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 Morningstar.ca 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 review.  While 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.

References:
2018 Year End Review
2017 Year End Review
2016 Year End Review
2015 Year End Review
2014 Year End Review
2013 Year End Review
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