Understanding the Canadian Pension Plan (CPP)
We have all experienced the discouragement of receiving our paycheque and seeing that a huge chunk of our money has been lost to taxes and other deductions. For some reason, the government provides no formal education on any of the various processes relating to taxes, pensions, or other related topics (why isn’t this part of the school curriculum?).
As a result, many of us must do our own research in order to properly understand the tax process and all of the other deductions coming off of our income. Aside from tax, the biggest and most common deduction off a standard paycheque is from the Canadian Pension Plan (CPP).
What is CPP?
The CPP is a pension plan designed to replace some of your income upon retirement through a monthly benefit. Through this program, Canadian taxpayers make contributions throughout their working life and receive this money back as a monthly pension when they decide to apply for CPP.
In this sense, it is nice to realize that at least some of the money being deducted off of our paychecks eventually comes back to us in the long run.
How it works
The amount deducted off of your pay each year for CPP is determined by your employment income.
- The minimum yearly income threshold for CPP contributions is $3,500, so taxpayers receive no CPP deductions on their first $3,500 of income.
- The maximum threshold for CPP contributions is $58,700, so taxpayers will not have CPP deducted on income earned beyond this amount.
Let me break it down in detail for easier understanding:
Someone making $120k a year will contribute the same amount to CPP as someone making $58k a year. In 2020, the CPP contribution rate was increased to 5.25% of employment income, as it continues to rise each year.
This means that taxpayers receiving employment income and a T4 will contribute 5.25% of their earnings between $3,500 and $58,700 to CPP in 2020, for a maximum yearly contribution of $2,898. (Note that this is for those receiving a T4 as contributions are different for self-employed tax payers).
CCP: If you are an employee
The nice thing about being an employee is that your employer is actually responsible for matching this yearly contribution to your pension plan. In other words, you have actually contributed $5,796 to your CPP for the year, but as an employee only half of this is deducted from your income while the other half is contributed by your employer.
CPP: If you are self-employed
If you are self-employed, you will be responsible for paying the full $5,796 yourself. Self-employed taxpayers have 10.2% of their income between $3,500 and $58,700 deducted and contributed to CPP.
Many of our self-employed clients will have a balance owing when they file their tax return, but often a good portion of the amount payable is actually just owed to CPP. While taxpayers are normally unimpressed that they have this balance owing at the time, it is important to realize that if a good part of this money is going to CPP you are simply “losing” this money to your own pension plan, rather than losing it to the government as tax.
However, the fact that all of your CPP contributions as a self-employed taxpayer are directly deducted from your income (versus as an employee where your employer contributes half) is also a factor to consider when deciding to start your own business. That being said, a self-employed taxpayer can deduct half of their CPP payable as an expense to reduce net income.
How to make CPP work for you
You can also receive CPP contributions back as part of your refund on a tax return if you over contributed through the year. As CPP is normally automatically deducted from employment income, this can happen in a few situations.
The two most common situations are as follows:
- Taxpayers earning a low income for the year (since the first $3,500 of employment income is not eligible for CPP), and;
- Taxpayers with multiple T4’s (with each T4 the CPP contributions are normally based on that being the only T4).
Between age 60-70 you can apply to begin receiving your CPP contributions back as a monthly benefit. The average monthly benefit ends up being around $600/month with the maximum usually near $1100/month.
The amount you receive is based on your earnings and contributions through your working life, as well as the age you elect to start collecting CPP. Be sure to look out for our related article ‘When should you start collecting your CPP’ in which I will elaborate more on this topic.
Having a disability on file with CRA will also increase the benefit you will receive, and potentially allow you to begin collecting CPP early as well. To get an idea of how much you have contributed and what type of benefit you might be looking at, you can check your statement of contributions on the CRA website.
I hope you have found this article both informative and helpful. Please feel free to share it with your friends and family.
Until the next time,
Gerry J. Hogenhout, CPA, CGA, CFP, AMP
Founding Principle, Canadian Investment Services
Get in touch
To find out more about CPP and how it relates to your personal situation, visit our website www.canadianinvestmentservice.com to book a free consultation today.
What they DON’T tell you about the investment marketplace - Part II
What they DON'T tell you about the investment marketplace - part 2
Welcome to Part II of this article series about understanding how the function investment marketplace functions in Canada. If you missed Part I then be sure to go back and read it before continuing - it will make more sense that way.
But to quickly recap Part I: the regulated investment marketplace is structured in such a way that investors are only able to access investment opportunities from either mutual funds, stocks and bonds, private equity, syndicated mortgage investment products, and segregated fund investment products. Due to government regulations, investors are not able to access any real-estate investment opportunities, largely because it is not in the interest of big banks who make a profit off your investments in the regulated marketplace.
I used the analogy of a shopping mall, where on the left-hand side sits the regulated marketplace (depicted as 5 stores: store #1 sells mutual funds, store #2 sells stocks and bonds, store #3 sells private equity, store #4 sells syndicated mortgage investment products, and store #5 sells segregated fund investment products). On the right-hand side of the mall sits one large store personifying the unregulated investment marketplace - real estate-related investment opportunities.
Okay, let’s jump straight back into it.
How does the OSC and FSCO/FSRA actually ‘trap’ investors?
The OSC and FSCO/FSRA trap investors through the financial advisor licensing system, which the OSC and FSCO/FSRA control. Each of the 5 stores on the left-hand side of the mall require separate and different investment licenses. When a person wishes to work in the investment industry as a financial advisor, they will normally enter the investment industry by getting a ‘license’ and working as a financial planner and/or investment advisor for an investment company (CIBC, Edward Jones, TD, Investors Group, RBC, Money Concepts, etc.).
If an advisor wants to work in store #1, they need to obtain an MFDA license. To work in store #2 they will require an IIROC license. Store #3 requires a Private Equity license, and store # 4 requires a Mortgage license, while Store #5 requires an Insurance license. Once an advisor gets any of these 5 licenses, they are now stuck in one of the 5 stores on the left-hand side of the indoor mall.
How does this affect me, the innocent investor?
When an investor like you works with a ‘licensed’ financial advisor, it means that they have you ‘trapped’ into one of the 5 stores on the left-hand side of the indoor mall. The unsuspecting investor assumes that their licensed advisor is acting in their best interests but this is impossible for the advisor to do. An investor would think that the fiduciary responsibility of the financial advisor is to them, the client, but unfortunately, this is not the case. In fact, the regulatory system actually prevents the licensed advisor from putting the best interests of their client first.
Given the way the investment industry is structured, the advisor must put the best interests of the company that licenses them ahead of their client’s best interests. This is a sad fact which I find to be unbelievable, but unfortunately, it is very true. The regulatory system, created by the banks and large investment companies, require the advisor to ‘trap’ their unsuspecting client into one of the 5 stores on the left-hand side of the indoor mall and, as such, the licensed advisor can only sell the investment products found in that store. Thus, the client (you) becomes trapped.
When investors figure this out, thanks to the help of Canadian Investment Services, they get angry and naturally feel duped. We tell them not to blame their advisors given it is not their advisors’ fault. The fault lies with the regulatory and licensing structure within the investment marketplace, which has been created by the big banks and large investment companies to help them control the financial assets invested in the overall investment marketplace.
The banks and trust companies do not want you to know this, and they certainly do not want you knowing about the Real Estate store on the right-hand side of the mall. Why? Because if investors learn about the Real Estate store they will move their assets there and away from the banks and investment companies. It’s very sad to say but today's licensed advisors are really glorified salespeople for the companies that license them.
So what is the solution? How does an investor get out of the trap?
To avoid being trapped, the solution is to work with an investment services company that is not restricted by an investment license, which is exactly how Candian Investment Services operates.
The easy way to find out if you are actually trapped is to ask your financial advisor which license they hold. If they hold an MFDA license, you are trapped in Store #1, if they hold an IIROC license, you are trapped in Store #2, if they hold a Private Equity license, you are trapped in Store #3, if they hold a Mortgage license, you are trapped in Store #4, and if they hold an Insurance license, you are trapped in Store #5. There are no if’s and but’s.
How can Canadian Investment Services help you?
Canadian Investment Services is not tied to any investment license, nor do we want to be. Therefore, we have no fiduciary responsibility to any bank or investment company - or any other company that creates investment products for that matter. We can proudly say that our fiduciary responsibility is to our clients.
We help our clients navigate the overall investment marketplace, and if we want any investment products from stores #1, #2, and #3, or mortgages and/or insurance from stores #4 and #5, then we just simply use the services of a licensed representative to access that product. Also, by not being tied to an investment license, we have access to the investment products that are found in the Real Estate store on the right-hand side of the mall, many of which we create internally ourselves (such as Real Estate Fix ‘n Flip projects).
Think of it this way: try to avoid going into The Investment Marketplace mall by yourself, you’ll just end up trapped in one of the 5 stores on the left-hand side. Alternatively, let Canadian Investment Services navigate you through the mall, and that way you’ll be able to access all of the investment products available on both sides of the aisle. In addition, we will provide you with the unbiased investment advice and financial planning information that you deserve. With our help, you’ll end up being invested in investment products that you actually want to be invested in, either from stores 1 through to 5 and/or from the Real Estate store.
How much does it cost to use Canadian Investment Services?
The short answer: nothing! That’s right, our service is free. Here’s why:
We deal with all your needs before you enter the Investment Marketplace mall by providing you with all the required education and information required for you to make an informed decision as to the direction you want your financial investment to take. We do this because when we enter the investment mall together you are much better equipped to determine which store to go into.
We help you determine which investment products and financial services you require and then we go into the store and purchase those products from a licensed advisor (the licensed advisor will then pay Canadian Investment Services a portion of the commission they have earned, and that’s how we get paid). That’s why our service to our clients is completely free. Given you deal directly with a licensed advisor, you would have had to pay the same amount of commission anyway. So what’s the difference? There is no added cost to you.
Canadian Investment Services provides you with solid, unbiased financial information, whereas licensed advisors are just trying to sell you what they are licensed to sell.
Ready to go shopping at the investment mall with us?
Visit www.canadianinvestmentservices.com to learn how we can help broaden your access to diverse investment opportunities.
This concludes Part II of this article topic. I hope you have found this information useful. I look forward to helping you structure and plan your financial future.
Until then, take care.
Gerry J. Hogenhout
Founding Principle, Canadian Investment Services
Edit: On The Run Agency
What they DON’T tell you about the investment marketplace - Part I
What they DON'T tell you about the investment marketplace - part 1
Throughout my extensive career in investment, I have noticed that an overwhelming majority of investors have been left to wonder whether their financial advisors really have their best interests at heart, or if investment products are simply ‘sold’ to them for a commission. As you will see, these concerns are not entirely unfounded.
Don’t shoot the messenger here, but most investors are being duped by their financial advisors. However, it is not entirely the fault of the financial advisor. The problem, in fact, lies with the investment industry itself and how it functions. In this article, I want to shed some light on this unfortunate problem so that you can better understand what has been happening to you and your investments up to this point.
At Canadian Investment Services (CIS), we strongly believe that educating our clients on how the investment marketplace functions leads to tangible investment results from informed decisions based on detailed knowledge. By informing and educating our clients with ultimate transparency, our investors avoid being duped while they actually become better equipped to determine what investment products and/or financial services they need. More importantly, they become better able to determine what they actually want to invest in within their own personal and/or corporate financial plan.
Understanding the investment marketplace
The simplest way to explain the investment marketplace is like this: think of the overall investment marketplace as various retail stores selling a variety of different investment products (mutual funds, stocks, bonds, private equity, and real estate-related investments) and/or providing financial services (mortgages and/or insurance).
Now, picture these retail stores inside an indoor mall, which we’ll call The Investment Marketplace Mall, which has a hallway with 5 retail stores on the left-hand side, and 1 large retail store on the right-hand side. The 5 retail stores on the left-hand side all sell their own investment products, with each store selling a completely different investment
The 5 stores on the left-hand side of the mall sell the following: product than what is found in the other stores.
- Store #1 sells only mutual funds
- Store #2 sells only stocks and bonds
- Store # 3 sells only private equity
- Store #4 sells only syndicated mortgage investment products (while their primary focus is to provide mortgage services)
- Store #5 sells only segregated fund investment products (while their primary focus is to provide you with insurance services)
So what happens on the right-hand side of the mall? Well, that’s a big store that sells only real estate-related investment products that are unfortunately unavailable to the stores on the left-hand side of the mall. And, to let you in on a secret, the investment industry does not want you to know about the real estate store, given it only sells real estate-related investment opportunities.
But there are so many real-estate investment opportunities many investors are gagging for which the traditional investment marketplace (left-hand stores) do not have access to due to regulatory and licensing constraints. The real estate store on the right-hand side offers many real estate investment products such as real estate fix ‘n flips, real estate joint ventures, real estate limited partnerships, private mortgage lending in your RRSPs, and facilitates the Child Home Ownership program as well as offering many other types of real estate-related investment products.
Apologies for the rather clumsy analogy, but hopefully you get my point: one of the big problems in the investment industry is that the overall investment marketplace is structured to prevent investors from knowing about real estate-related investment opportunities.
How is the overall investment marketplace governed and regulated?
In Canada, the investment marketplace is governed separately by each province. For example, Ontario is governed by provincial regulations established by the Ontario Securities Commission (OSC), as well as the Financial Services Commission of Ontario (FSCO, soon to be renamed FSRA - Financial Services Regulatory Authority of Ontario).
Back to The Investment Marketplace mall analogy: the OSC and FSCO/FSRA only govern the left-hand side of the indoor mall (stores 1, 2, 3, 4, and 5), and do not govern nor deal with the right-hand side of the mall - the Real Estate store. It may be hard to believe, but the Real Estate store functions without the need for an investment license from either the OSC or FSCO/FSRA. In fact, a person does not need any type of investment license to function within the Real Estate store, but those advisors who do hold an investment license are prevented from functioning within The Real Estate Store.
So, to clarify: the OSC governs and regulates the investment products found in stores #1 (mutual funds), #2 (stocks and bonds), and #3 (private equity), while the FSCO/FSRA governs the financial services found in store #4 (mortgages) and store #5 (insurance). The Real Estate Store is not governed by either the OSC and/or the FSCO/FSRA.
So what’s the problem?
The problem is that the overall investment marketplace is designed to ‘trap’ investors into one of the “stores” on the left-hand side of the indoor mall, and designed to not let them visit the other stores. And trust me on this, the investment industry does not want you, the investor, to know about the Real Estate store on the right-hand side of the mall (which is where all the real estate-related investment opportunities are found).
So why doesn’t the investment industry want investors to know about the Real Estate store? Because the big banks and large investment companies make too much money keeping you trapped inside store #1 (mutual funds) and store #2 (stocks and bonds).
The investment industry is strategically structured to keep investors trapped into store #1 and store #2 because this is where the big banks and the large investment companies make a fortune from their investment products, such as mutual funds and stocks. Given the banks and the investment companies control the OSC (just check out who sits on the OSC board of directors), this allows them to make a fortune for themselves off the backs of so many unsuspecting investors who simply do not know any better. This is why we at Canadian Investment Services think it is crucially important for investors to better understand the overall investment marketplace.
I hope that this newfound information will help you make better, more informed investment decisions based on what is available to you in the real estate investment marketplace.
Visit www.canadianinvestmentservices.com to learn how we can help broaden your access to diverse investment opportunities.
That’s all for Part I of this article topic. Be sure to look out for Part II where I continue to explain more about the OSC and FSCO/FSRA and what it means for you.
Until then, take care.
Gerry J. Hogenhout
Founding Principle, Canadian Investment Services
Edit: On The Run Agency
David & Gerry's Real Estate Cafe - COVID 19 edition, Live & Interactive. All About Real Estate & Investments.
https://youtu.be/-xSaL3NyeAc
In this session, we discussed Real Estate Development & Financing Real Estate Development during COVID 19, Why Residential REIT's (Real Estate Investment Trusts) are hot and much more.
David & Gerry's Real Estate Cafe - How to Add Investment Services to your Tax Practice
https://www.youtube.com/watch?v=nmnfv3x8CHw&feature=youtu.be
Description: In this session, we discuss how to add value to your current business model using investments.
What they don’t tell you about RRSPs
What they don't tell you about Registered Retirement Saving Plans (RRSPs)
RRSPs are one of the most commonly used types of investment strategies, but are really not that well explained or understood. Most people are aware that one of the main benefits of putting money into your RRSP is that you can use these contributions as a deduction to reduce your taxable income. For example, if I make $100k in a year and I contribute $20k to RRSPs, my taxable income for that year is reduced to $80k ($100k - $20k), which will greatly reduce my tax owing for the year.
While this is a great short-term benefit and can lead to a nice refund when you file your taxes, it is important to realize that an RRSP is a tax-deferred account. In other words, although you would not be taxed on the $20k you contributed, you will have to pay tax on this money when you withdraw it from your RRSPs. This part of the equation isn’t as widely advertised and explained by the companies trying to sell you on putting all your money into RRSPs, which results in many people ending up with a ton of money tied up in RRSPs that they can’t withdraw without losing half of it to tax.
So the question is why wouldn’t these companies be more up-front about the downside to this investment option? Well, the answer is simple: because they are making a very high management fee (usually about 2.5%) on all of the money you have sitting in RRSPs. This is another one of the downsides that investors should be wary of. As such, most advice is very biased and, too many times, not in your best interests.
Now I don’t mean to put an entirely negative spin on RRSPs, there are certainly situations where RRSPs can be very useful. Mainly, RRSPs are effective when you are in a high tax bracket (i.e. you have high taxable income) and you anticipate being in a lower tax bracket in later years. Going back to our example, if I make $100k in a year then putting $20k in RRSPs would make sense if I anticipate making less than $50k in the years I want to withdraw my RRSP funds. That way, I get a 30-40% tax saving going into the RRSP, and I’ll only pay 20% coming out of the RRSP (I’m up at least 10% on tax savings alone).
However, if I know my income is going to stay the same or increase, then I am just going to have to pay the tax I am saving that year when I withdraw that $20k, which can often be very inconvenient. This makes no sense, and that is why I am sceptical about RRSPs, very sceptical. In addition, if someone is already in the lowest tax bracket (taxable income below $50k) then any contributions they make to RRSPs will result in paying the same (or in many cases more) tax when this money needs to be withdrawn. Again, this makes no sense at all.
Overall, RRSPs can be a solid investment option in certain situations, but they are certainly not the one-size-fits-all investment answer that they are often promoted as.
An alternative to an RRSP is a Tax-Free Savings Account (TFSA), with the difference being you do not receive a tax deduction on contributions to a TFSA but you also don’t pay tax on withdrawals. Also, remember that any investment you choose to hold inside of an RRSP can instead be held outside of the RRSP, either in a TFSA or not inside of a TFSA. (just delete your highlighted area)
In closing, do not think of an RRSP as an investment, it is simply a vehicle to hold an investment, as is a TFSA. (just delete this too)
I hope you found this article helpful. If you have any questions regarding RRSPs and TFSAs then get in touch with us and we will be happy to offer any advice you may need.
- Gerry
Edit: On The Run Agency
Real Estate Investing 101
Real Estate Investing 101
Needless to say, there are many discussions that could be included in a ‘Real Estate Investing 101’ article, but this one is a bit different given I want you to look at real estate from a different perspective.
To begin with, I want you to look at any real estate asset that you can see - be it your own house, the house across the street, a duplex on your street, a triplex or an apartment building in your neighbourhood, etc. Think of that asset as the thing that protects your investment. Any time we invest money we need to deal with two very important aspects; 1) the security of your investment (i.e. what protects your investment) and; 2) the expected or potential rate of return.
Think of a bank, they lend out a mortgage and they register the first mortgage against your property. So what protects their money? Your house. What is the expected rate of return? Whatever you have agreed to pay the bank as an interest rate on the mortgage. Not much risk here is there? The bank has your house as collateral and they have a contracted agreement that requires you to pay a predetermined rate of interest. You need to look at a real estate investment in the same way, but from a different angle.
When you look at any house on your street, you too can use that house to protect your investment by either owning it or lending against it. If you look at owning it, you can do it in one of two ways; 1) own it yourself (i.e. own your own rental property), or 2) own it as a group with a number of people (i.e. a real estate income trust - REIT).
Alternatively, if you look at lending against it, you again can also do it in two ways; 1) lend against it yourself (i.e. private mortgage lending), or 2) lend against it as a group with a number of people (i.e. a syndicated mortgage).
This is a very conceptual look at real estate investing but it is a good way to overview different options of real estate investing, both from an asset protection perspective, as well as an expected rate of return. Needless to say, each different method of investing has many different pros and cons which need to be much further explored to truly compare these different options. But in concept, it’s very similar in that we are all about balancing the protection of your investment with your expected rate of return. We just need to figure out what real estate vehicle to use.
I hope you found this article helpful. If you have any questions regarding real estate investing then get in touch with us and we will be happy to offer any advice you may need.
- Gerry
Edit: On The Run Agency