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?
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.—January 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.
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.
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.
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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