apply
Scott Richardson:to part with those though is is over time, depending on how young the client is and and putting or the person is, and putting money into that holdco, like, once that holdco gets big, if it's generating, passive income
Mike Robinson:Yes.
Scott Richardson:And that passive income gets too big and you still have an active business, then what can happen is that passive income grinds down your small business rate. So there's there's a lot of nuances with it. So I agree. Like, I think the edge goes to the holdco to to get it started.
Mike Robinson:Mhmm.
Scott Richardson:But then eventually, if it gets too big, it it reverts back. And now you're going back personal, and it's it's just the a fine line that you have to walk.
Finn McKay:I guess this is like a really good situation where you'd wanna talk to, like, a financial professional to
Scott Richardson:make sure
Mike Robinson:you can I would recommend that highly? Exactly. Yeah. Well, and one of the things we haven't introduced, and I don't think it's it's for today's discussion, but I'll mention it just because we're on it, is if you really are in this position where you have all this surplus income and all this surplus money and you're starting your whole co and you're starting to revert back, well, you can start paying yourself again. And, yes, that's gonna be taxable either dividend or or otherwise, But you can now you're in a wonderful position to start doing philanthropic things and offsetting the tax implication, which money that you're ultimately not going to spend anyways.
Scott Richardson:Yeah. Yeah.
Finn McKay:And there's huge tax benefits to doing that, and then you can, you know, instead of giving money to the government, you can be giving it to causes that
Mike Robinson:are important to you. And that's really the choice. That's a great point is that you're going to lose the money either way.
Finn McKay:Yeah. It's just who gets it.
Mike Robinson:Do you wanna do it do you wanna pay tax, or do you wanna give to charity?
Finn McKay:Right.
Mike Robinson:The money's gone either way. You're not gonna get it. Yeah. Mhmm. But why wouldn't you choose charity?
Scott Richardson:Yeah. Yeah.
Finn McKay:And I guess one one, maybe a little bit of a selfish question, but, can you open up an RESP for someone who isn't your own child? Oh, absolutely. Nephew. And and then now if you open up one for, like, a niece or nephew or a friend's child or something like that, how do they track that child's grant room? And can do other people contribute to that RESP or do you have multiple RESPs for that one child?
Finn McKay:It's tied
Mike Robinson:to their SIN number. The child.
Finn McKay:It's tied to their SIN number. Okay.
Scott Richardson:Each child is only eligible for $7,200 of government grant no matter how many RESPs you got.
Finn McKay:And so you could have multiple accounts.
Mike Robinson:Yeah. Yes.
Scott Richardson:Usually what we encourage people to do is have the parents open the account.
Mike Robinson:Mhmm.
Scott Richardson:And then if you want a gift to it, it's way easier to control with the parents because the parents are gonna have to sign off on certain things anyway.
Finn McKay:Okay.
Mike Robinson:But it's a great point too because we often get asked, you know, how can I help my adult children without just giving them cash? Right. Well, you can help by making sure that your grandkids have full RESP contributions and funding. Mhmm. Because if you're a young adult, if you're 31 years old and you have a three year old child, you know, maximizing RESPs might be lower on your priority list compared to, like, buying a house and paying for groceries and just feeding the family.
Mike Robinson:Right?
Finn McKay:Right.
Mike Robinson:Whereas the, you know, the the parents, the grandparents, who are in a better economic situation can help their kids and grandkids by funding RESPs without just turning cash over to their adult children.
Finn McKay:Well, in my my grandfather, he opened up our ESPs for all of his grandkids, and it was, like, every single grandkid is just endlessly thankful. It is Exactly. It's brilliant. That is it is, like, that is the moment in life where you need money. You, you know, are trying to go to school.
Finn McKay:You are trying to work part time, and everything's expensive. And it's it's, and then you and then, yeah, you get to you can take the the the grants and the the actual gains on the investment.
Scott Richardson:Yeah.
Finn McKay:And it's, it's very, very positive.
Mike Robinson:It's very powerful. I will try not to climb on a soapbox, but well, I per like, outside of economic and financial planning and all that kind of stuff, in my opinion, one of the, if not the greatest way to improve a society is to educate it.
Scott Richardson:Yeah. Yeah. And so Yeah.
Finn McKay:There's, like, a little bit of, like, a values part to this too. It's not just about making sure you get the right tax stuff and
Mike Robinson:Exactly. From the government. It's about
Finn McKay:get your kids some education and give them an opportunity where they don't have to worry about them.
Mike Robinson:Exactly. So when I hear that a grandfather has, say, funded, I don't know how many grand let's say 10 grandkids, put them in a position to all go to post secondary education Mhmm. Like, that makes me feel really good. Like, that is a way to improve your society long term.
Finn McKay:Mhmm.
Mike Robinson:I like that.
Scott Richardson:I think it's a piece that people miss in terms of, financial planning is everyone always looks at themselves in a silo. Like, good for your grandfather because he looked at, like, improving the family wealth as way outside of him.
Finn McKay:Right.
Scott Richardson:And and that think about it. If if if you're a grandparent, you got a maxed out RRSP and TFSA, like, there is nothing that I can offer you. And I say this to clients all the time. I I can't offer you anything that gives you a guaranteed 20% return on your money. Yeah.
Scott Richardson:Yeah. But your son and daughter and grandkid can, and it's down there. So, like, let's get some money down a couple generations, and let's go earn a guaranteed 20% rate of return on your money.
Finn McKay:Yeah. So Very powerful.
Mike Robinson:And it's not gonna come back and invite you in any way.
Finn McKay:Right. Right. Right. Right.
Scott Richardson:Right. Right. Right. Right.
Mike Robinson:Scenario is that the worst case scenario is that the child does not pursue any form of post secondary education Mhmm. And you have to take it back into income. Well, the grants just go away, repaid, and then the rest you have to take into income. Okay. Well, I mean, there's worse things that
Scott Richardson:can happen. Though, if the parents do have RRSP room, they
Mike Robinson:can roll They can roll.
Finn McKay:Grant for
Mike Robinson:some of the, growth into Into RSPs. RSPs.
Scott Richardson:So like there's lots of really cool pieces. Just very underused, actually, I think all retirement and and savings vehicles. I don't know if you look at any of the stats, but like the uptake on RRSP, RESP, RDSP for people who are eligible and qualify.
Finn McKay:So our what was the last one?
Scott Richardson:RDSP. That was a registered disability saving plan.
Mike Robinson:Oh, okay.
Scott Richardson:Of the people that qualify for a lot of these programs, it's usually less than thirty percent of people that actually use them.
Finn McKay:Really? Mhmm.
Mike Robinson:Wow.
Scott Richardson:RRSP less than 30% of the population contributes, maybe a little bit more. I haven't looked at stats for a while after they
Mike Robinson:That's about right. But it's not because they're doing something else. They're just not saving at all. Yeah.
Scott Richardson:Yeah.
Finn McKay:You know, and it's it's tough to save. You know? You have to you have to really plan your life. And and and and you have to also, like, you know, actively, you know, delay gratification in your life,
Mike Robinson:which is hard. But there's also some, demographic and generational things happening like, you know, forty years ago, fifty years ago, most everybody had a defined benefit pension plan.
Finn McKay:Yeah. No. Now you are personally responsible for your retirement, and that that is a big change.
Mike Robinson:It's a big change, and it wasn't something we were taught. So even in my own household, like, my my father had a defined benefit pension plan, a rather rich one, quite frankly. But I did not grow up being told you gotta make sure you maximize your RSPs. I mean, I he said you gotta save money, you know, save 20% of every paycheck, those types of things. But we really didn't have RRSP contribution discussions ever.
Finn McKay:Well and it's an interesting thing because, like like yeah. Like, basically, your employer or the government or somebody else was responsible for your retirement essentially for a very long time. And retirement generally is kind of a new new concept. Like, two hundred years ago, you would have just died of
Mike Robinson:One hundred years ago.
Finn McKay:One hundred years ago. Yeah. You would have
Scott Richardson:invented by the Germans.
Mike Robinson:Right. We have died presented on that.
Finn McKay:Yeah. Yeah. And and and now then it was like, okay. Well, you know, people are living longer. We need to give them an opportunity to have a retirement and, you know, in a in a good society, everyone should have that.
Finn McKay:And so, you know, you have defined benefit plans. You have government pension plans, all this kind of stuff. And then now it's like, okay. Well, a bunch of companies went bankrupt because of because of defined benefit plans. They're a little bit too generous.
Finn McKay:And then,
Mike Robinson:you know so much that they're too generous. It's that, again, they didn't keep pace with changes. The they used to be very sustainable because and I and I'm not exaggerating. I might be making up the numbers a little bit, but, you know, you retired at 65 and you died at 69. Right.
Mike Robinson:Very easy to fund.
Finn McKay:Right. Very easy to fund that. But if you retire at 65 and then you live to 95
Mike Robinson:Exactly.
Finn McKay:Holy crap.
Mike Robinson:It's holy crap. It's very so I don't really blame these companies Mhmm. For getting rid of them. They're they're not sustainable and the only ones that you really see anymore out I mean, there's a few very large companies, but mostly it's government Mhmm. Because it's government money.
Mike Robinson:They there's an unending supply of it.
Finn McKay:Right. Right.
Scott Richardson:Well, and prior to, like, even but, like, I can't remember when they did the big CPP changes.
Finn McKay:Mhmm.
Scott Richardson:Like, I wanna say early two thousands, late nineties, something like that. But prior to that, a lot of pensions were basically banking on, contributions. Like, contributions were funding future generations. Well, when the baby boomers and and birth rates dropped off and we had less employees out there
Finn McKay:Yeah.
Scott Richardson:Then now future contributions aren't funding future pensions.
Finn McKay:Right. It's it's a little bit like kind of like a I mean, it's not a Ponzi scheme, but it's a little bit like, you know, kinda like that in that, you know, if your if your population shrinks a lot, all of a sudden you don't have that pot of money as much. And there's actually some really funny just just as, like, a sidebar, there's some really funny, things that have happened with, like, pension plans. And I wish I had the actual numbers on me exactly, but, like, Kodak, which was a huge business that you never hear about anymore. Right?
Finn McKay:And so I think it was this year, Kodak announced it because they've got this they've got a huge pension plan because they were a big business during a time when people had defined benefit pensions. And and, they had a very generous pension plan for all their employees, and then the business shrank like crazy. And so the business has shrank so much, but their pension plan is still this massive behemoth. And so and the the people managing the pension have done a killer job, and they've actually grown this huge surplus, which now Kodak has. And so I I can't I don't know the numbers exactly, but I believe it was something like their market cap was, like, $500,000,000, and then they had, like, 1,500,000,000.0 or just some absurd amount of money Yeah.
Finn McKay:As, like, as, like, a surplus. And then they they announced that they're gonna basically, you know, neutralize the the pension and then bring all that extra cash into the business, and the stock was up, like, tremendously on that news, obviously, because they're like, all of a sudden, we're we now have a billion and a half in cash or whatever
Mike Robinson:That's amazing.
Finn McKay:Which is hilarious. But it is interesting because, like, you know, Kodak's business was never managing a pension. And most businesses, their business isn't, like, managing a pension for Google. Their business is running, like, Kodak or whatever.
Mike Robinson:Yeah. Yeah.
Finn McKay:And so I guess that's one of the one of the other reasons why they've moved away from defined benefit plans is because it shouldn't be a business's obligation to, like, you know, manage that kind of thing. You wanna outsource it essentially.
Scott Richardson:Yes. Well and the reason why too is a defined benefit pension, any shortfalls are the responsibility of the employer.
Finn McKay:Yes. Which can be devastating if you don't do the math right.
Mike Robinson:Exactly. Well, and if you don't do the math right.
Scott Richardson:It's just what you got is what you got.
Finn McKay:Yeah. Yeah. And and then it
Mike Robinson:Not only that. So it the government rules are very onerous. Mhmm. So I'm not sure if this has changed, but the last time I checked, a a defined benefit pension plan needed to have sufficient capital such that they wouldn't be able to fully fund everybody immediately, which is completely unrealistic. Right.
Mike Robinson:But that's the way it was. And so that's early on when they started running into some trouble, which coincides with every major market decline
Scott Richardson:Right.
Mike Robinson:Is because suddenly Yeah. Yeah. We don't have enough. So we had enough because we've had back to back double digit rates of return. Right?
Finn McKay:Right.
Mike Robinson:And then the following year, you have double digit negatives, and then, oh, well, now we can't fund it, and they have to make it up, which is ridiculous.
Finn McKay:Right. And then you you're now in a economic decline.
Mike Robinson:Yeah. Business is down.
Finn McKay:Right. Business is down. Your the value of your pension fund is down. Well, and you think about how big some of these pension funds should get, and it's like, you know, if you have hundreds of thousands of employees over the existence of your business, this pot of money just gets enormous. And your business might be actually quite small relative to this size of this.
Finn McKay:I mean, like a Kodak.
Mike Robinson:Like Kodak. It's a
Finn McKay:good example.
Mike Robinson:If anyone's hearing this music, it's because we're in a hotel.
Scott Richardson:We are
Mike Robinson:not in
Scott Richardson:a school dance party.
Mike Robinson:Yeah. There's something going on over there that we don't know about. Sounds like we should go there after. I know.
Finn McKay:It sounds like it's coming from our the room that we're gonna be
Mike Robinson:I know. It's the main thing that's referencing. Probably testing. Oh, yeah. We're getting off we're getting hard off topic, but, it's okay.
Mike Robinson:It's natural flow.
Scott Richardson:One thing just on the pension thing is that's why they changed a lot of the commuted value rules because people when they left pensions, left companies and took the pension with them, it was depleting the pension too much. Yes. So they've they've changed a lot of that. So when you're leaving a pension, it's not as lucrative to walk out the door with it. But, anyway, that's a sidebar.
Scott Richardson:But I I do think we should, because we've talked about it before and you kinda brought
Mike Robinson:us on. Maybe it's a conversation for another day because we do get asked when people get laid off or change careers. Should I leave my
Scott Richardson:Pensioner.
Mike Robinson:Pension in the company or take a value and move it to a lira? Yeah. That's that is also a question that we get a lot.
Finn McKay:No. And that's where you actually have to probably just sit down and do the math to figure out what is assumed by the pension and all that kind of stuff.
Mike Robinson:So You do. Yeah.
Scott Richardson:Finn, to to tie it back to what you were saying before with, you know, asking the question of RRSP and TFSA and stuff like that is, I think that answer changes when you're younger. And kinda going back to what you just said about, when, you know, way back when retirement was invented, a lot of these products didn't exist.
Finn McKay:Right.
Scott Richardson:And it was a lot easier to figure a lot of this stuff out. You had a pension. You didn't have to worry about saving at all. You know, then RRSPs come along and people do it.
Finn McKay:But Right.
Scott Richardson:Now you've got TFSA. Another one that's also relatively new is FHSA.
Finn McKay:Right. Right. So now you have your RRSP, RESP, TFSA, and FHSA. Yeah. And then you also set another one, which I wasn't aware of, which is the disability savings plan.
Mike Robinson:Yes.
Finn McKay:Yeah. So there's there's a lot. There's a lot.
Scott Richardson:Yeah. But, I think the FHSA, it again, now you're changing the conversation.
Finn McKay:First time homebuyers.
Scott Richardson:Yeah. First home saving.
Mike Robinson:First home savings account. First
Finn McKay:home savings account.
Mike Robinson:And it's quite new as
Scott Richardson:well. Right. It's new, and it it it's actually the most ridiculous account to be created. It was really I think it was just
Finn McKay:a problem. Tell tell me about it, Scott.
Scott Richardson:And the reason is is because all you had to do all they had to do was change three rules in the existing First time homebuyers plan. Time homebuyers plan, which is being able to withdraw from withdraw from your r RRSP.
Finn McKay:Right. That's So that exists. Yeah. Yeah. Because you can withdraw a certain amount and you have to recontribute it.
Finn McKay:Right? And you don't lose the contribution room if I'm not mistaken. And you don't have to pay tax on it if if I'm not mistaken. So so if you have But you have to repay it.
Mike Robinson:But you have a long time.
Scott Richardson:Fifteen years.
Mike Robinson:Yes. Yeah.
Scott Richardson:But the all they had to do was change three rules to the home buyer's plan.
Finn McKay:K.
Scott Richardson:Make the withdrawal nontaxable. Right. Give you the ability to recover the r RSP room Right. And make you not have to repay it.
Finn McKay:Well, and then and then your RRSP would just be supercharged. Yeah. We don't have but but then also the government doesn't get to make an announcement.
Mike Robinson:Well, that's really what it is.
Scott Richardson:But And it's not about it.
Mike Robinson:When you save this account as ridiculous, like, it's it's a good savings vehicle. What's ridiculous is that they didn't need to do it. They could have just altered the existing plan, but then they couldn't make a big plan.
Scott Richardson:The reason why I it frustrates me is because you think of the hundreds of thousands or millions of dollars that companies, like, were affiliated with had to change back office systems.
Finn McKay:Yeah.
Scott Richardson:They had to get lawyers to redo apps, redo, like, the marketing behind it, everything. Yeah. It's a massive cost.
Finn McKay:So tell me exactly how, that works and who who would benefit and who would be eligible for that, the the first home buyers.
Scott Richardson:Well, home buyers plan, you can put $8 a year into it. K.
Finn McKay:And you have to have the account if I'm not mistaken, you have to have the account open.
Scott Richardson:Oh, but in order to earn the room.
Finn McKay:And you lose the room if you don't have it open.
Scott Richardson:Well, you don't lose the room. You just don't earn room if you don't have an account open.
Finn McKay:Right. Right. So, like, if you wanna you wanna even if you don't put money in it, you wanna open it, put a bucket in it, whatever.
Scott Richardson:You don't lose it in the sense that if you haven't opened the account, it's not like you're minus 8,000.
Finn McKay:Yeah. Yeah.
Scott Richardson:Yeah. So you don't
Mike Robinson:lose it. It's just
Scott Richardson:once you open the account
Finn McKay:You start to
Mike Robinson:gain room. A new
Scott Richardson:a new room. And it's basically eight times five. Like, it's $40, 8 thousand a year for five years.
Finn McKay:For five years. Oh, okay. And then it maxes out at at 40 Maxed. 40. Yeah.
Finn McKay:Okay. And then do you do you get a deduction?
Scott Richardson:So the beauty of it is it's like a combination of RRSP and TFSA.
Finn McKay:What a beauty.
Scott Richardson:So you get the tax deduction like the RRSP like we were talking about before.
Finn McKay:Right.
Scott Richardson:You get tax free compounding like an RRSP and a TFSA. Mhmm. But when you withdraw it for the purpose of purchasing a home
Mike Robinson:Mhmm.
Scott Richardson:It's a tax free withdrawal.
Finn McKay:Mhmm.
Mike Robinson:So you get
Scott Richardson:the benefit of both worlds.
Finn McKay:That's amazing. You get the
Mike Robinson:It's a good account. That is
Finn McKay:a good account. Yeah.
Scott Richardson:You get the benefit of both worlds.
Finn McKay:Right.
Scott Richardson:So for young people, now if you're debating RRSP versus TFSA
Mike Robinson:Mhmm.
Scott Richardson:Well, actually, now you gotta throw in FHSA. And
Mike Robinson:Well, I would argue you should you would should remove RRSP. RRSP from the equation because back to your original thing is, well, what's your goal and what's your time horizon?
Finn McKay:Right.
Mike Robinson:Because RRSP should not be in the equation if you're talking about using the money in the short to medium term.
Scott Richardson:Yeah. Exactly.
Finn McKay:Right. I guess that's the idea. I guess that's another part of, like, the planning aspect and having everything aligned is that the investments you put into this account, the first, what is it? First home oh my god. Savings.
Finn McKay:First home savings. Okay. First home savings. FHA. FHSA.
Finn McKay:FHSA. FHSA.
Mike Robinson:FHSA. FHSA. FHSA. FHSA. FHSA.
Finn McKay:FHSA. FHSA. FHSA. FHSA. FHSA.
Finn McKay:FHSA. FHSA. FHSA.
Scott Richardson:Kinda going back to our thing on housing, maybe it's not that short term of an account. Right. Maybe you're yeah. It might be more than five years that it takes you to save for it. But But
Finn McKay:I guess I guess, you know, if you if it does take longer, hey. You got tax free compounding in this account for a long time.
Mike Robinson:That's right.
Finn McKay:Maybe you, you know, buy a house when you're, like, 50. And it's like, you know, the account value is, like, quite big, and you haven't had to pay taxes on the whole thing.
Mike Robinson:Yeah. It's also another good vehicle again for parents to help adult children. Okay. Because you can give money tax free to your kids, and they and you can fund that account.
Finn McKay:And do the kids get the tax deduction?
Mike Robinson:Yes. Yes. Okay. Yes.
Scott Richardson:Yeah? So it's Pretty cool. It's pretty heavy, but it it again, I think it it's one of those things where RRSP versus TFSA, sometimes the answer is you just have to change the question. You're like, you're not asking the right question. Right.
Scott Richardson:Is it long term? Is it short term?
Finn McKay:Mhmm.
Scott Richardson:Is it medium term money? Am I willing to lock this money away for a long time? Mhmm. Or do I need it for another purpose?
Mike Robinson:Right.
Scott Richardson:And then what's the way to maximize the the return on my dollars?
Finn McKay:Yeah.
Scott Richardson:And that's the beauty of the FHSA is it's just like the RRSP where you're getting that same tax break right away.
Finn McKay:Right.
Scott Richardson:So, again, put that thousand dollars in, you're in a 30% tax bracket, you're getting $300 back in taxes right away. So it does help you kick start your savings. Mhmm. So that's those are kind of the two that I I would encourage the most is young people, FHSA. Mhmm.
Scott Richardson:Older people are a SP first.
Finn McKay:Amazing. I feel like we, actually answered that pretty well.
Mike Robinson:I think so too.
Finn McKay:And, And
Mike Robinson:our timing, I think, is pretty
Scott Richardson:Yeah. I thought that was awesome.
Mike Robinson:I like the fish though. What do you call what do you call a fish with no eyes?
Finn McKay:A first home savings account is what you're talking
Mike Robinson:about. So you should say, well, thanks and, that outro that we, that we worked out. Yeah.
Scott Richardson:So, thanks for, for joining us for this.
Mike Robinson:Thirty, thirty.
Scott Richardson:Oh, okay. Thanks for joining us for this episode of Bear With Us. Hopefully you'll join us, for our next episode, which we have no idea when it'll be or what it'll be about. But
Finn McKay:if you've got any ideas,
Scott Richardson:you know, reach out to us and let us know, what sort of things you'd like us to try and tackle.
Mike Robinson:Beautiful.
Scott Richardson:Okay. That was really good. Are
Mike Robinson:we Yeah. Are we disconnecting? Yes. Yeah.
Finn McKay:I think we can disconnect. I I was watching the thing and look like it was recording. I was kind of thinking I I I should have been wearing this just to make sure
Mike Robinson:the sound
Finn McKay:is good.
Mike Robinson:Yeah. Well, he checked.
Scott Richardson:Everything in this podcast is meant for entertainment and educational purposes only. It is not financial advice. And all the opinions that we express in this podcast are not necessarily the opinions of the companies that we work with or affiliated with. So bear with us while we discuss these topics, and remember that financial and investing decisions are different for everyone and you should consult a financial professional or do your own research before doing anything for yourself.
Mike Robinson:Well said.
Scott Richardson:Thank you.
Mike Robinson:I also like to say, trust me, when I'm giving you financial advice, you will know it. Yes. It will be one on one and in person, and it will be clear that this is financial advice.
Scott Richardson:This is not. You will know exactly what I'm talking about.
Mike Robinson:Yeah.