Travis Kidson 4/28/21 Travis Kidson 4/28/21

Pre-Retirement Planning: Line of Credit

One goal most people have while working is to pay off their debts.

So it comes as a shock that we then suggest, prior to retiring, they set up as large of Line of Credit (LOC) as possible. We also suggest that the credit line not have a minimum repayment, so that interest could be added to the principle.

We do this, not to have people borrow money, but to give them increased flexibility in retirement when their income may be lower. For many clients, setting up the credit line while they are working is easier than when they are retired.

There are a number of reasons why this makes sense.

Sometimes people will have a mortgage balance when they retire. By converting to a line of credit, they no longer have to worry about making a minimum payment, allowing a more effective use of their existing income. This is especially important when that income is modest. One client said that she did not worry as much and that life was easier.

Another client used the LOC so she could renovate her home and not have to take large lump sums out of her RRSP and pay taxes. She told me she had paid enough taxes; funny how often that rationale comes up!

The LOC could also be used to help grandchildren go to university or to take the entire family on a big trip.

However, one of the most important reasons we recommend this strategy is to provide a tax efficient way to cover emergencies, large medical costs not covered under medical plans or to pay for long term care while staying in your home.

This information has been prepared by Jack Fournier and Travis Kidson, who are Portfolio Managers for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Managers can open accounts only in the provinces in which they are registered.

Insurance products are provided through iA Private Wealth Insurance Agency which is a trade name of PPI Management Inc. Only services offered through iA Private Wealth, are covered by the Canadian Investor Protection Fund.

Beacon Wealth Partners is a personal trade name of Jack Fournier and Travis Kidson.

Travis Kidson 4/7/21 Travis Kidson 4/7/21

Tax Efficient Portfolio

Investment income is divided into three categories for taxation purposes:

• Interest income

• Canadian dividends

• Capital gains

Interest is a wide-ranging category and includes income from bonds or GICs, rental properties and dividends from non-Canadian companies. All this income is taxed at your highest marginal rate. Dividends are a share of profits after a company has paid taxes. To avoid double taxation, as Canadian residents we are given a tax credit for dividends from a Canadian company, which results in a tax rate less than that of interest income. Capital gains occur when something is sold for more that its cost, half of the profit is included and taxed as income. Thus, half of the growth is tax free as is the return of principle.

It is important to understand the tax categories if your investments are held in a non-registered investment account, but most Canadians have much of their investments in registered plans; RRSPs/RRIFs or TFSAs.

RRSP contributions reduce your taxable income (thus reducing taxes), income and growth within the account are not taxed but all withdrawals are taxed as income. The primary strength of RRSPs, providing tax deferral, assumes that your income will be lower in retirement. TFSAs are tax exempt; contributions are made after tax, but growth and withdrawals are not taxed in Canada.

Where possible, we encourage clients to have all three types of accounts. When we allocate individual investments, from a tax planning standpoint, historically it made sense to hold interest generating investments inside a registered plan and to have capital gain type investments in a non-registered account.

If the only investments you own are Canadian, then the above is true. But it is also wise to have exposure to US or international investments and then you need to understand the effect of tax treaties Canada has with other countries.

Let’s say you decide that you want to own shares of a US company such as Disney, which has a dividend. If you decide to hold it in your non-registered account, the US government wants its share of personal taxes and so 15% of the dividend is withheld and sent to the US government. This tax paid is a credit on the taxes you would otherwise owe in Canada on this income. If you held the shares inside your RRSP instead, the US tax treaty recognizes this as an account for retirement and taxes are not withheld. But if the shares are held in a TFSA, the tax treaty does not recognize this account and taxes will be withheld. But in Canada there are no taxes within the TFSA and so you are unable to claim the taxes paid to the US government, resulting in tax leaking out of the TFSA.

Beacon Wealth Partners is a personal trade name of Jack Fournier and Travis Kidson.