Investors have traditionally viewed risk as simply; volatility.   There are many ways to define risk though.

We have tried to uncover how we view risk, how we try to mitigate risk, and what we think is important for investors to think about.

Our Company Focus this month is Magna.

Please enjoy.

Emily Burt, MBA
Vice-President, Marketing and Communications

CardinalUpdateFebruary2012

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• Before the changes, CPP retirement pensions increased by 0.5% for each month after age 65 (up to age 70) that contributors delayed receiving them. For example, if contributors started receiving their CPP pensions at the age of 70, their pension amounts were 30% more than if taken at age 65.
• From 2011 to 2013, the Government will gradually increase this percentage from 0.5% per month (6% per year) to 0.7% per month (8.4% per year). This means that by 2013, if contributors start receiving their CPP pension at the age of 70, their pension amounts will be 42% more than if taken at age 65.
• The following table outlines the increase in the monthly actuarial factor for each year.

CPP retirement pensions will be lower if taken before age 65

• Before the changes, CPP retirement pensions were reduced by 0.5% for each month before age 65 that contributors began receiving them. For example, if contributors started receiving their CPP pensions at the age of 60, their pension amounts were 30% less than if taken at age 65.
• From 2012 to 2016, the amount by which a contributor’s early pension will be reduced will increase from 0.5% per month (6% per year) to 0.6% per month (7.2% per year). This means that by 2016, if contributors start receiving their CPP pensions at the age of 60, their pension amounts will be 36% less than if taken at age 65.
• The following table outlines the increase in the monthly actuarial factor for each year.

Changes to the general drop-out provision

Virtually all contributors are entitled to the general drop-out provision, which allows them to exclude a portion of their years of zero or low earnings from the calculation of their retirement benefit.

Because work interruptions occur for a variety of reasons, including involuntary job losses, and because time out of the labour force can lower the amount of one’s CPP pension, the pension formula is being enhanced to exclude up to eight years of low earnings under the general drop-out provision.

Starting in 2012, the number of years of low or zero earnings that are automatically dropped from the calculation of CPP pensions will increase.

• Before the changes, when Service Canada calculated average earnings over a contributor’s entire career (from age 18 until retirement), 15% of the contributor’s career period with the lowest earnings was automatically dropped. Under this provision, if contributors took their CPP retirement pension at 65, up to seven years of their lowest earnings were automatically dropped from the calculation of their average earnings.
• Starting in 2012, the percentage of low earnings will increase to 16%, which may allow up to 7.5 years of a contributor’s lowest earnings to be dropped from the calculation. In 2014, the percentage will increase to 17%, which may allow up to eight years of a contributor’s lowest earnings to be dropped.

Elimination of the Work Cessation Test

Starting in 2012, contributors can begin receiving their CPP retirement pensions without any work interruption. The elimination of the Work Cessation Test will make it easier for Canadians to make a phased transition to retirement.

Introduction of the Post-Retirement Benefit

Starting in 2012, if contributors are receiving CPP retirement pensions and they choose to work, they could continue to make CPP contributions that will increase their payments through the Post-Retirement Benefit (PRB). The newly-created PRB will be comprised of contributions made while contributors are receiving their CPP retirement pensions. If they are under age 65, contributions will be mandatory for them and their employers. If they are age 65 to 70, contributions will be voluntary (their employers will have to contribute if they do). People between the ages of 60 and 70 who make these contributions may begin to receive the PRB the following year.

• Self-employed beneficiaries will pay both employee and employer portions.
• Working CPP retirement pension recipients who wish to opt out of contributing to the Plan after age 65 will be required to inform the Canada Revenue Agency.
• Contributions made while beneficiaries are receiving their CPP retirement pensions will build up only the PRB. These contributions will not create eligibility or increase the amount of other CPP benefits, nor be subject to a credit split or retirement pension sharing.
• Each year of work will provide an additional PRB that will begin the following year and will be paid for life. Like other CPP benefits, the PRB rises with increases in the Consumer Price Index, providing protection from increases in the cost of living.
• The PRB will be added to an individual’s CPP retirement pension, even if the maximum pension amount is already being received.

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The following are three planning strategies that may be considered:

A. Cash flow: the most basic strategy is to improve retirement income or basic cash flow. Many people have found themselves to be “Asset Rich” and “Cash Flow Poor”. What has happened is that house prices have increased so much more in value than most people’s retirement income; as a result property taxes have created tremendous pressure on people’s standard of living. Many have found themselves living in houses worth so much more than what they originally paid; in many cases cannot afford to stay in their homes due to the increased property tax costs. The PTDP allows people to stay in their homes at the same time reducing their out-of-pocket expenses. The loan is paid off when they eventually sell their home and have access to the substantial capital that their house creates.

B. Investments/ Healthcare Reserve / Emergency Reserve: as briefly mentioned above the property tax savings can be invested in other investments at much higher interest rates. In some cases people are using the PTDP to “Stockpile” cash for future healthcare concerns or other emergency purposes. As the interest charges are so low it may be prudent to consider starting the program and building an emergency cash reserve for the future. Please note that even if the healthcare reserve or emergency reserve is not used a return of only 1% is required to breakeven. Through proper planning the use of the PTDP can provide substantially cheaper access to funds than a reverse mortgage, line of credit or the sale of a person’s home. Please note the implementation of this strategy should be considered well in advance of when the funds are required thus allowing time to build up the reserve.

C. Property Tax Estate Multiplier Program: the most efficient use of the PTDP is for people to consider an estate enhancement program. As the title suggests peoples estate can be substantially enhanced using the freed up cash flow that the PTDP creates. The Estate Multiplier program creates a substantial amount of capital that not only pays off the PTDP balance but leaves excess funds in the estate. Our clients are using these excess funds to pay taxes, help children and/or charities. The following is an example using different ages of how much extra value can be created using The Property Tax Estate Multiplier Program.

*Please note the example below assumes that the death of the husband and wife occurs at age 85. It also assumes that the property tax saving is $2500/yr. and the interest rate is 3%; which is currently 2% higher than what is being charged today.

The Property Tax Estate Multiplier Program uses a special second to die life insurance plan that is extremely cost-efficient, even if people are older. In the above examples part of the multiplier program can be donated to a favorite charity on an immediate basis or through the estate. If donated immediately individuals can use the tax saving from the gift to enhance their personal income situation. If donated through their estate then the numbers showing up under the Estate Gain column are the amounts that would go to the charity and thus creating the same equivalent tax deduction.

**Please note the Property Tax Deferment Program needs careful consideration before implementation, but properly used it can provide substantial benefits either for income enhancement or more importantly estate planning purposes. The above numbers are only examples, and would need to be verified by each municipality in which a person resides.

Contact the Legacy Group at (250) 480-1095 to book an appointment to complete a detailed analysis of your personal situation.

Below is the web page link to a government website explaining the deferral program.

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When you die, your will gives legal authority to deal with your estate to your executor (estate trustee in Ontario, liquidator in Quebec). Although your executor is legally entitled to do so, when the time comes to redeem or transfer certain assets registered in your name (such as investments with financial institutions, publicly traded shares, and in some instances, real estate) probate is usually required. Probate serves as proof to financial institutions, financial advisors and the land registry office that your will has been certified by the court and that your executor…

The entire report is below.

(Courtesy of Invesco Trimark)

Contact us for more information

Probate Planning

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