2021 Year End In Review: After Nine Full Years of Retirement

Another year has gone by and we are still dealing with COVID.  But from a market perspective, the initial shock and panic seems to be a thing of the distant past.  While there was a big dip in the stock market in March 2020 when the impact of the pandemic was first felt, the S&P/TSX index quickly recovered and has continued to climb steadily ever since.  At the end of 2020, although we had mostly recovered from the massive dip, the total value of our portfolio was still 3% lower than the start.  By the end of 2021, we were almost 18% higher than the start of the year.  Once again the common wisdom of not panic-selling during temporary adversity continues to hold true.

As always, it is a bit easier for us to follow that common wisdom since we do not rely on the value of our portfolio to fund our income.  After many years of allowing them to grow and compound, we are now very comfortably living off our dividends without the need to touch our capital (other than for exceptional cases - more on that later).  

Even in the difficult year of 2020, our dividend income still rose by 2.6% in our non-registered account, almost keeping up with the soaring inflation rate. The picture improved slightly in 2021 as by December of that year, our dividends had increased by a further 3.2%.  This was driven by the stocks we owned in non-financial sectors such as Telcom (Bell, Telus), Transportation (Canadian National Railway), Utilities (Emera, Fortis, Canadian Utilities, Atco, etc.), and miscellaneous stocks including Premium Brands and various Brookfield subsidiaries.  AW.UN raised their dividends twice in 2021 and end the year at about 97% of their pre-pandemic payout. In December they paid out a special dividend to disburse extra cash, similar to what they did twice in 2020, despite needing to slash their payouts due to lockdowns that year.  I like their slow and steady strategy of rewarding investor loyalty without over-committing.

Throughout most of 2021, we were still not getting any dividend increases from the financial sector.  At the start of the pandemic, the OFSI (Office of the Superintendent of Financial Institutions) put a freeze preventing any banks or insurance companies from raising their dividends. This ban was finally lifted on November 4, 2021.  Immediately after, all the financial institutions announced their intention of declaring larger than usual dividend raises, in order to make up for a 1.5-2 year period where they were held back while still racking up huge sums of excess cash.  Because the ban was lifted so late in the year, the banks had already paid out their 4th quarter distributions.  This meant that the raises for the banks will not be paid out until first quarter of 2022.  We are expecting a huge boon in dividend income by the end of March 2022 since we own shares in all of the big six Canadian banks.  Toronto Dominion, Royal, Bank of Nova Scotia and CIBC each raised their dividends between 10-13%.  Bank of Montreal and National Bank raised their dividends in the 23-25% range, probably to make up for the gap in their yield relative to the other big banks.

The three insurance companies that we own all pay out at the end of December, so we received the dividend raises in 2021.  Great West Life raised its dividend 12%, Manulife Financial 18% and Sunlife Financial 20%, in each case either double or almost double their normal annual increases.  Because of these last minute raises, by the end of 2021 our dividend payout had increased by 5.11%.  With the large bank raises still to come, things continue to look up for 2022!

In filing our 2020 taxes this past April, I misunderstood how one of my husband Rich's tax receipts should be interpreted and he ended up claiming an incorrect deduction and under-paying the tax owed.  In 2020 Rich took advantage of the pandemic induced temporary market crash to collapse his Life Income Fund (LIF) under the "Small Amount Rule".  He took out the remaining cash and moved it to his RRIF account, receiving a "Self-Directed Retirement Savings Plan Official Contribution Tax Receipt" for the same amount.  I assumed that he could use it all as a tax deduction to offset the income generated when withdrawing from the LIF, resulting in a tax-free transfer from one registered account to another.  This seemed like a reasonable assumption since that is what happened when we first converted our LIRAs into LIFs and were able to move 50% of the value into our RRIFs.  Unfortunately, in his notice of assessment, Rich was informed that his RRSP contribution room did not match the amount on the tax receipt and he had overcontributed.  This would result in a 1% monthly tax on the excess contributions until more room would be generated.  Given that we are retired and would not earn any further employment income, we did not have a way to generate more contribution space.  In addition, he still owed more income tax than what he paid at the time of filing.

Paying the excess tax owed was not an issue, but rectifying the situation so that Rich would not be penalized in an ongoing manner for the over-contribution was a different matter.  To address this, in April 2021 he filled in a paper T1 Adjustment Request form to apply the correct RRSP contribution amount, mailed it to Service Canada and paid the outstanding tax owed. While writing this blog, I logged onto his Service Canada account to confirm that that the adjustment was applied.  To our dismay, we do not see any record of the adjustment and instead on the Service Canada website, there is a notice of "COVID-19: Processing delays for T1 paper adjustment requests"!!  Instead it advises that we should have submitted an online "ReFILE" request using the same tax software that we originally used to file.  He has now re-filed online and has a confirmation number to prove that the filing has been received.  We won't know for sure until we see an official reassessment record on Rich's Service Canada account, but hopefully this puts an end to this situation.  We now also know about the online ReFILE option if we ever need to do something like this again.

As previously mentioned, we have accumulated enough dividend payouts for each month from our non-registered account so that we can cover the normal day to day expenses.  We also have two separate "high-interest" savings accounts with EQ Bank.  One is for unexpected/emergency expenses such as the need to repair or replace a broken appliance.  The other is to save up for planned major expenses such as vacations (remember those?!?), renovations or large purchases.  In 2021 we decided that it was finally time to replace our 16-year-old car which had given us many good miles but was on its last legs and would start to become a money-pit to continually repair.  Funding our desired new car would include not only clearing out our planned expenditures account but also selling some capital from our portfolio.

We considered what would be the best way to extract the extra funds that we needed.  We knew for sure that we did not want to sell good dividend-paying stock from our non-registered account since we would be both decreasing the income that we used to pay our day to day expenses, as well as generating capital gain. Should we sell losers from our RRIF accounts that were not paying good dividends?  This would help our long term goal of decreasing the size of our registered accounts before we hit 70 in order to minimize OAS claw back.  But it would also trigger extra income that we would need to pay tax on.  Alternately, should we sell winners from our TFSA, locking in profits and withdrawing them tax free?  If we did this, we would still have the opportunity to contribute back the funds in future years once we accumulated more savings again.

In the end, we ended up selecting a combination of the two strategies.  I sold some losers from my RRIF account that were not generating much income for us and which we didn't feel the need to hold on to long term in hopes of a recovery.  I withdrew some of the resultant funds as cash while also paying extra withholding tax to cover the additional income tax that I generated.  I made sure that the extra income would not push me into the next tax bracket.  At the same time, Rich sold the shares of Granite Real Estate Investment Trust (GRT.UN) from his TFSA, locking in the tax free capital gains that he had made since purchasing this stock.  While this had been an excellent stock that rose in both value and dividend payouts, we had purchased it in the wrong place.  This is because part of Granite's distribution is paid in US funds and unlike the RRSP/RRIF accounts, there is no agreement with the US to waive withholding tax in a TFSA account.  Every month Rich would lose a little bit of his dividend payout to US withholding tax, which was a pain to keep track of.  While we like this stock, if we decide to repurchase it, we will do so within our RRIF accounts.  In the meantime, selling from Rich's TFSA provided us with the cash we needed and opened up contribution room to buy something else in the future.

In terms of vacation (or lack thereof), we had canceled a couple of major trips to Europe in 2020 at the start of the pandemic and for the rest of 2020, we hunkered down at home.  Although we were double-vaccinated and despite COVID numbers starting to decline in the summer/early fall of 2021, we still did not feel comfortable flying or even traveling outside of the country.  Instead we were early adopters of what the provincial government has recently titled "Staycation in Ontario".   We started with same day road trips exploring areas a couple of hours outside of Toronto, including Kleinburg, Barrie, Guelph, Mono Cliffs, Uxbridge, Goodwood, Durham Forest and Paris, Ontario.  A silver-lining of the pandemic has been our discovery of fabulous places to explore right within "our own backyard".  Dipping our toes into overnight trips, we visited some friends in the Haliburton Highlands and stayed over for a few days.  In September we rented a house in Niagara on the Lake for 2 nights and enjoyed 3 days of cycling, hiking, wineries, dining out and even watching a show at the Shaw Festival.   Finally we went on a 4 day road trip which Rich sold to me as "Europe in Ontario" where we would drive a big loop in western Ontario and visit a bunch of little towns and communities named after European cities, including Vienna, Brussels, Dublin, Zurich, Copenhagen and Lisbon.  If you are interested in reading more about our travels, visit my travel blog http://arenglishtravels.blogspot.com

For 2022, there will actually be an "Ontario Staycation Tax Credit" that encourages Ontarians to vacation in their own province, allowing individuals to claim up to $1000 and families up to $2000 in travel accommodation expenses.  We already have a new slew of places that we are anxious to explore once the weather warms up.

As a final note, this blog, which supports my book Retired at 48 - One Couple's Journey to a Pensionless Retirement, was recognized as one of the top 15 Canadian Early Retirement blogs by the organization Feedspot, an amalgamation website that allows you to access your favourite blogs, podcasts, news sites, Youtube channels and RSS feeds from one place.