Experts have long recommended that investors set up their portfolios to be as tax efficient as possible by utilizing both registered and non-registered accounts. This is referred to as portfolio allocation, and is meant to view all of your investment options, types of accounts, and the tax consequences for your returns.
Investors were ideally supposed to place interest paying investments inside their RRSP, since they are fully taxable outside of a registered account. And because of the dividend tax credit, investors should hold Canadian dividend stocks in a non-registered account.
But then along came the Tax Free Savings Account and everything changed. Canadians 18 years or older can save up to $5,000 a year tax-free, and unused contribution room can be carried forward indefinitely. Cash, stocks, bonds, GICs, and mutual funds are all eligible contributions. You can withdraw money at any time in any amount without being taxed, and re-contribute the full amount on a yearly basis.
Benefits of TFSA vs Non-Registered Account
Investors are not taking full advantage of the TFSA at this time, with most individuals just parking their money in a high interest savings account. They also continue to believe that their Canadian dividend growth stocks are better off in a non-registered account. But with the potential for tax-free growth inside the TFSA, investors may be wise to re-think their strategy.
Not only will their Canadian equities grow tax-free, foreign dividend paying stocks are also free of Canadian taxation (with the exception of the U.S. 15% withholding tax). And for seniors, any TFSA withdrawals in retirement is not considered income, therefore not affecting eligibility for government benefits such as Old Age Security.
The only drawbacks I see in the TFSA vs. non-registered account debate is that you cannot claim a capital loss for any investments held within your TFSA, and the annual contribution room is quite small ($5,000) for those investors who want to convert their non-registered portfolio into a TFSA right away.
Portfolio Allocation
A high interest savings account shouldn’t be held in your RRSP or TFSA just to be tax efficient. Remember that many years ago you could get double-digit interest rates on GIC’s and savings accounts. Not anymore.
Shouldn’t investing be about maximizing your returns, not your tax efficiency? For individuals who have maxed out their RRSP contributions, or have a defined benefit pension plan with very little RRSP room, the Tax Free Savings Account is a great vehicle to use for investing in stocks and REIT’s.
Conventional rules of portfolio allocation are also being tested as older investors start to recognize the benefits of using the TFSA as part of their overall retirement plan. For younger investors, the small annual contribution room is not as much of a factor since their time horizon is much longer. The tax-free growth compounds over time, and will not be considered income when withdrawn in retirement.
Personally I do not have a non-registered account, instead choosing to maximize my TFSA with Canadian dividend paying stocks and REIT’s. This makes sense for my situation and for my retirement goals.
I hope that individuals do the math for their own situation when choosing investments, rather than relying on old rules of thumb about where their investments should be held.
Who wins the battle between the TFSA vs non-registered accounts?
It’s that time of year where organizations are completing their employee performance management, otherwise known as the annual performance review. Most managers dread the annual review process as much as their employees do.
Having a candid discussion with your employees about their strengths and weaknesses can be a challenging task, especially when you hold the fate of their annual raise in your hands.
The problem lies in leaving the employee performance management process until the end of the year, since you don’t get a chance to have these candid conversations on a regular basis. Have you ever asked yourself, “I wonder what keeps my employees coming to work every day?” Have you ever actually asked them? Try it on for size, you might just surprise yourself.
Employee Performance Management: Love Them or Lose Them
The 4 most important words at the heart of your employee performance management process:
- Love – Treat employees fairly and respectfully. Thank them. Challenge and develop them. Care about them and you will engage and retain them.
- Lose – Loss is just as serious when talent retires on the job as when they leave for a competitor.
- Good – Consider your solid citizens, not just your high potentials. Stars are people at any level who bring value to the organization.
- Stay – Encourage talented employees to stay with the organization. Talent will be the key differentiating factor in competitive industries.
The top 5 reasons that employees stay where they are:
- 5th – Supportive Management – Good Boss
- 4th – Fair Pay
- 3rd – Working with great people
- 2nd – Career growth – learning and development
- …and the number ONE reason….Exciting work and challenge!!!!
Some of you immediately zeroed in on the fact that fair pay lands in the fourth spot on the list…were you a little surprised that it wasn’t higher? Research indicates that if pay is seen as unfair, non competitive, or simply insufficient to sustain life, it will be a large dissatisfier.
Your talented people will become vulnerable to talent theft or will begin looking around. Also keep in mind that you can pay a high salary but if they are not being challenged, or grown, or cared about, a high salary will not keep them for long.
Stay Interview
Most of you have utilized the Exit Interview process over the years to determine where the organization went wrong or what they could have done better. The problem with this is that it only happens after the associate has accepted a position somewhere else or just plain made the decision to leave!
What is stopping you from conducting a “Stay Interview”? Will stay interviews help to determine the gaps before an employee makes that decision?
Select 2-4 of your employees, depending on the size of your department, and conduct a “Stay Interview” using the following questions.
- What can we do to make your job more satisfying?
- What makes a great day for you?
- What can we do to support your career growth?
- Do you get enough recognition?
- What can we do to keep you here?
- If you could change one thing about this department what would it be?
- What is it about your job that makes you jump out of bed each morning?
- If you looked back over your career what would you say is the best job or company that you have worked for so far?
In the employee performance management process, too often we forget to ask the important questions and end up missing a telling sign of a dissatisfied employee. If you make an effort to find out the cold hard truth you will retain your associates and create a more satisfied workforce for all.
One of the benefits of setting up a monthly budget as well as forecasting income and expenses is that at the end of the year I can review expenses in each of the areas where we spent our money and make improvements for the future.
Reducing our expenses was definitely top of mind as we adjusted to single-income living earlier this year. Since we had never used a personal budget before, I wasn’t sure what to expect. Looking back, I am extremely pleased with how we were able to control our expenses this year.
Review Expenses: Home
- Mortgage & Property Taxes – 21% of gross income
- Extra Mortgage Payments – 8.5% of gross income
- Utilities (Power/Gas/Water) – 3.25% of gross income
- Cable/Phone/Internet – 2.5% of gross income
- Furniture & Improvements – 1% of gross income
Overall we spent just over 36% of our gross income on our housing expenses, but a large portion of that was extra payments we were applying to our mortgage as we try to reduce our total balance before upgrading our house next year. We also managed to save on cable and internet bills.
Daily Living Expenses
- Groceries – 9% of gross income
- Baby Supplies – 1.5% of gross income
- Pet Food & Supplies – 1.5% of gross income
- Miscellaneous Spending – 1.5% of gross income
- Dining Out – 1% of gross income
- Alcohol – 0.5% of gross income
I’m really impressed with the way we controlled our daily living expenses, as this can be the largest variable expense in your monthly budget. We did a great job creating a meal plan and sticking to it, which saved us a lot of money on groceries and dining out.
Since we have a small child to look after we didn’t go out very much this year, just for special occasions like birthdays, our anniversary, and Harry Potter movies 🙂
Transportation Expenses
- Car payment – 5.5% of gross income
- Insurance & Registration – 1.5% of gross income
- Gas – 1% of gross income
- Parking & Maintenance – 0.5% of gross income
We were able to save a lot of money in this category this year. I work less than 5 KM from our house, which helps to save on auto insurance and gas expenses. We also redeemed our Air Miles rewards for gas certificates to Shell, which saved us $300 in fuel charges this year.
The remainder of our expenses go towards my defined benefit plan (11%), federal and provincial taxes (15%), TFSA and RESP contributions (6%), CPP and EI (4%), and then a lot of miscellaneous expenses under 1% of gross income. We also had a modest vacation this summer out in Kelowna as well as camping in the interior BC.
All in all I am happy that we started a budget this year and I like that we were able to save money, control expenses, and still maintain a good quality of living on just one income.
For next year, I’d like to continue to save some extra money each month until we move into our new house. At that point, I’ll need to re-evaluate our monthly budget until we get a good handle on what some of our new monthly expenses will be.
Do you look back and review expenses each year? How much of your gross income are you spending on each category?