2022 Year End In Review: After Ten Full Years of Retirement

My husband Rich and I can hardly believe that we have now been retired for over 10 years!  At ages 58 and 59 respectively this January, we are now welcoming many of our friends and family as they join us in retirement.  I feel like we have fulfilled so much of our early retirement wish list with extended travel and the luxury of free time to explore hobbies and interests. Now it feels like we are in the "gravy years".  I am grateful that we were able to do all of that before the pandemic brought social life and travel to a halt. I feel sorry for those who retired just as COVID-19 reared its ugly head, but hopefully they can now resume their post-retirement plans.  At least they had the silver lining of preserving extra retirement capital during the period of lockdown when there was nowhere to spend discretionary money.

2022 was a strange and stressful year for the economy. Weather factors impacting crops, global political strife and uncertainty, as well as grain and oil shortages due to the Ukraine War all contributed to soaring inflation experienced around the world.  In Canada, the 2022 inflation rate ended just under 7%, impacting cost of living across the board. Two examples include a bag of three romaine lettuces that cost around $2.99 only a year ago now selling for $8.99, and the price of poultry which increased by between 10-20% over the last two years.

For years, Canada’s inflation rate was steady at around 2% and this is the rate we used in our Retirement Plan that tracks how our portfolio is doing. At the beginning of 2022, I adjusted our plan to reflect an average of 4% inflation rate going forward.  This acknowledges the increase in inflation rate but optimistically assumes that inflation will not continue to trend at 6-7% for the long run. Even with this change, I was relieved to see that although our capital would reduce more rapidly, we still have sufficient funds to last beyond our expected lifetimes. I will keep my eye on this rate going forward and may need to make more adjustments in the future including reducing our rate of spending if required. 

Inflation, supply chain issues and global uncertainty took its toll on the stock market, as the TSX/S&P Composite Index was down by over 9%.  The value of our portfolio took an even bigger hit as our value decreased by over 11%.  It was dragged down by the 1-year returns from long-term losers like Corus (CJR.B – down 51%) and Cineplex (CGX.T – down 40%).  But unexpectedly, we also took a hit from the former stock darling, Algonquin Power (AQN.T) which unexpectedly plummeted in 2022 with a negative return of over 46%!  This further illustrates the need for diversification and not putting all your eggs in one basket by owning just a few companies or industry sectors.

Things looked dire for Algonquin Power in November as the stock price plunged. There were rumours of the possibility of the company cutting its dividend and this came to fruition in the second week of January 2023 when the dividend was slashed by 40%.  We still like this stock for the long term, so we decided to hedge our bets on it. At the end of November when the AQN stock price in our non-registered account dropped to just about the amount that we originally bought it for, we decided to sell these shares, triggering a tiny capital gain. We will use the proceeds to purchase stock that will provide us with more stable dividends. At the same time, we doubled down on Algonquin in my RRIF, enrolling in the DRIP (dividend reinvestment plan) to pick up more shares while the price is low. If the stock does rebound as we hope, then we will have increased our holdings at a discount and can move some shares back out to the non-registered account then.  Algonquin is a Canadian stock that qualifies for the Dividend Tax Credit, but pays its dividend in US Funds, so it would be nice to eventually have our regular source of US cash again.

Despite the dismal year for the value of our portfolio, 2022 was a good year for dividends, which is the main thing that we care about. Our income strategy has been to buy and hold good companies and live off the dividends that they pay.  This strategy has sustained us through several bear markets over the past ten years.  The dividend increases were especially strong in our non-registered account, which is where most of our large-cap, blue chip stocks are held, and where we source our annual income.  Within this account, our dividends rose by over 6.5%, which just about covers the high rate of inflation for 2022.  I think we are still feeling the effects of the post-COVID boost that started at the end of 2021 when banks and insurance companies were finally allowed to raise dividends and other sectors also started to ease their pandemic fiscal restraints.  It is uncertain what 2023 will bring with inflation is still running rampant.  Yet so far, seven of the companies in our portfolio (BMO, CIBC, ENB, NA, RY, Telus and TD) have already declared dividend raises for 1Q2023, albeit much smaller raises than the double-digit anomalies that we enjoyed when the restrictions on the financial sector were finally released.  Despite a bad year for the value of our stock holdings, our income strategy of living off our dividends remains a winning one.  Since we first retired in 2012, our dividend income has more than doubled.

Another benefit of the pandemic subsiding is that savings account interest rates started to rise again.  For years now, we have used EQ Bank as our no-fee, high-interest savings bank.  We like this company because it consistently has better than average interest rates (especially compared to the big banks) and doesn’t play the “bait and switch” game of teaser rates that only last for a few months. I like the stability that this bank offers and can’t be bothered trying to chase higher rates offered for short periods of time.

In January 2020, just prior to the start of COVID-19, EQ Bank was paying 2.45% on Canadian dollar savings accounts, with no minimum balance requirement. As the pandemic dragged on, the bank gradually lowered its rates, going from 2% in March, to 1.7% in August, 1.5% in October and then as low as 1.25% in April of 2021.  During that same period of time, my so-called “high interest account” with Simplii Financial was paying 0.01%!  In 2022, EQ Bank’s rates started to slowly rise again and as of September 2022, they are paying 2.5%.  With Simplii Financial, my high-interest savings account is currently paying $0.4% for balances up to $50,000.  Note that it is offering a teaser rate of 5% for new accounts, payable only between November 1, 2022 to January 31, 2023.  Guess which rate is touted in large black letters and which one is only found in tiny print if you persistently to search for it deep within the website.

Even more exciting than EQ Bank’s Canadian savings account interest rate is the 2% that it pays for US dollar savings accounts, again with no minimum balance requirement!  Prior to opening a US account with EQ Bank, I had a TD Bank US Daily Interest Chequing account that paid 0.01% (equivalent of 10 cents annually on $1000) and required a $1500 minimum balance to have the monthly transaction $1.25USD fee waived.  I used this TD US account to accumulate US cash from the US dividends paid by some of our stocks. This provides me with a physical bank where I can withdraw US cash for travel without incurring foreign exchange rates. 

I have always wanted a US credit card so that I could make purchases in US funds and pay off the balance with the US cash from my bank account. To achieve this, I switched over to the TD Borderless US Dollar account which pays no interest (but I was getting just about no interest anyway) and requires a $3000 minimum balance to have the $4.95USD transaction fee waived.  But this account also waives the annual $39USD fee for owning a TD US Dollar VISA card.  So now I transfer any US dividends that we receive into my EQ Bank US savings account where my money is finally growing due to the great interest rate.  When I purchase anything from the States using my US credit card, I then transfer money from EQ Bank to TD to pay it off.  This year we plan to start traveling abroad again, starting with a trip to New York City.  I will be able to pay for our accommodations, meals, theatre tickets and other expenses using my US credit card and US cash.

Although our portfolio is set for the most part and we don’t really do much trading anymore, we still had some interesting events happen to some of our holdings. In May, CIBC issued a 2 for 1 stock split. While I don’t really care about stock prices, I do check on dividend payouts quite regularly to determine whether any of our stocks have raised or cut their dividends.  When I noticed that our payout for CIBC reduced by half, I was able to quickly confirm that our number of shares had doubled accordingly and then googled to confirm the stock split.  I was not really that concerned because if one of the big banks ever did cut its dividend (let alone slash it by 50%), that would have been big news!  In June, BIP.UN and BIPC.T had a 3 for 2 stock split and I went through the same exercise to confirm.  Starting July 2022, PKI moved from monthly to quarterly dividend payouts.  The annual net result is still the same, but I miss getting a bit of income every month!

At the beginning of 2021, Cenovous Energy bought Husky Oil, which I held in my RRIF.  As part of that transaction, I received a “purchase warrant” for the right to buy extra Cenovous shares at a given price.  Through a complex formula that I wrote about earlier, I could either buy the shares if the market value exceeded the strike price or sell the warrant (which has its own stock ticker CVE.WT) before it expires in 2026.  In May 2022, the price of CVE.WT rose to $22.62 from an initial value of $3.62.  I could have held on longer to see if the price would continue to rise, but I knew that as we got closer to the expiry date of the warrant, the value of it would start to drop.  Not wanting to worry about this anymore, I decided to cash out and make a small profit.  So far this has looked like a good move, since the current price of the warrant is $18.19.

Since 2019, Rich and I have been actively trying to reduce the sizes of our RRIF accounts so that we can minimize CPP and OAS clawback when we hit age 70.  To accomplish this goal, we pay extra withholding tax from cash within our RRIFs to pay for the year’s income tax, rather than using the dividend income generated from our non-registered account or from our savings account to pay in the new year.  An additional benefit of pre-paying our taxes via withholding tax is that it eliminates the need for CRA-enforced “installment payments” that are required if you owed more than $3000 in tax the previous year.

To estimate how much tax we might have to pay, I use the previous year’s tax program and guess at how much the dividend income in our non-registered account might grow.  I then control how much we withdraw from each RRIF including the withholding tax to reach our desired net incomes. Since 2021, I have even tried to pay enough withholding tax to give each of us a small refund.  We are therefore incented to file as soon as possible in order to receive our refunds.  NETFILE makes this really quick and easy.  Last year we filed on February 23 and had money refunded to our bank accounts by March 3.

Because we filed so early, I did not realize that I qualified for the Digital Subscription Credit, since our Globe and Mail Saturday paper delivery subscription qualified us for a complimentary digital subscription.  The tax receipt arrived after I had already filed, so I did an online REFILE and got the extra refund a week later.  I now know to claim this on my tax return going forward.

We took multiple overnight trips within Ontario during 2022 in order to take advantage of the Ontario Staycation tax credit, which applies to money spent on accommodations during the calendar year.  An individual can claim up to $1000 and a family up to $2000 in order to receive a tax credit of 20% on these expenses.  This worked out great for us since we were still hesitant to travel or fly abroad, given all the travel horror stories we heard about delays, lost luggage and intermittent COVID resurgence.  Instead, we had lovely times spent in Stratford, Ottawa, Perth, and Fergus/Elora Ontario, keeping track of our receipts so that I can claim this tax credit.

Part of the analysis that we did before retiring at age 48 in 2012 was deciding whether we should purchase medical insurance to replace the coverage that we each had when we were working.  It would be another 17 years before we qualified for the Ontario Drug Benefit at age 65. After reviewing multiple plans and calculating the annual premiums vs. estimated claims, we decided that it was not worth it. Especially given the fact that most medical insurance policies have annual caps on claims, we were better off self-insuring and paying for our expenses out of pocket.  This turned out to be a good choice since in almost every one of our 10 years of retirement so far, we did not accumulate enough medical expenses to claim a credit on our tax returns.  That changed in 2022 when we incurred some extra dental and drug expenses. Once we realized that that our combined medical expenses had exceeded the threshold of $2421, we tried to front-load as much as possible into 2022 in order to maximize our benefit claim. This included refilling all of our prescriptions and scheduling Rich’s eye doctor and dentist appointment before the end of 2022.  Had I been more on the ball, I would have scheduled an eye appointment for myself as well. But by the time I thought of it, I was too late to get an appointment.  We transferred all of Rich's expenses to me (his spouse) in order to consolidate all the expenses in one tax return.  

Finally, in terms of personal interests, 2022 felt like the first “almost normal” year after all the COVID years.  In addition to our Ontario Staycation trips, we went on the longest vacation since before the pandemic when we took a 15-day driving trip out to the Nova Scotia and Cape Breton Island. We still haven’t resumed trips that involve flying yet, but probably will start in 2023. In preparation for more international travel to the States and Europe, we finally applied for NEXXUS cards, although it will probably be over a year before they are processed.  2022 was a time for re-socialization where we spent more time dining out, visiting and entertaining friends and family, going to more theatre and museums, like we used to do pre-COVID.  I wonder if all milestones will now be designated as "pre" and "post" pandemic?  All this additional activity showed up in our year-end spending analysis as our discretionary spending has increased again, now that the opportunities to spend money have reappeared.  And finally, we have joined the Pickleball craze, purchasing racquets and playing both outdoors in the summer and indoors at community centres through the colder months.

Updating Retirement Spreadsheet to Reflect Current Realities

Those who follow this blog or have read my book Retired at 48 - One Couple's Journey to a Pensionless Retirement know that we use a Retirement Spreadsheet which both estimated and tracked our portfolio growth progress during the savings phase prior to retirement, and created a spending plan to track against during the "draw-down" phase (post retirement) to ensure we do not prematurely run out of funds.  At the beginning of every new year, I update our actual year end portfolio balance in the "Actual Ending Balance" column for the previous year.  This causes the rest of the projections going forward to recalculate, thus providing a more accurate view of the future.  In creating my spreadsheet, I reverse-engineered from a online small app and then expanded upon it to support the extra data and functionality that I desired in my retirement plan.

Since we first started using this spreadsheet and in the sample spreadsheet that I distribute for anyone who requests it from me, I have used 2% as the estimated average inflation rate within cell J9.  In the spreadsheet's predictive estimate, the following fields are increased annually by that rate of inflation.

• Income Sources
• Canada Pension Plan (CPP) - Indexed to Inflation
• Old Age Security (OAS) - Indexed to Inflation
• Expenses
• Retirement Spending

This rate had been relatively stable for so many years (especially during our retirement years) that I not really given it much thought. Unfortunately in 2021, driven by stresses caused by the pandemic which show no sign of easing, the rate of inflation has risen to almost 5%.  It seems short-sighted not to reflect this in our ongoing projections for the future.

I have updated the latest version of the spreadsheet that I distribute to reflect this by increasing the predicted rate of inflation to 4% in cell J9 (couples examples) or I9 (individual example).  This is an input field that you can update to whatever you want, but I thought I would put something more realistic in the sample for now.  Given that the same rate will be used to predict all future years until you change it, I did not use 4.8% which is the current rate as of January 19, 2022.  I tempered the prediction a bit with the hopes that after the pandemic is done, the rate will ease a bit.  Anyone requesting my retirement spreadsheet going forward will get the version with this new rate (unless things radically change again).  

Anyone who already has my spreadsheet but would like to address this issue themselves have the following options:

1. Update Inflation rate in Cell J9 (or I9 for individuals) to 4%.  
• Unfortunately this will affect all the previous years' calculations which in turn will affect the estimates going forward
• This does not matter to anyone still in the savings phase since you will not have started using CPP/OAS/Retirement savings yet.
• For those in retirement spending phase, you may want to use the next option although if you have been updating the spreadsheet with your actual ending balance each year, the impact is negligible.
2. Update inflation rate only the years going forward starting from a given year
• Make a copy of the spreadsheet before you start so you can try again if you make a mistake
• Enter 1.04 (or whatever you want your going forward inflation estimate to be) in cell AD4
• Click on the first Retirement Spending calculation cell (e.g. Cell AF21 for couples examples, AB21 for singles example)
• Change the last part of the formula in that cell from $AC$4 to $AD$4 (couples) or from $AB$4 to $AD$4 (singles)
• Click and hold from the bottom right corner of your starting cell and drag down to the end to update the formula for all subsequent Retirement Spending years.
• Repeat the previous 3 steps for CPP and OAS (if desired)
3. I can send you a new spreadsheet but you would have to re-input all of your previous data.

In order to have an even more conservative estimate in our own personal spreadsheet to make sure we don't run out of money, I only updated the retirement spending estimate to use the higher inflation rate but left the OAS and CPP estimates with the lower rate.  By increasing our spending estimates but keeping our income estimates lower, I generate an extra buffer to make sure we don't overspend.

As Rich and I creep closer to the age where we might start taking OAS, I realize that based on the amounts remaining in each of our RRIF accounts, we may qualify for different amounts of OAS.  I have therefore updated my spreadsheet to split out the OAS estimate for Person 1 vs Person 2 in the couples examples.  Currently there is only one field to represent both people.  I should have done this from the start.  I also found an error in the starting year of taking OAS for Person 1 which I have now fixed.  It was previously hardcoded at age 67 but now uses the age entered in the input field.

Again, for anyone who already has a spreadsheet but would like these changes, email me to let me know and I can help you modify yours or send you a new one (but you would have to replicate the inputs from your current spreadsheet).

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 4.8% 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 8%.  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.

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 4^th 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 4^th 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!

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 4.8% 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 date—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.

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.

References:
2019 Year in Review
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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Buy Retired at 48 - One Couple's Journey to a Pensionless Retirement

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.

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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.