Thursday, August 12, 2021

Coming out of the pandemic - Looking forward to bank dividend raises

For buy and hold dividend-paying stock investors like ourselves, Canadian banks have traditionally been safe bets in terms of continuing to provide a steadily increasing source of income. Dating back to the period after the Great Depression, the banks in general have shied away from cutting their dividends despite numerous recessions and economic downturns.  In fact over the past several decades, all 5 “big banks” plus National Bank have consistently raised their dividends annually, just like clockwork.

The COVID19 pandemic brought on a good news/bad news situation, depending on your perspective.  The good news is that despite enduring over 1.5 years of lockdowns, job losses and business closures that brought instability and uncertainty to the economy, none of the banks cut their dividends. The bad news is that during this same timeframe, the OFSI (Canada’s banking watchdog) has prevented the banks from increasing their dividends in order to ensure the financial health of the banking system. This has continued despite the banks all generating better than expected profits and accumulating huge levels of excess capital. 

Now with the lockdowns coming to an end across the country and the economy rebounding, investors are anxiously awaiting the easing of these restrictions on the banks, although the possibility of the Delta variant triggering a dreaded fourth wave and another lockdown may put a damper to these hopes.  Dividend declarations for the banks have already been made for the first 3 quarters of 2021 without any dividend raises.  The 4th quarter dividend declarations for each of the banks should occur around the end of August, with Ex-Dates (the date before which you need buy a stock in order to qualify for the upcoming dividend payout) ranging between end of September to end of October, and the payout dates from October to November.  This will be the last chance for the banks to increase their dividends for 2021, and if they do come, the payouts are likely be larger than normal to make up for the missed increases of the past two years.

If and when banks are allowed to resume their raising of dividend payouts, it will be interesting to see how they do it.  There have been talks of increases in the range of 13-20%, when prior to COVID, the annual increases were around 3%.  To me, it seems more likely that a huge dividend boost would be paid out as a one-time special payout rather than a straight dividend raise.  As history has shown, once a bank raises its dividend, it does not decrease it again, come hell or high water or even pandemic.  If the banks raised their dividends by double-digits, future raises would compound upon this.  Giving out a special dividend to reduce the excess coffers, on top of the normal 3% raise, seems much more reasonable and sustainable.  Regardless of how it is done, there seems to be a large (but potentially one-time) increase in income coming our way, since we hold stock in all 5 big banks plus National Bank.

This leads to an interesting quandary for us with regards to our annual RRIF withdrawals, our taxable income for the year, and the resultant tax bracket that we will end up in.  In a normal year, we can come pretty close to predicting what our net income will be, since our income consists of the dividends paid out from our non-registered account (which we split equally), plus the annual mandated withdrawal that we make from our individual RRIF accounts.  We can roughly guess what the dividend payout from the non-registered will be by assuming a small increase fueled mostly by the dependable dividend-raising stalwarts that we own, including banks, telco, and railways.

We usually withdraw more than the government-mandated annual minimum from our RRIFs since our goal is to reduce the size of our RRIFs by the time we are 70 to minimize Old Age Security (OAS) claw-back.  Balanced against this goal is the need to keep our taxable income below the higher tax brackets in order to keep our income tax owed at a reasonable level.  By deciding which tax bracket we want to stay within, we can work backwards to determine how much we can withdraw from our RRIFs.  I use the previous year’s StudioTax online tax program to help make this determination.

In the past we would usually do this calculation at the beginning of a new year and make an early RRIF withdrawal.  Since our early retirement in 2012, we have been taking out stock-in-kind from our RRIFs as opposed to cash, continually increasing the dividend income coming from our non-registered account.  Having done this for almost 10 years, we are now in a position to fund all normal expenses just from that dividend income.  Now the annual RRIF withdrawals just act as further on-going “boosts” to that income to help combat inflation.  The earlier in the year we make the RRIF withdrawal, the sooner we can start adding the additional dividend payouts to our income for the year.

This year, knowing that the dividend flood-gates may be unleashed, we only took out the government-mandated minimum for our RRIF withdrawals.  As we have done the previous 3 quarters, we will wait for the 4th quarter dividend declarations by the banks before determining whether we should make a second RRIF withdrawal and if so, how much.  If the bank dividend increases are declared, we can recalculate the projected income that our non-registered account will produce.  Doing so will protect us from taking too much out from our RRIFs and inadvertently bumping us into higher tax brackets.

If the restrictions on the banks continue through this next round of dividend declarations, then we will know that no raises will come this year.  But sooner or later, they will come, so we would take the same precautions next year.  Not exactly a bad “problem” to have!

Friday, January 22, 2021

2020 (COVID) Year End Review: After Eight Full Years of Retirement

What a crazy year 2020 has been!  For almost a year and counting, COVID 19 has impacted the lives of people around the world in every conceivable way, ranging from economics, finance, social interactions, physical and mental health.  As mentioned in previous blog entries, the situation for my husband Rich and I has luckily insulated us from most of the economical effects of the pandemic.  Since we are now seasoned retirees with a stable and established income flow, we have not had to worry about how to continue doing our jobs in this strange and danger-fraught environment, or worse yet, about losing our jobs or struggling to pay our bills.  We also have been able to stay healthy and don't have any close friends or family who have been stricken with the virus.  We count our blessings and our hearts go out to all the people who have been adversely affected by this deadly disease.

In light of this strange and (excusing what has now become a hackneyed cliché) "unprecedented" year, it was not at all surprising that the markets tanked when the pandemic was first declared back in March.  What does seem astounding is how quickly stocks rebounded.  Within a few weeks, prices were back on the rise and by year end, the TSX/S&P Index actually closed 2% higher than where it opened on January 2, 2020.  Much of that recovery was fueled by the surge of tech stocks such as Shopify, as well as cannabis, lumber and gold stocks.  Is it the modern spin on an old adage that when hunkering down for the Armageddon, you should stockpile gold bars, SPAM and weed?  

Since we only care about dividends and not the value of our holdings, it has never been our strategy to chase the latest "flavour of the month" fads hoping for quick gains.  Instead we continue to hold time-tested stalwarts in unglitzy industries such as Finance, Utilities and Transportation.  So our portfolio, which was down as much as 30% at the bottom of the crash, has not experienced the full impacts of the TSX/S&P Recovery.  Still, by the end of 2020, we were down less than 3% relative to the start of the year.  

Yet of only importance for us is the fact that despite suffering dividend cuts or stoppages from 7 of our stock holdings, the overall dividend payouts within our non-registered account (which sources our monthly income) rose by 2.6% while the dividends in our portfolio as a whole rose by just under 1%. This is because by the end of the 2020, out of the 40 companies that we held in our portfolio, 26 had raised their dividends.  A caveat to that last statement is the fact that 19 of these companies declared their dividend raises prior to March when COVID struck, and the ones that raised after often did so by smaller amounts than in the past.  Most of these increases sit in our non-registered account while almost all of the cuts reside in our registered accounts.  This is by design since we tend to move the larger or more stable companies into the account that pays our bills while leaving the riskier ones in the registered accounts in hopes of long-term growth.

The fact that we made it through a pandemic year and still came out ahead in terms of income continues to strengthened our confidence in our retirement strategy. If we can make it through the past year, we can make it through anything. Things continue to look up for 2021 with vaccines starting to become available.  This seems to be reflected in the market which continues to rise, as well as for our dividends.  Four companies in our portfolio (Telus, Enbridge, Atco and Granite REIT) have already declared dividend increases for first quarter 2021.  Unfortunately there still seems to be a regulatory ban preventing any of the major banks from raising their dividends.  Hopefully this will be lifted as more vaccines roll out.

Of the 7 companies that cut their dividend, 5 of them (Chemtrade, Cineplex, Husky, Suncor and Corus) have lost so much value that they are not worth trying to dump in order to buy better yielding stocks.  We will just let them ride out the pandemic and hope for even a partial recovery.  Luckily these are mostly in our registered accounts which we now withdraw from just once a year and no longer count on for monthly income.  

Of note is AW.UN, which eliminated its dividend in March 2020 when the initial lockdown meant that ALL restaurants had to close.  But by July when eateries were allowed to reopen for takeout, this stock resurrected 62% of the payout.  As well, we received extra bonus amounts in  October and December.  This seems like a smart way to further revive the original dividend payout without committing to doing so every month.

In April 2020, Methanex (MX.T) eliminated 90% of its dividend payout and sank in price leaving us with a large loss in value.  In November on rumours that various vaccines were close to becoming ready for distribution, the price started to rise again.  Uncertain about whether this streak would continue, once the price rose to the point where we were actually in a slight profit situation, I decided to dump the stock and replaced it with one which paid a decent dividend.  To my chagrin, the share price of MX continued to soar and had I waited, we could have reaped an even higher profit with which to buy even more shares of the new stock.  But having been burned before waiting too long to try to maximize profits, I had to remind myself that we only care about dividends.  I had achieved my goal to replace a the dud that continues to yield almost nothing to one that paid 90% more per share.  Still, I guess it is just human nature to a little bit miffed at the lost opportunity😊 .

Each year I perform a review of our holdings in terms of market capitalization and sector diversity.  For the most part, we stand pat in terms of which stocks we hold, as long as they continue to pay us a healthy dividend.  So most of the changes in terms of market capitalization were due to the COVID-driven loss of value in the companies.  Only 13/40 of our companies showed any value growth after 2020, while the rest lost value with some showing a negative 1-year returns in double digits.  As a result, our large and medium cap percentages declined while our small cap increased, even though we mostly held the same companies.

Similarly the change in sector holdings were mostly driven by mergers and splits initiated by various companies, as opposed to any active trading on our part.  Power Corporation (POW.T) re-absorbed its financial arm PWF.T which it had spun off  years ago.  Unfortunately this transaction generated a small but unexpected capital gain for us in our non-registered account.  The amount was not large enough to bother selling stock to trigger an offsetting capital loss.  We do live in fear that one of our companies that has soared in price since purchase will one day be bought out and trigger a huge capital gain that we will not have enough loss to offset.

Brookfield, which already has numerous corporations with varying interests under its umbrella ranging from asset management, renewable energy and infrastructure, created two more.  BIP.UN and BEP.UN are both income trusts that pay distributions which may not be entirely "eligible dividends" that qualify for the dividend tax credit.  Historically the distributions have also included foreign dividend, interest income, capital gains and return of capital.  Each of these Brookfield subsidiaries spun off a new corporation (BIPC and BEPC respectively) that pays 100% Canadian eligible dividends as opposed to distributions.  This is of great interest to us since we would like to hold Brookfield in our non-registered account but have previously held off because of the accounting headaches of calculating ever-changing adjusted cost base (ACB).  These new corporations now give us an opportunity to do this, but first we would like to grow more shares tax-free within our registered accounts via the Dividend Reinvestment Program (DRIP). 

Speaking of DRIPs, after the market plunged in March, we started to DRIP in our registered accounts to take advantage of depressed prices in companies whose holdings we wanted to grow.  Our only other major trade was to sell Rio Real Estate (REI.UN) in January 2020 for a slight gain.  Because REI.UN had not raised its dividend since 2018, in  we replaced it with Granite REIT (GRT.UN), which has raised its dividend every year since 2015.   We were rewarded when Granite raised its dividend in 2020 and now has announced its annual dividend raise for January 2021. 

Another interesting acquisition/merger was announced 4Q2020 but did not finalize until January 2021 when Cenovus Energy (CVE.T) bought out Husky Oil (HSE.T), whose shares I own in my Registered Retirement Income Fund (RRIF).  For each share of Husky,  I received 0.7845  shares of Cenovus as well as 0.0651 of a "purchase warrant", providing an opportunity to buy additional Cenovus shares at the set "strike price" of $6.54.  Similar to a stock option, the purchase warrant has an expiry dateJanuary 1, 2026 in this case.  But the purchase warrant can also be sold in and of itself and has its own stock ticker (CVE.WT), average cost and market price.

Both these companies (and in fact the entire Oil Sands Industry) have been struggling for years now and the pandemic has not helped.  CVE and HSE have 5-year returns of -56% and -47% respectively and both slashed their dividend payout last year.  Having the former buy out the latter seems like a case of "The Blind Leading The Blind", even though this acquisition will turn Cenovus into the 3rd largest oil and gas producer in Canada.  Hopefully synergy and cost savings from redundancy elimination, plus the pending end of the pandemic will lead to brighter days for this company.

So the question remains regarding what to do with my existing Cenovus shares plus the purchase warrants.  If CVE continues to pay no dividends,  I will hope for the share price to rise to the point where it would be worthwhile to sell my shares and buy something else.  The same thing applies to our warrants.  I have 5 years to wait for prices to rise before exercising my warrants.  Whether I use the warrants to buy shares at the strike price and then sell for a profit, or just sell the warrants will depend on the price differential between the two options.  

As an example, as of this writing, the share price for CVE is $7.83 while the strike price is $6.54.  Buying today at the strike price and immediately selling would net me a "profit" of $1.29 per share.  At the same time, I could sell each warrant today at $3.53 which nets me to profit of $2.24 (the price for sale of the warrant less the profit I could have made from exercising them and reselling the CVE shares).   Currently the sale of the warrant has a "time value" since there is so much time remaining before it expires and therefore time for CVE price to rise further.  This is why the profit made from selling the warrant is more than that of exercising it.  This time value will decrease as we get closer to the expiry date. 

Currently the differential between the stock price and the strike price is not large enough to do anything.  I will monitor the situation over the next few years to see what happens.  When I do act, I would have to ask my broker to make the transaction and probably would have to pay the $9.99 fee for each transaction.  I don't have enough warrants for any of this to make a noticeable impact on our total portfolio value, but it was fun learning about how this all works.

Reviewing our actual spending for 2020 versus the estimates created at the beginning of that year, we found that we spent 33% less than anticipated.  Compared to 2019, our spending was down almost 30%, as opposed to the expected increase in spending due to inflation.  The pandemic took away most of our opportunities for discretionary spending.  We cancelled all our planned vacations for 2020 and 2021 and luckily received most of our money back.  Similarly we received refunds for most of the theatre tickets and other events that we pre-purchased, although a couple of venues only offered credits for future shows.  We also saved on transit since there was no where to go, and a bit on medical by deferring our regular dental cleanings while in lockdown.  Interestingly, our food bill came out just about even. While we could not go out to dine at restaurants (other than a slight reprieve in the summer), we did order takeout regularly and cooked at home more, leading to a rise in our grocery bill.  The increase in our grocery bill almost exactly offset the decrease in dining out.

We ploughed the extra savings into our "high-interest" savings account with EQ Bank, which unfortunately dropped its interest rate several times during the pandemic, starting at 2.4% and ending up the year paying 1.5%.  However this is still significantly better than my savings account with Simplii Financial, which now pays 0.10%, while the major banks pay even less according to the Cannex Deposit Account Report.  The unexpected savings come at an opportune time since we will probably need to replace our 16-year-old car in 2021.

As described in an earlier blog, aided by the market crash at the start of the pandemic, Rich was able to collapse his locked-in Life Income Fund (LIF) because its value fell below the "Small Amount" rule.  Rather than removing this value as cash or stock-in-kind, which would have increased his net income by over 20K, he opted to move it tax-free into his Spousal RRSP which he has not yet turned into a RRIF.  The value of the withdrawal was added to his net income but he received a corresponding RRSP contribution deduction for the same value to offset and reduce his net income by the same amount.  The result of this is that we now have one less account to worry about, no longer have to calculate minimum or maximum annual withdrawal requirements for this LIF and no longer have to suffer from the snail's pace at which one is allowed to draw down a locked in retirement fund.  Unfortunately although I try to take out the maximum allowed from my LIF each year, unless I encounter another opportunity like last year, it will take me decades before I can collapse my account.

For many years now, we have worked to move dividend paying stock in-kind from our registered accounts into our non-registered account.  We are now at the point where we can fund most of our annual expenses from the Canadian-eligible dividends paid to that non-registered account.  Our annual RRIF/LIF withdrawals just add more dividends to it.  Along with any increases in dividend payouts from the stocks in the non-registered account, the added dividends from the RRIF/LIF withdrawals act as income growth to counter inflationary impacts in our expenses.

The goal for our RRIF accounts is to reduce their values as much as possible before we turn 70 in order to minimize Old Age Security (OAS) claw back.  Since 2019, we have been using the following strategy.  At the beginning of the year, we take out the minimum required withdrawal as stock in kind into our non-registered account.  For this minimum withdrawal, no withholding tax is required.  As part of this minimum, we usually also take out any accumulated US dividends to bolster our cache of US cash in our US bank account.  Whenever we can travel to the States again for vacation, we will be ready to pay for most of it in US currency without needing to incur exchange rates. 

Throughout the year, we accumulate Canadian dividends paid as cash in our registered accounts to prepare for the next step. Towards the end of the year, we make another small in-kind RRIF withdrawal.  But instead of simply paying the required withholding tax for this withdrawal, we request to pay enough tax to almost cover our entire tax burden from all of our income sources (i.e. LIF and RRIF withdrawals, dividend income from our non-registered account and any capital gains incurred).  We use the free tax program StudioTax from the previous year to approximate what that tax burden would be and to make sure that our total income would not bump us into too high of a tax bracket.  The result of this is that by the time our income tax is due in 2021, we will have paid most of what we owe and further reduced the size of our RRIFs by paying the tax burden from within these accounts, rather than needing to dip into our savings.  It means that we pay our taxes a few months earlier than required, but the opportunity cost is inconsequential, and again, I would like to think that we are helping the economy in some way.

Based on the estimate from the 2019 StudioTax program, I paid enough withholding tax to cover all but a few hundred dollars of my projected 2020 tax burden.  When I plugged the same income and withholding tax numbers into the 2020 version at the beginning of this year, I was pleasantly surprised to see that instead of needing to pay a small amount of remaining income tax, I am now expecting a small refund!  This is partly due to the personal exemption and climate change rebate amounts, which increase each year since they are indexed to inflation.  Additionally, the marginal tax ranges have changed so that a higher amount of income is taxed at a lower rate.  For example, in 2019 the first $47,630 is taxed at 15% while in 2020, the first $48,535 fall under this initial tax bracket.  The same trend continues for the rest of the brackets.

That sums up the financial aspects of our COVID-influenced 2020.   Through a year of social distancing including two periods of full lockdown in Toronto without the ability to travel, dine out, go to live theatre, movies, or exercise at indoor gyms and tennis bubbles, we had to find creative ways to entertain ourselves and keep physically fit.   All in all, it has not been so bad and there have even been some benefits to our new routines.

Other than the few blissful months in the summer when COVID numbers were relatively low and we could do more outside due to the nice weather, our main source of exercise has been walking.  Looking for variety in our daily walks, we have covered every nook and cranny of streets and neighbourhoods within a 10-12km radius around our condo.  In doing so, we have come across new discoveries in terms of cool architecture, outdoor public art, colourful graffiti in hidden laneways, interesting lawn ornaments and sculptures in front of private homes, parks and ravines and many more sights that we never took the time to notice before.  Instead of going to the gym, I do exercises by following various Youtube videos.  Not being able to play tennis indoors, we suddenly have drastically lowered our acceptable temperature threshold for playing tennis (and ping pong!) outdoors, even with limited mobility while laden with heavy coats, hats and mitts.

Although we could not dine out at restaurants, we still wanted to support the local eateries and try to get take-out at least once a week.  We soon discovered that many of the high-end restaurants that we have wanted to try are offering 2-5 course set meals for pickup or delivery, usually at discounted prices compared to dining in, and without the hefty liquor bill that a night out would typically include.  Ordering is easy through the online Tock application that consolidates dining opportunities into one website.  We always pick up our order rather than having it delivered since we want the restaurant to get all the profits.   One restaurant that had been extremely difficult to get a reservation for prior to the pandemic is Alo.  By contrast, it has been fairly easy to order their take-out set meal and we have dined on their delicious offerings twice now.

As a replacement for the loss of live theatre, we have taken full advantage of all the free online theatre that was offered at the beginning of the pandemic.  This included previously filmed plays and musicals from U.K.'s National Theatre Live, Andrew Lloyd Webber's "The Show Must Go On" series, New York's Lincoln Theatre, Stratford Festival and more.   The free offerings seem to have dried up now, but there are still paid online theatre opportunities for relatively nominal prices compared to the cost of a live theatre ticket.  Most recently we have signed up with Musical Stage Company to stream 3 musicals for $90 CDN which each include a pre and post show talk.  The price is for the household so the cost for the two of us comes to $15 each per show.  Had we more people in our household, it would have been even cheaper per head.  While the online experience is not the same as being live in a theatre, it has been a great substitute in the interim.

We belong to the TIFF Secret Movie Club where we would go down to the Bell Lightbox once a month between October to April to watch a movie and then have a Q&A with the director or actor.  Similarly we regularly sign up for interest courses taught over 6-week periods at the Hot Docs Theatre.  During the pandemic, both of these events have gone online and I actually enjoy this format more than attending in person. Rather than requiring to attend the movie or lecture at a fixed time, I can stream the event repeatedly at any time over a fixed period of days, in the comfort of my own home, and in my jammies if I so choose.  In each case, the cost per household is also significantly less than the cost per person of the live version.  I would love for this to continue even after the pandemic is over.

It is not easy to replicate the experience of traveling abroad.  Rich and I both like visiting vibrant cities with interesting art cultures, so we were delighted to find that so many art museums have increased their online presence by offering video talks about works within their collections.  The Frick Museum in Manhattan produces some of the best series that we have found so far.  In particular, in each episode of their "Cocktails With a Curator" series on Youtube, a curator takes a single work in the Frick Collection and describes it in great detail, providing historical context regarding the artist and time period of the work, as well as analyzing the piece in terms of style, technique and subject matter.  The curator also pairs the talk with a cocktail, somehow related (sometimes extremely tenuously) to the work.  This adds to the fun of watching the video.  They have another series called "Travels With A Curator" that describes a remote, often exotic location that has some sort of link to a work within the Frick Collection.

When we were initially put into lockdown for the first wave of the COVID and forced to stay just within our own household, Rich and I jumped with both feet onto the "Zoom Video Chat" band wagon.  I signed up for premium Zoom which allows me unlimited meeting durations for groups of more than 2 Zoom windows.  We proceeded to hold social chats with friends and family across the country, Zoom dinners and pizza parties, book club meetings, games nights, art discussions and more.  In those first few months where everyone we knew was stuck at home with little to do, we probably had more contact with some people (albeit virtually) than we ever would have normally.

So as we head into 2021 with the pandemic still raging, we will continue to try to make the best of things and look forward to the day when mass vaccination will free us to go out and socialize again.  With both pent up energy and extra savings, we will be ready to party and splurge.

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Sunday, October 18, 2020

LIF Withdrawal Maximum - The 2nd Rule / CRA Installment Payments

I wrote most of this blog entry at the beginning of the year before COVID hit, which now seems like a life-time ago.  I lost track of it in midst of the pandemic, kept busy with assessing the economic impact of business closures on our investment portfolio and dividend income (more on that in my annual Year-End in Review to be posted in January).  Much of the content of this posting may not be relevant for the foreseeable future, since it was predicated on an exceptionally strong year for the stock market (i.e. 2019 - as I said, a life-time ago!).  Since 2020 is coming to a close, I decided to publish this anyways in hopes that one day, we will see good times again.


I have long complained about how unfair and paternalistic the rules are for a Life Income Fund (LIF), which places restrictions on the maximum that you can withdraw from it each year.  These rules are based on the premise that, left unchecked, an individual would blow through his retirement savings and have nothing left towards the end of his life.  As someone who is very good at managing money and planning for the future, I feel unnecessarily constrained by these restrictions and have looked for every opportunity to increase the rate at which I can "free my money" into my own control.

At the beginning of 2020, which marked my second full year of making LIF withdrawals, I was surprised by the calculation for my LIF maximum.  Up until now, I was only aware of the rule that calculates my expected LIF maximum for the year based on my age on January 1, my LIF balance at the end of December 31 of the previous year, and the posted annuity factor.  This slowly increasing factor is meant to make your money last until age 90.  I even have a spreadsheet listing the annuity factor and projected LIF maximum for each year.  Accordingly at age 56, I was expecting to only be able to withdraw around 6.57% of the value of my LIF.
Imagine my surprise when my LIF maximum for 2020 came to about 27% of the value of my account!  I thought this was a mistake and tried to get an explanation from my discount broker Scotia iTrade.  Unfortunately the agent on the phone did not know the answer and I did not get a response from the question that I posted on the Communications page of their website until three weeks later (by which time, I had already figured it out - Thank You Google!).  Left on my own to find the answer, I read up in more detail about LIF Maximum Withdrawal Rules on the Financial Services Regulatory Authority of Ontario (FSRA) website which controls my locked in company pension (converted into a Locked-In Income Fund in 2018) and clarified the rules for Ontario.  This is what I discovered:

I was not aware of the second rule which allows you to take out the investment gains from the previous year.  I had collapsed my LIRA into a LIF at the end of 2018 and immediately moved 50% to my RRIF under the one-time FSRA provision.  Accordingly there were no investment gains when my maximum was calculated for 2019 and I fell under the first rule.  Given the great year for the TSX in 2019 and the good dividends generated from the stocks held in my LIF, the account actually grew by over 27% by the end of the year.  This meant that in 2020, my LIF maximum was significantly higher than anticipated!

When I finally received an official response from Scotia iTrade, it clarified the second rule even further.  This value is calculated as:
In my case, since I did not have any net transfers in or out, this calculation for my 2020 LIF Maximum consisted of the following:
LIF Value Y/E 2019 – LIF Value Y/E 2018 + (LIF Withdrawal incl. Withholding Tax 2018)

With this new knowledge and understanding, I will be able to better predict and plan for my LIF withdrawal going forward.

Then came the quandary.  Should I take advantage of what could potentially be a one-time opportunity to take an unexpectedly large sum of value out of my LIF?  If markets are not as strong in 2020, I may not have this same opportunity and would fall back to the first rule of the calculated percentage which will come to 6.63% in 2021 when I will be 57.  The forgone opportunity to withdraw 27% from my LIF cannot be rolled over to the following year and would be lost forever.  

But taking out this unplanned maximum would push my 2020 income significantly higher than expected, increasing my income tax burden.  I also had not saved enough cash within my LIF to pay the withholding tax and would need to sell some stock in the account to generate it.  Additionally, I would need to scale back the larger withdrawal that I had planned for within my RRIF, where I did have the extra cash to cover the withholding tax.  My overall goal is to drastically reduce the value of my registered accounts by the time I am age 71, so that I will not be subjected to as much claw-back of Old Age Security (OAS) payments, which are indexed for inflation.  For the past few years, I have concentrated on my RRIF but now came an opportunity to deal with my LIF. 

After some thought, I decided that I could not pass up this opportunity.  Instead, I would withdraw the allowed maximum from my LIF and take the one-time hit to my net income level.  As has been my strategy for the past few years, I would take a portion of this withdrawal as stock-in-kind to move to my non-registered account where it will continue to generate dividend income at a better tax rate.  The rest of the withdrawal would be taken in cash and paid up front as withholding tax.  Rather than paying the minimum required withholding tax, I would pay enough to cover my projected overall tax burden generated not just from this LIF but from all of my registered and non-registered accounts.  I am able to obtain a fairly close estimate of this future 2020 tax burden by entering anticipated income figures into my 2019 tax software.  

To generate the cash to cover the withholding tax, I put in a "limit-sell" for some shares of one of my stocks and was able to sell at a decent price while locking in some tax-free capital gain.  By voluntarily paying extra withholding tax as part of my LIF withdrawal, I avoid the need for the government to put me on a mandated tax installment payment plan in future years.  CRA installment payments are required when insufficient tax is deducted at source.  The requirement for installment payments is as follows: 

No tax is deducted for any of the dividend payments that my husband Rich and I receive and split as income from our jointly held non-registered account.  The minimum withholding tax charged on my registered account withdrawals would not be enough to put me under the "net tax owed" threshold to avoid the requirement for installment payments.  Rather than needing to adhere to a fixed schedule (usually quarterly) for paying taxes throughout the year and having to make sure that I have the funds available for each period, I would rather be in control of when I pay and prefer to do it in one or two lump sums.  This way I can sell stock at an opportune time in order to fund the payment(s) and I can pay amounts closer to what I actually owe, as opposed to the CRA estimates that are based on previous years' net taxes owed.

My initial motivation for paying more withholding tax up front was a means to help the economy during the COVID crisis by paying my income tax debt to the government ahead of the regular due date.   Now with the possibility of being imposed installment payments, I would not be paying that far in advance anyway.

Taking advantage of the second rule of LIF Withdrawal limits was probably a good decision since it may be a while before these conditions present themselves again.   A similar situation happened for Rich, but since the size of his LIF is much smaller, withdrawing the maximum would not have the same effect on his annual income as it did for me, and he actually had enough cash saved up to cover the withholding tax.  So this was an easy decision for him to take advantage of this year's extraordinary maximum withdrawal allowance.  This large withdrawal followed by the initial market crash incurred after the start of the pandemic caused the value of his LIF to drop below the "Small Amount Rule" which allowed him to collapse his LIF all together and move the money into his RRIF.  I discussed this in a previous blog entry.

Thursday, July 9, 2020

3.5 Months Into the Pandemic ...

It has been over three months since everything first shut down due to the pandemic.  We have now gone through an entire "COVID-impacted" quarter of dividend payouts (or lack thereof) since the depth of the market crash in mid March.  This seems like a good time to reflect upon the economic fallout of COVID 19 and its financial impact on our portfolio. 

My husband Rich and I have been through market downturns before, including the financial crisis of 2008.  That situation was less stressful for us since we were both still working and had time to wait for a recovery.  In fact, that recession was a great time for us to buy stock at a discount and probably hastened our ability to retire when we did.  We saw it as a successful test of our retirement strategy of basing our income on dividends as opposed to the value of the stock.  Although stock prices plummeted, our dividends held strong.  It helped that only limited sectors were affected and for the most part, these were not sectors that we were heavily invested in.  Also since we limit the size of our holdings in any one company, we would be only slightly impacted by any company that did cut or eliminate its dividend.  In addition, it proved that we had the risk-tolerance and fortitude to concentrate on the dividends and not panic even while the total value of our portfolio fell drastically. We were tested again in 2015 when the markets fell 11% from the previous year for various reasons including worry over China's economy and its impact on the rest of the world.  That time we were 3 years into retirement.  But once again we stood pat, our dividends held, and by 2016 we had recovered all of our "paper" losses and were on the rise again.

Those two experiences helped to prepare us for the unprecedented decimation of the markets that resulted when COVID 19 led to the closure of all businesses except for "essential services".  This time all sectors across the board were affected in a major fashion.  Granted that stock values were probably inflated at their height back in mid February.  But at the bottom of the crash in March, the TSX/S&P index had fallen by over 37%!  At one point, the 1-year returns of every one of our stock holdings were in the red by double digits, some having lost over 50% of their value.  Once again, we ignore the value of our portfolio and look only at the impact to our dividends.

This time we did not escape unscathed.  Six of the companies that we own have either slashed or totally eliminated their dividend payouts.  We already knew about a couple of these from the last quarter.  They included Cineplex (CGX - more on this later) who understandably stopped payments since they were not making any revenue with their theatres closed, and Chemtrade (CHE.UN), an already struggling company who cut their dividend by 50%.  Husky Oil (HSE) was another troubled company that was on our radar for the potential of a dividend reduction.  Rather than totally eliminating it, Husky cut their dividend by 90%, now paying out just 10% of what it used to for the past 1.5 years.  In my opinion, leaving just 10% of your previous payout is a weak attempt at being able to claim that you are still a dividend-paying stock.  I closely track our dividend payouts each month and this measly amount is almost not worth my time to log.  However Rich thinks that it is an indication that the company hopes to resurrect a healthier dividend once their finances improve.  Methanex (MX), a producer of Methanol which has been affected by weak oil prices, used the same tactic by cutting their dividend by 90%. 

A&W Revenue Royalty Income Fund (AW.UN) took the opposite approach by totally eliminating their dividend payout, but declaring up front that this is a "temporary measure" while its restaurant chains closed at the start of the pandemic.  Now that the restaurants are starting to reopen again, hopefully this means that eventually the dividend will return.  Suncor (SU) was the most interesting case, since they actually raised their dividend by 10% back in the first quarter and then clawed it back before cutting its dividend by 50%.  So the net result is that Suncor has cut its dividend by the unusual amount of 55% since their previous payout.

The impact of these dividend reductions was tempered by the fact that 5/6 of them were situated in our registered accounts.  Having already made the bulk of our annual LIF and RRIF withdrawals at the beginning of this year, we can now defer next year's mandatory withdrawals up to the end of 2021, which gives us over a year and a half to wait for these companies to recover both in value and dividend payouts.  For the past few years, we have been making our RRIF/LIF withdrawals by moving stock-in-kind into our non-registered account, from which we withdraw the dividends to spend as income.  We usually move the more stable stocks, leaving companies in riskier or more cyclical sectors in the registered accounts.  This worked out especially well this year, since none of the stock that we withdrew cut their dividends.  Because of our strategy of moving stock-in-kind as opposed to selling stock and withdrawing cash, it would have actually been better had we made the withdrawals during the lowest point of the market. For the same amount of taxable income generated from the withdrawal, we could have moved more dividend-paying shares to the non-registered account at a lower share price.  But who could have predicted this latest market downturn?

The one dividend cut that directly impacted our annual income was Cineplex, which we hold both in our registered and non-registered account.  Cineplex had been a solid dividend-paying company that increased their payout annually since 2011, even though their share price had declined since we first bought it.  Things looked bright for this stock when it was announced at the end of 2019 that the company would be bought out by British company Cineworld for the price of $34 per share.  With that announcement, the market price of Cineplex shot up by over $10 to match and even momentarily slightly exceed the buyout price.  At that point, we considered cashing out our Cineplex shares in advance of the sale.  But inertia and the desire to continue reaping the seemingly solid dividend payout for a few more months led to us hanging on to the shares until the sale.  Then COVID 19 hit, Cineplex closed all their theatres, their share price plummeted, they eliminated their dividend payment and now Cineworld has backed out of the buyout deal.  The lost opportunity of selling our Cineplex shares and the loss of dividend income that those shares provided is regrettable, but our diverse portfolio is structured so that no one company's misfortunes will hurt us too badly.  There is no point to sell now at these depressed prices, especially since theatres are starting to reopen.  We will just continue to hold our Cineplex shares and hope for a rebound, while we watch the unfolding drama as the company sues Cineworld for breach of contract.

The news was not all bad in this second quarter.  Two more of our stock, Finning International (FTT) and Sunlife Financial (SLF), decided to not raise their dividend payouts, joining Bank of Nova Scotia (BNS) and Canadian Apartments (CAR.UN)  who did the same in the first quarter.  Despite having raised their dividends annually for multiple years, given the state of the economy, we considered this a win.  Three of our stock, Algonquin Power (AQN), Hydro One (H) and Power Corporation (POW), actually raised their dividends.  Not surprisingly, all three of these companies are in the Utilities sector which did not suffer as much from the pandemic-induced shutdowns.

During all this, there were two anomalies that made it look like two solid companies had reduced their dividends, but did not.  First Telus (T) initiated a 2-for-1 stock split, making it seem on the surface as if their dividend was cut in half.  In reality, we ended up with twice the number of shares at half the dividend rate and came out even.  Brookfield Infrastructure Partners (BIP.UN) made an even more complicated move when they split off a small portion of their company to create Brookfield Infrastructure Corp (BIPC).  For every 9 shares of BIP.UN, we received 1 share of BIPC and the dividend for both companies adjusted accordingly.  It took a bit of math to prove to myself that we came out with the same payouts between the two companies that we originally had with just BIP.UN, but we did.  One interesting thing to note is that unlike BIP.UN, BIPC is not an income trust, so eventually we could move shares of this company from our registered to our non-registered account without generating tax complications that come with holding income trusts in non-registered accounts.

So what has been the net effect on our portfolio and our dividend income after 3.5 months of the pandemic?  As indicated in my previous blog post, 19 of our 46 companies had raised their dividends in the first quarter, with Suncor being the only one that subsequently cut it in the second quarter.  This means that despite the cuts that we received, so far our overall annual dividend income is higher than it was at the end of last year.  The pandemic is far from over yet, but the worst of the market roil seems to hopefully be over?  If that turns out to be the case, then we will have survived the "mother of all" market downturns and it feels like if we can make it through this with our income relatively intact, then we can survive anything.   With stock prices still depressed relative to before COVID 19 struck, we continue to use Dividend Reinvestment Plan (DRIP) in our registered accounts to purchase more stock from the companies whose holdings we wish to grow.

Because so many activities have been inaccessible or undesirable to us over the past three months, our spending continues to be concentrated mainly on mandatory costs such as condo fees, utilities, household supplies and groceries.  During this period, we totally eliminated our usual spending on transit, hair cuts, dental appointments, discretionary shopping trips, and entertainment activities such as going to the theatre or movies and dining out at restaurants.  We have no plans for vacation spending for the rest of the year and have drastically reduced our driving costs.  For the first time since we retired, we have actually been able to add regularly to our emergency kitty funds stored in our high-interest savings accounts.  In the months of April and May, our average spending was almost 50% less than in previous years.  Now part of that was because we were also not charged property tax for two months and are paying a temporarily reduced utility rate on our hydro usage.  In June, as the property tax bills restarted and more restaurants opened up for takeout, our relative savings dropped by around 25% which is probably a more realistic rate going forward.

As described in my book Retired At 48 - One Couple's Journey to a Pensionless Retirement, we use Quicken both to accurately categorize our spending for ease of running reports, but also to predict up-coming spending needs to ensure that we always have enough cash flow, either coming from our dividends or augmented from our short or long term kitties.  So when our monthly property tax was deferred for two months, I post-dated the expenses in Quicken to remind myself that this money would come due eventually.

All in all, Rich and I have been quite fortunate throughout the pandemic since we were already retired and did not have jobs to lose or stress over, and our retirement income has so far held up quite well.  I read an article in the Globe and Mail back in March about ways that people who were financially secure could help out the economy.   We have implemented some of these ideas including regularly ordering takeout from our local restaurants and going to pick up the food so that delivery services do not eat into the profits, buying gift cards for future spending, donating to charities including the Red Cross, and accepting credits from theatres for future shows instead of getting refunds for cancelled performances.  One interesting suggestion that helps the economy in general is to file and pay your income taxes early.  We did this for our 2019 tax filings, paying at the beginning of May instead of taking advantage of the deferred payment deadline of September 1. Since Rich needs to make another small RRIF withdrawal to reach his annual RRIF minimum, he may opt to pay more withholding tax than would normally be required, as a way to reduce the tax owed in 2020 and also continue to help replenish the government coffers.  I realize that our small contributions won't do much if anything to address the overwhelming deficit that is being racked up during the pandemic, but hopefully every little bit helps?

Monday, March 23, 2020

Looking for Silver Linings in the Face of Economic Turmoil and Other Musings

Things are dire in the markets right now. The TSX/S&P index is down over 28% since the beginning of the year with our investments following suit. While we have a fairly diversified stock portfolio, that helps little in situations like this where all sectors are down across the board.  Our strategy of relying on dividends rather than the value of our stock will buffer us to a large degree. We are always at risk of dividend cuts but since we hold shares in so many different companies, no one company's dividend cut would substantially hurt our income situation.  Most of our companies are large cap, blue chip organizations that should be able to withstand what hopefully will be a temporary setback, but it is something that we will need to keep an eye on.  While a few of these companies may consider temporarily suspending any regularly scheduled dividend increases, most will be hesitant to cut dividends since this will be admitting weakness. The same premise held true for the Financial crash of 2008, although those were different circumstances.

Using TMX Money and Morningstar websites as information sources, I took inventory of our holdings to see where we stood in terms of upcoming dividend payments.  We are lucky that many of the companies whose stock we own have already declared their dividends earlier in 1Q2020 and are therefore obliged (legally?) to pay out at least through April.  A significant number of them even declared increases in dividend, right on schedule at the same time that they have for the past 3-5+ years.  It is interesting to note though that most of these declarations occurred before the MAJOR market free-fall that started around the beginning of March.  The only stock that still committed to a dividend increase after the beginning of March is Premium Brands (PBH) which declared mid March. I wonder if they regret it now?

By contrast, Canadian Apartment Properties (CAR.UN) also declared in mid March but did not raise its dividend as per schedule for the first time since 2012.  Bank of Nova Scotia (BNS) typically declares a dividend raise twice a year, payable in April and October.  There was no dividend raise for April 2020, even though the dividend was declared back in mid February, prior to the crash.  I wonder if the bank could foresee what was coming?

We hold stock in a few financially fragile companies who might not be able to withstand the downturn, especially those in industries directly hit by the reduction in business caused by self-quarantine and social distancing measures.  Already Cineplex (CGX) has missed its monthly scheduled dividend declaration date, which leads to the reasonable assumption that they will not be paying any dividends while their theatres remain closed.  Chemtrade Logistics (CHE.UN) has already declared that it will slash its April dividend in half.  Whether this is temporary or permanent is to be determined since Chemtrade has been struggling for a while now.  The companies that pay out monthly, like CGX and CHE.UN, have less time to ride out the storm than those that pay quarterly.  Corus Entertainment (CJR.B) and Husky Oil (HSE) already declared their 1st quarter dividend and do not need to decide on their next declaration until mid April and mid May respectively.  So these companies have a bit of time to wait and see if there will be a miraculous market recovery in the interim.  In the meantime, their share prices have plummeted to the point that their dividend yields are dangerously in the double digit range.

It will be telling to see what happens for our next set of companies who usually make their 2nd quarter dividend declarations around the end of April to mid May for payout between June to July.  While all of these companies have taken hits to their share prices, hopefully most of them will be able to ride it out and wait for a recovery.  It would not be surprising if they skip their annual dividend raises, but we just hope that they don't reduce their dividend payouts, temporarily or otherwise.

As with the last financial crisis in 2008, the secret is to stick to our "buy and hold" strategy and not succumb to the frenzy of panic selling that is currently sweeping the markets.  This would only lock in what is otherwise just transient losses on paper.  We can withstand minor cuts to our dividend income while we wait out the end of the pandemic.  In fact, there are various ways to benefit from the downturn, just as there were in 2008, although this time the situation is a bit more dire, extreme and unpredictable.

As of right now, all stocks across the board are "on sale".  It is a fine time for those waiting to get into the market, although it is difficult to know when prices have bottomed out. Since we are in retirement spending mode as opposed to retirement savings mode, we do not have much spare cash available to take advantage of the depressed market.  However we are able to DRIP (Dividend Reinvestment Plan) in our registered accounts (RRSP, RRIF, TFSA) in order to buy small amounts of stock at relatively lower prices each time we are paid a dividend from various companies. 

Since COVID-19 has forced the cancellation or closure of most of the social activities that constitute our "discretionary" spending, we actually have significantly less spending and more cash flow for the month of March. We have received refunds for pre-paid travel expenses, theatre tickets, movie events, tennis fees, gym memberships and more.  Social distancing and the mandated closure of all non-essential shops, services and entertainment options means that discretionary spending has been reduced to just about zero.  We can no longer dine at restaurants and the need to take transit or fill up gas to drive anywhere has trickled to a halt since there is nowhere to go.  We are left with only "mandatory" expenses to pay for.  Our monthly credit card bill for March is the lowest that it has been in years and this trend should continue until the crisis is over.  This should help any dividend hit that we incur.

Part of the contingency factored into our early retirement plan was the ability to scale back discretionary spending if we ever fell behind in our annual retirement projections.  To date, this has not been required since we went through so many great years in the stock market that we are now way ahead of plan.  But this enforced reduction in our spending opportunities has provided a good chance to reassess the cost of the bare-bones minimum monthly expenditures in our budget.  At this point, we are down to condo fees, property tax, hydro bills, utilities (cell phones, internet, cable), food, medicine, sundries (like toilet paper!?!) and NETFLIX (in order to survive the boredom!!).  I doubt that anyone stuck at home for such extended periods of time would debate that internet access and TV/Streaming services have become mandatory expenses.

One unexpected side-effect resulted from the massive loss in value in all of our accounts.  My husband Rich's locked-in Life Income Fund (LIF) is governed by strict rules that limit the maximum that you can withdraw each year, with the goal of making the funds last until age 90.  One of the few exceptions is the "Small Amount" Rule for Ontario which states:

If you are at least 55 years old and the total value of all money held in every Ontario locked-in account you own is less than $22,960 <amt recalculated each year>, you can apply to withdraw all the money in your Ontario locked-in account or transfer it to a RRSP or RRIF.

Prior to the big crash at the beginning of March, the value of Rich's LIF came nowhere near qualifying for the small amount rule.  Within a week, the value had plunged to the point that it qualified easily.  He filled out Form 5 from the Financial Services Commission of Ontario website and requested that all the stock and cash sitting in his LIF be transferred to his Spousal RRSP.  It took about 5 business days for our discount broker Scotia iTrade to execute the request and in that interim, we were concerned that the stock would rebound and no longer qualify.  No worries there, since the share price fell even further over these days.  So now he has successfully broken free from the strict rules of the LIF and he no longer needs to trigger annual withdrawals from that account.  Because the stock was transferred in-kind from registered account to registered account, there was no sale to lock in the losses and hopefully this will not count as LIF income.  The shares can now sit in his RRSP collecting dividends, allowing time for the share price to eventually bounce back.

We had already made our mandatory annual RRIF and LIF withdrawals at the beginning of the year before the stock crash.  I gave some thought as to what we could do if this was not the case. First I would defer the withdrawals until the end of the year to allow maximum chance for the markets to recover.  If that does not happen, then I would make my RRIF/LIF withdrawals as stock-in-kind into my non-registered account so that there is no actual sale of stock to lock in the loss values.  I would then keep the stock there and let the prices rebound.  As a side benefit, the dividends generated by the new stock in the non-registered account would be taxed at a much more favourable rate.  If I needed the value of those withdrawals to live on, instead of selling stock at a steep loss to generate cash, I would initially raid our long-term emergency kitties, hoping to replenish them once the market rebounded. Finally I would withdraw the minimum allowable amount for the year, which the Federal government has provided a one-time reduction of 25%.

These are trying times for all of us.  It is important to stay calm and not panic.

Thursday, March 12, 2020

Beware of "Ghosting" Your Spouse Credit-wise

Being the more detail oriented, organized and proactive person in our marriage, I have been the one to apply for any credit cards, making my husband Rich a secondary card holder.  I am also the registered owner for utility bills such as phone, cable, internet and cell phones.  All of our bank accounts are joint and the only accounts actually in his name alone are his RRIF and TFSA.  There is an unfortunate side effect of this which did not become apparent until the day Rich tried to open his own EQ Bank savings account.

We found out that Rich now has an extended period with no "credit history" even though he has been spending regularly on his credit cards, for which I pay off the entire balance every month.  He does not even have an easily accepted secondary "proof of identity" since his name is not on any of our utility bills, which seems to be the defacto identification criteria requested by many institutions.  After providing his driver's license, we realized that he could not produce any of the requested additional bills or statements that had just his name on it.  Even our property tax statement lists both of our names with mine is listed first.  Eventually he was able to use his T4RIF statement to confirm his identity and was able to successfully open the bank account.

However,  this did not help with Rich's lack of credit history, which is defined as "A consumer's ability to repay debts and demonstrated responsibility in repaying debts."  Your credit score is calculated by totaling points assigned based on:
  • Payment history - how promptly and completely you pay off your credit debts
  • Debt level - the amount of available credit that is used up each month
  • Credit history - the amount of time you have held each type of credit
  • Types of credit - whether you have credit cards, line of credit, mortgage, car loans, etc.
  • Requests for new credit - each new request decreases your credit score
Other than our credit cards, which are all in my name, we have no debt.  We paid off the mortgage on our home over 15 years ago and do not have any outstanding loans or even a line of credit.  This leaves Rich with a low credit score, since he has no types of credit to generate payment history, credit history or debt levels.  Despite not being over-extended with debt and my always paying off the little debt that we owe on our credit cards, Rich gets no credit (pun intended) for being a good loan risk.  It probably does not help either that we have been retired for over 7 years now, and therefore do not have recent employment history or income.

It has become a bit of a catch-22.  Rich has tried to rectify the situation by applying for one of the higher-end credit cards under his own name, but was rejected even though he can prove that he (as well as we as our household) have more than sufficient funds to support such a card.  Most recently we wanted to get a BMO World Elite Mastercard which has many perks including 4 free airport lounge passes per year and is currently under promo for 1 year no service charge.  As expected, Rich was declined by the automatic online assessment, but this time we made an appointment to speak to a BMO Personal Banking rep at our local branch.  We went armed with proof of income in the form of several years of income tax statements, along with an explanation as to his lack of credit history.

It took several days involving communications with more senior loan officers who wanted to see further proof of liquid assets, but Rich finally qualified for this credit card.  Now he needs to establish a better credit score by retaining the card for more than a few months, spending on average less than 35% of his available credit limit, and paying off the full amount owed every month.   Let this be a lesson learned for couples who allow one partner to generate all the credit history while the other partner has none.  All the bank representatives that we spoke to commented on how often they encountered this issue.  Once this happens, it becomes a big pain to try to resolve the situation.

Thursday, February 6, 2020

Withdrawing US Cash from TFSA

Throughout 2019, I withdrew the US cash dividends generated from my shares of Algonquin Power (AQN.T) that I held in my Tax Free Savings Account (TFSA) and moved the cash directly to my US bank account without incurring currency exchange fees.  Since the money came out of the TFSA, there was also no income tax generated.  This seemed like an excellent way to accumulate more US cash that I could use to spend on vacation in the States.   It was also an easy transaction to trigger since I could make the request on my own from my online account on the website of my discount broker Scotia ITrade (as opposed to lengthy waits on the phone to request an agent to do it for me!).

It was unclear how the withdrawal of US cash would affect my TFSA contribution limit for the following year, which is calculated in Canadian dollars.  I assumed that each of my withdrawals (approximately $195USD and $254USD) would be converted to Canadian dollars based on the exchange rate at the time of the withdrawal, and that amount would be added to my contribution limit.  I would not know for sure what exchange rate was used until I received notice of my new contribution limit in 2020.  I was also not entirely sure that I would not need to re-contribute the withdrawal in US funds, but that seemed unlikely.

Because the Canadian Revenue Agency (CRA) does not receive all the information regarding contributions and withdrawals from a TFSA account for a given year until the start of the next year, it does not update your contribution limit until end of January or beginning of February of that new year.  Even though I had made my 2019 TFSA contribution of $6000 in January 2019, and made withdrawals in April and October, none of these transactions were recognized on my CRA account until January 26, 2020.  It is important to understand this and not take at face value what the CRA account says that your contribution limit is during the year or else you may be led to mistakenly over-contribute.

When I finally did receive details on my 2020 contribution limit, it was as I assumed it would be.  Each of my USD withdrawals was converted to Canadian dollars at the given exchange rate at the time of withdrawal, and these Canadian values were added back to my contribution limit.  So this finishes my experiment of removing dividends in US dollars from my TFSA and replacing the equivalent value the following year in Canadian dollars, all without incurring any fees or taxes.  This is a strategy that I will continue to employ in the future.  Note though that the Algonquin Power stock that I hold in my TFSA is a Canadian stock, even though it pays its dividends in US dollars.  I do not hold US stocks in my TFSA since (unlike for the RRSP/RRIF) the IRS would take 15% withholding tax on dividends generated in this type of account.

Saturday, January 4, 2020

2019 Year End Review: After Seven Full Years of Retirement

At the end of 2018, the value of our portfolio had dropped by almost 10% from its year beginning value.  Yet by February 2019, we had pretty much recovered to our opening position from January 2018.  By the end of 2019, stocks had reached a new all-time high, surpassing 17000 for the first time ever.  In the span of one year, the TSX/S&P Index rose from 14347 to 17063, up almost 19%. Anyone who panicked and sold their stock at the end of 2018 would have missed out on the recovery.  We basically ignore the value of our stock, concentrating on the dividend payout of our portfolio which continues to increase year after year.  It is through the regular increase in dividend payments that we have been able to keep pace with, if not out-pace inflation.  This is a luxury that those with non-indexed defined benefit pensions do not have.  What would seem like an extremely generous fixed pension payout upon retirement might not seem so great 20-30 years later.

Following the same trend as the TSX, our portfolio was up 23.7% this year while our dividends rose by 9.5%. As I do every year, I reviewed our portfolio mix in terms of market capitalization and sector diversity.  While we did buy and sell a few stocks in order to improve our dividend flow (described in more detail below), over all there was not that much change from 2018 for either of these criteria. 

At the beginning of 2019 we took stock (pun intended) of the holdings in our portfolio, looking specifically at which of our holdings have not raised their dividend payout over the past 5 years.  We wanted to see if we could dump any of these "dividend duds" and replace them with companies that had a better history of raising their dividends regularly.  We were limited by a few factors:
  • We had a minimum yield threshold of 2.5-3% annually that we did not want to fall below
  • We wanted to maintain a good level of diversification in terms of sector and market capitalization.
  • Within our Non-Registered account: 
    •  We wanted to stay away from income trusts that cause accounting and taxation issues
    • We did not want to sell any stocks that might unnecessarily trigger capital gains.
The first stock that we sold was Firm Capital (FC.T), a Real Estate Income Trust (REIT) which has paid the same dividend of $0.94 per share annually since 2008.  It does pay out a variable "special" dividend at the end of each year but that does not compare to the cumulative effect of companies that raise their dividend payouts annually.   Rich sold the shares of FC in his RRIF and purchased Great West Life (GWO.T) which has raised its dividend every year since 2014 and did so again at the end of 1Q2019.  He also sold FC from his TFSA and bought Finning International (FTT.T), a mining equipment company which has raised its dividend every year since 2000 and did so again in 2Q2019.  I sold my shares of FC in my TFSA and bought Algonquin Power (AQN.T) which has raised its dividend annually since 2014.  Algonquin has the added benefit of paying its dividend in US currency so I was able to withdraw US Cash for spending (more on this later). 

We bought Morneau Shepell (MSI.T) in a registered account in 2017 as a way to diversify into a new industry.  Its share price increased significantly since our purchase, but the stock has not raised its dividend since 2010!  Since we care mainly about the dividend and not the value of the stock, we decided to sell it, take the profits and look for a better paying stock. With the proceeds, we bought Manulife Financial (MFC.T), which had raised its dividend at least once per year since 2013.  It was a good time to buy, since the share price had dropped almost $9 since the beginning of 2018 and we picked up the stock for a good price.  MFC did not end up raising their dividend in 2019 but as the analysts predicted, their price did rebound over $6 so hopefully the company will feel comfortable enough to start raising its dividend again in 2020.

There were a few stocks that we wanted to dump in our non-registered account, but decided against doing so. We held First Canadian Realty (FCR.T) and Sienna Senior Living (SIA.T), neither of which have a raised their dividend in years.  But selling either of these holdings would trigger capital gains.  SIA gave us another sector for diversification while FCR was one of the few real estate firms that was not a REIT.  This allowed us to hold a stock from the Real Estate sector in the non-registered account without tax and accounting implications. So we decided to hang onto these two stocks since they still produced a decent yield despite not having increased their dividends for a while.

Things changed in late November when we were notified that FCR.T would convert to a REIT by the end of the year.  A quick internet search showed that they had actually been planning this since the February, but we did not hear about this until now when it was pretty much a done deal.  This would not be good for us in the long run since part of the REIT income is not eligible for the dividend tax credit and would be taxed as full income.  Even worse, if return of capital is involved, keeping track of the adjusted cost base in a non-registered account would be quite onerous.  We decided to dump all of this stock and would sell enough shares of our deadbeat Corus stock (the perpetual loss that keeps on giving) to offset the capital gain.  We would use the unexpected proceeds from these sales to purchase more Canadian eligible dividend stock, this time with a better history of regularly raising dividends.   We decided on ATCO (ACO-X.T) a gas/electricity utility which has raised its dividend payout regularly since 1995.

In March, we were given an offer to voluntarily sell our holdings in Power Corp (POW.T) and its subsidiaries Power Financial (PWF.T) and Great West Life Co (GWO.T) as part of a stock buy-back effort by the parent company.  Given that these stocks have paid healthy dividends and each raised their payout consistently over the past 5 years, we had no interest in selling.  We were happy that this was not a "forced sale" like we encountered in 2018, since shares of two of these companies sit in our non-registered account and we would have been hit with more unplanned capital gains had we been forced to sell.

In midst of all this buying and selling, I made a trading error.  I sold MSI in a registered account and wanted to make a purchase with the proceeds.  But I had not waited long enough for the trade to settle and the discount broker had not taken its $9.99 commission yet.  I put in a limit buy request which included the extra $10 and surprisingly, the trade fulfilled immediately.  Once all the commissions were deducted for the sale and purchase, I ended up with a negative trade cash balance of $-6.45.  I was afraid that my discount broker would force me sell something that I didn't intend to (at another $9.99) just to cover this.  But when I phoned, I found out that I could carry a negative balance of up to $200 and no action would be taken.  Since the amount would be covered at the end of the month by our next dividend payout, all was well.  But I will be more careful next time to either wait for my sell trade to settle before making a new purchase, or at least make sure that I take into account both the sell and the buy fees of $9.99.

Finally in mid December it was announced that Cineplex (CGX.T) would be bought out by the British company Cineworld in 2020.  We own Cineplex in our non-registered account so I was concerned about being forced into another unexpected capital gain while losing the good steady dividend that Cineplex has provided over the years.  Luckily it turns out that we had been carrying an unrealized (paper) loss in our non-registered account and that the $34 buyout price would bring us just about back to par.  We also own CGX in one of our registered accounts and in this case, we will receive a nice tax-free gain, so this will all work out.  Once we receive the cash from the forced sale we will need to find a replacement stock that can replace the lost dividend income.

I have tracked the dividend increase (or lack thereof) of each of our stock for many years now and periodically take action to dump and replace companies who stop raising their dividend payout regularly, or worse yet, lower their dividend payout.  What I did not keep track of was when a company usually raised their dividend.  I just found out after the declaration and accepted it as a happy "surprise".  This year I decided to keep track of the month when each company tends to announce a dividend increase, so that I can determine when to look for it and be quickly warned if it does not happen as typically scheduled.  While some companies that regularly raise their dividends do not follow a fixed schedule, many others raise at the same time like clock work.  

Had I started this tracking earlier, I would have realized that Plaza Retail REIT (PLZ.UN) usually raises its dividend (at least it did between 2016-2018) in January but it did not do so in January 2019.  As it turns out, it did not raise its dividend at all in 2019 and has not done so in its January declaration for 2020 either!  But it took me the entire 2019 to figure this out since I did not know when to expect the increase.  Accordingly I used the website and looked at the dividend trends for each of our companies, tracking if and when they usually raised their dividends.  In the future, I will be more actively aware if an expected increase is missed and be more vigilant in case some action/re-balancing needs to happen in our portfolio because if it.   I don't think I would pull the trigger immediately, since occasionally a dividend increase could miss its regular payment period but still occur by the next period or the one after.  But if like PLZ.UN, the increase is missing over a couple of years, then maybe it is time to look around for something better.  After the New Year, Rich sold a bunch of PLZ.UN from his TFSA and will look to buy a new stock once he adds his TFSA contribution for 2020.

At the beginning of 2018, my husband Rich and I switched our strategy for RRIF withdrawal,  requesting to withdraw stock "in-kind" as opposed to cash.  I wrote about our reasons for this in the 2017 year end in reviewWhile we could withdraw our annual minimum without being taxed until the following year, any amounts in excess of the minimum would be subject to an immediate withholding tax at the time of the withdrawal.   Because it was our first year attempting this, we wanted to ease into the concept of paying withholding tax.  For each of our RRIFs, we requested the transfer of stock whose value came to a few thousand dollars over our minimum withdrawal amount, making sure to save up enough cash to cover the 10% withholding tax.  These amounts showed up in our 2018 T4RIF statements as tax already paid, reducing our total income tax still owed for the year.

Emboldened by this initial attempt, in 2019 I wanted to increase the amount withdrawn over the minimum, in order to speed up the process of shrinking our RRIFs and to increase the amount of dividend income that would be generated by our non-registered account, which is taxed at a much lower rate.  This meant paying a larger withholding tax, so I diligently saved dividend cash throughout the previous year to cover the amounts.  Unfortunately I misunderstood how the withholding tax works.  The phrasing of the wording on various websites made me think think that the withholding tax was incremental, like the marginal income tax rate where you are subjected to a higher tax rate only on the extra portion of income earned beyond the first rate.

Withdrawal Amount % Federal Tax Withheld
From $0 to $5,000   10%  (5% in Quebec)
From $5,001 to $15,000    20% (10% in Quebec)
Greater than $15,000   30% (15% in Quebec)
I thought we would be taxed 10% on the first $5000 over the minimum, then 20% on the next $10,000 (from $5001-15000) and finally 30% on anything beyond that.  In actuality, the rule is that depending on whether the entire value of my overage beyond the minimum is within $5000, or between 5000-15,000 or over 15,000, that I would be taxed at 10%, 20% or 30% on that whole amount.  Luckily I had saved an excess of cash in our accounts, so even with this new understanding of the rule, we should have had money to cover the withholding tax. But the plot thickens!  Because we are taking out stock in-kind instead of cash, there is also a gross-up to the amount being withdrawn before the withholding tax is calculated.  Factoring in the gross-up, Rich no longer had enough cash to cover the tax for the shares that he wanted to withdraw and had to scale back his withdrawal request.  Not wanting this to happen again in the future, I tried to find information about how the gross-up is calculated.  After multiple fruitless searches on the internet, the most I could find was an article by the Globe and Mail referring to the gross-up, but not explaining the calculation.  I then posed the question to the customer service line of my discount broker Scotia iTrade, and after several false starts, finally got the information that I was looking for.

The withholding tax including gross-up for an in-kind stock withdrawal is calculated as follows:

The following chart provides an example.  Now that we understand how it works, we can save the correct amount of funds to cover the withholding tax for our next RRIF withdrawals.

In fact, we could go one step further towards reducing the sizes of our RRIFs.  While you are mandated to pay a certain amount of withholding tax when you exceed the minimum withdrawal, there is nothing that prevents you from paying MORE than the required withholding tax for your current transaction.  Towards the end of 2019, one of my Strip Bonds came due in my RRIF, leaving me with an unusually large sum of cash. I decided to make one extra withdrawal from my RRIF, but rather than just paying the withholding tax on this transaction, I estimated how much income tax I might owe for 2019 and requested to pay enough withholding tax to almost cover that entire amount.  While it did mean that I was paying tax that was not due until April 2020, this allowed me fund this tax from within the RRIF in order to further reduce its size, rather than sourcing the tax money from outside of the registered account, shrinking our short term or long term savings "kitties".

It was important that we carefully checked the results of our RRIF withdrawal requisitions. Rich requested a given number shares of Enbridge (ENB) to be moved from his RRIF to our non-registered account, using the lowest price of the day.  Instead, the shares of the REIT Canadian Apartments (CAR.UN) was moved.  We caught the mistake immediately after the transaction was processed (a few days after the request), but since the request was made over the phone and there was no paper trail or email confirmation, we did not have any definitive proof that an error was made.  Then I realized that the shares of CAR.UN were moved using ENB's lowest price, making it clear that this was a clerical error.  Luckily we reported the issue prior to the transaction being officially "booked" and so it took a mere phone call and a couple more days delay for the problem to be corrected.  Left uncorrected, having the REIT in our non-registered account would have proved detrimental and problematic from a tax accounting perspective. Only part of the payments made by a REIT are considered dividends that qualify for the dividend tax credit.  The rest may be capital gain or "return of capital" taxed at higher rates.  The component of "return of capital" makes the adjusted cost base calculations on the units to be much more difficult, since it changes with each payout.  For these reasons, we try to keep all of our REITs and other income trusts within our registered accounts and it was why we sold our FCR stock from our non-registered account once the
company decided to convert to a REIT.

At the end of 2018, I turned 55 and was able to convert my LIRA into a LIF while transferring 50% of the value to my unlocked RRIF as stock in-kind.  This was quite the experience that I documented in the 2018 Year in Review.  In 2019, I made my first LIF withdrawal, again taking stock in-kind.  Since I was already taking out more and dealing with withholding tax in my RRIF, I decided to keep things simple and just take out the minimum from my LIF.  I chose a number of shares that would come just under the minimum amount and kept enough cash on hand to top up to the required number.  No withholding tax was required in this case.

But thinking more about this, I changed my mind and decided that I should always try to take the maximum from my LIF.   This will free up locked-in capital from my LIF more quickly and provide me with more flexibility, since I can take out any amount from my RRIF at any time, but if I forgo taking out the maximum from my LIF in one year, I don't get to make up for it in the next year. So after waiting several quarters in order to save up enough dividends to pay withholding tax, I made a second LIF withdrawal in mid May.  When calculating how much I could withdraw, I did not realize (although I should have) that the withholding tax would count towards my maximum.  I took my annual (LIF maximum - LIF minimum), which came to around $5900 and requested to withdraw enough stock in-kind to cover this difference, thinking that I could pay withholding tax on top of that.  I had discussed with the iTrade agent that the withholding tax would be 20% plus grossup (or 25%) and he put in the request.  Within a few minutes, the agent called back to inform me that my request was rejected since with the withholding tax, I had exceeded the maximum.  So I had to reduce the amount of stock that I transferred in-kind and ended up moving stock worth $4728 but I was still charged the same 20% + gross up withholding tax, even though my extra withdrawal was now down to the 10% + gross up (or 11%) range.  I didn't care enough to argue about this since this was tax I probably would be required to pay next year anyways.  But it is obvious to me that some of the representatives from my discount broker do not understand how the CRA withholding tax works.

Rich converted his LIRA into a LIF when he turned 55 this year and also went through the process of requesting 50% of the sum be transferred tax-free to his RRIF.  Because the initial value of his LIRA was so small, we were hoping that he would qualify for the "small amount" rule that allows you to unlock the entire amount if the value falls below a given rate ($22,960 in 2019).  His LIF did not meet the small amount limit and given the legislated rate of annual withdrawal even when taking out the maximum allowed, it will still take years before it reaches that level.

In a previous article, I wrote about my quest for more US cash dividends that we could withdraw from our investment portfolio and and transfer directly to our US bank account without incurring currency exchange.  I tried to withdraw US cash from my RRIF while paying withholding tax in Canadian dollars.  This turned into such a big headache that required three attempts before almost achieving what I wanted.  I will not try this ever again! Going forward I will make an initial RRIF withdrawal including any US stock, Canadian stock journaled on the US side of my account (e.g. AQN), or US cash that I want to extract, but making sure to stay under the legislated minimum and then top up with Canadian cash to reach that minimum.  Subsequently if I want to make a further withdrawal once I am in withholding tax territory, I will only do so with Canadian stock and Canadian cash.

By contrast, withdrawing US dividends from the TFSA accounts turned out to be trouble-free.  The money could be deposited directly into our US bank account without first requiring to transfer to our US non-registered account.   What is still not clear is how much extra room I will have in Canadian dollars in 2020 to re-contribute the withdrawn US cash.  I will not know this until Revenue Canada updates my allocation on my CRA account, which usually does not happen until some time in February.  For now, my account says that my limit is $12,000 since it still does not know about the $6000 contribution that I made in January of 2019, let alone the withdrawals of US cash made throughout the year!  Rather than waiting for the results before submitting this already overly lengthy blog entry, I will write a new one in February/March with my findings. 

By the end of 2018, the "discount" that we had previously negotiated for our Rogers cable and internet bill had expired, and our bill had increased by over $30/month from $140 to $171.  It was time for the annual ritual of complaining and threatening to go to the competition unless we could get a better rate.  I started these negotiations with Rogers via an online chat because I hate talking on the phone, and also, I wanted an online transcript of our conversation and the ultimate agreement so that there would be no misunderstanding.  Upon making my complaint, I was immediately offered the currently advertised package for $152, which was about $20 less than what I was currently paying, but would provide me with new Ignite technology and a significantly higher internet speed that was more than two times faster than our current speed.  This was not a promotional offer but rather what any new Rogers customer would be offered. However as an existing customer, we were not made aware of this and would not have been switched over without the complaint.  I also requested that the $150 installation/setup fee be waived and so we lowered our bill slightly and have much better service.  What a pain to be required to do this every year, just to ensure you continue to get a competitive rate!!

In the meantime, Bell was aggressively trying to make inroads into our condo and spent weeks in 2018 wiring individual fiber connections to each suite so that the speed would be extra fast.  For 5 days at the end of October 2019, Bell launched an on-site blitz where they tried to convert as many residents as they could from Rogers to Bell.  They offered a two-year deal for $124 after tax which included the Fibe Internet (1.5GB per second download), a TV channel package that included many more channels than we were getting at Rogers, including multiple extra sports stations and the Turner Classic Movie channel (TCM) that Rich has always wanted.  The deal also included free installation services (usually $210) and a free Home Hub 3000 modem (usually $200) and two months free access to Crave/HBO Max (usually $20/month).

In previous years we had not been able to switch providers since our TV connectivity wires were enclosed behind a built-in wall unit and we did not have an easy way to connect these wires to the closest Bell phone jack.  Luckily in the interim, Bell's technology changed so that their wireless modem can be connected remotely to the TV over WIFI.  We jumped on this deal which was too good to pass up.  But more importantly, we now have options again.  Once our two year deal with Bell is up, we can use the threat of returning to Rogers in order to either extend or get another deal from Bell.  Or if Rogers comes up with something better, we can consider switching again, which would not be that painful since we kept all of our Rogers connections on hand.  While Bell, Rogers and Telus still form an oligopoly for the most part, having the fierce competition between these companies opens up opportunities for savings.

Our retirement income strategy has been to transfer all the monthly dividends that we make from our non-registered account to our bank's chequing account in order to pay our regular monthly bills.  In support of this, we have maintained both a short term and a long term "kitty", in order to ensure that we have enough liquid assets to cover both minor and major unexpected expenses that may arise on top of our usual expenses.  Our short term kitty is a savings account in Simplii Financial, the discount subsidiary of CIBC that also holds the chequing account that funds our bill payments.  In this savings account from which we can transfer money to chequing within 1 business day, we try to keep up enough funds to cover up to one month's typical expenses.  Our long term kitty is used save up for major unexpected expenses, such as the day when we will need to replace our appliances, or worse yet, our car which is 15 years old this year.   We use EQ Bank as our long term kitty, since it pays an amazing 2.3% as its ongoing regular savings account rate (as opposed to 3 month teaser rates offered by banks when you open a new account).  Considering that this savings account is totally liquid and CDIC protected, the payout is better than most short term GICs that lock in your money for an extended period of time.

In 2019 we decided to set up a second EQ Bank account, in order to separate the kitty where we save money for mandatory expenses like the eventual car replacement, as opposed to major discretionary expenses like our annual vacation fund.  Since the first EQ Bank account was set up in my name, we decided to set the second one up in Rich's name so that we continue to balance our personal incomes for tax purposes.  This became an issue when part of the application process required my husband to produce an "official" online PDF document that indicated his full name and address to verify his identity.  They accepted Utility bill ( Water, Hydro, Gas bill), Internet Service Provider statement, Mobile Phone statement and Cable Provider statement.  Unfortunately we had signed up all the bills under my name and not his, as well as our credit cards for which I was the primary card holder.  His name was on the paper form of our property tax bill, but EQ Bank would not accept any scanned or photocopied versions.  It had to be an online PDF generated by the issuing company.  Finally they agreed to accept a T4RIF slip generated by our discount broker and my husband was able to successfully set up his account.  But we have learned our lesson and the next thing that we sign up for will be under his name, in order to give him a proper online presence.

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Buy Retired at 48 - One Couple's Journey to a Pensionless Retirement