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The book "Stop Working" by Derek Foster
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Hello all, Anybody out there who has read this book. I would like to know what your thoughts are ? The strategy is buying quality companies that pays dividend and never selling and just live off of the dividend. I'd like to know what the risks are of following this strategy. |
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As long as the 'quality' companies continue to pay dividends there is no risk. If dividends are reduced you will sell at a loss. |
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I am the author of the book "STOP WORKING: Here's How You Can!" The book outlines how I retired at 34. I bought dividend stocks, but I tried to focus on steady dividend payers - companies that had a long history of increasing their payouts. I also like to have a large portion in Canadian stocks as one gets the added benefit of very low taxation due to the dividend tax credit. US companies don't give you this advantage. Cheers, Derek Foster |
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Hi Derek, Thanks for the reply. Never thought I'd get a reply from the author himself. I'm a saver and just like you, have been thinking of ways on how to efficiently make my money work for me instead of me working for it. Me and my wife are both 32, with 60K mortgage left which we are aggressively paying - I'll probably give your strategy a try once I've fully paid the house. Just a question - are there times when quality companies stopped paying dividends because of a bad year ? Also what area in ontario would be considered low cost ? Again, thanks.. |
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I haven't read the book itself, but there was an article on it in Vancouver Sun, I believe. The author had $400k of investment and living off with a $35k annual dividends? Not much of retirement to me? How are emergencies covered? e.g. if you caused a car accident and lose all the auto insurance discount? Or, your roof needs replacement? Or, your car requires a hugh repair job? What about your kids' college tuitions? What about vacations? What if you lose 1/3 of your portfolio due to bad economy? I'll probably pick up the book and educate myself with something new, however, I don't think I'll retire with only $400k of investment. |
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> author had $400k of investment and living off with a > $35k annual dividends? Not much of retirement to me? > How are emergencies covered? i've read the book (frugally, via various visits to chapters!) and his situation is more diversified than you write. He also owns an income-producing property; he, of course, has just sold this book; and i believe his wife works part-time etc. as i also posted in another thread, we're thinking of doing a similiar thing on way less income - crazy, most people say, i know - but there's only so much time ... there are several other books on the subject and those authors also proport that you really don't need as much as the industry(ies) would lead us to believe. r |
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Okay, perhaps the article didn't go into enough detail about the author's investment. I'm assuming that the real estate is part of the $400k investment? Still, I'd not go for the minimum requirements. I.e. if I need $3000/month minimum I'd wait till my investments can make $4000/month before going into retirement comfortably. |
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off the top of my head, no, the real estate is separate - the author had always saved, from a young age; had no debts; lived and married overseas, bought a condo in ottawa, kept it, rented it out, moved to small town ontario; has 400k (approx) in dividend paying stocks; owns his current house outright also; has one car (i think) etc etc. Lives at a taxable income level low enough to receive GST rebates; lives frugally; has part-time income; book income etc. I think that for him, and others like him, including my mid-life-crisis-spouse, it's about time and "quality" of life. Of course, that means something different for everyone. I know people for whom "quality of life" means being a busy CEO. r |
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Having the house paid for, $400k in stocks, unknown amount of fully paid rental real estate, and a part-time income is reasonable enough to (semi) retire. Don't need a book to tell me that. 
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Silverm, You raise some good points. I'll try to answer them in order for you: 1. Emergencies - we have some money set aside for these. How much one needs depends on the individual. 2. Roof needs repair. It is a known fact that your roof WILL need repair (within 20 years or so). So you can set aside some money every month and make the payment when it comes due. Now I live in a condo, so my fees pay for this when it happens. 3. Car - huge repair. I buy a new car every three years so that it's always covered under the warranty. I'm a complete idiot when it comes to car repairs, but I'm smart enough to know I'm an idiot in this area - so I avoid it. I pay cash for my cars, then make payments tp myself for the next car. 4. Kid's college. Okay, here's where I'm going to sound cruel, but my wife and I have decided to HELP pay for my kids education - and they'll be responsible for the rest. I paid my own way (mostly). I find people appreciate things they've earned rather than received - and this goes for education too! (IMHO) 5. Vacations. Didn't take one last year because I was launching my book. We plan on driving down south (Florida, Texas) in the winter for two weeks or so. This is not that expensive if time is not an issue - which it's not. 6. Stock market crash (1/3 portfolio loss!). Here you've hit the nail on the head with regards to the difference in my strategy and the one usually espoused. I don't care about my "nest egg", but am instead focused on the "cash flow". Stock market crashed generally don't affect dividend payments for the kinds of investments I own, so I welcome a market crash with open arms! It simply won't affect my retirement. Silverm, if you have any more questions, please feel free. You can probably see the book at your local library - it's available in almost all systems across Canada. Give it a quick read and let me know what you think. Cheers, Derek (author STOP WORKING: Here's How You Can!) |
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> 1. Emergencies - we have some money set aside for > these. How much one needs depends on the > individual. You need money to set aside money. > > 2. Roof needs repair. It is a known fact that your > roof WILL need repair (within 20 years or so). So > you can set aside some money every month and make the > payment when it comes due. Now I live in a condo, so > my fees pay for this when it happens. Was just using roof as one example. Most people don't buy brand new houses. You can easily have bought a 17 year old house. You may have to redo the balcany. Even with condo, roofs are covered by the contingency fund, if there's enough. > > 3. Car - huge repair. I buy a new car every three > years so that it's always covered under the warranty. > I'm a complete idiot when it comes to car repairs, > , but I'm smart enough to know I'm an idiot in this > area - so I avoid it. I pay cash for my cars, then > make payments tp myself for the next car. A new car every 3 year? Now we have to factor the extra sales tax, and the new car depreciation into the retirement. > > 4. Kid's college. Okay, here's where I'm going to > sound cruel, but my wife and I have decided to HELP > pay for my kids education - and they'll be > responsible for the rest. I paid my own way > (mostly). I find people appreciate things they've > earned rather than received - and this goes for > education too! (IMHO) Fine by me. I think kids should learn to take car themselves. I had to borrow student loans myself. > > 5. Vacations. Didn't take one last year because I > was launching my book. We plan on driving down south > (Florida, Texas) in the winter for two weeks or so. > This is not that expensive if time is not an issue - > - which it's not. Gas + hotel also cost money. > > 6. Stock market crash (1/3 portfolio loss!). Here > you've hit the nail on the head with regards to the > difference in my strategy and the one usually > espoused. I don't care about my "nest egg", but am > instead focused on the "cash flow". Stock market > crashed generally don't affect dividend payments for > the kinds of investments I own, so I welcome a market > crash with open arms! It simply won't affect my > retirement. commented from a different post. > > Silverm, if you have any more questions, please > lease feel free. You can probably see the book at > your local library - it's available in almost all > systems across Canada. Give it a quick read and let > me know what you think. I'll give it a quick read. I'm sure I can pick up a few good pointers. |
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Allexx, Sorry, haven't been back here in a while. Yes, I'm sure there are examples of companies that have surprisingly cut their dividends - that's why I try to focus on quality, recession-proof companies that have a history of raising their dividends over time. I've been surprised much more on the upside than downside over the years. Cheers, Derek (author STOP WORKING Here's How You Can!) |
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One more thing I'd like to add. My wife does not work part-time. She did for about 6 weeks last winter at a ski resort where she learned how to ski (a little). But she does not work at all now (in a paid capacity). Cheers, Derek (author STOP WORKING: Here's How You Can!) |
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Hi Derek, I just finished reading your book today. Something that was not clear to me if for somebody with a large mortgage and having maxed out the RRSP room, you recommend paying up the mortgage or adquiring "dividend shares"? Can you elaborate on this? Thanks for your time. Italo |
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I am a huge fan of eliminating non-deductible debt ASAP -a mortgage would fall under this if it's a principle residence. Once one is mortgage-free, their financial flexibility increase immensely. Cheers, Derek Foster (author STOP WORKING: Here's How You Can) |
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Derek, Can you be more specific as to what you are currently invested in? I haven't read your book yet but would be interested in this type of investing. For example, which bank and insurance companies? |
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Meatball, I think what I own is not a good guage of what one should buy now. I bought Royal Bank a while ago when it was MUCH cheaper. I also bought Manulife when they announce the Hancock purchase and the stock fell to a cheaper price. I would not want to add to these positions now at these higher prices. But I will never sell them - as per my strategy. I just want to collect the dividends forever (and avoid paying the capital gains taxes). Naatans, I'm glad you found the book helpful. Best of luck. Derek I think the best thing one should do is look for the quality companies that meet the nine tenets in the book. Once you have a list, wait patiently until something happens to cause them to become cheap, then buy. |
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I went out and picked up a copy of this book and read it today. I was quite impressed. It really helped pull together some of my thinking on a few different matters. I think I may need to continue to concentrate on cashflow rather than the dollar value of my retirement account. Replacing earned income with income from dividends sufficient to cover my expenses should probably be my goal. The book also got me rethinking the value of registered accounts. My plan was to maximize my registered contributions and THEN start a non registered account. Perhaps I should work on both at once. I'll need to do some more thinking about this. One thing is pretty clear though-- I can't take advantage of the dividend tax credit if my stocks are in an RRSP. They'll be taxed as full income when I withdraw them. I'm going to have to give it another read through and really think about these things. I'm definitely glad I bought the book. |
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Derek, I have not read your book but as i read the threads my interest is stirring a few questions. How much income did you earn in your early years to accumulate so much money and retire so young? What were your expenses in those early years? tia |
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Polywuf, My earnings in the early years were pretty low. After university, I backpacked around Europe and Australia - working part-teim jobs to pay for it. The key at that time was low expenses. In addition, my investment portfolio has done quite well. Hope this answers your questions. Cheers, Derek |
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Derek, Now let me get this straight. As a young man your earnings in the early years were low. You backpacked around Europe and Austalia, working part-time jobs. You had low expenses. At the same time your investment portfolio did quite well. So far so good. Taht all makes sense. How did you get the money for the investment portfolio? |
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polywuf, I do go over it in my book (available at most libraries), but essentially, I contributed $200 every month and added any "windfall" money. Examples of windfall money would be tax returns, GST credit, etc. After I paid the $200, I was free to spend the rest of the money I earned without worrying about it. Hope this answers your questions. Cheers, Derek |
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I honestly think $200 a month isn't going to do it for me. I'm currently dedicating $450 a month towards debt elimination (over and above housing related debt) and investments. I'm also committed to my current standard of living and any additional increase in income (I'm just completing a professional designation, so there will be an increase) will go towards investing. The last 10 years has been an interesting time in the stock markets. "Buying recession proof stocks" worked marvelously. The problem I have is that the market is up and stocks are valued very high. I'm thinking that it's going to take a lot of time to research stocks and figure out at what price I should buy them. It might be that the buying opportunities of the last 10 years won't show up again for the next 10. There should be some corrections, but I'm thinking that I may never be able to get the quality stocks I want for the prices that would make sense. I'll have to continue to watch and wait and find companies to research. The problem is though, that bad economic news that drives the price of a desired share down can come very quickly. So I'll have to keep a good portion of my investments fairly liquid. This generally means lower returns in the mean time while I wait-- with some exceptions. As for "Let's Pray for a Stock Market Crash", I say, not yet-- I'm not quite in a position to take advantage of it. ;0 |
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naatans, You raise some good points about the market providing great opportunities over the last ten years. I agree with you. The funny thing is that in the late 90's, everyone was convinced tech stocks were the best bet - and many people ignored the stable, reliable investments that offer good dividends (income trusts come to mind). I agree that there are less great opportunities out there. A quick read of Warren Buffet's "Chairman letter" in the Berkshire annual report says as much - he's sitting on $40 Billion and can't find anywhere to put it. I'm sure it's a nice problem to have though. He bought BUD recently (Anheuser Busch), and I looked at it, but gave it a pass. I'm probably overlooking something - that's why he has the mountain of cash I suppose. Anyhow, I've found that if you just sit tight, opportunities eventually surface. I bought Royal Bank about 6 months ago at around $60/share. They were having short-term problems. You don't need the whole market to crash. Just be patient and good things eventually happen..... Best of luck to all! Cheers, Derek |
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The retirement section of the book seems very vague/incomplete to me. How long do you expect the readers to invest before being financially ready to retire? If I punched in $200/month @ an aggressive 25% return per year. After 10 years, the investment only grow to $104k. If I can maintain that 25% growth, I'd need 15 years to reach $400k. You may be able to hit 25% growth in some particular years, but not over the long term. Maybe the book is telling me to STOP WORKING... 15 years later..... after you paid off your mortgage.... in the best case scenario. Unfortunately this isn't something that I didn't know before. |
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From my understanding, the retirement approach in the book is more about cashflow than portfolio size. The example portfolio was a tad over three hundred thousand but was bought at a little over a hundred. The problem though, is getting enough money together to buy the stocks that produce the income to cover retirement expenses. 200 a month doesn't look like it would cut it unless one took advantage of buying opportunities and made very few or no mistakes. It essentially involves half-way market timing-- buying low (but not selling high) and thus getting a good dividend/distribution yield to cover expenses. It seems to me that the retirement planning part of the book is vague entirely because it's based on the investment part. If you find the right stocks, build up capital and play "hunting game" like a croc/alligator (to use the analogy in the book) and get the stocks for the right price, the actual value of the portfolio because irrelevant-- it's only value is the ability to produce cash flow. Portfolio size (and thus monthly contribution as they are directly connected) becomes an issue though, when trying to figure out how to get the cashflow with the capital available. That's why I've come to the conclusion that I don't think $200 a month will cut it. Sure, it might, if the market provides the buying opportunities over the next 10 years that it provided in the last 15. There's a bit of a buying opportunity right now with Rothmans. I'm not sure I'm interested in owning tobacco stock, but the news of class action lawsuits has driven the value of their stock WAY down. But they're still distributing dividends and making the same profit. If I were buy now and they win (or lose minimally) in the legal battle to come, it will be a great buy that would give a massive amount of cashflow in the years to come. If they lose the lawsuit badly, it could be disastrous. Either way, the stock is cheap right now and it *could* be a good buying opportunity. From what I've read, Derek Foster took advantage of a very similar situation with Philip Morris. |
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Good call on RBC. In the last 6 months it's been as low as 50.64. And the dividend yield is impressive even at 65. What really looking great though, is that the last time the stock was hovering around 60, they split it 2:1 on October 6, 2000. And then the dividend went up! Perhaps something like that is coming again. Either way, RBC meets pretty much all of the criteria for a good pick. During the tech boom, I was involved in IT. I remember thinking about all the dotcoms-- they're just guys like me with ideas and some computers, where's the assets and profits? Would I trust me with millions of dollars and a computer? Heck no! My thinking at the time was that telecom was a better bet than tech-- fortunately I stayed out of Nortel and focused on the smaller regional phone companies (telus, MTS). Short term impressive capital gains are nice, but keeping those stocks for a long time would have been better. The main downside I see with looking at what Warren Buffet does is that the fact that he does it drives the price up because he has a lot of imitators who copy-cat purchase whatever he announces. He knows what he's doing though. |
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Just a note-- those were the NYSE values for RBC. The Canadian stocks split on Sept 25 when the stocks were at about 86. Getting RBC at 60 would be great. |
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Silverm, Some good points.....the $200/month was a baseline. I would also add any "windfall" cash - tax returns, GST credits, etc. I am not arguing that the key to early retirement is to save $200/month. The main focus is to zero in on the cash flow rather than trying to build up the portfolio size. The book was intended to show people a strategy different from the one usually espoused. Naatans, I agree that you can't blindly follow Buffett. However, with regards to BUD, the price rose almost 10% after is was announced that Buffet had bought a "substantial" stake, but then it gradually dropped back down over a few months to where it's back to roughly where he bought. I just don't see it being a great buy with the boomers shifting their drinking to wine and spirits over beer (good news for Corby?). They've moved into international markets, but I don't know if they are all on thier own like Coke or Pepsi. I see Carlsburg, Heiniken, Guinness, and many others in the key markets. Also many local breweries exist..... One other note - watch out for Rothmans. On Yahoo, it shows that the price has fallen 50%, but this is not accurate. The stock split earlier in the year and the actual price is close to its high. Cheers, Derek |
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Cash flow is always expressed as a percentage of market value, and they roughly raise in the same percentage amount over a long period. Otherwise, you'll see a company with 100+% yield if yield grows faster than market value. It's also aggressive to expect dividends to grow over 25% over a long term. |
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Silverm, I disagree with this. The "cashflow" I'm talking about is the money that's paid to the investor in the form or dividends or distributions. It's not a percentage of market value. Market value rises and falls like a yo-yo, but dividends are much more stable for the right kind of companies. The market can go down 50% this year, but the dividends Royal Bank pays should remain constant (or even go up, using history as a rough guide). This would definately change the "percentage". Also, I have never said I expect dividends to grow at a rate of 25%. I agree that this expectation would be totally unrealistic. I simply expect the dividends in my portfolio (in aggregate) to rise faster than the rate of inflation. I think this is reasonable once again using history as a guide. Cheers, Derek |
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Hi all. I recently read the book after a friend loaned it to me to read. I have to say that a lot of what was written in the book made a lot of sense. I have no background in stocks or shares, however nearly two years ago I started investing money into mutual funds. It seemed fairly straight forward and I have only ever increased the amount I pay in. I'm curious about investing a little more, one small step at a time. I looked at BMO and to set up a type of account requires $5000. I know the book doesn't explain how to start buying your own shares, but I would appreciate any help in buying stocks (in Ontario). I think for most people like me, there is a mystery and alot of misconception about stocks/shares etc. Can anyone enlighten me to the hows/costs to start something like buying recession proof/dividend paying stocks? Many thanks. Sam. sam@samb.ca |
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Silverm - - You're right about all that. As I've said, I don't think 200 a month will do it. If one is planning on buying and never selling, then the rate of return might better be compared to the cost at buying rather than current market values (though these should always be monitored and considered). If you're *never* going to sell something, the only thing that really matters is how much you paid for it and it's return based on that. So if you bought a stock for 10 and it paid a 3% dividend, and the stock goes up to 20 over the next 5 or so years and the dividend stays at 3%, you could well claim you're getting a 6% return per year on your original investment. The problem is, that if the stock goes down and they dividend yield goes down with it. Ouch. I guess that's why there's the stress on stocks that pay increasing dividends and have a history of keeping them up even when the market value goes down. As for Rothmans-- I can't find any info on the stock split. It's not a company I'd buy anyway, being tobacco and all. I just noticed the stock was low and went hunting for a reason why and found the class action lawsuits announced at the same time as the dive. I'm sure if I look hard enough, I could find the exact date of the stock split and see whether or not the announcments of lawsuits had any real impact. The funny thing is that every website I check a chart on, there's no mention of a split. samba - To buy stocks you need an account with a broker. You can go for a full service broker or a discount brokerage. Discount brokerages are much cheaper and most (or all) of the banks offer them. If you're account is less than a certain ammoung 15000-30000 depending on the place, you'll have to pay a yearly administration fee. There's also a commision of around $30 on each purchase and a commission to sell (if you're going to sell). Like you, I'm currently heavily invested in mutual funds and moving into more stock purchases. I've basically decided to go for the following course of action: 1) Build up some money - I've increased the amount I'm setting asisde each month in order to get to the position to buy some stocks so the commission costs make sense. I'm keeping this money in a high interest savings account. I need this money to stay liquid in the event of a buying opportunity (which I will research thoroughly before making) 2) Identify a list of stocks to watch. I've taken some time to pour through some stocks which have a history of increasing dividends. Many meet most or all of the criterea that Derek Foster talks about in his book. There are actually a fair number of good candidates mentioned in his book and a lot of different ways of finding more. 3) Research the stocks. Find out all the pertinent information. Get more knowledge about stocks and investing. The recommending reading list is a good place to start. A general "stocks for dummies" or something like that would be a find place to start if one is completely new. 4) Determine a good buy value. Given the research above, dividend history, market value, etc., determine what I feel comfortable paying for a stock. It may take making a few mistakes and buying too high to figure this out. 5) Start watching them. Monitor the price of your target stocks for a while. Watch for news stories about them that might drive their price down without affecting the underlying business. 6) Open the brokerage account. There are a few threads in these forums about picking a brokerage. 7) Buy the stocks when they are at the prices you want 8) Reinvest or collect the dividends depending on your goals For costs, expect to pay an administration charge until the value of your portfolio is high enough for them to waive it. It can be from 50 to 200 a year. Trades are about 30 a pop. I've heard TD's discount brokerage has the lowest going rates right now of the banks. You'll also have a small tax liability from the dividends. Canadian dividends recieve a credit which will help with this. |
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naatans, I know - a lot of sites are really slow at adjusting their data to reflect splits. Everyone - be careful with internet data! If you go to the Rothman's site and click on investor relations and then click on news releases and scroll down to Feb. 4/05, you'll see the split was announced with their quarterly earnings. I was a shareholder at the time, so I know first hand. I guess I have to eat my **never** sell here, but I bought in 2003 at $23/share. I sold after the split at around $23/share (but with the split I owned double the amount of shares). 100% gain in 2 years is great. Normally I would have just held onto them, but with the lawsuit concerns I decided to bail. I felt the risk of the company had increased. Thanks for helping out on the info regarding opening a discount brokerage account. I had taken it for granted most readers would know about this - but the most common question I get is, "How do I open a discount brokerage account." In retrospect this was the biggest oversight I made. Sorry. Cheers, Derek |
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I wanted to mention A canadian discount broker called Questrade which charges $17.95 per trade with no additional fees or adminastration costs. Question for Derek: Have you ever looked into Exchange-Traded-Funds called "i-units"? |
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The strategy also includes reducing non life enhancing expenses. It's the dual approach of increasing passive cash flow and decreasing expenses that really shortens the trip to financial freedom. Loved the book so much that I actually plunked down money to buy it (Derek, why isn't it listed on amazon.ca?). I employed a similiar strategy with very similiar results (ironically by the same age). So it works. |
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Miller, I don't buy EFTs. I prefer to "put my eggs in a few baskets and watch those baskets carefully". What I mean is that I have pretty strict criteria when choosing investments. Most investments are not worth owning at any price and I prefer to focus on the one's I'd like to own (when there's a temporary problem that drives the price down). Cheers, Derek (author STOP WORKING: Here's How You Can!) |
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I've been reading "The Intelligent Investor" by Benjamin Graham. I've become mostly convinced (and spent a lot of time thinking about my own risk tolerance) that he's right about the role of bonds. While they may not have the tax advantage of dividends and don't perform as well as stocks (generally speaking), I believe they have their place in the building of my portfolio of income producing investments. I plan on using Barclay's iUnits "iBonds" ETF of bonds as this accomplishes a lot of the criteria about buying bonds that Graham goes into. The proportion of bonds will be about 10% of my portfolio (currently it's made up entirely of equities). Some ETFs do hold primarily dividend yielding stocks. The problem is that the manager (or rather those making the decision of what belong in a given index or not) buys and sells them. While the capital gains are nice in some respects, selling deprives you of a continuing income stream in the form of a steadily increasing dividend. The only other ETFs I'm interested in are ETFs of income trusts. They produce a good yield and are a good diversivied product holding a lot of great income trusts that I am invested in anyway. I may allocate future income trust investments into such an ETF. So, iBond and income trust ETFs seem like a good addition to the strategy of buying dividend producing stocks. Other ETFs, don't seem so wonderful for "Stop Working" style investment goals. |
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LOL! I just took a look at a spreadsheet I have that outlines my portofolio and the income it's producing and how that stacks up with my inflation adjusted income desired at age 35. I'm only a few percent of the way there. I've got a little less than 10 years to make up the other 90-something percent. Lots more "hunting game" with stocks to go. |
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Naatans, Over time the dividends you receive will feed into your portfolio and help you reach your goal. So the beginning is the slowest, it picks up speed gradually after that! In addition, stocks seem to be rather expensive right now (especially the nice, stable dividend payers). Eventually something will happen that lets you buy them more cheaply. Best of luck! Cheers, Derek |
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I've bought and read your book. One thing in the book is that it assumes a relatively low marginal tax rate in all the calculations - especially the dividend calculations. If you were in a higher tax bracket, would your advice be different? I calculated that the tax rate on dividends would be around 32% for me for instance. Thanks |
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http://www.taxtips.ca/tax_rates.htm How unfortunate to be stuck with the > $100k income. If you're married I'd focus on maximum income splitting with your spouse. |
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or >$71k even. |
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Sandro, Glad you read the book. You raise a good point. The book focuses on only one tax bracket for simplicity. I felt if I included calculations for each tax situation, the main message would get lost and the book would become very boring. My goal was to convey my investment strategy in an entertaining and simple fashion. I feel the strategy is the best one for people in any tax bracket. I don't trust the "stocks always go up long-term" mantra, and so I would still advocate the approach of building up a cash-flow rather than looking at the nest-egg. I still think the type of investments (recession-proof, etc) are appropriate for any investor (with the checklist I outline). I am also pretty sure that the taxes you pay on dividend income is still lower than what you pay for employment income or interest income (correct me if I'm wrong here). Thanks for the comment, and feel free to ask any other questions you might have. Best of luck! Cheers, Derek Foster (author of STOP WORKING: Here's How You Can!) |
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In the section of the book that compares the income after working expenses (drycleaning, professional dues, CPP/EI, commuting, etc.,) with the income of a portfolio, it seems that you can have the equivilant available cash of a higher tax bracket while being in a lower one. It's also different province by province. Here in BC, I can get over 33000 a year in dividends without paying a single penny in tax thanks to the dividend tax credit combined with the personal basic tax credit. Other provinces aren't so favourably disposed towards dividends. |
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Here in BC, I can get over 33000 a year in > dividends without paying a single penny in tax thanks > to the dividend tax credit combined with the personal > basic tax credit. can you elaborate it ? I beilieve that personal basic tax credit in BC is around 7000 so you can have up to 27000 in dividend without being taxed ? |
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> can you elaborate it ? I beilieve that personal basic > tax credit in BC is around 7000 so you can have up to > 27000 in dividend without being taxed ? 33000 Grossed up to 41250 Canadian Tax Owing: 5695.20 + 1244.10 = 6939.30 Canadian Dividend Tax Credit: 5499.98 Canadian Personal Tax Credit: 1303.68 Canadian Tax owing: 135.64 BC Tax Owing: 2000.20 + 749.30 = 2749.50 BC Dividend Tax Credit: 2066.625 BC Peronsal Tax Credit: 524.89 BC Tax owing: 157.99 Total tax owing: 293.63 You're right-- it's a bit less than 33000 because the grossing up puts part of the earnings into the next tax bracket. Paying $293.63 in taxes isn't that bad. And if you really don't want to pay it, just make a donation or take some classes somewhere. You've got time afterall. Either way, paying 293.63 on 33000 of income is paying only .889% in income tax. If you want to pay no tax, I believe the number comes in around 29000 per year in BC. My initial figure of 33000 forget that the grossed up income is taxed before the dividend tax credit is applied, not after. |
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Derek, let me ask some hard questions. In an average year, what percentage of your pre-tax income do you pay in federal and provincial income taxes? In an average year, what percentage of your pre-tax income is derived from cash payments to you by the federal government like CCTB and the GST credit? |
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cfacfpcimfma, The amount of taxes I paid in the past was mostly dependant of capital gains I incurred - this was the biggest variable factor. My strategy evolved over time (which I outline in the book STOP WORKING), so I now try to avoid capital gains taxes (by not selling), and simply collect the dividends forever! When I retired, I projected that I would be paying a very small amount in taxes (with the dividend tax credit and deferred taxation on investment trusts) - but this would vary somewhat from year to year (as the amount that can be deferred with income trusts varies. The entire income tax I pay should remain below 10% and sometimes even be below 5%. Of course this figure is only income taxes and it excludes GST, PST, gasoline taxes, property taxes, and the like (which are difficult to avoid unless you want to live an impoverished existence, which didn't seem appealing to me). GST and Child Tax credits should make up about 15% of my pre-tax income. This is an estimate and depends on future policies created by future governments. Hope this helps. Best of luck on your future success! Cheers, Derek |
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Derek, you wrote The entire income tax I pay should remain below 10% and sometimes even be below 5%. Of course this figure is only income taxes and it excludes GST, PST, gasoline taxes, property taxes, and the like (which are difficult to avoid unless you want to live an impoverished existence, which didn't seem appealing to me). GST and Child Tax credits should make up about 15% of my pre-tax income. I appreciate your desire to point to other taxes you pay like GST, PST, gas, property, etc. as evidence that you are paying your fair share. You do get roads to drive on, an assurance of medical care, fire protection, and education for your children, et cetera out of such monies. With your income taxes not covering your tax credits, your family appears to be a net drain on Canadian government finances, i.e. a net drain on your fellow citizens' wallets. If you were 34 and had tucked enough away that you could support yourself and your family out of your own resources, then that would be admirable. If you were 34 and unable to support yourself because of some misfortune, then there is an argument for some implied social contract that would support the less fortunate among us. However, you were 34 and able-bodied when you decided to stick other people with part of your family's normal living expenses. Why does the world owe you a living? |
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cfacfpcimfma, It doesn't owe me a living. I have paid thousands of dollars in capital gains taxes over my lifetime (much more than the vast majority of Canadians). I have been a net contributor to the system, not a "drain" as you mention. I addition, I collect some foreign dividends which I then spend here in Canada, stimulating the economy. I disagree with your conclusion, but to be fair, you've only been given half the picture. Best of luck. Cheers, Derek |
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> > can you elaborate it ? I believe that personal > basic > > tax credit in BC is around 7000 so you can have up > to > > 27000 in dividend without being taxed ? > > 33000 Grossed up to 41250 > Canadian Tax Owing: 5695.20 + 1244.10 = 6939.30 > Canadian Dividend Tax Credit: 5499.98 > Canadian Personal Tax Credit: 1303.68 > Canadian Tax owing: 135.64 > > BC Tax Owing: 2000.20 + 749.30 = 2749.50 > BC Dividend Tax Credit: 2066.625 > BC Personal Tax Credit: 524.89 > BC Tax owing: 157.99 > > Total tax owing: 293.63 > > You're right-- it's a bit less than 33000 because the > grossing up puts part of the earnings into the next > tax bracket. Paying $293.63 in taxes isn't that bad. > And if you really don't want to pay it, just make a > a donation or take some classes somewhere. You've > got time afterall. > > Either way, paying 293.63 on 33000 of income is > paying only .889% in income tax. If you want to pay > no tax, I believe the number comes in around 29000 > per year in BC. My initial figure of 33000 forget > that the grossed up income is taxed before the > dividend tax credit is applied, not after. thanks for the breakdown, naatans. So I guess "stop working" thing should work as long as enough dividend income ( 33000 in dividend is A LOT ) can be generated every. BTW, what about US stock which also distributes dividend ? I guess it will be taxed differently , right ? |
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Foreign dividend income is taxed just like earned or interest income. At the full marginal tax rate. This isn't as good as Canadian dividends, but it's still not punishing you for holding foreign stocks. It also makes foreign fixed income securities (like US Bonds) equally attractive. One might also be tempted to place foreign dividend producing stocks and Canadian & foreign bonds into an RRSP for the tax benefit. This will work fine until you hit 69 where you'll have to begin withdrawing the principle. This could force you to sell at a very bad time. What I'd do is strategically begin selling US stocks off at 60-65 and only have fixed income securities until it gets converted into a RRIF. My plan is to only have fixed income securities in my RRSP and to have the majority of my portfolio be non-registered dividend producing stocks (mostly Canadian, some foreign) |
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Naatans, Not to be **** or anything, but with foreign dividend income, you actual pay a 15% witholding tax and then pay tax at your top marginal rate on the dividend income (at least for US shares). There is a small seciton in the tax form where you can recover some of the witholding tax. I find the way foreign dividends are taxed makes them somewhat unappealing, but this is offset by the fact that some foreign companies (mostly American) are really great companies. If the Canadian economy were bigger and we had more stellar companies, I would not have bought any foreign shares. But as this is not the case, my strategy is the same as your future plan for your non-registered account (dividend shares - mostly Canadian, but mixed in with some investment trusts). Cheers, Derek |
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Bonsoir Derek, Mes hommages! Tu mentionnais vouloir perfectionner ton françs, alors je t'éis dans la belle langue de Moliè. J'ai 30 ans. Je me suis procuréon livre au Chapters de Ottawa (Marchéy). J'ai eu un immense plaisir à e lire et cela a é le sujet de conversation de toute une soiré J'y voyais un peu de "Pè pauvre, pè riche", mais avec toute la perspective canadienne. Je suis enseignant depuis 5 ans à ttawa. Aucune dette, une voiture neuve (jetta tdi) payéCash". Nous préyons , ma copine et moi faire l'acquisition d'une proprié bientôOutre les REER, le fond de pension des enseignants, je n'ai aucun investissement. J'ai fais quelques dollars avec Nortel, sans plus... J'ai adoréon volume. Cela m'a permis d'ouvrir mes horizons. Il ne me reste qu'à onter un portefeuille...et laisser l'argent travailler pour moi (un joli hobby !) Je suis trèheureux d'avoir eu l'occasion de t'éire. Longue vie à oi et à oute ta famille! Karlito |
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Bonjour Karlito, Je veux perfectionner mon francais, mais je trouve que sais tres difficile! J'ai appris francais en ecole, mais quand j'ai habite en Korea, j'ai appris Korean. Maintenant, quand je veut parler francais, j'ai fait une melange avec les deux langues! I'm sorry for all the mistakes! I would like to improve my French (which should be pretty easy as I have a lot of room for improvement!). I read what you wrote and I think I understand most of it. I'm glad you enjoyed the book - I hope it will help you. Cheers, Derek |
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Newsgroup, Just in response to your post regarding the fact that $33,000 in dividend income is a LOT! You're absolutely correct here. If you managed to buy stocks which yeild an average of 3% (realistic right now), you'd need $1 million to retire! That's much more than I have. The key is that I added some income trusts (paying a yield of 10% or so) to the mix. This accelerates your journey to freedom. If one focuses only on paying NO TAX, you end up having the tax "tail" wagging the investment "dog". The STOP WORKING strategy focuses on good income in the form of dividends and distributions. The low taxes automatically follow. Cheers, Derek (author STOP WORKING: Here's How You Can!) |
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I forgot about the withholding tax-- I currently only own Canadian stocks & income trusts, so it hasn't come up for me yet. The 33000 was just an example of how high you can get and still pay next to nothing in income tax. Also, since the rate of return in your strategy only depends on the price going in (as there's next to no selling going on), increases in the stock price and dividends, should get the yield on the original investment above 3%. But I suppose that's more of a protection against inflation than a way to get closer to 33000. |
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Naatans, Either way, dividend income is taxed MUCH less than employment earnings. Your example shows this - the exact figure is not the most important fact (and it may vary slightly among provinces). Sort of makes you want to live off of passive income as quickly as possible. Cheers, Derek |
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How has increases in interest rates affected the price of all the banks? I was speculating that it would have an adverse affect |
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Good point, Hihger interest rates should reduce bank shares. This link is not as strong as a number of years ago as the banks have earned more money from service fees. Look at your bank statements and you'll see why. Derek |
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> the banks have earned more money from > service fees. Look at your bank statements and > you'll see why. Are there actually people left who pay service fees on basic checking/savings accounts? Why? |
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Yes there are! My friend just got charged $35 to reorder regular cheques and she has to pay 1.50 each time she writes one! When I asked her why she wouldn't switch banks, I got a blank stare. Banks don't necessarily have brand loyalty, but they have something that keeps people from going elsewhere. |
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I've used about 10 checks in the last 5 years. Mostly because I finished school, got a job, house, wife and that stuff. I understand there are all these people who don't want to change, and are willing to pay for it. But this will change, in time. |
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Then again, why don't more people use their LOC as an unlimited no-fee chequing account? Either it's harder to set-up than I thought, or the banks really frown upon it. I mean if you can do the entire thing on-line (transfer money into the LOC), then you wouldn't even have to face the tellers and their dirty looks. |
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Derek, Do you consider a "audio" version of your book? |
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I've been asked this a lot, so I might follow up with that soon. Thanks for the question. Cheers, Derek |
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Derek, Just finished your book today. Really enjoyed it! My husband and I really need to get started now. Wanted to know if you would give us a bit of advice..... we owe approx 70K on our house and no other debt and have been maxing our RRSP's (I know maybe not the best strategy)....we got badly stung by a financial planner.....who lost us a lot of $ and put our money in some bad things (Nortel,etc). We are now trying to recover some loses in the RRSP and get ahead. Most of this RRSP $ is now in money market mutual fund but we have them in a place where we can buy stocks. Would you recommend buying up stock now or waiting for the right price? (we have had the $ sitting this way for at least a year and have to stop procrastinating) WE aslo have about 20K saved in RESP for our 2 kids aged 5 and 3. This $ is also in money market mutual fund. Where would you put that? Last question: Sounds like best case is for us to try to pay off the house asap and stop saving RRSP but should we still save outside RRSP? If we could borrow $ from against the house should we use the dividend to pay down the mortage? Would this pay the house down faster but really cost us no more....write off the interest of the loan and use dividend payment to pay house and loan? How much would we need? thanks, barrie |
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barrie, Thanks for the info. There are a lot of factors to consider but I don't give speific financial advice for a few reasons - (the main one being legal issues). I'm glad the book has made you reconsider what you have been doing and perhaps you will choose a different path going forward. Best of luck! Cheers, Derek |
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barrie, If you're risk adverse and have a lot in money market funds, think about your rate of return after inflation. Money market funds return less than the inflation rate, so you're actually loosing money. Perhaps a monthly income fund is what you need? Two excellent ones are from TD and RBC. I choose RBC because it has more bonds than TD (even though it has a slightly lower rate of return). I don't need my RRSPs for another 20 years and therefore see the RBC Monthly Income fund as an "alternative" to bonds. The RBC Monthly Income had a 5 year compound annual return of around 12.5%. I do have a small amount in two bond funds from PH&N, but that's only to keep a perspective on the bond market and interest rates. |
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I truly enjoy this thread. It teaches me a lot about investing. More specifically in relation to the discussion about RRSP and building on Derek's (excellent) book, I am currently trying to figure out whether it makes the most sense to keep risky assets outside the RRSP, or inside. Conventional wisdom says they should be outside, not to risk losing valuable RRSP contribution limits. This would seem to work only at an early stage. Once you're getting closer to 69, I'm wondering whether it isn't more advantageous to put most of the risk in your RRSP, given that it's fully taxable money (vs. your non-registered account, whose capital is after-tax money). In other words, you get to play with money whose 30~40% belongs to the government anyway. I'm trying to put together an excel sheet that could oppose the two strategies but I was wondering whether anyone (including Derek) had already thought about this and would mind sharing? Note that risky assets usually bear more taxes (limited dividends, high capital gain volatility), and it's an additional reason why one would want to keep them in the RRSP. Thoughts? |
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Derek Foster: [Canada] doesn't owe me a living. I have paid thousands of dollars in capital gains taxes over my lifetime (much more than the vast majority of Canadians). I have been a net contributor to the system, not a "drain" as you mention.[/quote] Tell us how many "thousands of dollars in capital gains taxes" you have paid. Tell us how it stacks up against the five or six grand you collect every year in federal welfare benefits. |
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> Tell us how many "thousands of dollars in capital > gains taxes" you have paid. Tell us how it stacks up > against the five or six grand you collect every > year in federal welfare benefits. Dividend income implies ownership in a business that has also paid a ton of taxes. As a business owner, he has also paid tens of thousands of dollars in income taxes through the businesses he happens to have ownership interests in. If anything, the taxes on dividends are far too high. After all, it does represent after-tax income, since the income was already taxed within the corporation itself. |
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cfacfpcimfma, First off, let's clear this up. I have NEVER received any welfare. The issue we're discussing here is GST/Child Tax Credits. To claim that I am or have received welfare is just plain wrong. As to how many thousands in capital gains taxes I have paid, I don't know the exact figure, but it dwarfs the amount I have received in tax credits. I have no interest in going over a dozen or more years of tax info just to answer your enquiry. Suffice it to say the amount is a LOT. If that answer is not to your liking, I can make a proposal. I will refund all the Child Tax Credits and GST credits I have ever collected to you personally! Then you can refund all the capital gains taxes I have paid over my lifetime out of your personal funds. We can deposit the money "in trust" with a lawyer and sign the agreement. Deal? Cheers, Derek |
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Derek, What is your take on tax liens in Canada? Supposedly, we are to gain a higher rate of return in liens than stocks. Why would we not pursue this avenue then? |
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Nelly, I'm not familiar with them, but usually there is no "free lunch". If the projected rate of return is higher, usually the risk is as well. Do these pay a regular, secure cash payment. Please send a little more info. Cheers, Derek |
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Derek, Here is an excerpt from "Profit by investing in Tax Liens: Earn safe, secured and fixed returns every time" by Larry B. Loftis, Esq. Every state and county in the USA levies property taxes on real property. Property taxes are also levied in Canada. With exceptions to Indian reservations, every property has taxes due on it each year. Each year, the local taxing jurisdiction (usually the county) will assess taxes on each property and send the owner of the property a bill for the taxes due from the prior year. If the owner does not pay his bill by a certain date, the county (or city in some cases) will levy a lien against property for the amount of the tax bill. In addition, the county will charge interest and costs the the owner. The lien is then auctioned off to an investor. At the auction, the price of the lien and/or premium and/or rate of return will be decided, based on the where abouts of the auction. For example, a $1000 lien can be auctioned off an a bid down system, where the interest rate among investors is bidded down and awarded to the lowest bid. Other counties have a set return, but the premium on the $1000 lien is bid up, and there is hyrid too I believe. Anyway, when the property owner pays off the property bill, he has to pay the county the delinquent taxes, plus interest and/or penalty, and the county immediately cuts a cheque to the investor for his initial principal plus the interest rate or penalty return. In short, according to Loftis, everyone wins: the property owner gets additional time to pay the tax bill, the county gets the money it needs to run the local government, and the investor gets a nice, safe, secured return (excerpt pgs 12-13) If the property owner doesn't pay the taxes, then there are other procedures in place in which you can obtain property at a very cheap price, or they sell the property at a tax deed sale, and you still receive your interest. The problem I am finding is that I cannot find out if or where to buy these liens in Canada. I just thought you might have an inside track on them. Thanks, Nelly |
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Foster: First off, let's clear this up. I have NEVER received any welfare. The issue we're discussing here is GST/Child Tax Credits. To claim that I am or have received welfare is just plain wrong. Sorry, Derek. Any government income support program that cuts off because your other declared income gets too high is welfare. You can shut your eyes and plug your ears and sing na-na-na, but facts are facts. As to how many thousands in capital gains taxes I have paid, I don't know the exact figure, but it dwarfs the amount I have received in tax credits. I have no interest in going over a dozen or more years of tax info just to answer your enquiry. Suffice it to say the amount is a LOT. That's pretty impressive for a guy who, according to the Globe, was in university a dozen years ago and out of this country for at least half of the time since. You can't have more than half a dozen Canadian tax returns with capital gains on them. How long could it take to add six numbers? If that answer is not to your liking, I can make a proposal. I will refund all the Child Tax Credits and GST credits I have ever collected to you personally! Then you can refund all the capital gains taxes I have paid over my lifetime out of your personal funds. We can deposit the money "in trust" with a lawyer and sign the agreement. Deal? Add up the six numbers first and tell us what the total comes to. Any deal would have to include all previous and future CCTB and GST credits, BTW. nelly: The problem I am finding is that I cannot find out if or where to buy these liens in Canada. They don't exist in the same form in Canada. When back taxes are sold by municipalities, there are usually strict limits on the interest rate obtainable. You're wasting your time looking. |
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cfacfpcimfma, By your definition, anyone who collects Child Tax Credit, GST credit, or Old Age Security is on welfare? I don't agree, but then we're getting off topic.... I don't have all my income tax returns going back 17 years. I do know that if I cystalized my current gains sitting in my portfolio, I'd owe over $50,000 in capital gains taxes (prior to 1972, I'd owe nothing - they weren't taxed then). But my strategy is to defer taxes indefinately by buying and holding and simply collecting the dividends. That's a cornerstone of my investing philosophy. I'll owe these taxes (plus a whole lot more) at the time of my death. Of course, I'd also like to defer death indefinately, but somehow I don't think I'll be as successful on that front. But I can "buy" more time by retiring early and living out my dreams now, rather than following the standard dogma of working to enjoy my "golden years" after I'm 60 - that's the premise of the book. Cheers, Derek |
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> Sorry, Derek. Any government income support program > that cuts off because your other declared income gets > too high is welfare. You can shut your eyes and plug > your ears and sing na-na-na, but facts are facts. Load o' Crap. The tax code specifically spells out that we are entiteled to all benefits given under the tax code. Benefits under the tax code are given for a reason: to encourage and discourage certain behaviors. Carrying out an encouraged behaviour and gaining your legal benefit from it is not the same as collecting income because you can't or won't support yourself. Also, if in the colletion of taxes, the government decides that collecting it at certain rates from certain income levels wouldn't be right/beneficial for the country and it's citizens, giving it back isn't welfare, it's a lower tax rate. Pitzel's point on Dividend taxation is excellent. Canadian corporations are already taxed for income and then the same income is taxed again when it passes to the shareholder. As a business owner (which is what owning stocks really is), someone in Derek's position is certainly paying their share of taxes through the businesses of which they own pieces. It certainly makes sense to claim the benefits one can recieve. Would you turn down an RRSP credit because getting that money back from the government is "welfare?" That tax credit has a cut off based on income too. As I said, Load O Crap. |
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Derek: By your definition, anyone who collects Child Tax Credit, GST credit, or Old Age Security is on welfare? I don't agree, but then we're getting off topic.... We disagree then. Everyone else can make up their own mind about how to characterize government programs which pay people who make up to around $20,000 taxable per year, a little more if they have children, but cuts them off if they make more. To me, it sounds like every other welfare program. But I can "buy" more time by retiring early and living out my dreams now, rather than following the standard dogma of working to enjoy my "golden years" after I'm 60 - that's the premise of the book. As I started out saying, that's a wonderful goal. More people should shoot for it. I just don't think it's fair to stick someone else with the tab and then hold it out as a model for what others should do. It's great if people can retire at 34, but try taking a wider perspective. How could everyone retire at 34 if everyone was filching 15% of their income out of their neighbours' wallets? naatans: The tax code specifically spells out that we are entiteled to all benefits given under the tax code. Benefits under the tax code are given for a reason: to encourage and discourage certain behaviors. Carrying out an encouraged behaviour and gaining your legal benefit from it is not the same as collecting income because you can't or won't support yourself. Perhaps you have not noticed, but Derek doesn't want to support himself. He could work, he could make more money, but there are things more important to him. That's cool. I can buy that. There are things more important in life than money. If he lived like that, I would pat him on the back. Instead, he is taking money from other people via the government because he has something else he prefers to do. That's not cool. IMHO. As a business owner (which is what owning stocks really is), someone in Derek's position is certainly paying their share of taxes through the businesses of which they own pieces. It certainly makes sense to claim the benefits one can recieve. The tax system makes an allowance for that. The dividend tax credit on individual returns is an attempt to compensate for taxes paid at the corporate level. Would you turn down an RRSP credit because getting that money back from the government is "welfare?" That tax credit has a cut off based on income too. It's very bad luck for you to ask me that question. Given a choice between an upfront tax deduction with full taxation on withdrawal and no tax consequence on either contribution or withdrawal - like an IRA versus Roth IRA in the States - I would take the second. But that's just me. |
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cfacfpcimfma, As I stated earlier, I pay more in even capital gains taxes then I collect in these tax credits - so how am I taking money from other people? I can't be taking from others if I'm putting more into the tax system then I am taking out. For a little history: - prior to 1917, there was NO INCOME TAX (it was a temporary measure to pay for the war). Then over time in increased - and government services increased also. - prior to 1972 there was NO CAPITAL GAINS TAX (why have double taxation?). Then the government created this tax and used it to pay for more services..... So over time, the government has taken more, and given more. I would be perfectly happy to refund all the child tax I ever received and get back all the capital gains taxes I paid - I would be in a much better position (financially). But I have to follow the rules that have been set out. Cheers, Derek |
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Of all the loads-o-crap that appear in these forums from time to time, its difficult to decide which of the following three gems would take the prize for widest & deepest. >.. if in the colletion of taxes, the government decides that collecting it at certain rates from certain income levels wouldn't be right/beneficial for the country and it's citizens, giving it back isn't welfare, it's a lower tax rate. The CCTB is not a form of tax reduction. It is a HANDOUT, pure and simple. How else would people who pay NO TAXES be eligible to receive it? According to CRA, the goals of the CCTB are:. 1. to help prevent and reduce the depth of child poverty; 2. to ensure that families will always be better off as a result of parents working I doubt that Derek.s children are at risk of experiencing poverty, or that their family would suffer (monetarily) if Derek or his wife were to get jobs. So they would seem to fall outside of the intent of the program, if not the letter of the qualifying criteria. This is not the gov.t .giving back. money that Derek paid in taxes, it is the gov.t handing him money that they collected from his hard-working neighbors. >..As a business owner (which is what owning stocks really is), someone in Derek's position is certainly paying their share of taxes through the businesses of which they own pieces. No. The taxes paid by the businesses are not taxes paid by Derek. They do not in any way reflect Derek.s .fair share. I agree that the double-taxation of dividends is a concern. The tax credit goes some way toward addressing that, but I wouldn.t be opposed to amending the structure even further. Still - none of that justifies taking money away from Derek.s neighbors, in order to give it to him. >..Would you turn down an RRSP credit because getting that money back from the government is "welfare?" That tax credit has a cut off based on income too. Firstly, there.s no such thing as an RRSP credit -- it is a deduction. And secondly it is never cut off based on income. Even someone drawing a billion dollar annual salary can make RRSP contributions. It is beyond ridiculous to suggest that there is any similarity between claiming an RRSP deduction, and accepting a CCTB handout. Derek is seemingly able-bodies, educated, and intelligent. He should be capable of supporting his family out of his own pocket. But he has made a conscious decision not to support himself, but to accept handouts that take money out of his neighbors. pockets, and put it in his own. |
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Cardu, I'm going to make an assumption here that if you disagree with double taxation (as in dividend income), then you must also disagree with capital gains taxes - also a form of double taxation. I've paid more capital gains taxes than the vast majority of canadians and much more than I've collected in the child tax credit - so I'm not taking anything from anyone else - I'm a net contributor. Also, if you go to the CCRA, it says the CTB is ...to help families with the cost of raising children - and it isn't totally phased out until the family income exceeds $96,955. I don't think that's to avoid "child poverty". Cheers, Derek |
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>> >..As a business owner (which is what owning > stocks really is), someone in Derek's position is > certainly paying their share of taxes through the > businesses of which they own pieces. > > No. The taxes paid by the businesses are not taxes > paid by Derek. They do not in any way reflect > Derek.s .fair share. So Derek instructs the managers he has hired to run his business to pay tax on his behalf, from the treasury of his own business. How is that different than Derek writing the cheque to the CRA himself? Derek's businesses also employ tens of thousands of Canadians that pay copious amounts of income tax. If Derek's businesses didn't exist, then many Canadians would not have jobs and there would be little in terms of economic output. Quite frankly, it is because of underinvestment, and such a staunch committment to the socialist principles you espouse in Canada that is keeping individuals such as Derek out of quality employment. For example, few employers in Canada would probably appropriately accomodate the legitimate need for Derek and his wife to properly nuture their children through reasonable telecommutting options. Few employers provide reasonable on-site daycare options for children of employees. And many employers are still stuck in the stone age with respect to accomodating childrearing individuals in many other ways that I cannot even begin to describe in this forum. |
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>..staunch committment to the socialist principles you espouse [pitzel] Since when are personal responsibility and self-sufficiency socialist principles? Socialists despise those principles. These aren.t Derek.s businesses, he didn.t hire any managers to run them, and he can.t issue instructions to anyone. If he tried, he.d be escorted to the door by security. He owns a tiny handful of shares (tiny being the key word). He had no part in providing employment for the thousands of employees of these businesses, and the fact that those employees pay taxes on their income is entirely irrelevant to the discussion at hand. The effect on the economy if these businesses didn.t exist is another bizarre bit of irrelevance, as are the comments re: telecommuting and daycare. In any event, you.re missing the point. The fact that these businesses have already paid tax on their earnings is recognized in the dividend tax credit, and the dividend tax credit is the reason that Derek already paid next to no tax on his Canadian dividend income. Clearly, the only reason Derek paid any tax at all is that he also had some combination of rental property income, foreign dividend income, and maybe some ordinary income from income trust distributions (all of which are taxed at a rate 5 times higher than dividends (in Derek.s tax bracket)), and perhaps some capital gains (which are taxed at a rate 2.5 times higher than dividends). Whatever Derek.s .fair share. of tax might be, it is based on his overall taxable income, not merely his dividend income. To argue that he or any other investor should have their .fair share. of tax on other income sources forgiven, simply because they own a couple of shares of common stock, is lunacy. Derek; I have the greatest respect for what you.ve accomplished in your investing, but.. >.. you must also disagree with capital gains taxes - also a form of double taxation. I would support further reduction in the inclusion rate for capital gains tax, since it.s an impediment to investment. But there is certainly no double taxation in it. Who else paid tax on your speculative profits other than you? >..Also, if you go to the CCRA, it says the CTB is ...to help families with the cost of raising children - and it isn't totally phased out until the family income exceeds $96,955. I don't think that's to avoid "child poverty" There are different components to the CCTB, and the basic benefit is, as you say, more universal. But I wasn.t making those words up - I was quoting directly from CRA. Does the benefit you receive include any amount attributable to the National Child Benefit Supplement? That portion of the CCTB is intended, and I quote . .to help prevent and reduce the depth of child poverty.. It starts phasing out at about $21k family income, and is phased out entirely by about $35K. You may not think so, but CRA says its to avoid .child poverty.. >..I've paid more capital gains taxes than the vast majority of canadians and much more than I've collected in the child tax credit - so I'm not taking anything from anyone else - I'm a net contributor. OK . so you.ve paid some capital gains tax in the past. Big deal. Those taxes were the price you pay when you make substantial profit from speculative trading. They were not some .savings account. set aside for you to draw cash out of later. In any case, whether you are a net contributor or not isn.t measured on a cash in / cash out basis. You draw (as do we all) substantially more out of the system than merely cash handouts. |
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Sorry to be technical, Cardhu, but it is a credit. Check the tax code. It's a non refundable credit. Describing it as a deduction is accurate, but "credit" is the most accurate term and the one used in the code, on the tax forms and the like. |
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Derek Foster: As I stated earlier, I pay more in even capital gains taxes then I collect in these tax credits - so how am I taking money from other people? That isn't what you stated earlier. Your earlier statement is that you have already paid so much capital gains tax in the past that what you collect now is a mere pittance by comparison. You have refused to review old tax returns to put a number to that claim because it would be too much work. Fine. Forget digging through old records. Just pull out your 2004 return - it was only a few months ago - and tell us whether you paid more or less in capital gains tax for 2004 than you collected in CCTB and GST credits. I can't be taking from others if I'm putting more into the tax system then I am taking out. If only you were. For a little history: ... Maybe this sort of pedantry and obfuscation works on the ignorant but let me give you a clue. Always presume that the person you're speaking to knows as many or more facts than you do. The history of income and capital gains taxes in Canada is irrelevant to the question of whether you are a net drain on your neighbours' finances. capital gains taxes - also a form of double taxation. Let's see you defend that bald assertion. You invest $100, you sell for $150. How is the $50 difference "doubly taxed"? I've paid more capital gains taxes than the vast majority of canadians and much more than I've collected in the child tax credit Yet, challenged to put a number to that claim, you beg our indulgence because you can't be bothered to root through old records. I'll say again what I said above. The G&M review of your book says you were a student until at least the early 90s. You could not have paid many capital gains taxes in those years. The G&M review says you were outside Canada for five or six years after university. You could not have paid any capital gains taxes in those years because you weren't a resident. That gives you 5-7 years in which it was possible that you might have paid capital gains taxes. Of course, adding up 5-7 numbers is too much for a busy fellow like you. Meanwhile, the federal government is paying you $470 a month in CCTB and probably another $200 a quarter in GST credits, about $6500 tax free every year. pitzel: such a staunch committment to the socialist principles you espouse in Canada that is keeping individuals such as Derek out of quality employment. The only thing that keeps Derek unemployed is Derek. He has found a comfortable spot where the unintended effect of rules set up to help the really unfortunate is to drip other people's money into his own pocket, even though he isn't the least bit unfortunate. few employers in Canada would probably appropriately accomodate the legitimate need for Derek and his wife to properly nuture their children through reasonable telecommutting options. It's no surprise to hear this argument. Derek has kids so employers now have an obligation to furnish a telecommutable job. Few employers provide reasonable on-site daycare options for children of employees. Derek has kids so employers now have an obligation to furnish daycare. It just never ends, does it? Derek is X or Derek has Y, so someone else owes Derek something. How convenient for Derek. The world owes him. naatans: [Re RRSP contributions]: Sorry to be technical, Cardhu, but it is a credit. Check the tax code. It's a non refundable credit. It's a deduction. You don't know what you're talking about. |
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> naatans: [Re RRSP contributions]: Sorry to be > technical, Cardhu, but it is a credit. Check the tax > code. It's a non refundable credit. > > It's a deduction. You don't know what you're talking > about. Ummm. I said it is accurate to call it a deduction. Are you having reading comprehension issues? It's simply *more* accurate to call it by it's proper term, "a non refundable tax credit." Just like the basic personal tax credit, old age credit, etc., etc.,. Check the forms and tax code for yourself. Though this is completely a side issue. > It just never ends, does it? Derek is X or Derek has Y, > so someone else owes Derek something. How convenient for > Derek. The world owes him. Bitter much? Pitzel outlined quite accurately the way that business owners contribute to the economy and the government's tax revenue. Just because you keep insisting collecting CTB while living off dividend income makes one a negative drain on the country doesn't make it so. Also, no one's obligated to discole their private financial information on a web forum. He can say "I pay more in capital gains taxes than the CTB + GST credit" and you can say "No you don't!" but what good is it? You can make some extrapolations about his potential capital gains given the information that you have, but no one needs to justify themselves to you. Would you spell out financial details on a public web forum? Your userid gives you the ability to do it anonymously. Derek Foster doesn't have that luxury. Also, you're twisting Pitzels statements about the furnighing of telecommuting/daycare benefits into some sort of obligatory requisite for employers. He made statements that few do offer them, and nothing to the effect that they must. It's simply a matter of priorities when one has children and the difficult choices one faces in those situations. I know a couple who recently woke up and realised that the cost of daycare, the extra car, etc.,. was more than the husband was making at work. So he quit and stayed home with the kids. Now they collect CTB. Is he on welfare too because he chose time with his children over working? Derek's children (and any others who have the benefit of *present* parents) will be richly rewarded by spending time with their parents during their formative years. If you think that someone living off of the proceeds of their investments shouldn't recieve CTB or GST credits (which IS a return of taxes paid), talk to your local MP rather than whining about it on a web forum. Until such a change is made, it would be stupid for someone with kids not to take advantage of all the benefits offered to them. |
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cfacfpcimfma, I made you an offer to refund all the tax credits if you refunded all the capital gains taxes I paid (which you declined). I also mentioned that I have roughly $50,000 capital gains taxes owing in my current holdings. I'm telling you I've paid much more in taxes than I've collected, but you don't believe me so that's okay - we agree to disagree. I'm sorry I upset you with the history of taxation. I was simply trying to show that over time the Canadian government (rightly or wrongly) have introduced more taxes and also offered more programs. I feel if I am paying taxes that weren't levied on previous generations, then I should also collect the benefits that this new taxation pays for. If you disagree, then again, we agree to disagree. This would be a topic for political discussion..... I was not trying to say I know more about taxation than you do. In fact, on page 128 in my book I state, "I am not a tax expert, although I know certain key points about our tax system." Maybe you are much more knowledgeable about taxation than myself - or anyone else on this board. I do know how taxation affects investment decisions very well - that was a key to my retiring at 34 (but I'm not saying I know more than you). I was not trying to challenge you on this - and I'm sorry that I upset you. Anyhow, we can debate endlessly and never reach a final "answer". cfacpcimfma, you seem pretty knowledgeable about investing, so what do you think of my strategy of buying and holding stable, recession-proof stocks and deferring taxes as long as possible and just collecting the dividends? How about my strategy for not being dependent on the ups and downs of the stock market? Let me know. All the best. Cheers, Derek |
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calm down guys -- it's a moneysense forum, not a juridical one. you might not agree what Derek did but I didn't see any difference between him and many other "investors" --- eventually he will( or could have done ) pay capital gain tax back to the society , he basically just defer it to when he feel like to. As to CTB, he is legally eligible for that benefit or you can call any family under income of 96K as a "welfare collector". |
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Dear MoneySense Investors: I have read the last number of replies and noticed it has migrated into a: 1) "personal" attack on Deryk 2) That 1) above then manifests itself into analysis of the role, impact of the Canadian "handout"/"entitlement"/"special pleading" culture which is frankly destroying Canada. I am responding because the thread is moving towards my main irritant about Canada - the "entitlement mentality" and the tax that is necessary to support and expand same. So I respond and expect to get blasted. This tread would not exist if Deryk had to finance Deryk's lifestyle of choice himself without any government support. I have "stopped working" because I lived so far below my middle class means that I saved the cash - separate from investing income. I did without kids, cars, consumer goods, magazines, cigs, alcohol, trips to Florida, CD's, marble counter tops etc. I relied on limited to no gov't credits (basic exemption, dividend tax credit, capital gains and the moving credit, thats it) but payed alot of tax. I moved 3x across Canada for work and have done well. I did not sit around and whine like many Canadians in underdeveloped areas. I expect all other Canadians to get up and move and find work instead of waiting for a gov't handout while they sit next in a dead mining town etc. I therefore resent paying for any other Canadians lifestyle unless you are burdened with bad luck (mental illness, accident, poor health due to no fault of oneself) or have served the country in war. How dare anyone presume to take my money when I worked to save it by making responsible decisions. This entire discussion on tax credits etc is based on the never ending expansion of the personal/corporate/provincial welfare state in Canada and the whining about how much I get vs someone else (the recent posts). It is pathetic. I am ready to be blasted by the vast majority of people in Canada who rely, adore and wish to expand the role of gov't and the size of the social welfare state. This country would be better off cultivating a culture of innovation, responsibility and being accountable to fund your own lifestyle expenses (funding sources: individual hard work, family, church, cultural groups, private donations AND doing without). Past generations of Canadians operated this way. In the 1960's, people and families transfered their individual accountability to the government - this happened at the same time in Germany, England and to a lesser extent USA. The brutal fact is that not all people are "equal" and not all people are "equally deserving" - I acknowledge that concept is non Canadian! If anyone wants a certain lifestyle, work, scrape, save, innovate and do it yourself. Want kids - pay for it yourself. Tax policies should force people to get up, move, innovate, share apts with others, avoid costly lifestyles, move to find work etc - it would be a very hard slog, but result in independent and resourceful citizens. But then, in Canada, that is exactly the political plan of the federal Liberal party - once most Canadians are on gov't handouts, they WILL ALWAYS VOTE LIBERAL to keep their cash flow arriving. The success of the plan is obvious. The buck is going to end at some point in the G8 countries with big social welfare overhead (check out the economic disaster in Germany) - because our cost of doing business is huge and our overseas competitors will beat us on cost. Anyways, that is my take on this specific post, the attacks on Deryk's past tax situation and the impact of the social welfare state that generated the post in the first place. "Entitlement jealousy" is the current and future of Canada. InvestingQueen |
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naatans: Ummm. I said it is accurate to call it a deduction. Are you having reading comprehension issues? It's simply *more* accurate to call it by it's proper term, "a non refundable tax credit." Just like the basic personal tax credit, old age credit, etc., etc.,. Check the forms and tax code for yourself. RRSP contributions are deductible under s.60(i). Unlike all the tax credits you have named, RRSP contributions are more valuable to high income taxpayers because they are deductions, not credits. They save taxpayers money at marginal rates. Credits other than charitable contributions operate only at the lowest marginal rate. Give it up, naatans. Be a mensch. Admit you're wrong. It's easily done. Just because you keep insisting collecting CTB while living off dividend income makes one a negative drain on the country doesn't make it so. I live off dividend income right now. Send me $500 a month out of your bank account, like Derek is collecting, and then tell everyone that I'm not a drain on you. Also, no one's obligated to discole their private financial information on a web forum. I asked him and he didn't come up with it. So I asked again for a simple comparison for last year alone and ... He can say "I pay more in capital gains taxes than the CTB + GST credit" and you can say "No you don't!" but what good is it? ... notice that his 2:04 pm message does not address the topic. It makes you wonder, doesn't it? I'll bet Derek paid 0 in capital gains taxes in 2004 and collected $6500 in CCTB and GST credits. That's why he won't answer. no one needs to justify themselves to you. I am not asking him to justify himself to anyone. I am just asking him to admit what he's really doing: subsidizing his lifestyle choices with other people's money. It's simply a matter of priorities when one has children and the difficult choices one faces in those situations. Okay, but what about the choice that was made to have the children in the first place? Why does everyone else get to pay for that choice? Derek's children (and any others who have the benefit of *present* parents) will be richly rewarded by spending time with their parents during their formative years. True but, as they are Derek's children, then Derek should be footing the bill, not his neighbours. If you think that someone living off of the proceeds of their investments shouldn't recieve CTB or GST credits (which IS a return of taxes paid), talk to your local MP rather than whining about it on a web forum. Until such a change is made, it would be stupid for someone with kids not to take advantage of all the benefits offered to them. I have tried. Politicians are idiots and my MP is no exception. As for your final sentence, you are just advocating a society full of looters. Be careful what you wish for. Derek: I made you an offer to refund all the tax credits if you refunded all the capital gains taxes I paid (which you declined). Ahem. I asked for further clarification, which would have required you to sum half a dozen numbers. You declined to provide that information. what do you think of my strategy of buying and holding stable, recession-proof stocks and deferring taxes as long as possible and just collecting the dividends? It's great. How about my strategy for not being dependent on the ups and downs of the stock market? I am not sure what you mean. I guess you can tell I don't approve of one component of your not being dependent on the market. investqueen: This tread would not exist if Deryk had to finance Deryk's lifestyle of choice himself without any government support. The thread might but this latest argument wouldn't. What I wrote to Derek in my first post in the thread stands. "If you were 34 and had tucked enough away that you could support yourself and your family out of your own resources, then that would be admirable." |
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cfacfpcimfma, "I'll bet Derek paid 0 in capital gains taxes in 2004...." Okay, I'll agree to that bet. What's your wager. Let's put the money in trust with a lawyer ASAP. Talk is cheap, so let's put our money where our mouths are. How much do you wager? Cheers, Derek |
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cfacfpcimfma, "I'll bet Derek paid 0 in capital gains taxes in 2004...."[i] Okay, I'll agree to that bet. What's your wager. Let's put the money in trust with a lawyer ASAP. Talk is cheap, so let's put our money where our mouths are. How much do you wager? Cheers, Derek |
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Hey, I finally got a rise out of you. Let's see if we can get an answer to my very simple question now. Just pull out your 2004 return - it was only a few months ago - and tell us whether you paid more or less in capital gains tax for 2004 than you collected in CCTB and GST credits. No actual dollar amounts required, no detailed disclosure of your finances. A one word answer, "more" or "less", will be fine. |
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cfacfpcimfma, More. Cheers, Derek |
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> Give it up, naatans. Be a mensch. Admit you're > wrong. It's easily done. Check the basic tax forms. It's under tax credits. I always agreed that they are deductions. This is splitting hairs. Perhaps the most accurate way of putting it is that it is a deduction that produces a non refundable tax credit? Either way, they are money back from the government that is cut off at a certain income-- so I used it as an analogy to welfare to demonstrate the shortcomings of your definition of welfare. > I live off dividend income right now. Send me $500 a > month out of your bank account, like Derek is > collecting, and then tell everyone that I'm not a > drain on you. Do you have a legal reason (like children or some other eligibility for the money)? If you do, you can have my money distributed to you through the proper channels (ie out of tax revenue from the government). If not, then you're not legally entitled to any of my money. Derek apparently is though. > I am not asking him to justify himself to anyone. I > am just asking him to admit what he's really doing: > subsidizing his lifestyle choices with other people's > money. I don't believe he's doing that. But your point is fair enough even if I do disagree with it. Every time we take advantage of something provided by tax revenue, we're subsidizing our lifestyle choices with other people's money. Say we figured out the per-citizen cost of all our programs and decided that anyone who didn't actually contribute that amount or greater would be cut off. What would happen? Should we disallow poor people to drive or take transit because they haven't paid their fair share of the roads? Should the fire department let their house burn down because they pay too little in taxes? What about health care? Not everyone can contribute a net gain to the government's tax revenues. Even if Derek didn't contribute a net gain (which I believe he does as he has stated so and the companies that he owns pay taxes on his behalf), I'd have no problems with him driving, having a fire put out, going to the hospital or recieving CCBT. > True but, as they are Derek's children, then Derek > should be footing the bill, not his neighbours. But his neighbours decided they should through Canada's governmental system. He's elegible for the benefit and contributes to the overall Canadian economy and the government's tax records. You say his contributions are negative to his gains. I say maybe not and take him at his word that his capital gains taxes alone cover what he's gotten through CBT. > I have tried. Politicians are idiots and my MP is no > exception. As for your final sentence, you are just > advocating a society full of looters. Be careful > what you wish for. I see your point. However, I don't agree with it. I think that the current income level cutoffs for CBT make sense and having it available regardless of the source of ones income (work, dividends, cap gains, etc.,). makes sense too. Taxes fund projects and programs that are supposed to be for the betterment of us all. There are times when we will all feel that some part or another is being abused. I don't believe someone living off of dividend income is abusing their situation by collecting CBT. I also don't believe that someone should decline a benefit because someone else doesn't like that they accept it. I'd also like to take the time to apologize for the times when I have become less than civil so far. I was also wrong to tell you to go talk to your MP about it. Talking about it here is part of the process. It might rub you the wrong way, but I'd recommend checking out Alan Dickson's book Free Parking. Here's a quote from the Thank You at the beginning of the book: "... To all those toiling to advance their social and economic status, determined to climb into the upper-income tax brackets. To the myriads of investment advistors and their devoted clients who have amassed hundreds of millions in RRSPs -- all to be taxed at a future date: you have my profound thank-you I go to bed content each night in the knowledge that your dedication and generous contributions to our tax system have secured my future benefits." |
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Even if you paid zero capital gain tax and received zero Child Tax Credits, you're still a net drain to the socialty unless if you live on the ocean. The socialty doesn't clean up your waste, and pave the roads for free. You pay taxes because you owe them. Don't mix this up with the CTC that you received. |
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> Should we disallow poor people to drive or take > transit because they haven't paid their fair share of > the roads? Should the fire department let their > house burn down because they pay too little in taxes? > What about health care? Not everyone can contribute > e a net gain to the government's tax revenues. "Poor" is a misleading word here. I think people who're both wealth and income poor should be allowed to drive. On the other hand, people who are wealthy and CHOOSE to be "income poor" shouldn't. |
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> > I live off dividend income right now. Send me $500 > a > > month out of your bank account, like Derek is > > collecting, and then tell everyone that I'm not a > > drain on you. > > Do you have a legal reason (like children or some > other eligibility for the money)? If you do, you can > have my money distributed to you through the proper > channels (ie out of tax revenue from the government). > If not, then you're not legally entitled to any of > f my money. Derek apparently is though. The original question is whether it's a drain, not whether it's legal. You can be immoral and legal at the same time. |
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@silverm: Replace "poor" with "those who pay less taxes than the cost-per-person of the services they use". My point was that if you figure out the average tax contributed by Canadian citizens and target those below average as free-loaders, you'll target half the country by definition. We *cannot* make things better for those who make less than us if we are unable to give up something to do so. The main complaint about someone who's living off of passive dividend income collecting these benefits is that we feel they're being misused/abused in that situation and are not going to those who are less fortunate or whom we feel "really need it." Say I work my butt off, saving and investing in companies until those companies I own supply a level of income I set as my goal, but make such that I qualify for tax credits, CCTB, GIS, OAS, etc.,. Here's a series of questions: Should I or should I not collect them? If I collect certain ones does that mean I'm a drain? Do certain ones mean I'm not a drain? Does everyone who accepts OAS count as a "drain?" Which ones can I accept before I'm a drain? I can calculate per-share how much in tax my businesses pay on my behalf. If I can show that my business interests contribute (or doesn't contribute) enough to cover the benefits, does that somehow justify or not justify my claiming them? The crux of it is that people *hate* paying taxes and seeing their contribution go to a use of which they disapprove. |
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> @silverm: Replace "poor" with "those who pay less > taxes than the cost-per-person of the services they > use". My point was that if you figure out the > average tax contributed by Canadian citizens and > target those below average as free-loaders, you'll > target half the country by definition. I've no problem helping the poor, but I'm targeting the ones who pretend to be poor. > I can calculate per-share how much in tax my > businesses pay on my behalf. If I can show that my > business interests contribute (or doesn't contribute) > enough to cover the benefits, does that somehow > justify or not justify my claiming them? Let's keep business taxes seperate from personal taxes. Businesses don't pay taxes on your behalf. A business is a draining entity just like a person. Businesses are also obligated to make their fair share to pave the roads, pick up the garbage, pay government employees, etc. |
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The problem with seperating business and personal taxes is that we are talking about the net gain/drain of a person. I'd say that all taxes connected by legal ownership to that person should be considered. I do think though, that when it comes down to it, it's simply a matter of people feeling that the certain use of tax credits or payments like the CCTB by people in certain situations isn't what they were intented for or not in line with their values. Such people feel robbed. Like the government took their money and gave it to someone it wasn't intended for. That's the real issue at hand, in my opinion. So any thoughts on my questions about which credits would be justifiably claimed by someone living off of dividend income? Which are not? |
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I don't know all the available credits to claim, but my take is.... If you're able and also young (like 34), then you shouldn't claim CTC, and you can't claim OAS legally anway. If you're able but old (65), go ahead and claim OAS, since no one wants to you to work till the end of your time. |
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My main message to Derek is that the taxes paid by you and your businesses are used to fund the public services received by you and your businesses. There's nothing or not much left for you to justify receving the child tax credits. |
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Derek: More [capital gains taxes paid than CCTB/GST received in 2004.] Thank you, Derek. I take back every nasty thing I have said or implied. As a net contributor and not a leech, you have every reason to be proud of being able to retire at 34. Keep it up every year from now on. naatans: > Give it up, naatans. Be a mensch. Admit you're wrong. It's easily done. Check the basic tax forms. It's under tax credits. Whether I check the Act, interpretation bulletins, or basic tax forms, RRSP contributions are deductions, not tax credits. Have a look for yourself on a T1. All the tax credits you listed are on Schedule 1, the tax computation. RRSP contributions aren't there. They are back on the basic form as a deduction on the way to net income. Be a mensch. Admit you're wrong. Do you have a legal reason (like children or some other eligibility for the money)? Legal schmeagle. There are bad laws and stupid laws but that wasn't your argument. Your argument was that collecting more in CCTB and GST credits than paying in tax wasn't a net drain on the country. By your own argument, shipping poor little me $500 a month out of your own bank account should not be a net drain on you. Be a mensch. Admit you're wrong. If not, I expect my first $500 payment by Monday.  Say we figured out the per-citizen cost of all our programs and decided that anyone who didn't actually contribute that amount or greater would be cut off. What would happen? [list of dire consequences omitted] Do you want my honest opinion? I believe I could solve the problem at one str oke. I think they shouldn't have the right to vote. I guess I'll never get elected. I'd also like to take the time to apologize for the times when I have become less than civil so far. That is very gracious of you. I apologize in turn. Alan Dickson He's a different kettle of fish entirely. Dickson is clearly a leech, is proud of being a leech, wants everyone to know that the rest of us are all suckers. He's got balls but he's got no one's respect either. silverm: The socialty doesn't clean up your waste, and pave the roads for free. In a shocking reversal, I will now take the opposite side. Derek pays property taxes and gas taxes and sales taxes. That should come close to paying for garbage and fire and roads and medical care. On the other hand, people who are wealthy and CHOOSE to be "income poor" shouldn't [be allowed to drive]. That's what gas taxes are for, not income taxes. |
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You were right about the RRSP thing. I was wrong about tax credit being more correct. Sometimes I get pretty certain about things I remember. Perhaps I should have listened to my own advice to go check the forms. > Legal schmeagle. There are bad laws and stupid laws > but that wasn't your argument. Your argument was > that collecting more in CCTB and GST credits than > paying in tax wasn't a net drain on the country. No, my argument was that people who are living off of dividend income have business interests that contribute on their hehalf and are not a drain. Not CCTB and GST in isolation. My argument was that CCTB is not the same as welfare. As for the GST credit, it's definitely a return of tax paid. The only problem is that it's a shot gun approach where you recieve an amount based on your income level rather than a rebate of the GST you actually paid. > By your own argument, shipping poor little me $500 a > month out of your own bank account should not be a > net drain on you. Yes. I agree. Thus I told you to collect it the proper way. I have no doubt that you or legally connected economic entities pay sufficient taxes to make you a net contributor. Go get it! Even if you weren't a net contributor, I'd say go get it on the hopes that the extra money might help the kids involved. That's one of the main goals of CCBT. > Be a mensch. Admit you're wrong. If not, I expect > my first $500 payment by Monday. You're welcome to it, just apply for CCBT like everyone else who gets it! Go on, I'm all for it! If you really insist on collecting it not from the government, I'll send you my share $500 divided by the tax paying adult population of Canada. You'll have to pay the postage though. Still interested? I'll await your self addressed stamped envelope. > Say we figured out the per-citizen cost of all our > programs and decided that anyone who didn't actually > contribute that amount or greater would be cut off. > What would happen? [list of dire consequences > omitted] > > Do you want my honest opinion? I believe I could > solve the problem at one str oke. I think they > shouldn't have the right to vote. I guess I'll never > get elected. I dare say you won't. I have some symphathies for your position though. Some part of me agrees that those who take the responsibility to contribute should also have the responsibility over how that contribution is used. I do find the idea of a income level requirment for voting thoroughly repugnant though. Perhaps equally repugnant to our current system ;] > He's a different kettle of fish entirely. Dickson is > clearly a leech, is proud of being a leech, wants > everyone to know that the rest of us are all suckers. > He's got balls but he's got no one's respect > t either. I found his book very interesting. He makes no bones about who's supporting him. It's right there in the dedication of his book. At the very least, his position is a demonstration of flaws in both the system as a whole and the way most Canadians live their lives. > That's what gas taxes are for, not income taxes. I made the mistake of lumping taxes of all sorts together in my original post about cost-per-citizen of our services. I think that's what lead to Silverm not seperating the taxes like that in his reply to me. |
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silverm: The socialty doesn't clean up your waste, and pave the roads for free. In a shocking reversal, I will now take the opposite side. Derek pays property taxes and gas taxes and sales taxes. That should come close to paying for garbage and fire and roads and medical care. There are millions of little expenses going on, and it's not humanly possible for me to list them all. Garbage, roads, medical care are just a few off the top of my head. Property taxes, gas taxes and sales taxes will cover some very specific expenses. |
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> My main message to Derek is that the taxes paid by > you and your businesses are used to fund the public > services received by you and your businesses. > There's nothing or not much left for you to justify > y receving the child tax credits. But what about all the taxes that the kids pay? |
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> But what about all the taxes that the kids pay? What about the education that the kids received? |
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Hello all, The last number of posts have turned this from an investment topic into a political one. We can debate back and forth endlessly and I don't think anyone will learn from it, so I would like to propose we shift gears and move on to another issue that maybe will be more beneficial to the participants (maybe we'll learn something we can apply in our lives). So here it is.... I'm 34 and retired and I don't own an RRSP - and I don't like them for a number of reasons. BUT many canadians have a substantial portion of their assets in RRSPs. For those who have read my book - what do you think about my assertion that RRSPs are overrated? Do you agree that they are not always your best option. Do you think some people contributing to RRSPs maybe shouldn't? Any thoughts? Cheers, Derek Foster (author STOP WORKING:Here's How You Can!) |
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Hi Derek, We basically had the same discussion with respect to the efficacy of RRSPs a month or two ago. Basically the thread, which somewhat degenerated into a flamewar (much like this one), was split along the same lines as the split is here. In essence, do you call a lost government benefit such as OAS, GIS, GST rebates, subsidized housing, etc. to be a 'tax', or do you strictly only look at physical monies paid to the government as being 'taxes'? If you pick the former, as I argued, RRSP's are almost useless as most seniors will face incremental rates of tax and lost benefits in excess of 50%. If you pick the latter, RRSP's are an absolutely great deal. I also proposed a strategy which turned out to be controversial, whereby one invest throughout their lives, much as you have, in a portfolio of equities. And then, in their retirement, instead of selling said equities, they, through a margin borrowing facility, progressively borrow additional funds from their non-registered margin account to fund their retirement needs. If properly managed, it defers taxes until death, and depletion is quite unlikely if withdrawals are made at a sustainable and manageable rate. |
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The thing that I don't like about RRSP is that while your growth is tax free, the principle becomes taxable upon withdrawl. It also converts every type of gain into regular income. Another downfall is the eventual forced collapse or conversion into an RRIF at 69. My income is going to more than double (barring unforseable disaster ofcourse) in the next five years, so I've been holding off on making large RRSP contributions. I do have some though. My goal is to replace earned income with income generated by my portfolio. While I believe that dividends are an excellent source of income (especially given how Canadians ones are favourably taxed), I will have some fixed income securities in my portfolio for the usual reasons. My current debate is whether or not to hold these in an RRSP or not. As I transition from working to living off of my investment income, I may be in a prime position to use my RRSPs for the purpose Alan Dickson discribes in Free Parking-- avoiding paying taxes. I could easily max our my RRSP during the high income years coming up and completely withdraw them during the first of the years I will no longer be employed full time (at a rate that makes sense for the purpose of not paying a lot in taxes). In that case, I'd still likely choose fixed income investments to protect the principle. After all, what's the point of using an RRSP to avoid paying a high rate of tax on some income if you lose it? |
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I believe that, with dividends, and in particular and more specifically, dividend funds, there are a couple issues that people really need to be aware of when buying them in their younger years, and those are: 1) Most Canadian dividend funds will be significantly overweighted in financials. Yes, this sector has turned in a stellar performance over the past decade, but a pure dividend-based approach would miss a lot of good opportunities in sectors such as oil and gas. 2) So you have a bunch of dividends in your brokerage account or bank account at the end of the month. Now what? Your advisor gives you a phone call and sells you another investment, collecting another commission. 3) As people get older, it seems, their ability to keep track of their bills, manage cash, and manage their investments diminishes. You wouldn't believe how many seniors I have personally come across, who live below their means, who simply have all their government cheques deposited to a 0% savings account at the local bank and have significant balances. The less 'work' an investment plan is, the more likely it is to work out in the longer term. That is why I believe, if a person really doesn't need 'income' (ie: they are in their 'accumulation' years, not their 'retirement' years), they shouldn't go out of their way to invest in such a way to generate lots of income. A bunch of cash in a bank or brokerage account is just too difficult for many people to resist spending, rather than reinvesting. Its not a huge deal to derive 'cash' from a portfolio of stock or ETF holdings (use a margin account), why then concentrate on high-yielding dividend payers, rather than high quality companies with good long-term growth stories. There are lots of examples out there that pay dividends -- albeit not the 3-5%/annum like the banks do. The optimal way for planning for retirement, in my beliefs, is to structure your investments, CPP, OAS, and company pension to provide sufficient after-tax income to cover day to day *operating* expenses that must be paid for in cash, and that are relatively predictable. For example, condo fees, taxes, petrol, utilities, mortgage payments, food, personal care products, a modest entertainment and travel budget, etc. are relatively predictable cash items that can be budgeted for. Anything above and beyond that, and I personally believe it is most beneficial for one to fund such through secured margin borrowing against a tax efficient portfolio of equities. For example, if you retire at 55, and drive until you are 85, chances are, somewhere along the way, you will want/need a new car. Instead of accumulating a large amount of cash (and being taxed on it, and seeing it not even grow), a secured borrowing facility facilitates the purchase of that new vehicle, without introducing a large amount of cash, tax, or benefits reduction drag on your overall investment portfolio or finances. Also, a small amount of borrowing can act as a deflationary hedge, as we saw recently after Sept. 11, when interest rates became negative in real terms, after-tax. |
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Nataans, I agree with the weaknesses you point out. I also think RRSPs can be used to avoid taxes by contributing when income is high, and withdrawing when income is low - for example if you take a year off to travel (page 161 of STOP WORKING) - just like you mention. I don't see why you would debate holding fixed income outside of your RRSP - if your income is going to double over the next few years, won't you face very high taxes for the income you received from the fixed income? Factor in inflation, and you might actually be losing ground, IMHO. I understand the idea of putting some in your RRSP (income preservation for not-too-distant withdrawal), but avoid long maturities and also avoid bond funds - they won't accomplish this for you unless they only hold shorter maturities. Pitzel, I know I might get attacked for this, but I think you should plan your affairs to legally maximize your financial postion. Like the economic model, where everyone acts in their own best interests. So I do see how "always maxing out RRSPs" could harm you financially - with clawbacks like you mention. That's another potential weakness. With regard to dividends, I would like to change the term to cash flow. I think if you want to collect a regular income, your true dividend-payers could be combined with investment trusts to give you income without over reliance on the financial industry - and you could also have good exposure to oil and gas (example: my biggest holding is Canadian Oil Sands bought a couple of years ago and also mentioned in my book). I would collect the dividends and reinvest them during the accumulation years. I don't know if I agree that people lose ability to keep track as they age (although perhaps some people do). Could it be that a lot of the seniors you witnessed were never good at managing their affairs? I'm not making an absolute statement here - just a curious question. I see the potential benefit of your strategy in that you can get money out tax-free. I don't like the risk though - I mean if you have margin, you run the risk of getting a margin call. Cheers, Derek |
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> them during the accumulation years. I don't know if > I agree that people lose ability to keep track as > they age (although perhaps some people do). Could it > be that a lot of the seniors you witnessed were never > good at managing their affairs? I'm not making an > absolute statement here - just a curious question. The seniors I see this happen to are generally fairly bright individuals, albeit most of them have been dealing with their local bank or credit union, and mostly buying moderate to unsophisticated investments, ie: GICs or income funds. What ends up happening is that they go through an exceptionally cold winter, or become burdened with health problems, and the cash piles up like crazy. > I see the potential benefit of your strategy in that > you can get money out tax-free. I don't like the > risk though - I mean if you have margin, you run the > risk of getting a margin call. In absolute terms, yes, there is a risk of a margin call. However, a margin lender would be crazy to call in a loan that is less than 20-30% of invested assets. Speaking of risk mitigation, during the past couple years, with depressed stock markets, and weak dividend payouts, especially after Sept. 11/01, some people, in order to sustain their retirement, would have been forced to sell some of their long-time holdings at the bottom of the stock market cycle to continue to fund their standard of living. A margin account would have provided them the ability to spread the risk of depleting their capital base over a number of years when such extreme circumstances prevailed. |
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> I don't see why you would debate holding fixed income > outside of your RRSP - if your income is going to > double over the next few years, won't you face very > high taxes for the income you received from the fixed > income? Factor in inflation, and you might actually > be losing ground, IMHO. I guess I'm still thinking a little incorrectly about the exit strategy of these investments. I don't like that the principle gets taxed upon withdrawl from an RRSP (as it wasn't taxed when it went in) and I need to realise that it will only be withdrawn on a year where there is little or no other income. I'm still thinking that somehow I'm going to be subject to the same high taxation as the people who accumlate 2 million in their RRSPs and thus lose OAS, get taxed badly on their 75k a year withdrawls, etc.,. I certainly will not have 2 million in an RRSP 15 (or less) years from now. > I understand the idea of > putting some in your RRSP (income preservation for > not-too-distant withdrawal), but avoid long > maturities and also avoid bond funds - they won't > accomplish this for you unless they only hold shorter > maturities. I was probably going to adapt the strategy used by segregated fund managers-- figure out a target year for maturity and what the inflation adusted value I need to have in order to have 100% of what I put in. Invest that portion in a fixed income security with the appropriate maturity date. Based on the interest rate, I can figure out how much I can then invest in something a little higher risk with little or no danger to the principle. Then, upon reaching the end of my full time work, the fixed income portions come to maturity and it's all withdrawn in way that's intelligent based on taxation. It should work great for accomplishing the goal of income deferral. Sure, it won't give me stellar returns, but it'll do what I intend it to do. |
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For millions of people, RRSPs are the best option available. For millions of others, they are not. I am certain there are some people contributing to RRSPs who maybe shouldn.t, and I am equally certain (in fact these forums frequently prove) that there are some people avoiding RRSPs due to erroneous beliefs, who would be better off using them. This subject has been discussed in many threads over the past couple years, although much of the material from before the forum reorganization has been lost. Two of the common themes are the .preferential tax rate. argument and the .clawback. argument. There is a common misconception that dividend producing and capital gain producing investments should be held outside of RRSP, to retain the preferential tax treatment, but in the vast majority of cases, the advantage of accelerated growth due to tax deferral in the RRSP outweighs the disadvantage of losing the preferential tax treatment. I view clawbacks of government programs as an additional tax. When viewed this way, RRSPs are the best way to go for a huge segment of the population. To characterize them as .almost useless. is simply wrong. Clawbacks occur either at the low end of the income scale, or the very high end. If you don.t reasonably expect to be in those ranges in retirement, then abandoning the RRSP simply because you think of a clawback as an additional .tax. would be stupid. They can.t claw back something you were never eligible for in the first place. The GIS clawback threshold is very low. The clawback is based on combined family income, and it doesn.t take much income at all to move beyond the eligibility range. A couple of decent CPP payouts, and your GIS is history. The OAS clawback threshold is $60K per person, so a senior couple who.ve made good use of income-splitting strategies can earn $120K per year before the clawback even begins to kick in. They.d have to earn nearly $200K to have the full amount of both OAS benefits clawed back. So for any couple that expects to have combined family retirement income between about $29K to $120K, it is irrelevant whether the clawback is thought of as a tax or not. For those who expect (or hope) to be above the OAS clawback threshold, the prudent thing to do would NOT be to abandon RRSPs and run for the hills screaming at the mere thought of clawbacks, but to assess whether the additional income provided by RRSP investing exceeds the amount lost to the clawback, or vice versa. In the case of both GIS & OAS (and probably most other income-tested benefit programs), dividend income results in higher clawbacks than RRSP income. RRSP withdrawals result in clawbacks of either 25%, 50% or 75% for GIS, depending on the circumstances, and 15% on OAS. For dividend income, the corresponding clawback rates are 31.25%, 62.5%, or 93.75% for GIS, and 18.75% for OAS. I recall the margin-debt thread, but I don.t recall it being particularly controversial. It was simply an interesting off-the-wall alternate retirement-funding approach that didn.t pan out . it just doesn.t offer a whole lot in the way of advantage. |
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> the advantage of accelerated growth due to > tax deferral in the RRSP outweighs the disadvantage > of losing the preferential tax treatment. For the most part, I think this is correct. As for the dividend side of things, it also depends a lot on the province. Some (like Ontario and BC) are great for dividends, while in others you pay way more tax on them. My problem with the way preferential tax treatment is lost is when I want to live entirely off of investment income (not while I'm accumulating). When compound growth is no longer an issue, having dividends count as regular income really hurts. The question is though, will a bunch of dividend producing investments have their growth inhibited by taxation enough to make the perpetual conversion into regular income worth it? I don't think they will. If one never sells the stock in question, the only growth that will ever be taxed will be the reinvestment of dividends. > For dividend income, > the corresponding clawback rates are 31.25%, 62.5%, > or 93.75% for GIS, and 18.75% for OAS. Are dividends grossed up for all purposes of taxation or just for the determination of the dividend tax credit? I can't recall right now. RRSPs also have a strong point for the majority of Canadians who don't want to give a lot of thought and attention to investment matters-- simplicity. No worrying about preferential tax treatment, capital gains, dividend tax credits, adjusted cost base, etc.,. And there's the appeal of the tax savings. I have RRSPs that were put in place for just those reasons. |
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> I recall the margin-debt thread, but I don.t recall > it being particularly controversial. It was > simply an interesting off-the-wall alternate > retirement-funding approach that didn.t pan out . it > just doesn.t offer a whole lot in the way of > advantage. Maybe you don't remember the thread, but the calculations I showed, showed that it was a strategy that worked just fine and had the potential to offer significant advantages over RRSP's. I won't resurrect the thread, but I would ask that you not pass your opinions off as fact. |
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>.. I would ask that you not pass your opinions off as fact Likewise. I remember the thread very well, thank you. I remember that you didn.t show any calculations at all . you showed your conclusions and made some claims. I remember that many of those conclusions and claims didn.t hold up to close scrutiny. |
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>...... naatans, I'm not quite sure what you mean by this. This is money you earned years ago (whenever you made the contribution) in your regular job, but you still haven't paid any tax on that income. Facing tax on it on withdrawal is only fair. Having said that, withdrawing during a low-income year is a good idea. Even if it doesn't turn out to be tax-free, shifting income down to a lower tax bracket is good, too. In fact, that's what the majority of RRSP users will do, when they begin their RRIF withdrawals. |
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oops - meant to quote... >......I don't like that the principle gets taxed upon withdrawl from an RRSP (as it wasn't taxed when it went in) |
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Cardhu, you're getting what I'm saying-- it is only fair. I just don't like it. A lot of people also, don't invest the amount they save initially in taxes, they use it for other purposes. In that case, you actually have a post tax amount growing tax free but then being taxed again upon withdrawal. This is purely a function of using the tax return rather than investing pre-tax dollars though and not a weakness in the way RRSPs themselves work. There often are excellent uses of the tax money returned to people (or not paid at all depending on if you have a deduction at source or are self employed or what have you) like debt reduction and the like. So you're not missing anything-- I guess there wasn't much of substance in that observation of mine in the first place. |
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Sorry, "taxed again" isn't accurate. You have a post tax amount (which was not yet taxed, the amount that would have been taxed was used elsewhere rather than invested) that is then taxed. That's what I don't like, and it's more of a matter of investor choice and hitting contribution limits. |
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Naatans - Yes, ON and BC have great dividend tax rates in the lower bracket, though they.re nothing to write home about in the upper brackets. Living off of RRSP withdrawals is no less living off investment income than living off dividends. My suggestion is that you focus not on the absolute tax rate you.ll pay in retirement, nor the absolute number of dollars you.ll pay in tax. Focus instead on what you.ll have left after the taxes are paid. If you use an RRSP for both your accumulation stage, and your retirement stage, there.s no doubt you.d pay more tax in absolute terms. But you.d also have a much larger nest egg, by a factor of 1.4 to 1.6. Because the nest egg is bigger, the amount of dividends your portfolio receives each year is bigger. So if you draw only the dividends generated each year, you.d still have more left over after taxes, despite the higher tax rate. The tax on dividend income is calculated on the grossed-up amount as if it is regular income, and then the credit partially offsets that. For most programs that use an income-cutoff, the amount used includes the grossed-up dividend amount. It makes no difference what people do with the tax break. You never get taxed twice on the same amount . and you will still in most cases get better after-tax return in the RRSP. Regarding your comment that RRSPs are good for people who don.t want to think too much . that.s true, but as these forums frequently show, many people agonize unnecessarily about preferential tax treatment, etc. etc., and over-complicate their affairs for no good reason. As it turns out in this case, the simplest approach is also the most profitable. Of course, its still necessary to understand all these things, to be able to deal with your expanding portfolio once your RRSP is maxed out. |
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> Naatans - Yes, ON and BC have great dividend tax > rates in the lower bracket, though they.re nothing to > write home about in the upper brackets. They get really bad once you're over around 60K a year. While a lot of us might not need 60k in retirement, we might be making it while we are accumulating. > Living off of RRSP withdrawals is no less living off > investment income than living off dividends. Sorry if I gave the impression I thought differently. > Focus instead on what you.ll have left after the taxes > are paid. I think that's good advice-- focus on the bottom line. > But you.d also have a much larger nest egg, by a factor > of 1.4 to 1.6. Because the nest egg is bigger, > the amount of dividends your portfolio receives each > year is bigger. So if you draw only the dividends > generated each year, you.d still have more left over > after taxes, despite the higher tax rate. I'm going to have to do some number crunching specific to my situation and my goals. > It makes no difference what people do with the tax > break. You never get taxed twice on the same amount Right. There's no double taxation on the principle of a registered investment-- we often just invest the post-tax amount and use the difference for other stuff. Cardhu, I'm going to have to think more about what you said and crunch some numbers. Thanks for the food for thought. As for the margin idea that Pitzel put forward, I think it has some merits as well. I'll have to search for the thread and see what exactly was said. |
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Cardu, You raise some good points. RRSPs can be good for some people, but there are weaknesses as well. The biggest one is the fact that you're forced to withdraw a certain amount every year after age 69. If dividends don't cover this and the market is down, you're cashing out at a low point. I know people tend to shift a percentage into bonds or GICs, but this will have the effect of reducing long-term returns somewhat. Also, I think people can achieve the same results if they already have their house paid off. They could get a secured line of credit and buy dividend-paying investments. This would provide them with a tax reduction (just like an RRSP), and also allow them to get the dividend and capital gains tax advantages. I know it would not be for everyone, and they need to plan very carefully, but it's another option, IMHO. Cheers, Derek |
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>Also, I think people can achieve the same results if > they already have their house paid off. They could > get a secured line of credit and buy dividend-paying > investments. This would provide them with a tax > reduction (just like an RRSP), and also allow them to > get the dividend and capital gains tax advantages. I > know it would not be for everyone, and they need to > plan very carefully, but it's another option, IMHO. > > Cheers, > Derek I am not too familiar with tax and would like to know what's the pros & cons in the following example, anyone? e.g. you paid off your house and have a job with salary of 50k. you have a HELOC with rate of 4.5% . you borrowed 200K against your home to buy CDN dividend stock/trust with a return of 3.0% in dividend --- assuming you don't contribute anything to your RRSP and won't sell the investment . does that give you any tax benefit? thanks, |
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newsgroup, If you borrow to invest, the interest is tax-deductible. Make sure you follow the rules outlined with Revenue Canada. The investment income you earn can be tax advantaged - for example dividend income or income trust income. If the dividend rate and borrowing rate are the same, you can still actually come out ahead due to the tax differential. The risks are in the investment you choose. If you had done this with Nortel for example, you would be extremely unhappy at this point. The other risk is if you have a variable rate loan. If rates rise, you would be forced to make bigger payments. This factor is partially offset by the fact that the interest is tax-deductible, so a rise in interest rates is somewhat subsidized by the government. Still, you should only do something like this if you earn enough money to cover the payments. I've used this strategy a number of times in the past, and it did help speed up early retirement for me. Cheers, Derek |
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> e.g. you paid off your house and have a job with > salary of 50k. you have a HELOC with rate of 4.5% . > you borrowed 200K against your home to buy CDN > dividend stock/trust with a return of 3.0% in > dividend --- assuming you don't contribute anything > to your RRSP and won't sell the investment . does > that give you any tax benefit? Well, the interest on that 200k at 4.5% would be tax deductible. So that's 9 thousand a year (but you have to pay the 9 thousand a year in interest). Sadly, the dividends would only return about 6k a year. If you made 50k a year, you'd be taxed (depending on your province) around 15% on the dividend income and save about 30% on the money you paid in interest. So that means you'd save ~2700 at tax time, but then have to pay about 900 for the dividend income. So, that's Money Out: 9000 in interest 900 in taxes on the dividend Money In: 6000 in dividends 2700 in tax savings 8700-9900= -1200. Looks like you'd end up losing about a hundred dollars a month. Eventually, your return would increase (as the dividends increase) so you'd start to make money. Also, mixing in some secure trust units with a stable underlying business would increase you initial rate of return. I think it would also be incredibly important to do ones best to buy the dividend producing stocks at a low point. It would take a lot of time watching and waiting and playing hunting game like a crocodile (see the section in the book about it). This could make it so you're actually making money right off the hop. Another thing-- this situation would change pretty drastically if you were in a slightly lower tax bracket or in a province that is very favourable to dividends. I think the crux of such a strategy would getting the return over the interest of the investment. Buying at a good time and then having the dividend grow. However, just because I've proven so wonderfully unreliable as an information source so far in this thread, I'd like to ask anyone else to comment or offer clarification or correction on what I've posted here. Perhaps there's something I've missed. |
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>The biggest one is the fact that you're forced to >withdraw a certain amount every year after age 69. 69 is very old. Since you can't take it with you, why not draw about 7% every year starting from age 70? Assuming your investments (bond+stock) will grow somewhere around 5-9% a year, you may not deplete your RRSP entirely for the rest of your life. |
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Derek . the holy grail is a myth . it doesn.t exist. Every approach has its pros and cons . the key is to determine whether the pros outweigh the cons. Another of the very common misconceptions that keeps getting trotted out is that the RRIF withdrawal schedule forces one to cash out at a low point. This is wrong - there is nothing in the RRIF rules that dictates when you must sell any of your holdings. The RRIF withdrawal schedule is a withdrawal schedule, not a liquidation schedule. You can withdraw in kind, just the same as you can contribute in kind. You claim you will only collect the dividends from your portfolio . without ever having to liquidate. So why would you assume that an RRSP user would be unable to assemble a similar portfolio, or live as frugally as you do? In the scenario I described above . essentially doing what you do but inside an RRSP instead, and with retirement at age 50, the RRSP portfolio would easily generate enough to dividends in the pre-RRIF years to fund an identical after tax income as your method, and to pay the .extra. taxes, and with some left over to reinvest in further shares. In the RRIF years, the dividends might not be sufficient to cover the withdrawal, but they could be sufficient to continue funding an identical after tax income as your method, and to pay the extra taxes. The amount of RRIF withdrawal exceeding the dividends received would simply be moved .in kind. into a parallel unregistered account, where it would start generating its own dividend stream. I.ll grant you that the mandatory RRIF withdrawal schedule is an irritation, as I.d much rather have the absolute freedom to make up my own mind about withdrawals, but I can fully understand why it was set up the way it was. The bottom line is I.ll still be much further ahead than I would have been if I.d shunned RRSPs in the first place, so a minor irritation is all it is. On a level playing field, the RRSP produces higher after-tax income than an EQUIVALENT non-registered investment, in the vast majority of cases. Leverage can overcome the RRSP.s inherent growth advantage, but it introduces risk . something not everyone is comfortable with. And then it ceases to be a RRSP vs nonRRSP comparison, but a leverage vs non-leverage comparison. You imply that leverage is an either/or proposition. If someone owns their home outright, why could they not use both the RRSP and build a leveraged portfolio as well? I do. |
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Like most people, I'm still paying off my mortgage. Based on my project, it should be paid off in the next 5 years if I don't contribute to RRSP. Do you think my mortgage is my main priority or should I contribute to RRSP? My marginal rate is probably around 33%. My calculation shows that I should be ahead with RRSP, but making extra mortgage payments is a form of guranteed and tax-free investment. Hard part is figuring out the risk-adjusted return. |
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I consider my mortgage prepayment the "fixed income" portion of my portfolio. I would compare the return to First world goverment debt or highly rated corporate debt. Against equity investments your mortgage prepayment will have a lesser return, but the risk difference is substantial. Another factor is that by paying it off now you are protecting yourself against future interest rate hikes. sure 5% after tax now isn't that impressive, but in a few years it could be 7 or 8% after tax which is excellent considering the low risk. |
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Cardu, I agree - all investment options have pros and cons. I don't think I said differently, but if I gave that idea, that wasn't the intention. I understand that you are not necessarily forced to liquidate all your holdings in a RRIF. But the reality is that it will create taxes owing, so if you don't have the cash to cover these taxes, you will be forced to liquidate when the market is low. I understand that you can keep a portion in fixed income to reduce this risk, but it will also reduce your long-term returns, IMHO. Sure, I agree that the investment strategy of seeking quality, recession-proof stocks could be used inside an RRSP. Once again, if I stated my case improperly, I am sorry. My main beef is that many feel RRSPs are your only option or always the best option, and clearly they are not (but sometimes they can be). On page 161 of my book I state, "This is where the water gets muddy and there is no clear winner here." (with regards to RRSPs vs other investing options). I agree that you have to analyse the potential risk of borrowing to invest, but I don't think it is only a leverage vs a non-leverage postion. The reason is that if you commit to investing x dollars/year or instead you take out an investment loan which has interest payments of x dollars/year, the net result per year in "out of pocket" expense is the same. But the non-RRSP option allows you to build up a tax-advantaged income much more quickly. Of course anyone could have an RRSP and an investment loan. But this would require more $$$$ invested every year (x + x dollars from the example above). If you are in the postion - great! Again, I'm not presenting this as the "only" option, just another possible path. Overall, I think we mostly agree? Cheers, Derek |
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