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Canadian Housing Markets To Decline 30%, Pimco Says

Canadian Housing Markets To Decline 30%, Pimco Says.

The house price correction that some market analysts have been predicting for Canada for years will begin this year, says the world’s largest bond fund.

House prices in Canada will fall as much as 30 per cent over the next two to five years, says Ed Devlin, head of Canadian portfolio management for Pimco, the trillion-dollar mutual fund run by high-profile billionaire Bill Gross.

I’ve been talking with clients and writing about how the housing market is overvalued,” Devlin told the Financial Times. “The change this year would be that I actually think it starts this year.”

But Devlin isn’t calling this a crash; he refers to it as a market “correction.” In a note published in January, Devlin said Canada’s housing markets won’t “burst” in a “disorderly manner” like the U.S. market, because Canada’s economic conditions are relatively stable.

Nonetheless, Canadian house prices are “stretched,” Devlin noted, and a cyclical correction back to more sustainable price levels is in the cards.

Not everyone agrees with this forecast, and whether or not Canada is experiencing a housing bubble has been the subject of heated debate among economists for several years.

But with prices hitting record highs and showing double-digit gains in some markets in recent months, more and more observers are growing worried that housing costs are growing unjustifiably high.

In a recent Reuters poll, 13 of 16 housing market analysts said they were “very concerned,” “concerned” or “somewhat concerned” that house prices could fall in Canada.

A recent Deutsche Bank survey named Canada as having the world’s most overvalued housing market.

But other observers argue Canadians can handle the high house prices, thanks to record-low interest rates that are making monthly payments more affordable than sticker prices would suggest.

Pimco’s Devlin doesn’t see those interest rates going up, but he does predict banks’ costs will rise, thanks to new regulations, and banks will pass on those costs to consumers.

One of those new rules was announced last week, when Canada Mortgage and Housing Corp., the government-run mortgage insurer, announced it is raising the premiums it charges for insuring mortgages by 15 per cent on average. Those new premiums will be reflected in higher borrowing costs for consumers who borrow more than 80 per cent of the value of their house.

A divide has opened up between domestic observers of the Canadian housing market — who tend to favour the view that Canada’s housing market remains healthy — and foreign observers, who appear much more concerned that Canada’s decade-long run of house price increase could end in disaster.

Bets against Canadian banks and the loonie have been hitting record highs over the past year. Those who bet against Canada’s banks have so far been losing, as their earnings have held up.

But those who bet against the loonie have been more successful; the currency has lost about 10 per cent of its value against the U.S. dollar over the past year, with about half that decline taking place since the start of the year.

Canadian Student Debt Growing Fast, But U.S. Is Much Worse Off

Canadian Student Debt Growing Fast, But U.S. Is Much Worse Off.

student debt canada

Student debt in Canada has soared in recent years, highlighting growing concerns that post-secondary education in becoming increasingly inaccessible.

But Canadian students can at least take some solace in this: The situation is much worse in the U.S.

According to Statistics Canada’s Survey of Financial Security, released last week, student debt grew 44.1 per cent from 1999 to 2012, or 24.4 per cent between 2005 and 2012.

In all, one in eight Canadian families are carrying student debt, with a median value of about $10,000, StatsCan reported. There was a total $28.3 billion in outstanding student debt in 2012, the survey found.

Yet Canadian students’ debt burden “pales in comparison with the U.S.,” writes BMO economist Sal Guatieri, noting that south of the border, student debt grew 110 per cent between 2005 and 2012, to almost $1 trillion.

The situation in the U.S. has grown so extreme that some experts are calling student debt the next economic bubble.

All the same, Canadian students are seeing their financial obligations grow faster than income. According to a study from the Canadian Centre for Polilcy Alternatives, released last fall, the costs of a post-secondary education — including tuition and compulsory fees — have tripled since 1990.

The CCPA forecasts that costs will rise another 13 per cent by the 2016-2017 student year. Ontario has the highest fees, at $8,403 on average last fall, rising to $9,517 by 2016-17. Newfoundland has the lowest. Its average of $2,872 last fall will barely rise, to $2,886, by 2016-17.

study last year from TD Bank found students are increasingly delaying major life milestones due to the rising costs of education, with the situation being made worse by a sluggish post-recession job market. That survey found average debt load sits at around $27,000.

Tuition hikes were at the heart of the Quebec student protests in the spring of 2012. The CCPA projects Quebec’s average tuition will hit $3,759 by 2016-17, low when compared to most provinces, but a nearly three-fold increase since 1990-91.

But to BMO’s Guatieri, the relatively better position of Canadian students, compared to U.S. ones, is good news for the economy.

Canadian students “could be in a better financial position to buy automobiles and homes than their American counterparts,” he wrote.

Hidden Camera Investigation Uncovers ‘Atrocious’ Investment Advice

Hidden Camera Investigation Uncovers ‘Atrocious’ Investment Advice.

As RRSP season closes and many Canadians prepare for tax time, a CBC Marketplace investigation reveals that financial advisers at some of Canada’s top banks and firms are giving consumers inaccurate, misleading and inappropriate advice.

Meanwhile, consumers face a complicated patchwork of regulatory bodies if they want to complain about bad investment advice, as some investor rights groups call for more robust consumer protection rules.

Since a third of Canadians rely on advisers to help them make financial decisions, Marketplace sent a person wearing hidden cameras to visit the five big banks and five popular investment firms in Ontario. The full investigation, Show Me The Money, reveals how individual banks and firms performed. The show, including practical tips on how to hire a financial adviser, airs Friday at 8:00 p.m. (8:30 p.m. NL) on CBC Television.

“That’s one of the worst pieces of advice I’ve ever heard in my life,” financial analyst and former adviser Preet Banerjee told Marketplace co-host Erica Johnson when shown hidden camera footage of one of the tests. “That was atrocious. That’s the only word to describe that advice.”

Hidden camera investigation

The tests revealed a wide range in the quality of advisers. Some performed well, giving clear answers and asking appropriate questions about the tester’s financial situation and risk tolerance. Other interactions, however, Banerjee found troubling.

In some cases, information was incorrect or misleading – even in response to direct questions, such as how fees are calculated. Some gave unrealistic promises about returns, including one adviser who said that a $50,000 investment should increase by $10,000, $15,000 or $20,000 in one year.

Others failed to adequately assess the customer’s risk profile, which advisers are supposed to use to ascertain the suitability of investment products they recommend to a person.

In an unusual twist, one firm tried to recruit the Marketplace tester to become an adviser herself. While some designations and certifications do require training, and individuals have to be licensed to sell specific products, “financial adviser” is not a protected term. There are currently about 100,000 advisers in Canada.

Several advisers in the Marketplace test neglected to include any conversation of paying down debt in their financial advice, which Banerjee says reveals a conflict of interest that most consumers don’t consider as they’re weighing the recommendations of an adviser.

“If you invest there’s a commission involved with that, or a percentage of assets,” he said. “But if you pay down debt, there’s no financial incentive for the adviser to do that. So that’s one of those conflicts of interests that people should know about.”

As a result of the Marketplace investigation, one firm suspended the employee and reported the behaviour to the regulatory body, the Investment Industry Regulatory Organization of Canada (IIROC).

Change coming slowly

The Marketplace test was similar to a broader mystery-shopper test in the UK by the Financial Services Authority. That test included 231 mystery shopping tests of investment advice at six major firms. The results of that test, made public last year, found that more than 25 per cent of investment advice was of poor quality because it was unsuitable or because the adviser did not collect enough information to be able to make the recommendations.

Ontario firms could face a test this year, as the Ontario Securities Commission (OSC) conducts a mystery shop to determine the quality of investment advice. While the OSC declined to provide specific details about its test to Marketplace, the results are expected to become public later this year.

However, investor rights advocates are critical of slow-moving efforts to provide better consumer protection. In a letter to the OSC, the Investor Advisory Panel pressed for reform, including how fees are structured and how complaints are investigated. “We have debated, discussed and studied the issues and their solutions for many years. It is time for decisions that will lead to a more robust investor protection regime in Canada.”

Among the most pressing issues: Financial advisers are not in fact required to act in the client’s best interest.

“There’s a big debate raging about that very issue right now,” says Banerjee. “So, it seems in a couple of years they will be bound to do what’s in the client’s best interest. But right now that’s not actually regulation.”

That runs contrary to the very reason many Canadians turn to advisers in the first place.

“If you walk into a financial institution, I think the average person on the street assumes they’re going to have someone who’s going to take care of all their financial issues,” says Banerjee. “But on the other side of the desk, there’s a wide range of people that you could see. Some of them are just order-takers or salespeople and others are true financial planning professionals.”

Patchwork complaints process

For consumers struggling with the consequences of bad investment advice, a confusing patchwork of organizations oversee complaints, including IIROC, the Mutual Fund Dealers Association (MFDA) and provincial securities associations. Each body oversees different types of complaints, depending on the nature of the complaint or the type of product the adviser is licensed to sell.

The Ombudsman for Banking Services and Investments (OBSI) also investigates complaints, but only for participating banks and firms. And OBSI has limited enforcement powers, offering only non-binding recommendations, so it’s entirely up to the bank or firm to decide whether or not to comply.

OBSI’s 2013 report, released this week, reveals a sharp increase in the number of banks and firms refusing to compensate investors for mistakes.

According to the report, banks and investment firms refused to pay back investors even when OBSI found wrongdoing in 10 cases last year. In total, investors were denied more than $1.3 million in restitution. The OBSI report called this trend “disappointing.”

Marketplace notified all of the banks and firms about the test and approached some for interviews, but all declined. Some viewed the test as an isolated incident; others vowed to investigate and take appropriate measures.

When Is RRSP Deadline? Contribution Cutoff Date For 2013 Almost Here

When Is RRSP Deadline? Contribution Cutoff Date For 2013 Almost Here.

The Huffington Post Canada  |  Posted: 02/26/2014 5:48 pm EST  |  Updated: 02/26/2014 5:59 pm EST

The deadline to contribute to a Registered Retirement Savings Plan (RRSP) is drawing near, and apparently quite a few Canadians are leaving their contributions to the last minute.

Thirty-one per cent of eligible Canadians still planned on making a contribution before this year’s cutoff date, according to a poll conducted by Harris/Decima for CIBC from Feb. 13-17.

This year’s RRSP deadline is March 3, now less than a week away.

Out of that 31 per cent who still wanted to contribute so close to the deadline, just under half hadn’t made any contributions for that tax year, while the remainder had, but planned to contribute more.

The poll showed those most likely to procrastinate on planned RRSP contributions were between the ages of 25 and 44. CIBC said previous research indicated younger Canadians often need to balance their savings with debt repayment, which can result in delaying contributions.

A previous poll conducted in November 2013 for RBC said only 23 per cent of Canadians planned to contribute the maximum amount allowed. Younger Canadians are less likely to have the cash to make the maximum contribution, CBC noted, but just 20 per cent of people between the ages of 35 and 54 and 25 per cent of people over age 55 said they’d contribute the full amount.

Senior Manager with RBC Financial Planning Richa Hingorani said putting money aside on a regular basis can help make the process more affordable.

“Maxing out your contribution at the start of the year is great if you can afford it,” she said in a press release, “but for most Canadians, regular contributions throughout the year is a more realistic and effective approach.”

Christina Kramer, CIBC’s Executive Vice President, Retail and Business Banking, also noted the benefit of saving throughout the year, rather than scrambling to find cash close to the cutoff.

“Some Canadians find it difficult to come up with a lump sum for their RRSP, underscoring the importance of creating a budget and a regular savings plan for the year ahead to avoid the last-minute crunch,” she said in a news release.

Taxing The Rich Not A Drag On Economic Growth: IMF Paper

Taxing The Rich Not A Drag On Economic Growth: IMF Paper.

CP  |  By Julian Beltrame, The Canadian PressPosted: 02/26/2014 10:33 am EST  |  Updated: 02/26/2014 3:59 pm EST


OTTAWA – A new paper by researchers at the International Monetary Fund appears to debunk a tenet of conservative economic ideology — that taxing the rich to give to the poor is bad for the economy.

The paper by IMF researchers Jonathan Ostry, Andrew Berg and Charalambos Tsangarides will be applauded by politicians and economists who regard high levels of income inequality as not only a moral stain on society but also economically unsound.

Labelled as the first study to incorporate recently compiled figures comparing pre- and post-tax data from a large number of countries, the authors say there is convincing evidence that lower net inequality is good economics, boosting growth and leading to longer-lasting periods of expansion.

In the most controversial finding, the study concludes that redistributing wealth, largely through taxation, does not significantly impact growth unless the intervention is extreme.

In fact, because redistributing wealth through taxation has the positive impact of reducing inequality, the overall affect on the economy is to boost growth, the researchers conclude.

“We find that higher inequality seems to lower growth. Redistribution, in contrast, has a tiny and statistically insignificant (slightly negative) effect,” the paper states.

“This implies that, rather than a trade-off, the average result across the sample is a win-win situation, in which redistribution has an overall pro-growth effect.”

While the paper is heavy on the economics, there is no mistaking the political implications in the findings.

In Canada, the Liberal party led by Justin Trudeau is set to make supporting the middle class a key plank in the upcoming election and the NDP has also stressed the importance of tackling income inequality.

Stephen Harper’s Conservatives have boasted that tax cuts, particularly deep reductions in corporate taxation, are at least partly responsible for why the Canadian economy outperformed other G7 countries both during and after the 2008-09 recession.

In the Commons on Tuesday, Employment Minister Jason Kenney said the many tax cuts his government has introduced since 2006, including a two-percentage-point trim of the GST, has helped most Canadians.

Speaking on a Statistics Canada report showing net median family wealth had increased by 44.5 per cent since 2005, he added:

“It is no coincidence because, with the more than 160 tax cuts by this government, Canadian families, on average, have seen their after-tax disposable income increase by 10 per cent across all income categories. We are continuing to lead the world on economic growth and opportunity for working families.”

The authors concede that their conclusions tend to contradict some well-accepted orthodoxy, which holds that taxation is a job killer.

But they say that many previous studies failed to make a distinction between pre-tax inequality and post-tax inequality, hence often compared apples to oranges, among other shotcomings.

The data they looked at showed almost no negative impact from redistribution policies and that economies where incomes are more equally distributed tend to grow faster and have growth cycles that last longer.

Meanwhile, they say the data is not crystal clear that even large redistributions have a direct negative impact, although “from history and first principles … after some point redistribution will be destructive of growth.”

Still, they also stop short of saying their conclusions definitively settle the issue, acknowledging that it is a complex area of economic theory with many variables at play and a scarcity of hard data.

Instead, they urge more rigorous study and say their findings “highlight the urgency of this agenda.”

The Washington-based institution released the study Wednesday morning but, perhaps due to the controversial nature of the conclusions, calls it a “staff discussion note” that does “not necessarily” represent the IMF views or policy. It was authorized for distribution by Olivier Blanchard, the IMF’s chief economist.

Canada Housing Crash Feared Among Analysts: Reuters Poll

Canada Housing Crash Feared Among Analysts: Reuters Poll.

 Posted: 02/26/2014 1:06 pm EST

canada housing crash

Canada’s real estate market may be resting on a house of cards, say experts in aReuters poll.

The news agency surveyed 16 housing experts and almost all of them are worried that prices could fall sharply after a decade of rapid growth.

Three said they were “very concerned,” two said they were “concerned” and eight said they were “slightly concerned.” Three said they were not concerned at all.

However, the analysts also didn’t believe that a housing crash would happen any time soon. In fact, prices are expected to rise 2.2 per cent this year, one per cent in 2015 and 0.8 per cent in 2016, Reuters reported.

“Outside of Toronto and Calgary, the housing market is largely cooling, though far from crashing,” Sal Guatieri, senior economist at BMO Capital Markets, told the agency.

Concerns about a housing crash arise amid positive signs for the country’s real estate market. The average price of a Canadian home rose between 1.2 per cent and 3.8 per cent in the fourth quarter of 2013, said a Royal LePage survey.

But the market also remains vulnerable, as prices could fall by as much as 25 per centdue to spiking interest rates or an “economic shock,” a TD Bank report said earlier this month.

The report by economist Diana Petramala found that Canadian housing is massively overvalued — by 60 per cent compared to rental rates and by 30 per cent compared to people’s income.

However, the report also said that much of the imbalance in the market reflects “frothier conditions in the larger urban centres of Toronto and Vancouver.”

Bank of Canada Governor Stephen Poloz warned in early January that long-term interest rates could rise in response to tapering by the U.S. Federal Reserve, though he also did not appear in any hurry to hike them.

Canadian Consumer Debt To Hit All-Time High By 2014’s End, TransUnion Predicts

Canadian Consumer Debt To Hit All-Time High By 2014’s End, TransUnion Predicts.

CP  |  By LuAnn LaSalle, The Canadian PressPosted: 02/26/2014 8:29 am EST  |  Updated: 02/26/2014 10:59 am EST

MONTREAL – Canadians are still on target for a record year of personal debt despite ending 2013 by making a small dent in the money they owe, says credit monitoring agency TransUnion.

At the end of last year, Canadians owed a total of $27,368 on such things as lines of credit, credit cards and car loans, TransUnion said in a study released Wednesday.

That’s down $117, or 0.42 per cent, from $27,485 in the fourth quarter of 2012 — the highest level of non-mortgage debt on record.

“We’ve been told over and over and over again from so many places that we’ve got to get this debt down and we can’t make it happen,” said Thomas Higgins, TransUnion’s vice-president of analytics and decision services.

TransUnion is sticking by its prediction that average consumer’s total non-mortgage debt will hit an all-time high of $28,853 by the end of 2014.

“There’s nothing to give us any indication that the debt levels are going to start to come down in any noticeable chunk,” Higgins said from Toronto. “Right now, we’re still trending in that direction (to higher debt), for sure.”

Higgins said Canadians started to pile on debt in the years before the 2008 recession. He said he’d have to see Canadians’ personal debt being reduced consistently by $500 to $1,000 over four to six quarters before he would say “we’re sorting of heading somewhere.”

In the last quarter of 2013, consumers’ credit card debt and debt on lines of credit were down a bit, Higgins said.

But consumers spent a little less on holiday shopping only because they got “better deals” rather than consciously cutting spending, he said.

The study also found that loan delinquencies in the quarter ended Dec. 31 were down, meaning that consumers were making minimum payments on their debts.

“We may not be paying all of it, but we’re paying enough down so that you’re still in good standing.”

But Higgins cautioned that if anything impacts the economy, the markets or interest rates, delinquency rates are usually impacted first.

Meanwhile, the study also found that Vancouver residents experienced the biggest increase in consumer debt, hitting $41,077 at the end of last year, up seven per cent from $38,357 in 2012.

On the other hand, those in Montreal managed to reduce their debt by 5.5 per cent from $19,651 to an average of $18,563, the lowest among residents of all major Canadian cities.

Higgins said Vancouver generally has higher incomes allowing consumers to take on more debt, while consumers in Montreal usually save to buy bigger items or pay with debit cards.

In a report on Tuesday, Statistics Canada said Canadian families have become wealthier over the past several years, with net worth rising despite the well-documented growth in household debt and a setback from the recession.

However, there were big differences across age groups, regions and family types and economists noted that the biggest single reason overall for the improvement was rising house prices, which are widely expected to moderate or even fall in the next few years.

TFSA or RRSP? It’s All About the Tax | Sarah Twomey

TFSA or RRSP? It’s All About the Tax | Sarah Twomey.

Sarah Twomey

Writer, Desjardins Group

Posted: 02/24/2014 7:52 am

Still unsure about the differences between a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP)?

The fact is it’s all about the tax. Here’s a quick refresher of the tax-free registered savings account:

How much can I put into my TFSA? Since the beginning of 2013, you can now contribute up to $5,500 a year. Your annual contribution limit will appear on your Notice of Assessment after your tax return has been processed. At the end of the year, any remaining balance will be added to your contribution limit in the following year. One great TFSA advantage is that there usually isn’t a minimum deposit required to open an account, which makes it easy to pay yourself first. And you can easily access your funds if you’re in a tight financial spot. It’s also worth noting that your withdrawals won’t compromise your eligibility to receive federal benefits like the Guaranteed Income Supplement, Employment Insurance or the Canada Child Tax Benefit. Any withdrawals you make can be replaced in the following year.

It’s a great retirement savings tool: If you’ve successfully reached your RRSP contribution limit, continue to make deposits to your TFSA, keeping in mind your annual limits. Remember, these deposits are tax-free and tax-receipt-free. In other words, deposits you make to a TFSA won’t reduce your taxable income, you won’t receive a tax receipt for your deposits nor will your withdrawals be taxed like an RRSP. By contrast, any deposits you make to an RRSP are deducted dollar for dollar from your taxable income in that tax year. For example, if you make $40,000 a year and contribute $2,000 to an RRSP, the tax on your income would be calculated on $38,000 only. However, any withdrawal you make from your TFSA will be tax-free and the funds are not declared as income.

Don’t forget to diversify: Consider shaking things up with a little diversification. You can choose investment options like stocks, bonds, mutual funds and guaranteed investment funds (GIFs). Also, you now have the option of borrowing your full contribution limit. However, unlike other investment loans, the interest paid on this loan cannot be used as a tax write-off. If you could afford to, contributing to each year’s maximums in both plans would be ideal. Of course, it comes down to finding a balance between creating a strong nest-egg and paying off debts. But, these tax considerations can certainly help you meet your long-term financial goals.

Canada Middle-Class Dreams A ‘Myth’ In Troubled Economy: Internal Gov’t Report

Canada Middle-Class Dreams A ‘Myth’ In Troubled Economy: Internal Gov’t Report.

OTTAWA – Canada’s middle-class is mortgaging its future to stay afloat, making the Canadian dream “a myth more than a reality.”

That’s the blunt assessment of an internal Conservative government report, an unvarnished account of the plight of middle-income families that’s in contrast to the rosier economic picture in this month’s budget.

The document was prepared last October by experts in Employment and Social Development Canada, the department that runs the employment insurance fund and other income-support programs. The Canadian Press obtained the report under the Access to Information Act.

“The wages of middle income workers have stagnated,” it says, referring to the period from 1993 to 2007.

“Middle-income families are increasingly vulnerable to financial shocks.”

The document, drawing on three years of “internal research,” was prepared for the department’s deputy minister, Ian Shugart, shortly before the resumption of Parliament last fall.

“In Canada, political parties are making the middle class a central piece of their agendas,” notes the presentation.

A department spokesman, Jordan Sinclair, said in an email that the research “was not linked to the parliamentary schedule or topics raised within the House of Commons.”

The authors say middle-income families have seen their earnings rise by an average of only 1.7 per cent a year over the 15 years ending 2007.

“The market does not reward middle-income families so well,” says the report. “As a result, they get an increasingly smaller share of the earning’s pie” compared with higher-income families.

Shugart was also told middle-class workers “get lesser government support for their work transitions,” referring to a sharp fall-off in employment-insurance benefits compared with other economic groups.

The analysis stops short of the 2008 global recession, though other analysts have noted the economic crisis wiped out many well-paid manufacturing jobs in central Canada that have supported middle-class prosperity.

The report also refers to debt, saying “many in the middle spend more than they earn, mortgaging their future to sustain their current consumption.”

“Over the medium term, middle-income Canadians are unlikely to move to higher income brackets, i.e., the ‘Canadian dream’ is a myth more than a reality.”

Current Conservative messaging emphasizes a million new jobs created since the recession; Canada’s relative economic stability compared with other industrialized countries; and various tax cuts provided to “average” families since 2006.

Sinclair repeated those talking points when asked for comment on the report.

“Today, the Canadian economy is remarkably strong, setting the conditions for Canadians and their families to succeed and enjoy a high quality of life,” he said. “Middle-income Canadians receive proportionately greater (tax) relief.”

This month’s budget acknowledged the need to create jobs and provide workplace training, but the budget documents never refer explicitly to the “middle class.” The term “middle income” occurs just three times in the main budget, and once in a news release.

Since becoming Liberal leader in April last year, Justin Trudeau has frequently cited the plight of the middle class, a theme repeated at the party’s weekend convention in Montreal.

Research from the Library of Parliament shows that since Jan. 1, 2013, Trudeau has used the phrase “middle class” 52 times in the House of Commons, compared with twice for Prime Minister Stephen Harper and nine times for NDP Leader Tom Mulcair. None of them used “middle income.”

Toronto Liberal MP Chrystia Freeland commended the public servants who produced the report, saying that for the Liberals “it was like getting a good grade on your homework.”

“This is a very strong, non-partisan, data-driven report, focused on Canada, which confirms our assertion, which is at the centre of our policy, that the middle class in Canada is being squeezed and that we have to do something about it,” she said in an interview from Montreal.

“The public discourse has been lagging — we’ve been in denial.”

Freeland, who won a November byelection and now is the party’s trade critic, is author of the 2012 book Plutocrats, which argues that wealth distribution has favoured the ultra-rich and left everybody else behind.

Follow @DeanBeeby on Twitter

Millennials, Here’s All You Need to Know About RRSPs | Jeff Cates

Millennials, Here’s All You Need to Know About RRSPs | Jeff Cates.

Jeff Cates

President and CEO of Intuit Canada

Millennials, Here’s All You Need to Know About RRSPs

Posted: 02/20/2014 5:23 pm

Unless you live under a rock, you’ve probably heard a lot about RRSPs lately. As the March 3 deadline looms, most Canadians are hurrying to figure out their RRSP contributions for 2013. But if you’re a millennial, all this RRSP talk might be prompting more questions than answers. And the numbers suggest there are questions.

A 2013 Intuit survey found that 61 per cent of millennials (those born between 1980 and 1995) have a TFSA or RRSP, compared to 77 per cent of Canadians ages 34 and above. Forty-three per cent of millennials report they have an RRSP. For the majority of Canadian millennials, this is a missed opportunity. And even if you are contributing, are you sure you’re getting the most out of your RRSPs?

Let’s start with the basics: what is a RRSP?

A Registered Retirement Savings Plan (RRSP) is an investment account designed to encourage saving for retirement. And while that seems like a long way away, there are immediate incentives by way of tax benefits. Essentially, RRSPs are tax shelters, which reduce your taxable income, and enable tax-deferred growth.

So what does this all mean, and why should you care?

All RRSP investments grow tax deferred, meaning you only pay taxes on the money invested, including profits, when you make a withdrawal. Since you will theoretically have a lower income in your retirement years, the amount taxed on your withdrawals will be significantly less. All this means more money for you in your golden years.

You also reap a very significant tax credit, since RRSP contributions lower your taxable income. For example, if you make $40,000 and contribute $5,000 to a RRSP, your taxable income will be $35,000. Essentially, RRSPs allow you to keep more of what you earned.

There are many options to choose from when you first invest in an RRSP. Popular choices include mutual funds, guaranteed investment certificates (GICs) and RRSP savings deposits. Setting one up is easy, since most banks and employers offer seamless ways to get started. What’s important to know is how much you can actually contribute, which this year is 18 per cent of your 2013 net income, to a maximum of $24,270.

Sound good to you?

Here are some tips to help you get the most out of RRSPs:

Get filing: Not earning much? You should still file your taxes. Even if your returns are small this year, you’ll start building up your contribution room for later on when you have more income to invest in a RRSP.

Start small: The average Canadian millennial is saddled with debt thanks to unemployment and rising tuition costs. According to the Canadian Federation of Students, students in Ontario and the Maritimes average over $28,000 in debt. If you’re in this position, focus on paying off all your debt first, while putting a small amount into your RRSP. Even $20 per month will grow over time and set you up down the road.

Get a bonus on that bonus: Bonuses are great, but taxes make a huge dent in them. Try contributing your bonus to a RRSP, and you’ll reduce the amount that’s taxed. Put yourself in a lower income tax bracket: If you’re making above the minimum income bracket, this is your chance to keep your tax rates low. If you can, contribute the difference into your RRSP. You’ll pay lower taxes, and have more set aside for the future.

Diversify: There are many investment options when you set up a RRSP; don’t waste this opportunity and put all your contributions in one type of investment. Try spreading them out between a more conservative account, like a GIC, and a more risky mutual fund or stock that has higher potential for growth. You tend to have less financial commitments in your 20s and early 30s, like children or a mortgage, so now is the time to take some risks.Be in it for the long haul: The benefits of a RRSP come with leaving it open until later in life. If you expect you’ll need some of your savings sooner, spread you saving between a RRSP and TFSA.

RRSP time doesn’t need to be confusing. Consider your situation, investment goals and how you can get the most out of your money. Your future self will thank you.

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