A CASE STUDY REVIEW AND RESULTS AFTER JUST ONE YEARNew

A CASE STUDY REVIEW AND RESULTS AFTER JUST ONE YEAR^New

We will call this case study RR.

RR was referred to us by an existing client who was very happy with what he had done with us in a short period.

RR, who is 35, was a self-made investor who had accumulated $100,000 in his RRSPs.

He was doing well in getting decent returns, on average of 12% per year.

So in his mind, he felt he did not need a financial planner.

Until he saw what his friend who referred him to us was doing.

What RR wasn’t doing was looking at the Tax liabilities he was creating every year as he was putting all his money into RRSPs and accumulating nothing tax-free.

He also was not using a plan that included strategies that maximized his returns and reduced his income tax at the same time. He thought he was building wealth but forgot he was also creating wealth for his partner CRA.

So for the first step of our journey, I needed to explain that if he continued to invest the same way he has been, this would happen for the rest of his life.

First, he needed to know the Rule of 72. 72 times an interest rate will tell you when your money has doubled. So our example is using an interest rate of 10%. Therefore money would double every 7.2 years.

So at 35, he has $100,000

at age 42.2, he has $200,000

at age 49.4, he has $400,000

at age 56.6, he has $800,000

at age 63.8 he has $1,600,000

This does not count toward the fact that he would add any more RRSPs to the original $100,000. This is the projected growth of the money that has already accumulated.

You can imagine the compound effect of continuing to buy RRSPs each year and how much more the CRA will take.

Now, if you knew you would have that amount in RRSPs at age 64, most people would be happy. So when I pointed this out to RR, he was, and now he was more convinced he was doing well and did not need a Financial Planner.

Until I told him every cent he would have was 100% taxable, he had a partner who had a 50/50 partnership with him. His eyes glazed over.

At the age of 64 and retired, he could now start taking out an income of 10% a year from his $1,600,000 RRIF, which would be $160,000 a year.

He would, of course, have clawbacks to his government benefits because of his high taxable income.

So those Benefits would be lost even though he may have put in up to $150,000 in payroll deductions over a lifetime.

He would also have to pay Tax on his income from his RRIF.

$160,000 would put him in the highest tax bracket.

For our example, we will round it down to 50%.

This means he could pay up to $80,000 annually for the rest of his life.

So you have to ask yourself, Is that a good investment?

If that is not enough, let’s see what happens when he dies.

Well, since he is still making 10% per year, and that’s all we are taking for income, the principal remains at $1,600,000, and even though if he has a spouse,

you can transfer this to her 100% tax-free.

You need to know that about 40% of RRSP holders are married at death, leaving 60% of the estate exposed to taxes immediately. However, no more tax-free transfers are available when the spouse dies.

All this money becomes 100% taxable.

Therefore 50% will go to CRA. THAT’S A LOSS OF $800,000 TO THE ESTATE

before it goes to your children.

So again, was that a significant investment? Give half your lifelong savings to CRA.

This is where good tax planning can save you hundreds of thousands of dollars.

So in the future, you can continue to save for your partnership with CRA, or you can fight back and use my 35 years of experience to help you to create a Tax free income at retirement and leave an estate Tax free and end your partnership with CRA.

The first part of the program is to slow down the growth in Tax liabilities and start creating a tax-free program.

To do so, I explained we needed to move money from the RRSPs to a 100% tax-free investment without paying Tax.

The best way to do this is to have an equal tax deduction to offset the amount of Tax you would pay on any money withdrawn from the RRSP.

At the same time, we want to enhance the growth so that the compounded multiples can create wealth over time.

The best way to do this is to borrow money. Businesses do this all the time and so do countries. You are the only person who does not do this because you never thought of how easy it is. And no one wants to get into debt.

But this is an investment loan, where the investment itself becomes the collateral for the loan. So you’re getting an asset to offset the loan debt, so your net worth does not change.

At any time, you can cancel the loan and repay using the funds minus your profit. You only need to concern yourself with the monthly interest-only payment.

The first reason we use a loan is that the interest on the loan is tax deductible when used to create income. So now we have a Tax deduction to offset the taxes of the money you are pulling out of your RRSPs, which we use to fund the loan.

So RR borrowed $200,000 and invested the money into a segregated fund sold only by Life Insurance companies because of their 75% guarantee at maturity on the principal, reducing the risk significantly. The investment is also credit-proof only because it is a product sold by a Life Insurance company. Not even CRA can touch it.

The monthly cost of an interest-only loan was $600 per month, and we started a monthly withdrawal plan from his RRSPs of $600 to pay the price. So no money was being taken from RR’s pocket.

The money we are using was the future Tax he would have paid CRA if he continued with his old plan. So there is no cost to RR.

WE ARE USING THE TAX SAVINGS TO FUND THIS PROGRAM.

The next step is to create the Tax exempt investment where we want all money to go eventually. There it will grow 100% tax-free.

But let’s go back to the borrowed money and see what happened one year later.

His profit last year was $38,000, as he made a 19% return.

He was pleased his total cost was the $7,200 he used to pay for the cost of his loan, and that netted him $38,000. I pointed out that if he took the $7,200 out of his RRSP without the Tax deduction, he would have lost 30% of this to CRA. So 30% of his $38,000 was created by CRA, so he has CRA creating his wealth. Isn’t that better than what you were doing, creating a 50/50 partnership before?

I then pointed out that his money would compound much faster as the multiplier worked in his favour.

Then I decided to give him a surprise. A strategy I created only two years ago makes this program even better. Did I ask him how much-unused RRSP room he had left?

I told him we needed at least $38,000.To our delight, he had more than enough.

So we then took profits of $38,000 and purchased $38,000 in RRSPs. So his tax savings will be roughly $13,000 in taxes.

So have you done the math? $38,000 profit plus $13,000 tax refund is $51,000, and the cost was $7,200, which CRA was paying.

So his actual net cost was about $5,000, and his return was ten times that. Could RR do this with what he was doing before? Of course, the answer was No.

While buying the RRSP will add to his original RRSP, which, if left there, would create more taxes down the road. Additionally, once we have caught up on his Unused RRSPs, this will slow down the growth of his registered money.

Adding a guaranteed 20-30% return by purchasing an RRSP is a no-brainer.

After all, I can not guarantee that return on his investments. But, because of his age, I want him to grow the money fast and address his taxes as we monitor his investments yearly.

So we now compound our rate of return for last year even further to $51,000.

The Tax refund is also re-invested into the TAX EXEMPT INVESTMENT so it can grow 100% tax-free.

Also, one more thing, the profits from the loan are capital gains, but only a portion because whole units are sold, which also includes a part of his principle. So he had a capital loss to offset the increase. In the future, he could use the RRSP deduction to offset further Capital gains. All money not used to buy RRSPs in the future can go into a 100% tax-free investment.

This is how you move RRSP money to tax-free money. You cannot do this without a Financial planner with a Life license regulated by FSCO.

For those concerned about the rates of return, I ask my clients three questions, and if you answer no to any of these situations, then you need to use Demographics as a guide for all your future investments.

Do you believe Technology will slow down over the long term?
Do you think the demand for health care will slow down over the long term?
Do you think the growth in living standards in India and China will slow down?

Why not if you answered no to these questions and you’re not investing there?

Both the Nasdaq and Health care funds have averaged around 20% returns for the last five years, so you can see how when I say our average rate of return for the previous 11 years is the same.

The Asian Pacific Segregated fund we used last year returned 27%.

I still think the results are too high. Then look at what has happened in only two weeks:

Asian Pacific is up 3.67%

Emerging Markets 2.42%

Global Health care 3.045

Nasdaq is up 4.43%

So while you’re saying it can not last, other people are making the money you could be doing.

All my clients knew this would happen, as we predicted a massive rally would occur once the tax cuts went through.

Later in the year, I expect a positive outcome from Brexit, which will create an even more favourable effect on equities.

Again I want to remind readers that I no longer sell Insurance or investment products; I only advise as a consultant, which I am allowed to do as I spent 35 years in the Financial service industry.

Leave a Reply Cancel reply

Contact Us

Follow us on

Quick Links