Month: April 2016

Four ways to invest your tax return

Your taxes have been filed and you have received your tax return – now what?

There are several ways you can be proactive with your tax return, which means you will be “working smarter and not harder” for your savings. Here are a few ways to stretch your money further.

1.    Invest in a Tax-Free Savings Account (TFSA)

Any Canadian who is 18 years or older with a valid social insurance number can contribute to a TFSA – this means you can have an early start on your financial planning. Keep in mind the annual contribution limits for 2016 has been rolled back to $5,500 from $10,000 in 2015.

Contributions to a TFSA are not deductible for income tax purposes. But any amount contributed as well as any income earned in the account (investment income and capital gains) is generally tax-free, even when withdrawn (CRA).

It’s important to keep this in mind, because knowing when to use your TFSA versus your RRSP for savings or withdrawals is key, especially near retirement because it can drastically impact how much tax you pay that year.

2.    Make a contribution to your Registered Retirement Savings Plan (RRSP)

While the deadline to contribute to your RRSP for 2015 has passed, it’s never too early to start contributions to your RRSP for next year – as long as you have contribution room. You should always consider investing your tax return in an RRSP to grow your retirement savings.

Deductible RRSP contributions can be used to reduce your tax and any income you earn in the RRSP is exempt from tax as long as the funds remain in the plan – you typically have to pay tax when you receive payments from the plan.

Generally, one should refrain withdrawing from RRSPs before reaching the age 72, when it is then required to make mandatory withdrawals. When income levels are low, withdrawing from your RRSP could be advantageous because the tax payable would be low that year. But, in most cases clients should first draw from their TFSA and taxable accounts allowing other assets to continue to grow as long as possible.

3.    Contribute to a Registered Education Savings Plan (RESP)

A large student debt can be financially crippling for a young person just starting their life, especially as it’s often compounded with the same time they are buying their first home, or thinking about starting a family. Start to squirrel away some savings early and take advantage of the tax benefits over time.

It’s always smart to plan ahead, not only for your own retirement but for your children’s education as well. You can either contribute to a family plan or a specified plan. There is no annual limit for RESP contributions, however, the lifetime limit on the amounts that can be contributed to all RESPs for a beneficiary is $50,000 (CRA).

Contributions are not tax-deductible, but all investment income generated in the RESP is tax-sheltered. Plus, the government may add up to $500 in contributions per year per child. And, when the money is withdrawn, the plan earnings and government contributions are taxed in the beneficiary’s hands – often students, with low income that would pay minimal or no taxes on the money.

4.    Re-invest your money back into your portfolio

Many affluent investors use more than one investment firm, leading to a piecemeal approach, often resulting in higher tax bills. As written in our piece on tax efficiencies, investors should pay close attention to asset allocation, which is the process of placing particular investments in either taxable or tax advantaged accounts.

By putting an asset into an account that receives the best tax treatment, investors will likely be able to gain an additional return each year. While the yearly amount may seem minimal, after 30 years or more, the tax savings will add up and can boost retirement assets by as much as 30 per cent.

Start by shifting investments subject to the highest marginal tax rate. Tax advantaged accounts should be first populated with bonds. If there is additional room, high turnover, active equities should be put away in the tax benefit accounts. Ask questions and find out what the best options are for your assets.

There are many things to think about with hopefully a little extra cash flow coming your way soon. Speak to your financial advisor and review your options. Find out what works for you this year.

Sharp Declines Lead to Sharp Rebounds

Dramatic and sudden declines in stock markets are both rare and painful initially. Many times they are the final straw for quite a few investors who decide it is time to throw in the towel and head for the sidelines. However, investors should keep in mind that this is likely not the onset of a new bear market, since most bear markets are not the result of sudden sharp drops but by the steady onslaught of one thing after another or in other words, a death by a thousand cuts. The Canadian stock markets abrupt decline in January 2016 was not a major bottoming; it was probably the start of something very, very good.

The tsunami of negative sentiment that engulfed the stock market earlier this year was almost palatable. No matter which way you turned, the common worry was “Oh no! Here we go again.” While the majority is not always incorrect, it is less likely that group think will truly achieve the anticipated result. When everybody thinks alike, everyone is likely to be wrong. Contrarians exist because they see things differently; they peel back the layers of conventional wisdom and look for reasons to disagree. Often what they uncover becomes very profitable for investors who stray from the herd.

History, as is often the case, provides answers when trying to decipher the impact of sharp drops in the stock market. For the purposes of this analysis we examined the historic data for the S&P/TSX Stock Index since 1980 and determined the rate of change for the stock market over rolling 29 day trading periods, which can be considered a short. The stock market generated an average rolling 29 day return of 0.8% with a standard deviation (a measure of volatility) of 5.6% over the past 36 years. To uncover the extreme actions of the stock market we looked for 2 standard deviation events (which only occur 5% or less of the time) or when the stock market declined by 10.4% (0.8% minus 2 times 5.6%) and more. While this occurred quite a few times, particularly in years of significant declines (1981, 1987, 2001 and 2008), we only incorporate the final day of the abnormal decline for the purposes of this analysis. The 14 days that comprise the dates these abnormal drops occurred are listed to the left.

Using these dates as the starting point to discover what happened in subsequent periods, we observed a truly different outcome than what would have been expected if the pessimism of the sharp drops was extrapolated forward. As the chart to the right shows, during the first month after the abnormally sharp decline occurs the stock market bounces back 6.9% versus the average rolling monthly period for the entire market of 0.5%. This trend of impressively sharp stock market rebounds continued through the next 3 month, 6 months and 1 year periods. The recovering stock market not only recouped its losses after 3 months, but it significantly outperformed the market as a whole during the entire recovery phase.

Of course, the rebound has not always occurred, but it happens more often than not. Most likely the stock market should continue to significantly rebound after the recent sharp drop. These results show that there is something genuinely worthwhile in contrarian analysis and that looking through the prevailing sentiment whether it is bullish or bearish can be a very rewarding endeavor.



This report may contain forward looking statements. Forward looking statements are not guarantees of future performance as actual events and results could differ materially from those expressed or implied. The information in this publication does not constitute investment advice by Provisus Wealth Management Limited and is provided for informational purposes only and therefore is not an offer to buy or sell securities. Past performance may not be indicative of future results.

While every effort has been made to ensure the correctness of the numbers and data presented, Provisus Wealth Management does not warrant the accuracy of the data in this publication. This publication is for informational purposes only.