Summer is usually a quiet time for the Q&A inbox, but not this year.
For whatever reason, money is at top of mind for many people right now and your questions have been pouring in. Here are a few of the most interesting.
GIC coming due
Q - I have a $35,000 one-year BMO GIC coming due this month. I own lots of shares in different companies, but I am enjoying the security associated with my GIC. I would like to purchase a two-year this time. Which one do you suggest?
Also, I am thinking, maybe, of putting some of that money in a Vanguard ETF. I am looking at their Growth ETF. Which one do you think is best? – Kathie S.
A - We’re talking apples and oranges here – the safety and low return of a GIC or the risk but potentially higher return of a stock ETF.
Before you make any decision, you need to decide on your priorities.
For GICs, you won’t get much of a return at any of the big banks. BMO is currently offering 1.6 per cent on a two-year investment, although for a limited time you can get 2 per cent on an 18-month deposit. You’ll find better returns at smaller financial institutions. Oaken Financial is offering 2.85 per cent for two years while EQ Bank has a posted rate of 2.65 per cent. Both are CDIC insured.
If you want to invest in an ETF there are lots of good ones around. The Vanguard Growth ETF Portfolio (VGRO-T) is very new (launched in January 2018) and has an unimpressive one-year return of 4.4 per cent (to June 30).
Saving for grandchildren
Q – My husband and I have four young grandchildren. Each birthday we deposit $1,000 into an InvestorLine account that we have set up for each one. At this point we are buying Vanguard ETFs. We realize that at some point, when the child receives the money, there will be capital gains.
Both sets of parents have their kids registered in RESPs. We do not want to get involved with that. Can you offer another way we can keep doing this but in something that will not get as taxed as our system now? All grandchildren are under 10 years old, so we have lots of time. – Kathie S.
A - RESPs are the most tax-effective way to save for your grandchildren’s education. Since you don’t want to use them, there are no other tax-avoidance methods that I know of. They can’t have Tax-Free Savings Accounts until they are 18 and they can’t open RRSPs if they don’t have earned income.
As things stand right now, any interest, dividends, or capital gains earned on the investments made on their behalf will be attributed back to you for tax purposes. That’s because the children are minors. If they were adults, you could give them money without attracting tax.
One suggestion is that you give the $1,000 to the parents, which would be a tax-free transaction. Then they could contribute it to the RESPs that already exist, increasing the amount of education savings. – G.P.
Q - I know of someone 63 years of age who does not hold a tax-free savings account. How much is he eligible to contribute, starting now? Also, how much did the Mawer Balanced Fund drop in 2007-2009? – Shelia H.
A – Your friend could contribute up to $63,500 to a TFSA in 2019 – that’s the lifetime limit to this year.
Between Jan. 1, 2007 and the market bottom in March 2009, the Mawer Balanced Fund lost about 17 per cent. – G.P.
More on mortgages
Q - My partner (age 67) has given his ex-wife the total of his RRSPs as a settlement payout. This has left him with no retirement income, he has no pension, and gave up 48 per cent of his CPP. He still works and can save $2,000 per month. We have a mortgage of $300,000 on a small suburban home we purchased together. Is it smarter to put that extra $2,000 toward the mortgage or to start a new RRSP? My idea is to start a new RRSP to get the refund and put that back into the mortgage. Barring any health issues, we expect him to continue working to 70. What do you think? Thanks. - Catherine M.
A - On the surface, your idea sounds like a good one. Paying down debt, especially coming up to retirement, is always a good strategy. But there are a couple of factors to consider.
First, how much of a tax refund will be receive? That, of course, depends on his income level. If it is relatively low, then the amount of the refund won’t make much of a dent in the mortgage.
Second, is there any chance he might qualify for the guaranteed income supplement (GIS)? That will depend on total household income. If the answer is yes, then opening an RRSP would be a bad idea because any income from the plan (or a subsequent RRIF) would reduce the amount of the GIS payment. Better to pay off the mortgage, which will have no effect on income. – G.P.
TFSAs and the U.S.
Q - I understand that if you have a TFSA and hold U.S. citizenship that you must pay tax on any earnings to the U.S. government. Why is this so when the U.S. has a similar tax-free vehicle? Is anything being done to approach the U.S. government for equivalent status based on the tax treaty? – M.K.
A – Tax-free savings accounts are not considered to be “retirement plans” within the terms of the Canada-U.S. Tax Treaty. That means they are not recognized by the U.S. Treasury Department as being tax-sheltered. Any change in that would involve amending the Tax Treaty. I am not aware of any action under way to achieve that. – G.P.
If you have a money question you’d like answered, send it to me at email@example.com and write Globe Question in the subject line. I can’t guarantee a personal response, but I’ll deal with the most interesting questions periodically in this space.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.