Disability Insurance: What You Don’t Know Can Hurt You

DisabilityInsuranceBy JoAnne Sommers

Imagine for a moment that a disability prevents you from working for an extended period of time. How would you manage financially? Would the loss of income force you into debt or jeopardize your children’s education or your retirement plans?

If that scenario seems remote, consider that most Canadians seriously underestimate the likelihood of becoming disabled. In a recent RBC Insurance survey, 45 per cent of respondents said they believed that disability occurs infrequently. Yet one-in-seven Canadians are currently disabled and one-in-three working Canadians will experience a period of disability lasting longer than 90 days during their working lives. In fact, the average duration of disabilities affecting working Canadians is more than two years, says Mark Hardy, senior manager, Life and Living Benefits, RBC Insurance.

Hardy says there is a mistaken perception that most disabilities are catastrophic in nature – caused by one-time, traumatic events such as physical mishaps and workplace-related accidents. “Many Canadians don’t recognize that common, chronic conditions such as mental illness (including depression and anxiety) and physical conditions such as diabetes and arthritis cause the majority of disabilities. Fewer than 10 per cent of disabilities are caused by accidents.”

It’s difficult enough to cope with the trauma of being disabled – even for a short time – without having to worry about the accompanying loss of income. That’s where disability insurance comes in. Disability insurance provides a monthly income if you’re unable to work because of a serious injury or illness. Payments end when you return to your job, reach age 65, or die.

People who work for large companies usually have some kind of employer-sponsored, long-term disability insurance coverage. If you’re self-employed or work for a smaller company, however, there’s a good chance you have no disability coverage at all.

Hardy recommends that you investigate the health insurance benefits provided through your employer and determine if the disability coverage is adequate to meet your needs. Find out how your plan defines a disability, he says. Does it provide return-to-work services? Are you covered for illness as well as injury?

Something to keep in mind is the fact that disability plans typically will either cover you for “any occupation” or “own occupation.” The latter is preferable, because under this definition, total disability means the inability to work at your regular job. With “any occupation”, total disability means the ability to perform the duties of any job. In the latter case, if you become disabled, but could perform a less demanding job, you may not receive the benefit.

When evaluating your coverage, remember that many disability plans cap your benefits. For instance, your plan may cover 60 per cent of your gross income, but only up to $2,500 a month. If you earn $100,000 annually, $2,500 amounts to only 30 per cent of your normal pay.

Also keep in mind that payments from most employer-paid plans are taxable. If you have a private disability insurance plan and pay your own premiums, the payments you receive will be tax-free. What’s more, employer-paid plans are not portable – if you leave your employer, you lose your coverage.

If you’re thinking of supplementing your disability coverage, one option is critical illness (CI) insurance. A CI policy will provide a tax-free, lump-sum payout ranging from $25,000 to $2 million, depending on your coverage, if you are diagnosed with one of the conditions covered under the policy. They include various forms of cancer, heart ailments and chronic diseases. The benefit is tax-free and does not affect the amount of disability benefits you may be receiving.

However, critical illness insurance can be quite expensive – in the range of 1-3 per cent of your gross income for $100,000 worth of coverage, says Hardy. Such policies may also have strict requirements regarding survival periods – typically 90 days – that must be met before you receive a payout. If your illness doesn’t meet those requirements, the policy may not pay you a cent.

It can be challenging to navigate the complexities of disability and critical illness insurance coverage so you may want to ask an independent insurance agent to obtain quotes from a number of insurance companies on your behalf. Adrian Mastracci recommends that you obtain two or three quotes so you can compare prices and coverage options. Your family and personal medical history will factor into the cost and you’ll probably have to pass a medical exam, notes Mastracci, portfolio manager with KCM Wealth Management Inc. in Vancouver.

“You might have to prove a five-year history of income if you’re self-employed and want to purchase disability insurance,” he adds.

If you can’t get a personal disability insurance policy in your name, you could look into group coverage available through professional organizations, he says.

For additional information on the costs and benefits associated with disability and CI insurance, visit RBC Insurance.com (see Protect Your Income).

Planning Your Exit Strategy

By JoAnne Sommers


As a small business owner you’re probably so busy with the day-to-day demands of running your operation that you haven’t given much thought to planning for retirement. If so, you’ve got plenty of company.

A recent Scotiabank poll found that one-quarter of Canada’s small business owners haven’t thought about what they want to happen to their businesses when they retire, while only 19 per cent say they have formulated a succession plan.

Entrepreneurs delay retirement planning for various reasons. Some love their work so much that they never want to retire. Others decided to stay in business longer than they’d originally intended because of the economic uncertainty resulting from the 2008-09 recession.

But even if you have no plans to retire in the near future, you need an effective succession plan to help ensure that you can achieve your retirement objectives when the time comes.

Tina Di Vito, director of Business Succession withScotiabank in Toronto, recommends that you maximize the financial benefits of selling your business by creating a succession plan early. “A lot of planning can be done with an eye to minimizing taxes or maximizing the sale price but it must be done years in advance of retirement. If you wait until you’re ready to sell, you’ll miss out.”

The first step in planning your exit strategy is to create a proper buy-sell agreement, says Di Vito. This is especially important if you have a business partner.

“A buy-sell agreement spells out what happens with your ownership share, either on your death or when you exit the business for other reasons. If you don’t currently have such an agreement, you should put one in place immediately.”

Here are some additional succession planning tips:

• Have a Tax Strategy

There are many tax implications of a small business sale and it takes time to ensure that the company and its ownership are structured to maximize after-tax proceeds.

You need to determine if you’re eligible for Canada’s $800,000 lifetime capital gains tax exemption on proceeds resulting from the sale of shares.Also, discuss with your family whether they are interested in taking over the business when you leave. If so, it may be possible to structure the takeover in a tax-efficient manner. A professional tax practitioner can help you to structure the sale as advantageously as possible.

• Maximize the Value of your Business Before Transitioning

It’s important to maximize the value of your business to potential buyers by ensuring that it is a profitable, viable entity, says Di Vito.

“Many business owners who are planning to exit their businesses go into pre-retirement mode and start letting things go. It’s important to keep sales and revenues growing even if you’re planning to exit because that will add value to the business and boost the sale price.”

Structure Retirement Income to Meet Your Needs

Succession planning is more than selling your business, says Di Vito. Your succession plan is an integral part of your overall financial plan, which means you need to take both your personal and business finances into consideration.

“Think about how the two can work together to help you reach your retirement goals,” says Di Vito. “Consider how much income you will need your business to generate to fund your retirement. How will you generate it: through dividends, share redemption or an outright sale?”

• Revisit and Refresh

Conduct an annual financial review to make sure you’re on track with your retirement and succession plans. And discuss your plans with your financial advisor and other trusted professionals to determine your progress and make adjustments as needed.

Small business people frequently find it difficult to think about leaving the business they’ve created, says Di Vito. “They often feel that their business is their life. But once they understand the process and start planning for it, they discover that it relieves a great deal of stress.”


The following tips can help ensure the best results from the sale of your small business: 

• Have a well-thought-out and clearly documented plan that integrates your personal financial situation, the business and ownership structures, both currently and in the future.

• Create contingency plans to deal with unplanned, catastrophic circumstances that could jeopardize your business and your family’s finances.

• Establish a target date to transfer ownership of your business and begin to prepare the business and yourself for that event.

• Know the current value of your business and establish a target value for the ultimate sale price.

• Consider your exit strategy. Will you be transferring your business to a family member or selling to a third party?

• Have a plan in place that will maximize the value of your transferrable assets and protect that value up to the planned transition date.

• Assemble a team of trusted experts to help with the various aspects of ownership transfer. It should include a small business advisor/business banker, a wealth advisor/personal finance advisor, a lawyer and an accountant.

(Source: Tina Di Vito, Scotiabank)

Staunching Heartbleed

By JoAnne Sommers

YourMoneyBy now you’ve undoubtedly heard of Heartbleed, the Internet security bug that triggered alarm bells around the world and shut down a number of Canadian government websites, including the Canada Revenue Agency (CRA), for several days in mid-April.

Heartbleed is a major coding error in OpenSSL, software code designed to make communications secure on more than two-thirds of active Internet websites worldwide, plus email, chat servers and virtual private networks.

The software encrypts and protects the privacy of passwords, banking information and other sensitive data that you type into “secure” websites. Such websites are identified by the “lock” icon (HTTPS)on your browser.

The flaw exposes this information to potential theft by computer hackers and cybercriminals. What’s more, it is impossible after the fact to determine who may have gained unlawful access to the data.

Mark Nunnikhoven is the Ottawa-based vice president, Cloud & Emerging Technologies, at Trend Micro, a global leader in cloud security. He says that Heartbleed enables a hacker to grab random snippets of information from a server and assemble them like a puzzle.

“It allows an attacker to trick the server into sending him information which he can put together to produce a full picture of everything happening on that server.”

While the existence of Heartbleed only recently became public, the researchers who discovered it say the flaw has been around for about two years. A patched version of OpenSSL is now available to repair the problem and software companies are updating their code and informing users of the fix.

Nunnikhoven recommends that consumers visit the websites of any companies they deal with to see whether the site was affected by Heartbleed and, if so, how they’re handling the problem. This will also tell you how the organization handles confidential information, says Nunnikhoven. “Within 12 hours of Heartbleed becoming public knowledge, the CRA shut things down. As a taxpayer, I’m very happy they took that extreme measure because it shows how carefully they treat your information.”

On the other hand, if it takes a week for an organization to post a basic notice about Heartbleed, you might want to question them about it, he says.

If an affected website has resolved its vulnerability to Heartbleed, you should immediately change your password for the site and continue changing it every couple of months, says Nunnikhoven. However, he cautions against changing passwords before your vendors make the update. “Until then, you’re more vulnerable if you change a password because it will be in your server’s memory and a hacker could access it.”YourMoneySide

It’s also essential to maintain strong password discipline, something most
Canadians do very poorly. You should have a unique password for every website for which you have an account. No two passwords should be the same and anything that can connect money or critical data services like cloud backups should never share passwords.

Nunnikhoven recommends that you use a password manager, which lets you create a master password; software then creates a unique password for every site you use. You don’t need to know or remember your passwords, because they’re all stored and protected behind one very strong master password.

Trend Micro has warned that the Heartbleed bug also affects smartphones. We published a post saying that mobile apps are just as vulnerable to the Heartbleed bug as websites because apps often connect to servers and web services to complete various functions,” says Nunnikhoven. “We found 7,000 apps that are affected by this vulnerability and we’re advising people to check the websites of the most common apps to find out whether they’ve addressed the problem and then change their passwords.”

Business owners who run their own systems need to ensure they’re using the latest version of OpenSSL, says Nunnikhoven. Those who don’t run their own systems should contact their service provider to make sure the issue has been resolved, he adds.

Handy online tools such as the one available at http://filippo.io/Heartbleed/ will verify whether a server has been fixed.

Nunnikhoven says the Heartbleed crisis is a reminder of the important ongoing relationship that exists between small business owners and their service providers. “Often, after you set up a network in your office you forget about it. Heartbleed reminds us that you need to know how your IT people will respond if you need them.”

For more information about Heartbleed, visit http://heartbleed.com

Protecting Yourself from Cybercrime

By JoAnne Sommers

YourMoneyWe Canadians sure love our mobile devices. Since the end of 2012, the percentage of Canadian adults who use a smartphone has nearly doubled to 56 per cent, according to a recent Google survey. At present, there are over 26 million mobile phones in this country for a population of about 35 million people.

The Google survey found that more than one-third of us would rather get rid of our televisions than part with our smartphones. And eight out of 10 smartphone owners surveyed said they don’t leave home without their mobile devices.

Yet most Canadians fail to take even the most elementary steps to protect the wealth of sensitive information – pictures, texts, emails, work files and banking information – stored on these devices.

Only 25 per cent of Canada’s smartphone users have basic free security software and 60 per cent of mobile users don’t know that security programs for their smartphones and tablets exist, according to the 2013 Norton Cybercrime Report from Symantec, a U.S.-based software security maker.

That ignorance exacts a steep price. According to the Norton report, cybercrime is on the rise in Canada: its cost more than doubled from $1.44 billion to $3.09 billion between 2012 and 2013. The report also estimated that seven million people in Canada have been victims of cybercrime in the past 12 months at an average cost of about $380 per victim.

Today’s cyber-criminals are using more sophisticated methods, such as spear-phishing – an advanced form of phishing, where cyber-criminals target their victims by sending malicious links to their email – and ransomware – when a cyber-criminal gains access to your computer or smartphone and locks it, preventing you from accessing any of the information inside it.

These attacks yield more money per attack than ever before, says Stephen Trilling, Chief Technology Officer, Symantec.

Canadians are victims of all kinds of cybercrime on a daily basis, including online credit card scams, clicking on malicious links in their social networks, identity theft, and having their information stolen while using free Wi-Fi, says Symantec Canada’s Toronto-based Director of Consumer Solutions Lynn Hargrove.

Symantec has found that 60 per cent of Canadians use public or unsecure Wi-Fi, while 24 per cent do online banking on free Wi-Fi networks. “What people don’t realize is that there’s no security on those Wi-Fi networks for the most part,” says Hargrove.

Canadians are guilty of a host of other cyber sins, she adds. Only 56 per cent of smartphone users delete suspicious emails from people they don’t know and just 46 per cent avoid storing sensitive files online. Forty-two per cent fail to log off after each social media session while another 28 per cent share their social media passwords with others.

“Everyone wants the ability to be connected anywhere, anytime, but it comes with a risk,” says Hargrove, noting that the consequences can entail, “anything from obvious financial losses, like money out of your credit card or bank account, to lost income, to the cost of getting your information back.”

The two biggest challenges for Canadians are making sure to use a sufficiently complex password for their mobile phones and tablets and ensuring that they have robust security software installed on their devices, she says.

Hargrove offers the following tips to protect against cybercrime:

  • Always password protect your smartphone and tablet.

Don’t use things like your birthday or anniversary date, which can easily be found online through your public profile, says Hargrove. “Create complex passwords that include a combination of upper and lower case letters, numbers and symbols, and change your passwords regularly. Use different usernames and passwords for each online account so if one account is compromised, cyber-criminals won’t be able to gain access to other online accounts with the same username and password.”

  • Never shop or do your banking online while using a free Wi-Fi network in a coffee shop or elsewhere.

When banking and shopping, make sure the website is security enabled. Web addresses with “https://” or “shttp://” mean the site has taken extra measures to help secure your information. “http://” is not secure.

  • If in doubt, throw it out.

If an email, social network post or text message looks suspicious, delete it, even if you know the source.

  • Download security software on all your mobile devices.

Use a comprehensive security software suite and keep it up to date to avoid letting cyber-criminals onto your system in the first place, advises Hargrove. The suite should include anti-virus and anti-malware protection; online identity protection; network threat protection; browser protection; vulnerability protection; antiphishing technology; automatic updates; email and instant messaging (IM) monitoring; firewall; and spam blocking.

  • Check your credit card and bank statements regularly for fraudulent transactions.

“People who think their personal or financial information might have been accessed by a cyber-criminal should immediately change the user names and passwords for their online accounts and contact their bank and/or credit card company,” says Hargrove.

By taking these simple and affordable steps, you can save yourself a world of trouble – and probably a significant amount of money as well.

How to Use Your Tax Refund

By JoAnne Sommers

When a tax refund cheque arrives in the mail, it feels a little like Christmas morning. The money almost seems like a gift, even if you shouldn’t have paid it to the government in the first place.

The temptation is to treat yourself – perhaps take a vacation or buy some new “toy” you’ve been hankering after. But there are more advantageous ways to use the money that will leave you and your family better off financially. Let’s look at some of them.

• Pay off Your Credit Cards

Financial advisors agree that the best thing you can do with a tax refund is to pay off your credit card balances.

“Most major credit cards charge at least 20 per cent interest and you’re paying it with after-tax money,” says Adrian Mastracci, fee-only portfolio manager with KCM Wealth Management in Vancouver. “So repaying your balance is like getting a guaranteed, risk-free, after-tax rate of return of 20 per cent.”

If you have more than one outstanding credit card balance, repay the highest-cost debt first and go from there.

• Pay down Student Loans, Lines of Credit, Mortgages and Overdrafts

For most people these debts, with the possible exception of student loans, are not tax-deductible so the next step is to pay them off, says Mastracci. That includes mortgages, even those with a low rate of interest.

“You want to get all non-tax-deductible debt off your books,” says Mastracci. “Notice, though, that I didn’t mention business loans, since the interest on them is tax-deductible.”

• Contribute to your RRSP

Unless you already have all the money you’ll need for retirement, the next step is to boost that nest egg. Providing that you have Registered Retirement Savings Plan (RRSP) contribution room left for the year, this is an excellent option, says Mastracci, since it will provide further tax savings when you claim the tax deduction in the future.

• Contribute to a TFSA

If you don’t have any RRSP contribution room left for this year, one alternative is to put the money into a tax-free savings account (TFSA). Unlike RRSPs, there is no tax deduction for a TFSA deposit. Investment income earned in a TFSA is not taxable and capital losses can’t be used as a deduction. You can withdraw the money whenever you wish but cash withdrawals can’t be re-deposited until the following year.

Looking Ahead  It’s not too soon to start thinking about next year’s tax situation, says Mastracci. He recommends that you do a taxable income projection for 2013, estimating your 2013 income and using your 2012 tax rate to calculate what you’ll pay on it.  Starting the tax planning process early gets you looking at your finances more frequently and helps you to focus on the right questions: What’s best for me? Should I contribute more to my RESP, RRSP or TFSA? How can I maximize the benefits of those contributions?  “Your 2012 assessment notice tells you how much RRSP contribution room you have for 2013 so there’s no reason to delay,” Mastracci says. “You might as well get the benefits now.”

Envision:seeing beyond  magazine talked about the relative merits of RRSPs and TFSAs in the January/February 2013 issue.

• Start an Emergency Fund

Life is unpredictable so everyone needs an emergency fund. It should contain enough to cover three to six months’ worth of expenses, says Mastracci.

“You need to be able to access the money quickly and easily, so invest in a high-interest savings account (one that allows you to withdraw the cash at a moment’s notice without penalty),” he adds.

You can also use a TFSA as an emergency fund but the money must be invested in instruments that are flexible and liquid.

• Make a Loan to your Spouse/Partner

If you and your spouse are in different tax brackets, loaning money to the partner in the lower bracket can save tax dollars, says Mastracci.

The spouse in the higher tax bracket lends the money to his/her partner and charges the prescribed rate of interest (currently 1 per cent; you can lock in this rate indefinitely).

The partner in the lower tax bracket then invests the money and pays any tax owing on it. He/she will have to pay interest to the spouse in the higher tax bracket each year by Jan. 30; the interest payment is tax-deductible.

• Allocate Money to an RESP

The costs of a post-secondary education are significant and contributing to a registered education savings plan (RESP) for your children or grandchildren can make a big difference.

An RESP contribution also triggers Canada Education Savings Grants (CESGs) of 20 per cent on the first $2,500 invested in an RESP each year. That means an extra $500 annually per child if you contribute $2,500. The maximum lifetime CESG contribution is $7,200.

What’s more, the 20 per cent CESG grant, along with any growth from the investment itself, is taxed in the child’s hands, not yours.

• Donate to Charity

You can do good while doing well for yourself by donating your tax refund to charity. If you haven’t made a charitable contribution previously, or not since 2007, you are entitled to the new enhanced donation tax credit introduced in the 2013 federal budget. It provides an additional 25 per cent in tax savings federally on your first $1,000 of donations.

• Enjoy Yourself 

Spending some of that tax refund on a holiday or some other fun activity has its advantages, says Mastracci. If nothing else, it’s bound to make you popular with your family.

Federal Budget Rates a ‘B’

By JoAnne Sommers

Canada’s small business owners got some good news when the 2013 federal budget was announced on March 21st. The document included several significant measures that will benefit entrepreneurs, including expansion of the lifetime capital gains exemption (LCGE) and its indexing to inflation, and extension of the Employment Insurance (EI) hiring credit for small businesses and its expansion to include companies with up to $15,000 in EI premiums.

Thanks to these measures, among others, Canadian Federation of Independent Business (CFIB) President Dan Kelly gave the budget a ‘B’.

“Overall, this is a good budget for small business. Federal Finance Minister (James) Flaherty has done a solid job by remaining on course to eliminate the deficit while announcing some important measures forCanada’s entrepreneurs.”

Kelly said CFIB was particularly pleased the government publicly acknowledged taking some of these measures – such as the expansion of the temporary hiring credit for small business – at the recommendation of CFIB’s 109,000 members.

The one-year extension of the credit will provide up to $1,000 against a company’s increase in its 2013 EI premiums over those paid in 2012; the measure applies to employers with total EI premiums of $15,000 or less in 2012.

“This is a big one for our members,” said Kelly, who noted that firms with payrolls of less than $550,000 qualify for the credit. “If you expand your payroll for any reason, you receive a $1,000 EI credit, even if you haven’t hired anyone. EI rates are going up modestly so this effectively negates the hike.”

The increase in the lifetime capital gains tax deduction from $750,000 to $800,000 will help small business owners when they’re ready to move on, he adds. And because it will be indexed to inflation, the exemption’s value will be protected in the future.

“That’s especially important because small business owners don’t have gold-plated pensions when they retire,” said Kelly. “Most plan to retire on the funds they receive from selling their businesses.”

The deduction applies to small businesses that primarily operate in Canada and have few investments or foreign holdings. According to KPMG EnterpriseTM, the increase could mean up to $12,000 in tax savings.

A less-pleasing development was the announced decrease in the federal dividend tax credit rate on non-eligible dividends to 11 per cent, down from 13.33 per cent. The change applies to non-eligible dividends paid after 2013.

“Until we know what changes the provinces will make to their dividend tax credits, we won’t know the combined federal and provincial tax rate on non-eligible dividends in 2014,” the budget document said.

In recent years, it has been more lucrative to take money out of a small business in the form of dividends than salaries or other means, said Kelly. “Now, the government has closed the loophole. We’re watching this closely and waiting to hear how it impacts our members’ firms. We’re concerned it will be poorly received.”

While CFIB expected the change, it would be much easier to accommodate if the small business tax rate had been reduced from its current 11 per cent, he noted.Ottawahas said it would look at further tax relief, including for small business owners, after the deficit is eliminated.

Kelly applauded the government’s focus on eliminating the deficit by 2015/2016 or earlier. “Small business people know that running deficits is dangerous because they may result in future taxes.”

The need for governments to balance their books was recently highlighted by a CFIB report titled Canada’s Fiscal Fitness. The report measures spending, revenues, and debt as a percentage of gross domestic product (GDP) for the federal government and all 10 provinces, and illustrates the negative impact that would result if governments were to miss their spending targets.

Other budget highlights that impact small business include:

• The Canada Jobs Grant

Given that half of Canada’s small firms are concerned with the shortage of qualified labour, CFIB is pleased the budget includes renewed focus on skills training. The budget also has plans for a jobs grant, which will see Ottawa provide matching funds of up to $5,000 per person for skills training programs. Employers and provincial governments will be expected to put in the rest. This approach is an improvement on funneling money through the provincial governments, which hasn’t worked well, said Kelly.

“Because details of the plan will have to be negotiated and approved by the provinces before it goes into effect, we’re taking a wait-and-see attitude. We will be lobbying to ensure the new Jobs Grant recognizes informal, on-the-job training and those elements of current training programs that are working well. But getting employers more involved in training is a step in the right direction.”

• Accelerated Capital Cost Allowance

The accelerated capital cost allowance for machinery and equipment has been extended for two years.

• Reducing Red Tape

Kelly lauded progress on reducing the red tape burden at the Canada Revenue Agency (CRA). “This has been a huge irritant for small business,” he said.

• Venture Capital Support

The budget contains some new venture capital support, including $60 million over five years, for startup accelerators and incubators. The government will give the Business Development Bank of Canada $100 million to invest in companies that complete those programs.

Canadians Turning to Online Investing

By JoAnne Sommers

Canadians now use the Internet for everything from booking vacations to searching for new romantic partners. So it’s not surprising that growing numbers of us are researching and managing our investments online.

A recent TD Direct Investing Poll found that 41 per cent of respondents use the Internet to research their investment options; 22 per cent expressed comfort with managing their investments online and another 13 per cent said they invest online more frequently than they did five years ago.

The growth in popularity of “do it yourself” (DIY) investing has a lot to do with convenience, as well as flexibility and control.

“You can log on 24/7 and never need to make an appointment,” explains Robert Nuyten, a Toronto-based BMO InvestorLine consultant. “And online brokerages offer a variety of tools to help you manage your account with confidence.”

Online brokerage accounts can hold a wide variety of investments. BMO’s list includes mutual funds and exchange-traded funds (ETFs), guaranteed investment certificates (GICs) and bonds. Investors can also purchase individual stocks through such accounts.

Probably the most compelling benefit of the DIY approach is significantly lower commissions. “The average cost of a single online trade ranges from $9.95 to $29,” Nuyten notes. “By comparison, if you use a full-service broker it’s in the $100 to $200 range.”

It pays to shop around before selecting a trading site. There’s a wide range of online brokers to choose from and they compete intensely by offering special rates and deals, such as free trades for a specified period of time. Compare features, pricing and promotions carefully. You can also get recommendations from friends, family and co-workers, and visit investing blogs and financial discussion forums to find the broker that’s best suited to your needs.

Once you’ve chosen a broker, think about the purpose of your online trading activities. “What do you want to accomplish?” asks Nuyten. “Dabbling in the market is very different than building an investment portfolio. Your intentions will determine the type of account that’s best for you.”

To help you decide, there are advanced tools and features available on the direct brokers’ websites. You can also discuss the matter with a representative at your local bank branch.

DIY investing is not for everyone. Independence generally means limited or no access to financial service professionals when you have questions about risk or the suitability of certain investments. You’re also on your own when it comes to dealing with the emotional roller coaster of price swings and questions about whether to sell a holding that has appreciated or hold on to it in hopes of increasing your gains.

Online trading also involves a lot of work. Although all trading sites offer tools and huge amounts of research information, you need considerable self-discipline to work through all of it. So be honest with yourself – is this really for you?

If it is, then go for it. And good luck!



  • The Internet has loads of basic explanatory information for people who are new to DIY investing. Start with GetSmarterAboutMoney.ca, a non-profit site that provides good, basic information.
  • The investor education centre, Globeinvestor, at www.theglobeandmail.com is worth a visit.
  • Investopedia (www.investopedia.com) is another website worth checking out; it’s like an online encyclopedia.

A GPS for Investing

Online investors have traditionally been on their own when it comes to making decisions, but for those who want personalized advice and validation for their choices, BMO InvestorLine recently introduced adviceDirect. The fee-based service, which is unique inCanada, provides continuous portfolio monitoring and notifications and advises investors when their portfolios require attention related to asset allocation, level of diversification and poorly rated equities. It also lets you know if the portfolio has more risk than your investor profile allows.  

“The launch of adviceDirect represents a new way to invest and helps take the guesswork out of investing decisions by offering investors personalized advice so they can stay in charge of their portfolio,” says Robert Nuyten, a Toronto-based BMO InvestorLine consultant. “In many ways, it is like having a co-pilot to help you manage. Not only do we alert you, but we provide recommendations and advice about where to correct issues so your portfolio is aligned with your investment objectives.”

adviceDirect isn’t for casual investors: the minimum account size is $100,000, for which you get 30 free trades, and the cost is 1 per cent of the account value annually. For accounts between $500,000 and $1 million, the fee is 0.75 per cent and over $1 million it is 0.5 per cent.

The new service is very popular with BMO InvestorLine clients, Nuyten says. “Our feedback was that some self-directed clients wanted something between full service and complete independence. There was nothing in between those two extremes before and adviceDirect fills that void.”

More information is available online at www.bmo.com/advicedirect.

Preparing for the New Year

By JoAnne Sommers

The New Year is traditionally a time for making resolutions about everything from weight loss to spending more time with family and friends. It can also be a time of financial reckoning as bills for the holiday season come due.

On a more positive note, the New Year offers us a chance to start fresh, getting our financial houses in order for the year ahead. With that in mind, here are some things to consider as you put together your financial plan for 2013.

RRSP Contributions
You can make both regular and spousal contributions to your RRSP for 2012 up to March 1, 2013 and are free to start making regular and spousal RRSP deposits for 2013 at any time.

Your 2011 income tax notice of assessment sets out your RRSP room for 2012. But be careful not to over-contribute by more than $2,000 or you will incur penalties.

The earlier you contribute to your RRSP, the more time your investments will have to compound, which can make a big difference to your savings when it’s time to retire.

Remember that if you don’t use all your contribution room in any one year, the unused room is carried forward indefinitely. The tax deduction for your RRSP contribution can also be carried forward indefinitely, so you can use it in a future year when it would be more beneficial, i.e. when your taxable income is greater.

Business Owners and the Self-Employed
In order to create maximum RRSP room of $24,270 for 2014, your income must be about $134,800 in 2013. This means that owners of companies and those who are self-employed should review their 2013 remuneration mix, revisiting their combination of salary, management fees, bonus and dividends as applicable.

Also, think about whether an Individual Pension Plan (IPP) would be more beneficial to you than an RRSP. An IPP is essentially a one-person defined-benefit (DB) plan that allows well-to-do business owners, incorporated professionals and senior executives to save more than they could in an RRSP.

The Tax Free Savings Account (TFSA) can be an excellent supplement to your RRSP. If you haven’t started one yet, don’t worry – you can catch up for the years you missed at any time.

You can put up to $5,000 in a TFSA for each of the years 2009 through 2012. The maximum contribution for 2013 is $5,500. Unused TFSA room can be carried forward to 2014 and beyond.

Unlike the RRSP, there is no tax deduction for a TFSA deposit. Investment income earned in a TFSA is not taxable and capital losses can’t be used as a deduction. You can make TFSA deposits for the rest of your life but don’t over-contribute as the penalties can be significant. You can withdraw the money whenever you wish but remember that cash withdrawals cannot be re-deposited until the following year.

Tax Returns for Children/Students
Start gathering the paperwork to file a tax return for each of your children who will have income in 2013. That includes those who are students. Most students don’t earn much so they won’t have to pay much tax in 2013. However, you’ll be creating RRSP room for them for future years when they have a larger salary.

Income Tax Installments
2013 quarterly income tax installments are due on the 15th of March, June, September and December. Installments apply to self-employed individuals and to those who may not remit sufficient tax amounts at source. If you are affected, the Canada Revenue Agency will send you installment reminders.

You may want to set up or contribute to a Registered Education Savings Plan (RESP) for one of your children or grandchildren. A $2,500 annual contribution per child provides the maximum $500 government grant.

Family RESP plans are better than a series of individual ones if you have two or more children who will be related beneficiaries. That’s because you can have several beneficiaries with a family RESP and if one of them doesn’t go on to post-secondary school you can allocate all of the RESP proceeds among those who do. However, if you have separate RESPs for each child and one doesn’t go on to school, you will either have to transfer that child’s RESP money to your RRSP or pay tax on it as income.

The maximum lifetime RESP contribution is $50,000 per child. Beneficiaries must report the money in their RESPs as income when they receive it. The goal is for students to report the taxable RESP amounts while they still have a low tax rate.

Harvesting Gains and Losses
Don’t forget about 2013 gains and losses allocations from mutual funds that you hold in cash accounts. If you own a mutual fund outside your RRSP or TFSA and the fund sells a holding that generates a loss or gain, you will be allocated your share of that loss or gain after it’s sold.

You can apply your 2013 losses to any gains you realized in 2013; alternatively, you can apply those losses to gains from the past three years, or carry them forward. And don’t forget the 30-day rule before repurchasing the same security.

Thanks to Adrian Mastracci, portfolio manager with KCM Wealth Management in Vancouver for providing valuable information used in this article.

Is There a PRPP in Your Future?

By JoAnne Sommers

Your-MoneyThere’s good news on the horizon for small- and medium-sized employers who want to offer retirement savings plans to their employees.

In June 2012, federal legislation governing Pooled Registered Pension Plans (PRPPs) received royal assent. This means that a new kind of defined contribution pension plan will be available to employers, employees and the self-employed across Canada once federal tax legislation is passed and the provinces pass their enabling legislation.

The legislation will allow regulated financial institutions – banks, insurance companies and investment companies – to begin offering PRPPs to small businesses and self-employed individuals who would otherwise not have a pension like those available at larger companies.

PRPPs will enable smaller businesses to offer their employees registered pension plans that will be simple to administer, says Dan Kelly, president of the Canadian Federation of Independent Business (CFIB), which represents 109,000 small- and medium-sized enterprises (SMEs) across the country. Only 15 per cent of Canada’s small employers currently offer some form of retirement savings to their employees, Kelly notes.

“PRPPs will be an excellent addition to the retirement savings options for small business owners and their employees. Small firms tell us that the main reasons 80 per cent of them do not have any form of company retirement plan for the business owner or their employees are the costs and administrative burden of offering a plan. If properly implemented by the provinces and financial institutions, we expect PRPPs to move the ball forward on both fronts.”

New CFIB member data recently revealed that one-third of small firms would consider offering a PRPP in their workplace, while another one-third would like to receive more information about them.

Current pension plans are beyond the reach of most entrepreneurs and Group RRSPs quickly become unaffordable because employers must also pay Employment Insurance, Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) and Workers’ Compensation premiums on top of any contributions to the plan. RRSP management fees are often very high (in the range of 2-2.5 per cent) compared to other forms of retirement savings, Kelly says.

PRPPs should enable smaller firms to offer pensions at a cost usually available only to very large pension plans, said The Honourable Ted Menzies, Minister of State (Finance). “Because PRPPs will involve pooling large funds, Canadians will benefit from lower management costs. In effect, they will be buying in bulk, leaving more money in their pockets when they retire.”

For smaller businesses, one of the principal attractions of the PRPP is that it is fully voluntary, says Kelly. Employers may choose whether to offer it and, if so, whether they wish to contribute to it. Employees would be automatically enrolled but could opt out.

The employer’s role would be limited to deducting the employee’s contribution from his/her pay cheque and remitting it to the financial institution. All other responsibilities, including how the funds are invested and the associated costs, would rest with the financial institution and the individuals who participate. The financial institution would act as both trustee and plan administrator.

“Unlike CPP, small business owners can decide whether or not they wish to participate,” Kelly notes. “CPP is the biggest payroll tax of all and we pushed back against recent proposals for increased premiums. This is a much better solution to the problem of insufficient retirement savings.”

PRPPs could also help small businesses to attract and retain key employees, he adds. “Many smaller companies are trying desperately to find and hang on to workers and this will put them in a position to compete with larger firms for top talent.”

Kelly doesn’t consider PRPPs a panacea, however, and he warns that, “They could easily be screwed up by the financial services industry or the provinces. Regulatory headaches are a possibility and the financial services sector must ensure low-cost administration. We will be monitoring financial institutions to ensure that administration fees are significantly lower than those associated with current RRSPs.”

CFIB is also calling on the provinces to move quickly to implement the necessary legislation and to ensure that PRPPs remain entirely voluntary.

“We hope the provinces don’t implement a patchwork quilt of policies. We want PRPPs to be fully portable so that a worker who switches employers can take their pension with them, even if they’re moving to another part of the country.”

Ontario has already announced that it won’t proceed with implementation of the PRPP until Ottawa agrees to increase CPP premiums. “They’re using it as a political football,” says Kelly, adding, “We’re deeply disappointed with them.”

Quebec proposed legislation to implement PRPPs earlier this year but it died when the provincial election was announced.

Kelly says CFIB is hoping that a western province – Saskatchewan, Alberta or B.C. – will take the initiative in passing enabling legislation. “We need a larger province to move this forward because financial services companies are unlikely to develop PRPPs for smaller provinces alone,” he explains.

Getting Back to Basics

By JoAnne Sommers

Your Money
With apologies to Thomas Paine, these are the times that try investors’ souls. Given the European debt crisis, continuing low interest rates and ongoing stock market volatility, not to mention the possibility of another recession, it’s tough to know what to do with your money these days.

But before you throw up your hands in despair, Adrian Mastracci, Vancouver-based portfolio manager with KCM Wealth Management Inc., has three recommendations for dealing with the current investment environment.


  1. Refrain from making changes just for the sake of change
  2. Don’t get into the investing boat without a life jacket
  3. Get back to portfolio basics as soon as possible

“Today’s investment climate is filled with uncertainties and investor patience can easily vanish,” says Mastracci. “So you need to develop sensible strategies that allow you to control and accept uncertainty.”

Mastracci offers the following “life jackets” to help you get through the current malaise:

• Have a written game plan.

If you don’t have one or it’s out-of-date, create a new one. Your game plan takes into consideration your investor profile, time horizon and risk tolerance, plus diversification, tax friendliness and asset mix. It becomes the foundation for the ongoing management of your portfolio.

• Review your asset mix in the four core investment categories: equities, bonds, cash and real estate.

It’s important to understand asset mix or allocation because research shows that it is responsible for most of a portfolio’s variability. Your asset allocation is determined by your risk tolerance and that is impacted by your age, net worth, time horizon and investing experience, plus psychological factors such as preference and attitude.

Portfolios are made up of some combination of equities (stocks), bonds, also known as fixed-income investments, and short-term investments, also referred to as money market or cash investments.

Stocks offer greater potential for growth but come with a higher investment risk. Generally, the more years until retirement, the bigger the role stocks could play in your investment mix.

The potential risk and return on bonds is moderate – generally lower than stocks, but higher than short-term investments. In general, bond prices rise when interest rates fall, and vice versa.

Short-term investments are considered the least risky of the three basic investment types but they also tend to produce the lowest returns over the long run. Short-term investments often become more important as you get closer to and into retirement.

It is important to review your asset mix periodically because it may not reflect your current risk tolerance, says Mastracci.

“You may have too much invested in stocks and mutual funds, for example. A 70 to 85 per cent mix of equities is an aggressive profile and 85 to 100 per cent is speculative. It takes a serious appetite for risk to embrace either of these profiles.”

Most investors are comfortable within a 40 to 60 per cent equity mix, he adds.

One way to think about risk tolerance is to ask yourself at what point losses start to hurt you, notes Mastracci. “Capital preservationists might be done at 20 per cent while more speculative people may be able to stand a 50 per cent loss.”

• Rebalance your portfolio when necessary.

Most people don’t understand the concept of rebalancing, says Mastracci, who explains it as follows:

“If, for instance, you bought an equity at $100 and it reaches $150, sell some of it, say 20 per cent, and put the proceeds into an area where you need to plug a hole, such as fixed income.”

Rebalancing seems counter-intuitive but it makes sense because markets don’t keep going up indefinitely. Moreover, equities and fixed-income investments tend to move in opposite directions. Inevitably what goes up will come down and vice versa. So as an investment starts to increase in value, sell some (not all) of it, take a profit and put that into something else.

By following this strategy you’ll be adhering to the time-honoured – if seldom-followed – mantra, ‘buy low and sell high’.

• Review the duplication of stocks among your mutual funds.

There is a lot of duplication in most portfolios, says Mastracci, adding that it’s not unusual to find 60 to 65 per cent overlap, particularly among people who hold mutual funds.

“Owning a collection of funds full of overlap reduces your portfolio diversification and if you value broad portfolio diversification, you want little duplication.”

He suggests you analyze the individual securities inside each fund to determine how much overlap exists. Fund names may differ, but the content often contains much similarity or duplication.

“Having a personal asset mix helps to reduce overlap. You can also use Exchange Traded Funds (ETFs) and index funds for that purpose. Fewer than 10 ETFs with low or no overlap should suffice to right your mix.”