Ashley Cochrane: Good evening, everyone. Thank you for joining us for the investment webinar this evening. My name is Ashley Cochrane. I’m an Early Career Specialist at the Canadian Medical Association and MD Financial Management. I connect medical students and residents with the services and benefits offered by the CMA, including delivering financial education, such as this webinar.
I’m here with Derek Yeung, Financial Consultant at MD Financial Management. Derek is an experienced financial advisor who works exclusively with medical students, residents and new in practice physicians. It’s great to have you here, Derek.
Derek Yeung: Thanks Ashley, happy to be here.
Ashley Cochrane: Great. So, thanks again all of you for joining us. We would like this session to be interactive. So as we present, please feel free to enter questions in the Q&A box on the right hand side of the screen. We will answer as many of your questions as possible towards the end of the presentation.
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Following today’s session, we’ll be in touch with you via email with a link to the recording of the webinar. If we do not get a chance to answer your question today, you can contact MD directly by going to the Contact Us section of the website: md.cma.ca or you can meet with your MD Advisor.
This is our agenda for the talk this evening. First, I’ll provide a brief introduction to the CMA and the CMA’s company, MD Financial Management. Second, we’ll take a look at investment accounts. Then we turn to asset location and allocation. Then we’ll cover incorporation. And lastly, we’ll point out some additional resources and answer your questions.
The CMA is the national association of physicians and physicians-in-training. It is a voice of members on issues that affect the profession and that will impact the future of health care in Canada. The CMA supports you by advocating for an improved medical education system and innovation in the healthcare system.
To be a member of the CMA, you must first be a member of your provincial organization. Then you can be a member of your national association, the CMA. And as a member of the CMA, you can access member benefits, including MD Financial Management.
The CMA owns MD and has given it one mandate: To provide physicians and physicians-in-training with objective financial advice and solutions based on your unique needs. From medical school to residency into practice and beyond, MD is there for you.
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MDExO® is a collaboration among financial advisors and specialists who engineer total wealth management strategies and solutions for physicians just like you. They offer advice and solutions related to financial planning, investments, insurance, estate and trust planning, banking and borrowing, and medical practice incorporation.
So now, I’m going to pass it over to Derek who will get into investment accounts.
Derek Yeung: Perfect, thanks Ashley. So we’ll start with registered accounts. Registered accounts are simply accounts that have a tax advantage associated with them. And later in the presentation, we’ll get into detail what some of those advantages are. But just to begin here with registered accounts, as mentioned, there’s typically a tax advantage associated with it. And the best way to think of these accounts is to think of it like a bucket or a vessel. Essentially, you can hold whatever you wish inside of these accounts. So it could be cash, GIC, stocks, bonds and mutual funds. And, of course, with these investments that’s how you’ll get an investment return or an investment income from that within these accounts. And that, of course, can be paid out in the form of dividends, interest or capital gains.
Ashley Cochrane: Thanks, Derek. Sometimes I hear people say, “I want to buy an RSP.” But you don’t actually buy an RSP, right?
Derek Yeung: That’s right, Ashley. So because an RSP, as I mentioned, is an account in itself, I think of that as a vessel. And you would actually purchase investments within the account and not actually purchase the account itself.
Some of the basics with RSPs, you can make a contribution to your RSP at any time during the year as well as the first 60 days of the following year. And you essentially get a tax deduction for the contribution you make into your RSP and that would be one of the main benefits there. Now, your contribution room is limited, so it’s based on 18% of your previous year’s income or up to a maximum of $25,370 if it’s for the year 2016. And, I mentioned that this amount does increase a little every year. So for example, 2017, it increases to $26,010. It’s whichever is lower here, so either 18% of your previous year’s income or the maximum. And also the important thing to note is the unused room can be carried forward indefinitely. So if you don’t use some of your contribution space, not to worry. It doesn’t mean you lose it. It just simply gets carried forward each year.
Ashley Cochrane: That’s a great point. Derek, we have a question here: What does that mean? What does it mean that the deduction may be carried forward to future years?
Yeah, great question. So for example, if you contribute $10,000 to your RSP this year in 2016, you’ll, of course, receive a $10,000 deduction and you can apply it in this year or you can apply it next year. For example, if you’re making, let’s say you have an annual income of $50,000 this year and you make a $10,000 contribution to your RSP, well your taxable income will be lowered to $40,000. And that $10,000 tax deduction, in that example, it means that you’re applying it in that year. If you didn’t want to apply in that year, you can apply it in, let’s say in 2017 if you know your income is going to be much higher, and it may be more advantageous to apply it at that time since you’ll have more of a benefit with that tax deduction. Because for example, if you’re making $100,000 annually versus $50,000, you’re in a much higher tax bracket, so your tax deduction will be worth a lot more to you at higher income levels versus lower income levels, of course.
Derek Yeung: Yes. So one of the main benefits of the RSP, I just say one of the biggest ones is that tax deduction that you receive for your contributions. And of course the other thing is all the investments that you have within the RSP will grow tax sheltered, so it won’t be taxed until you withdraw the money from the RSP. So your money could double, triple or increase by whatever rate of return and it’ll be completely tax sheltered until you withdraw from it. And the other things is there’s two different programs that are available within the RSP that allows you to withdraw money from your RSP without getting taxed on it, and that’s the Home Buyers’ Plan and the Lifelong Learning Plan, which we’ll get into a little more detail a little bit later on, but those two programs are very popular amongst physicians. And then of course, as I already mentioned, answering the question there of tax deductions, certainly you can take advantage of these deductions in higher income earning years. And I think physicians-in-training typically have this on their side where you know that your income will likely increase significantly after residency, as an example.
So what classifies as earned income? Basic salaries and wages, including bonuses, call stipends, self-employment income in the form of salary (i.e., from your medical practice incorporation account), rental income, it could be grants and royalties. Some examples here, pretty straightforward, that don’t qualify would be dividend income from your medical practice incorporation, pension benefits and most investment income and disability payments.
Now there’s a few different ways you can view or check what your total contribution space is for the RSP. And one is looking at your notice of assessment. This document would be sent to you from the CRA after you’ve filed your tax return every year. Or, the alternative is you can go onto CRAs website under My Account to register for online access and you’ll be able to view it on there as well. And actually sorry, there’s a third option here where you can simply call in. So that’s available as well.
Another form of RSPs are spousal RSPs. Spousal RSPs essentially allow you to contribute to a spouse’s RSP account. And of course the deduction does go to the contributing spouse. Now why this may be beneficial is because couples who may have a spouse that earns less than the other can essentially split their income in retirement by leveling out a lot of the taxable income that each spouse will receive. Now one important thing to look at here is to make sure that you still have to stay within your RSP contribution limits because there are penalties if you do over-contribute, and of course another important thing to note is that if the contributions are withdrawn in the same year or two proceeding years by the spouse, the contributor will be taxed.
Ashley Cochrane: Derek, we have a few more questions about RSPs.
Derek Yeung: Sure.
Ashley Cochrane: The first one: Do you need to open an RSP to be eligible to carry forward the contribution room?
Derek Yeung: No, that’s a good question. So no, the answer is no, you do not have to open an RSP. So if you look at your notice of assessment where it shows your total RSP contribution space, you’ll likely see that if you’ve earned income in the past you’ll see that you have contribution space available, even without an RSP account being present or open.
Ashley Cochrane: Okay great, thank you. And another question: Would I draw out of a line of credit to put into an RSP?
Derek Yeung: Certainly that’s something that is a fairly common question. Again, it really depends on the individuals. Often times, err on the side of caution because the line of credit does have interest associated with it. You’d be kind of diving into the realm of what we call leverage investing. So, of course, you do get that benefit of getting the tax deduction, but at the same time assuming the funds are invested in the RSP, that can add certainly another layer of risk involved because it’s borrowed money that’s there.
Ashley Cochrane: That’s a great point, and I should point out as well that we’re going through the webinar and we’re covering a lot of information here. It’s really important that you speak to a financial advisor for these questions who can really give you advice catered around your specific situation.
I have another question here about an RSP, we’ll take one more before we move forward here: Why not contribute and max out the TFSA amounts first, before contributing to an RSP? And actually, I think we’re going to get into a comparison shortly in a couple of slides.
Derek Yeung: Yes, that’s right. So perhaps maybe we’ll leave this question for after we’ve gone to the TFSAs because certainly there is a lot of advantage taking that strategy as well. So we’re not necessarily saying to contribute to an RSP before you contribute to your TFSA. A lot of times if the individual has the capacity to do so, it may make sense to do both as well. So we’ll circle back around to that question after we’ve gone through TFSAs if that’s all right?
Ashley Cochrane: Yeah, that’s great. We’ll finish with RSPs here and then we’ll get into TFSAs. And then we’ll do a comparison between the two.
Derek Yeung: Yeah, sounds great.
Ashley Cochrane: Great.
Derek Yeung: Here we have an example of an RSP and how a tax deduction can benefit an individual. In the left column here you have an annual income of $75,000 and no RSP contribution. The total taxes owing on $75,000 is approximately $16,125 versus somebody who has made a $10,000 RSP contribution. The total taxes owing would be only $13,975 for the year, again because they’ve lowered their taxable income and only $65,000 will be taxed in that year, so the difference being roughly about $2,150.
Ashley Cochrane: Great. So what if I were to make a withdrawal from my RSP?
Derek Yeung: With a withdrawal from your RSP, again if it’s outside of those two programs, the first time Home Buyers’ Plan and the Lifelong Learning Plan, the income will be taxed in that year that you make the withdrawal. So alternatively if let’s say using the sample example, you have $75,000 annual income and you make a withdrawal of $10,000 your taxable income will be $85,000.
With the Home Buyers’ Plan, the one of two programs where it allows you to withdraw money from the RSP tax free, basically how this plan works is it allows you take up to $25,000 from your RSP to put towards a down payment on a home, and you have to be qualified as a first-time buyer. And one of the requirements would be that simply you’ve never bought a home in the past, ever. Or, if you have it doesn’t mean that you can’t qualify, you just have to ensure that you haven’t owned a home in the last four years. Now another great benefit is that each spouse can withdraw up to $25,000 for a total of $50,000 for the purpose of the home purchase. And a very important thing to note is that you must ensure that the funds are in the RSP account for at least 90 days before you withdraw it specifically for the Home Buyers’ Plan, otherwise it won’t be eligible either. And since the way it works here is you’re essentially loaning yourself the money from your own RSP to fund the purchase of a home, you are required to pay it back into your RSP. Now it’s very, very flexible so you don’t have to start making payments towards your RSP or pay it back, so to speak, until year two after the withdrawal and you can stretch it out for over a 15-year period. So it can be very, very flexible.
Now the Lifelong Learning Plan, it’s similar to the Home Buyers’ Plan. The funds have to be in the account for at least 90 days and there is a repayment period. So it’s a little bit shorter in this case, it’s 10 years. However, you don’t have to begin paying it back until five years after you’ve made the withdrawal. And the amounts are a little bit different. You can withdraw up to $10,000 over a four-year period up to a maximum of $20,000.
Now a common question we also get is that you can simultaneously take advantage of both plans, so if you haven’t fully paid back your Home Buyers’ Plan you can still make a withdrawal specifically for the Lifelong Learning Plan.
Ashley Cochrane: Okay, great. And we have another question here, speaking of the Home Buyers’ Plan: If one spouse does not qualify for first-time buyers but the other does, can one spouse benefit from this?
Derek Yeung: Great question. So unfortunately, not in this case if they are, of course, residing together. And when a spouse doesn’t qualify, unfortunately you’re out of luck there.
Ashley Cochrane: Okay, thank you. So now let’s get into TFSAs.
Derek Yeung: Yes. Tax-free savings accounts, so this account is relatively new, it was first introduced to Canadians back in 2009. And the contribution limits back in 2009, the annual maximum contribution limits were $5,000 per year. And if you fast forward to 2013, it increased to $5,500. And in 2015, under the Conservative government, they increased it to $10,000. And in this year, the Liberal government came into power, and they reduced the total annual maximum limit to $5,500. Now if you add up all of these annual maximum contribution limits, it gives you a total number of $46,500. So if you’ve never opened up at TFSA account before or if you haven’t contributed to a TFSA account, you’d be able to theoretically put in a lump sum of $46,500 right now. This account can be very advantageous for individuals who may not have a large contribution limit available in their RSPs because TFSAs, much like RSPs, offer tax sheltering. The gains or the investment income that you would have within the accounts are completely tax free, they grow tax free and one of the main differences here is that when you withdraw the money or if you withdraw the money from the tax-free savings account, it’s also tax free. Whereas the RSP, it’s tax deferred.
Ashley Cochrane: Great, thanks Derek. Let’s go into a comparison between RSPs and TFSAs. What are the main differences between the two?
Derek Yeung: Yes. As I mentioned with the deductions, RSP you get a nice tax deduction with whatever contribution you make. But the TFSA, there’s no tax deduction that gets applied here, because it gives you the benefit of a tax-free withdrawal you won’t see a tax deduction there. Now, the unused contribution room with RSP does carry forward as I mentioned, and same with the tax-free savings account. So if you’ve missed all the previous years since 2009, you can certainly catch up even if you don’t currently have a TFSA account open. And one of the biggest differences is with the tax treatments is that the RSP you will pay tax when you withdraw from the RSP at some point, it’s just a question of when. Whereas the TFSA, when you make a withdrawal, it’s completely tax free. And one big difference, of course, is the termination date. So I didn’t get a chance to mention this earlier on. However, with the RSP, you are expected to convert the account by age 71. So a very common strategy would be to convert it into what we call a registered retirement income fund account, which we won’t get into too much detail today, but essentially that account would allow you to withdraw set minimal amounts per year so that you’re not withdrawing your RSPs all out at once because of course it wouldn’t be the most ideal situation where you essentially withdraw all your RSPs in one year because you’ll have a pretty big tax bill from that. And with TFSAs, there’s no termination date so you can carry this whether you’re 25 years old or 85 years old.
Ashley Cochrane: Great. People often ask, “Should I put money in a TFSA or an RSP?” but it really depends on your goals.
Derek Yeung: Right, exactly. Somebody had a question earlier on about why not invest in a TFSA before an RSP. So certainly there are a lot of advantages. I think when I work with a lot of residents or even medical students who do have some savings, often times I would recommend a TFSA simply because individuals coming out of med school probably wouldn’t have worked very much and typically when we look at their RSP contribution limit there’s not a very high number there. So starting off with your TFSA gives you a lot of contribution space but also a lot of flexibility as well because as I mentioned earlier with the RSP when you’re making a withdrawal, you will have taxes withheld right at source, so depending on the amount that you’re withdrawing, it could be anywhere from 10, 20 or 30% of tax withheld right away. Whereas the tax-free savings account if you withdraw $5,000, you’ll get $5,000 right away. So it offers that flexibility, but at the same time still have the tax sheltering benefit.
Ashley Cochrane: Yeah, that’s a really good point. We have a question here: Can you put dividends from a medical corporation into the TFSA? I think you mentioned previously that you can put dividends into the RSP.
Derek Yeung: Can you put dividends from a medical corporation into the TFSA? So certainly you can. Of course again, there would be some tax consequences from that because dividends are taxed at a different rate.
Ashley Cochrane: Great. So now let’s go into asset location and allocation.
Derek Yeung: Asset location, we’ve already spoken of some examples, such as RSPs and tax-free savings accounts. So that’s simply where you’re placing your investments. And asset allocation is the asset classes that you would hold within the accounts. So that could be a breakdown of—in this case—10% cash, 30% fixed incomes and 60% equity.
And in our next slide here, it just further shows what some of your other asset location options are. So we already again, mentioned RSPs, tax-free savings accounts, and registered education savings plans. With registered education savings plans, it allows you to make contributions but they’re not tax deductible. However, much like the RSP and TSFA, it does offer your investments to grow tax deferred. So ideally if you’re saving up for post-secondary education for your child, withdrawals when they do make them are taxable in the hands of the beneficiary, which ultimately is the child usually. And of course another account would be the corporation account, and of course all billings or business income will be taxed at the corporate rate, which is one of the benefits of a corporation account. And the idea is that if you don’t need to withdraw all the funds from the corporation account, the earnings can stay invested within that account.
Ashley Cochrane: Great. I see we’re getting some questions about TFSAs, RSPs. Keep your questions coming in. We will get to them at the end of the presentation as well, so please keep sending in your questions.
Derek Yeung: This is an example of the asset allocations within some of your accounts. So again, you can hold a certain percentage of equity, fixed income and cash in all these different accounts.
Ashley Cochrane: I should mention as well, we will be getting into each of these asset classes afterwards as well. So we’ll be getting into each one of these and describing each one.
Derek Yeung: Another example here, just showing your overall portfolio. So if you have multiple accounts such as your RSP, TFSA or corporation accounts, you can have a full breakdown of when you combine these three accounts what’s your equity exposure like, and your fixed income and your cash exposure as well.
Ashley Cochrane: How do we determine the asset mix whether its 50/50 equity and fixed income, or otherwise?
Derek Yeung: Yes. That’s a very important piece of the discussion we would have with clients and it’s based heavily on three main criteria. So we would look at your goals and objectives. So goals can be, obviously, purchasing a home, planning for a wedding, obviously, looking at planning for your retirement. And we would also look at what would be aside from looking at how much you’d have to contribute every month or every year, we would look at what would be the expected rate of return we would need to help you achieve these goals. Secondly, we would look at your time horizon and the purpose of the account. So this will be very important because somebody with a much shorter time horizon versus somebody who has a long time horizon (i.e., planning investing for the long term for their retirement) will likely have a very different investment approach, investment strategy. And finally, of course last but not least, we look at your risk tolerance. So very important to determine whether you’re somebody who’s extremely risk averse or somebody who has a bigger appetite for growth opportunities.
Now asset allocation, we can’t stress enough that it’s going to be very important because it’ll certainly determine your portfolio risk and returns. And we would consistently review this on a regular basis, usually once or twice a year because this can certainly change as your goals and objectives change, but also there could be new constraints that come up that can certainly alter the plan.
Fairly straightforward here, again you can hold equities, fixed income, cash, cash and equivalents within your portfolio. Now these three different asset classes have different risk levels and of course when there are different risk levels they come with different rates of return, typically. Starting with cash and cash equivalents, I think it’s no surprise here to say that it’s the most conservative of the three; however, because there’s such low risk involved with these cash equivalent type of assets, the return is much lower. And then alternatively, you have fixed income which is still considered to be fairly conservative. However, the returns are still lower than your equity asset class investments. With equities, these are essentially your individual stocks, so it can have the potential to be very volatile but also this is where you can receive a lot of your growth opportunity.
Ashley Cochrane: Derek, can you define each of these and explain what it means?
Derek Yeung: Yes. Starting with equities, again it’s simply, owning individual stocks or shares of a company. There’s a dozen examples here of companies that are publicly traded on the stock exchange, so the Toronto Stock Exchange, the New York Stock Exchange, and you can actually purchase individual shares since they’re publicly owned corporations. In a portfolio, typically you would have a portion of these companies if there’s equity in your portfolio, of course.
Now, with the equity returns and income, how you essentially can gain from this is if you purchase a share at $10, in this example, and sold it for $15 five years later, your gain would be $5 per share, so pretty straightforward. However, in some cases with companies that are willing to share their profits with their shareholders, they can provide dividends. And in this example, Apple will provide a dividend of $2 per share and if you own 10 shares that’s simply $20 of dividends that you would receive.
Fixed income, again is more conservative than equities and often times with fixed income you’ll have bonds involved and bonds can be issued by governments or corporations. And all a bond is, is essentially a contract between the issuer of the bond and the investor. So the issuer will have a few different terms with the contract or the bonds and typically with these agreements, the investor will certainly have gains through capital gains or interest, which we’ll get into shortly.
Ashley Cochrane: What is an example of a fixed income security?
Derek Yeung: Bonds are certainly one. We have some provincial or federal government bonds and that’s probably the most ideal. But you can also have things like GICs as well. Now with the bonds, this is how it’s essentially broken down. You have a face value of $1,000, so if you purchase a bond for $1,000 there will also be a maturity date associated with it and that’s essentially when the principal will be repaid along with interest. And the interest payments can have a fixed schedule. So it could be quarterly or semi-annually and aside from the increase in value of the bond you’ll also have interest paid out to you.
So again, just an example here, if you purchase a bond for $100 and it increases in value to $105 your capital gain is $5. And here in the example we have an interest of 6% semi-annually, which would provide you with $30 of interest payments every six months on a $1,000 bond.
Finally, we have cash and cash equivalents. So again, these are very highly liquid, very conservative type of investments which would include short-term treasury bills, usually 90-day term deposits and money market funds. A lot of these products would provide rates of return of less than 1% or in and around 1% potentially, some a little bit more of course depending on the duration. However, they do serve a pretty good purpose. A common example would be a medical student looking to pay off, or a resident looking to pay off, their student loans within a couple of months knowing that they’re going to be in repayment mode. You may want to have part of your portfolio in cash or cash equivalents so that it’s not only very liquid but also you’re not worried about a decrease in value here because they’re extremely conservative.
Ashley Cochrane: Great, keep the questions coming in. We’re going to get to more questions in just a moment. And to give a quick recap, we’ve talked about the different accounts. And from there we looked at the different asset classes that can be held in these accounts. Now we’re going to look at an investment commonly used in RSP and TFSA and that’s mutual funds.
Derek Yeung: Yes. Mutual funds are essentially a pool of investments packaged into one and they’re professionally managed. And the mutual fund, essentially, it will hold several different securities within different asset classes. And when an investor buys into a mutual fund, essentially you’re buying X amount of units of that mutual fund and it certainly provides a lot of diversification with mutual funds because you’re getting a lot of exposure to many different market sectors with minimal amounts of capital.
As I mentioned, when you’re purchasing mutual fund units, these units over time can increase. And in this example, if you bought the fund at $30 per unit and it grows to $45, your gain is $15 per unit. However, since the mutual funds are essentially a pool of investments packaged into one, a lot of the underlying investments or securities can provide interest payments or dividend payments, i.e., if a mutual fund carries a lot of individual stocks and those companies do provide a dividend, often times you’ll have additional returns through interest and dividend payments on top of your capital gains for the mutual funds.
Alternative asset classes, so these are just simply your non-traditional asset classes such as real estate, infrastructure. You can invest in gold, silver, or copper, hedge funds or personal property. A lot of the times you’ll see mutual funds will have a component that includes alternative asset classes in addition to fixed income and equities. To again, provide a little more diversification in times where equities and fixed income will have less returns.
Diversification, I’m sure everyone’s heard this before. It’s very important to ensure that your eggs aren’t all in one basket and it’s important to diversify your portfolio because you want to make sure that your assets typically don’t have too high of a correlation within each other. You’re looking at equities and stocks and bonds. Theoretically and generally speaking, they do have an inverse relationship associated with them in a lot of cases. So with proper diversification, it can help you reduce downside risk; however, there is a possibility that you can over-diversify your portfolio as well, which can reduce the upside potential in the portfolio, so you want to be careful of both ends.
Ashley Cochrane: Great, so about investment timing. What is dollar cost averaging?
Derek Yeung: Yes. Dollar cost averaging is a very common strategy. It’s where an individual may buy a fixed dollar amount of a particular investment on a regular time horizon or schedule. Why this can be beneficial is because it can average out your purchases and not worry about the fluctuations in the markets.
Ashley Cochrane: And long-term versus short-term investing. How does this influence your approach to risk?
Derek Yeung: I think I touched on this earlier in the presentation, your level of risk is typically determined by…one of the things it’s determined by is how long you’ll be invested for. So as an example, if you have a very short time horizon, likely you’ll have a much more conservative strategy associated with that, i.e., if you’re purchasing a home within a year or purchasing a home within six months, you want to preserve your capital as much as possible and not have to withdraw at a loss. Whereas if you’ve invested long term for retirement, you may actually welcome times where there’s downturn because you can actually purchase units or shares of an investment security at a discount.
Ashley Cochrane: That’s a great point, time horizon is really important when you’re deciding what to do in terms of financial planning. And how do you know when it’s a good time to start investing?
Derek Yeung: Generally speaking, it’s never too early to start investing. However, I will say it really depends on the individual situation, looking at their goals, objectives. As an example, I’m working with a lot of medical students and residents. There are some individuals that are extremely in debt at first and they certainly much rather prefer to pay off their debt before starting to invest. However, I will say the power of compounding interest; it can be very powerful as well. So by starting early you can certainly grow your savings just as quickly as you see your debt can grow typically in med school.
Ashley Cochrane: Alright. We have a question here about dollar cost averaging. Can you explain it just in a little more detail, Derek?
Derek Yeung: Yes. And actually in this slide, it provides a pretty good example. Here it shows that when prices are lower, the unit price, we’ll look at January the first line there at $11.52. And if you’re putting in $500, you’re purchasing 43.4 units. Whereas if you look at the bottom, in December, you’re putting in the same amount of money but the price is higher. So in other words, you are purchasing less units. By contributing the same amount each month regularly, you don’t have to worry about again, timing the market and buying when it’s only low. Essentially you’re preventing yourself from having to worry about all that. But essentially what you’re doing here is when prices are lower, the investor will purchase more units and when the prices are higher, you’re purchasing lower amounts of units or shares.
Ashley Cochrane: Okay, so we’re going to switch gears a little bit and turn to incorporation.
Derek Yeung: Incorporation, so another account that you can certainly hold your investments in. Now, incorporation is simply creating a separate legal entity for your medical practice. And of course the corp. would own the medical practice and the physician would be the primary shareholder or employee. Now all your billings or business income will be paid to the corp. and then you can pay this income to the physician in the form of a salary or a dividend. Two main benefits why somebody should incorporate: the main thing, of course, the tax deferral and income splitting. So with tax deferral, because the income in a corporate account would be taxed at a different rate than if somebody were to just receive that income personally. Assuming you retain money in that corp. you can have those assets within the corp. grow and still remain invested as opposed to withdrawing it and being taxed at a higher personal rate. So again, it’s the value of compound interest as well there.
Ashley Cochrane: And how do you know when it is a good time to incorporate?
Derek Yeung: There are a lot of different variables to look at when you’re deciding when to incorporate. Generally, you want to consult with your MD Advisor and of course an accountant as well. They’ll be a big part in deciding whether it’s a good time to incorporate. But some of the things you should look at is to see, if you are in a relationship, to see if your spouse is making a lower income than yourself or if you see yourself leaving money in the corporation and you’re not having to draw all the income from your corp. that may be a sign that it could be a good time to incorporate your practice. Or another thing to look at is of course if you have any dependants, such as parents or adult children, that you can income split with, because with income splitting, you’re typically looking at adding family members as non-voting shareholders within the corp. so you can pay them an income in the form of dividends, which can ultimately lower your overall taxes as a family.
Ashley Cochrane: What are some questions that new in practice physicians should ask their advisor when considering incorporating?
Derek Yeung: There are number of things certainly, but I’d say one of the main things is looking at obviously the opportunity for income splitting but also looking at how you’re compensated, like how your income is generated exactly and the details around that. But also, one of the important things is looking at how it impacts your current savings strategy or your current savings pattern because, as an example, if you’re paying yourself a salary from your corp. you can certainly still contribute to your RSPs because it would generate more contribution space within your RSPS. However, if you’re paying yourself in the form of dividends, you’re not generating any new RSP room.
Ashley Cochrane: Great, thanks Derek. We’re going to get to your questions in just a moment. Keep sending them in.
I want to mention a few additional resources that you have available to you. On the MD website, we have quick clinics which are brief videos that explain these topics really well. We have an RSP and TFSA Balancing Act video, also a video on whether to pay down debt or to start to invest, also to rent or to own. And for those of you especially interested in incorporation, we have a webinar on that as well as other topics such as TFSA and RSP as well. So we have lots of resources on our website if you want to take a look at that. You also have access to MD MedEd Counsel, so that’s Early Career Specialists such as myself and Financial Advisors like Derek available to you in your city who can meet with you one-on-one and come up with a financial plan catered to you. So I’d highly recommend that as well. I should also mention we have events that happen across the country in different areas. So check out our website or get in contact with somebody at MD and we can tell you more about that.
So now we’re going to answer some more of your questions. Thank you to everybody who’s been sending these in. These are really great questions.
First of all, let’s go to: Where’s the best place to hold cash or cash equivalents? Should I keep them and lower return assets out of my TFSA and chase returns in that account?
Derek Yeung: You can hold cash or cash equivalents in any one of your accounts. So it could be your RSPs or TFSAs, so that could be, again, one portion of the accounts. It would really, again, depend on going back to the beginning when determining or developing your asset allocation to see if it’s suitable to hold that amount. So again, if you’re an individual that will be making a large purchase soon and you see yourself making a withdrawal from one of your investment accounts, certainly instead of having it sitting in cash and not gaining anything, this is where cash and cash equivalent will be a good alternative because again, it’s very conservative and at least it’s providing a bit of returns for you in the interim until you actually make that withdrawal in that short period of time.
Ashley Cochrane: That’s a great point. And again, I would highly recommend sitting down with an advisor for those types of questions to get a really solid answer based on your situation. We’ll go to another question, this time about Lifelong Learner Program.
Derek Yeung: Sure.
Ashley Cochrane: Do you have a short example, Derek, for the Lifelong Learner Program?
Derek Yeung: Yes. Often times residents will tell me they look at maybe going back to do their masters. Essentially, as long as it’s for qualified full-time post-secondary education, it would qualify. So I’m not too sure, hopefully that answers the question.
Ashley Cochrane: Yeah, that sounds good. Thanks, Derek. Another question here, let’s see: So do you never pay tax on any of the money you put in the TFSA or is it just the income you generate from the TFSA?
Derek Yeung: Right, great question. When you’re making a contribution through TFSA, you’re using after tax dollars to contribute to your tax-free savings account. So after that, there’s no taxation. In other words, again using the example if you put $10,000 in your tax-free savings account, of course that’s after tax dollars that you’re using. So if that $10,000 gets invested in mutual fund X, Y, Z and that increases to $12,000 and you want to make that withdrawal, that $12,000 will be completely tax free.
Ashley Cochrane: Great, thank you. Another question about TFSAs, let’s see: Can you buy hedge funds through your TFSA?
Derek Yeung: Yes, you can. Certainly with hedge funds, it’s a whole different investment option. Certainly there are a lot of different variables to keep in mind when it comes to hedge funds. Typically there will be certain asset requirements for investing in hedge funds and typically for the more experienced investor.
Ashley Cochrane: Great, switching gears a little bit: Can you comment on what about ETFs and passively traded funds?
Derek Yeung: Yes. Exchange traded funds are very common nowadays and certainly a great investment option. One of the benefits of exchange traded funds is that they have very low fees. Now for those folks on here that aren’t too sure what an ETF is, it’s essentially very similar to a mutual fund in that it’s a pool of investment securities packaged into one. However, the purpose of them is to mimic the particular market. So for example, an ETF can be designed so that the securities that are within these ETFs are meant to mimic the same types of returns that the Toronto Stock Exchange would provide over the course of the year. Very important to note that with ETFs, even though they have lower fees, again, if you’re looking for specific selection of advice for ETFs, often times you’ll be paying some sort of fee on the account or some sort of financial planning fee or trailer fee with the advisor. So even though you’re saving on the investment option itself, because they’re traded, the important thing is to know that they’re actively traded exactly like individual stocks. These are more self-directed type of investments. So when seeking advice, you’ll typically pay for the advice at most discount brokerage firms for ETFs.
Ashley Cochrane: Great, thank you. A question about TFSA: When I withdraw from my TFSA, is the room for re-contribution the base amount plus the growth or just the base amount? Can you clarify this please?
Derek Yeung: Yes. When you withdraw from your TFSA, the beauty of it is that you can actually contribute the amount you’ve withdrawn in the following year. So we’ll take 2016 as an example. If you have your TFSA maxed out at $46,500, in other words if you put in $46,500 this year. If it’s grown to $50,000 by the end of the year and you decide with withdraw that entire $50,000 amount, in 2017 you can put that $50,000 back in plus the $5,500 of contribution space that would be made available just for being in a new year.
Ashley Cochrane: Great, thanks Derek. I see its 9 o’clock. We’re going to wrap it up there. For those questions that just came in that we haven’t had a chance to answer, we’ll be in touch with those answers for you and I also encourage everybody to speak to an MD Advisor if you have any more questions.
I also want to remind you that we’ll be in touch with an email in the next week or so that’ll include a link to the recording of today’s session. And if you have any further questions, we encourage you to contact your MD Advisor and get in touch with us. On our website, we have a Contact Us button and our website is: md.cma.ca.
Thank you all very much for joining us this evening. I hope you found this information helpful. Have a great night.