Categories
Investing

Questrade Referral Promotion

Questrade discount brokerage in Canada has a new referral program where you get $50 worth of trades if you are referred by another customer. The basic program has been around for a while but they have improved the referral process.

Lowest Stock Trading Commissions!

Feel free to use this link when you fill out the application. For other bloggers feel free to sign up for the referral program and of course use “dc988dd9” as the referrer ID.

You can see what I wrote a while ago about Questrade here.

Why I like using Questrade for trading stocks and exchange traded funds

I use Questrade for my non-registered leveraged account as well my rrsp and I’m quite happy with them. My attitude about brokers is that their service is a commodity in that they all do the same thing – they convert your money into shares and vice-versa so the only variable as far as I’m concerned is the cost. As a low cost investor I want the lowest fees and for my situation, Questrade has the lowest fees.

Questrade also deals with mutual funds -they will rebate up to 1% of the management fee back to the investor.  Read more about the Questrade mutual fund rebate.

The minimum to open an account is $1000. The minimum to keep an account active is only $250.

My suggestions on which discount broker to use:

If you are looking to do a lot of rrsp “wash trades” then Questrade and TDW are your best bet. A wash trade is when you sell a US$ security in your rrsp, it gets converted to CDN$ (and you pay a currency conversion on it), and then you buy a US$ security and you pay the currency conversion again. They do not charge for the conversions in this case.

If you are looking for a discount broker that offers a lot of extras like fancy graphs and research then you should stick with the big banks. But consider that for $29/trade (if you don’t have $100k) you are paying a $24 premium per trade for that extra research, bells, whistles etc. Even if you only do 10 trades per year that’s $240 per year. There is a lot of research available for free on the internet and $240 will buy quite a bit of the paid research (or a lot of beer).

If you are looking for more information on mutual funds, index funds and ETFs then sign up for a Morningstar free account.  Morningstar is the industry leader in investment information.

Categories
RESP

RESP Withdrawal Rules and Strategies For 2020

When the RESP beneficiary (student) is ready to go to school, the subscriber (owner of RESP account) needs to start withdrawing money from the RESP account. To withdraw money you have to provide some proof to your resp provider that the resp beneficiary (child) is going to an approved post-secondary school. You don’t have to show receipts for specific purchases.

Two types of money in the RESP account

In your RESP account, there are two different types of money: contributions and accumulated income.

  • The contribution amount is the sum of all the contributions that you made to the account over the years.
  • The accumulated income is made up of grants, capital gains, interest, dividends earned in the account.Any money that is not a contribution is considered to be accumulated income.


This distinction is important because the taxation of withdrawals from the contribution portion of the account is different than withdrawals from the accumulated income portion.

  • Contribution withdrawals are not taxed.
  • EAP (educational assistance payments) which are withdrawals of accumulated income, are taxed as income at the hands of the student.

The good news is that students have the personal exemption, as well as tuition tax credits which helps lower their tax bill. Obviously income earned during summer jobs or on co-op work terms will affect their taxes as well.Another bit of good news is that you can tell your financial institution if you are with drawing contributions or EAP (or both) so you can manage the taxes to some degree.

Please note there is no withholding tax on any kinds of RESP withdrawals, so if the student ends up in a taxable situation, they will have to pay the taxes at tax filing time.

A withdrawal limitation

First – one withdrawal rule to get out of the way – you are only allowed to withdraw $5,000 of accumulated income in the first 13 weeks. After 13 weeks, you can withdraw as much accumulated income (via EAP) as you wish.  There are no limits to withdrawals from the contribution portion as long as the child is attending school.

Basic RESP withdrawal strategy

When planning the withdrawals, try to withdraw as much accumulated income money as you can tax free.For example when the student first starts school, they will have just completed a short summer (two months) so they probably won’t have much income for the year. That might be a good time to maximize payments from the accumulated income portion of the account (EAP).

On the other hand, if the student is in a co-op program and has two work terms in one year and only one school term, that might be a good year to take out contributions rather than accumulated income.

You don’t want to end up with accumulated income in the RESP account if the child is no longer going to school.

What if your child doesn’t go to school?

What happens if Junior decides that school is not for him?  You have to collapse the plan and pay a pile of tax on it.

First of all you have lots of time to collapse the plan so don’t do it right away. It’s always possible that your child will give up on their pro hockey or musician career and will need the money for schooling later on.  You can keep the account open for 35 years after the year in which the account was opened.
If you do collapse the plan, the contributions are tax free, anything else (accumulated income) is added to the subscriber’s gross income for taxation purposes.And on top of that, the accumulated income is charged a tax of 20%.
If you are retired or have any way to reduce your income in the year you collapse a resp plan, do it to save taxes.

What if the child does more than one session at school (ie multiple degrees)?

You are allowed to use the RESP for one degree and then keep some money in the account for future education.  The only limit is the 35 year limit previously mentioned.  Be warned that it’s not a bad idea to take out all the RESP money during the first degree so that there are minimal taxes and no penalties.  If you save money in the RESP account for future degrees and the child doesn’t end up using the money, there will be increased taxes and penalties.

More RESP information

8 Things you need to know about withdrawing money from your RESP account.  Lays out the details of how to actually withdraw the money.

How to withdraw excess money from your RESP account.  Some strategies for withdrawing extra RESP money without penalty.  This applies if the student started school and quit early or ended up with extra money.

How to avoid RESP withdrawal penalties if the child doesn’t go to school.  If you child ends up not using the RESP at all – here are some ideas to avoid penalties and taxes.

More RESP information – Comprehensive list of RESP articles on this site.

Categories
Real Estate

Silent Partner Real Estate Investing

Thicken My Wallet asked me a while ago to post more about the multi-use building that I was involved in purchasing as a silent partner, and my experience doing that sort of deal. Just to be clear, what I mean by silent partner is someone who puts money into an investment, but isn’t involved in the day-to-day management of it.

Some time ago a buddy of mine, who has been holding my hand while I learn about real estate, contacted me with info about a building he’d found in a small Ontario town he lives near. He sent me the general building info, and it seemed pretty good ($400K, bar and retail store on the main floor and rooming house upstairs).

My friend likes to be pretty aggressive with real estate, so he never has enough cash to buy everything he’d like to. He also likes to mortgage to the hilt so that he has as much possible cash for the next purchase as possible. Given this, he’s quite open to partnering with people (and has done so successfully in the past with his sister’s boyfriend).

I told him it looked interesting, asked for an income statement (which seemed too good to be true, but we verified it). We put in an offer conditional on a property inspection (and my buddy negotiated a vendor-take-back mortgage).

After the inspection was completed (and we managed to get $25K knocked off the purchase price due to some potential problems turned up by the report), we set up a corporation (my buddy took care of all this), and recently completed the purchase.

Originally my friend was planning to live there himself, so he was going to manage it in exchange for living rent free, but in the end he changed his mind, and what we decided would be fair would be that we’d pay him 10% of the gross rent to manage it (and treat this the same as any other property expense), then we’d split everything else 50/50. I live in Toronto so wouldn’t have been able to do any of the management duties.

I went to tour the building, but for the most part deferred to my friend’s experience. This isn’t necessarily a course I’d recommend to everyone, but I’ve known this guy for about a decade (we met at university) and I was in his wedding party, so I’m willing to trust is judgement.

There’s a fine line to walk between doing business with someone you’re close enough to trust, but not doing business with someone you’re so close to that it might jeopardize the friendship. Some people trust more easily than I do, and some people are more able to do business and keep the friendship out of it than I can. For me there’s a pretty narrow range where business and friendship intersects (and I’m always nervous when I’m in that territory).

As an example, I could see my brother suggesting him and I buy property together (with him as the silent partner). I’d be very uncomfortable doing this, as if anything went wrong with the deal, I could see it causing problem with the relationship (and I don’t want to lose my brother over money). On the other extreme, whenever you go to “real estate networking” events, you’ll find TONS of people who are very excited to partner with you on deals. I’d say if you’re that sick of your money, just send it to me instead of losing it to them.

We’re still in the early stages of managing the property, so I’ll post more details in the future once figures start rolling in (and mention if we run into any problems).

I’m writing this late at night the night before posting, so I may have left out important details. Please let me know if there’s any holes in the story and I’ll be happy to fill them in! 🙂

Categories
Real Estate

Anecdotes and Advice from a First Time Home Buyer Part 3 – Choosing a Realtor

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally.
See Part 2 – Down Payments and Financing

Going it alone or choosing a realtor

With the availability of information online on MLS (Multiple Listing Service), how necessary is an agent? After all, agents work on commission and are paid a percentage of the value of a home. The fee is paid through the seller, but a buyer indirectly pays through the negotiated selling price.

For myself, the decision came down to the practicality of having an expert do the initial culling through the listings. Because our top priority is to stay along the subway line, my husband and I are dealing with the “hot” neighbourhoods where houses can sell within a week of being listed. As home buying novices, we wanted the advice of an expert in finding the right home and not overpaying for it. Real estate professionals have access to MLS properties before the public and can fine-tune searches. Agents are also experienced in negotiating offers, have access to a plethora of specialists such as home inspectors, lawyers, and mortgage brokers, and can lead one through the intricacies of closing costs and legal requirements.

Choosing a real estate agent

Choosing the appropriate person to work with was therefore not a decision that we made lightly. Start with the recommendations of friends and people you trust. Look at an agent’s online profile and their recent listings to evaluate if they work in the neighbourhoods you are targeting and at your budget. How long has the person been in the business? Although I was confident about a friend’s referral, I still met with the agent to interview her and to determine if she was someone with whom I would be comfortable working. I was impressed with her frank advice and that we could sign a buyers’ representation agreement for as short a term as two weeks. My husband and I decided to begin with a one-month contract instead of a longer commitment to see how it goes.

Dual Agency or Buyer’s Agency Agreements

Several of my friends were fortunate enough to find their homes without an agent and then worked with the listing agent to negotiate the buying price and finalize the offer. Such a situation, whereby the seller and buyer use the same agent, is referred to as a dual agency. The seller must also agree to this arrangement. From the agent’s perspective, dual agency is advantageous as s/he would earn a double commission. However, the worry is whether the agent has your best interests in mind, especially in terms of price.

Engaging in a buyer’s agency agreement is a contract to use the services of a particular agent or company for a specified length of time. The advantage of such a contract is that the realtor has agreed to work for you and is obliged to disclose all available information.

Realtors also have a network of other experts they can connect you with such as home inspectors, mortgage brokers and lawyers. A real estate agent’s job is to make things easier for you, so do not be afraid to make use of their network if you don’t already have access to such professionals.

Read the next post in this series “What to Buy?”.

Categories
Personal Finance

Courses I’d Like to Take

Wooly Woman tagged me to post about courses I’d like to take if they were offered. My mind actually jumped to courses I’d like to teach, which probably doesn’t say anything too flattering about me (I’d rather have the chance to force people to listen to me then listen to someone else 😉 ).

Course #1The no BS course for landlording

$300 for 11, 6 hour sessions (over 3 months – 66 hours total), much like the H & R Block tax course. Would cover buying property (running the numbers), dealing with sellers and real estate agents, lawyers, renovating, tenants, etc, etc. Course instructor would have no hidden agenda other then providing information (wouldn’t try to sell the students anything). It would be the opposite of the popular (and scummy) guru crud.

Course #2The Pursuit of Happyness

Without any spirituality or cult stuff, a course that would investigate the meaning of existence, false paths people pursue attempting (and failing) to find happiness, and approaches that do lead to meaningful, fulfilled, happy lives (perhaps with psychological research backing it up)

Course #3Startups for Fun and Profit

A course that would provide the “Coles Notes” of a business education for techies that want to start up their own company. Present ideas from people like Paul Graham and suggest worthwhile books that present non-technical subjects using an approach that would make sense to techies (something like “Selling for Engineers”). Critique business plans and provide connections. Sorta like Y Combinator but easier to get into.

I’ll take Mike, Money Gardener, Growth in Value and Telly (in the comments perhaps?) to continue this meme.

Categories
Investing

ETFs vs. Mutual Funds

Recently, Rob Carrick of the Globe and Mail wrote an article in which he compares Canadian equity mutual funds to the iShares Canadian Composite Index Fund (XIC) in terms of performance over the last five years. He discovered that only five mutual funds out of about 100 beat the ETF.

Funds which beat XIC in the last five years:

  1. Acuity All Cap 30 Canadian Equity
  2. imaxx Canadian Equity Growth
  3. Altafund Investment Corp.
  4. TD Canadian Equity
  5. TD Canadian Equity-A

While I would argue that you really need a longer time period and varying conditions (ie bear market) to determine if ETFs are superior to mutual funds, this study raises some interesting questions. If you have an investment advisor who tells you that they can pick top performing mutual fund managers then I would suggest you take a look this list of Canadian equity funds and if you don’t see anything familiar then maybe you should ask your advisor why they didn’t pick one of the top funds. Another good question to ask yourself is why you even need an advisor if you can pick a standard ETF and get better performance.

One of the big benefits of Exchange Traded Funds (ETFs) are the lower management costs which are typically less than 0.5% when compared to mutual funds which normally charge anywhere from about 1.3% to 3% for equity funds. Books such as Four Pillars of Investing and Random Walk Down Wall Street emphasize the fact that these lower costs result in better returns for ETF. Only a minority of mutual funds will beat their index in any given year and the problem is that very few of those funds can continue to beat the index for any length of time. Over time, broad market ETFs will beat the vast majority of mutual funds which makes it very difficult to pick the rare fund that does better than an ETF.

The problem we have as consumers is that we never see any advertising which promote ETFs (since they are low cost after all) but we get bombarded with ads from financial companies which always boast about one or two of their funds which have had superior performance in a recent time period. What you need to figure out is how many funds those companies manage and how many are they advertising? It’s usually a small percentage.

Categories
Announcements

Quest For Carnivals

Link, links and more links…

The BagLady had quite a post this week – if anyone out there has been through potty training their kid (I haven’t) then feel free to comment on this one. On an unrelated note – check out her sitemeter stats for the last month.

Canadian Dream did a bit of an expose on his recent history – incredible story if you ask me.

Becoming Cheap was featured in the 96th Festival of Frugality hosted by Fire Finance. This post was also featured by Rocket Finance as well as My Good Cents.

Rental Income vs. Property Value made the grade at TwoWiseAcres – a rather funny real estate blog. They also posted this article which shows what can happen when two bloggers try to share a blog 🙂 .

Getting Fired was hi-lighted by Brip Blap who liked Mr. Cheap’s analogy regarding firings.

The Dividend Guy had a book contest and guess what? I was lucky enough to win a book in the second contest in a row! Me open library any day now!!

Mighty Bargain Hunter included Recession Investing in the Carnival of Personal Finance #122 with a clever Dr. Suess theme.

Categories
Real Estate

Anecdotes and Advice from a First Time Home Buyer Part 2 – Down Payments and Financing

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally.

See Part 1 – First Steps and Pre-Approved Mortgages.

Mortgage Down Payments

Remember that a mortgage is a fancy term for a loan; however, it is a loan that is secured against the value of your home itself. The original amount that is borrowed is referred to as the principal.

A conventional mortgage requires a downpayment of at least 20% the purchase price of a home.

First time home buyers can take advantage of the federal government HBP (Home Buyers’ Plan) whereby an individual is allowed to withdraw up to $20,000.00 from his/her RRSPs. Minimum repayments of 1/15th of the loan are required each year, with the full amount to be repaid within 15 years. You are essentially loaning yourself the money for a home purchase. The downside is that the withdrawn money would be not be appreciating in your RRSP.

If you do not have 20% down, what are your options?

When a mortgage is taken out on more than 80% of a house’s cost, then it is known as a high-ratio mortgage and lenders require mortgage insurance to protect themselves in case of default. The insurance is required on the full mortgage and is either paid upfront or added to the mortgage itself.

Mortgage insurance is charged on the full principal mortgage. The calculation is based on the percentage of the mortgage compared to the total purchase price.

CHMC (Canadian Mortgage and Housing Corporation) and Genworth Financial Canada are the two institutions which provide mortgage insurance in Canada. Mortgage insurance premiums are available here.

Table of CMHC Mortgage Loan Insurance Premiums

Loan Size
(% of Lending Value)

Single Advance Premium
(% of Loan)

Up to and including 65%

0.50%

Up to and including 75%

0.65%

Up to and including 80%

1.00%

Up to and including 85%

1.75%

Up to and including 90%

2.00%

Up to and including 95%
Traditional Down
Payment Flex Down

2.75%
2.90%

Up to and including 100%

3.10%

Note: See your lender for premium surcharges and other terms and conditions that apply.

Thus, with a house purchase price of $400,000 and a $50,000 down payment, the CMHC premium to insure a high ratio mortgage would be:

$350,000 mortgage x 2% (the rate for a loan 87.5% of the house value) = $7,000.

My husband and I decided to avoid taking out a high ratio mortgage and will be using a line of credit to top up our downpayment to reach 20%. We were leery of the compounding interest on a higher mortgage. As good savers, we are confident of paying off a line of credit quickly, so the borrowing cost will actually decrease as the loan is paid off.

Different Types of Mortgages

The lowest lending rate is only one of the considerations for a mortgage. These other variables will be discussed below and vary by bank or lending institution.

Fixed or Variable Rate — A fixed rate is a set lending rate for a specified period of time with fixed payments. A variable rate changes on a monthly basis against the prime rate. Therefore, while your payments remain the same, the amount that goes towards the principal loan versus interest changes.

Although historically, variable rates have saved money, it is a guess which direction rates will go in the next few years. Therefore, which route you go depends on your comfort level in terms of risk.

Open or Closed – Open mortgages allow you to repay the entire mortgage or make extra payments without penalty fees. Some closed mortgages charge a fee for extra payments, while other closed mortgages require that you wait until the end of the term. The degree of “openness” on a mortgage varies between institutions. If you wish to pay down a mortgage faster and will have extra funds for payments, you may not want to choose a completely closed mortgage.

Term – The length of a mortgage agreement can last from 6 months to 10 years. Short-term mortgages run for two years or less and are advantageous for borrowers who think that rates will be decreasing in the next few years. After the end of a term, a new mortgage can be negotiated with a different lender.

Amortization period – A period of 15 to 40 years can be chosen. The length of time that you choose to pay back your mortgage will affect the size of your payments and the amount of interest that you will eventually pay.

Payment Schedule – The frequency of payments (monthly, weekly, bi-weekly, etc.) against your mortgage will vary between financial institutions. Because interest is compounded monthly, making weekly payments will more quickly reduce your principal mortgage than paying on a monthly basis, even if the overall size of the monthly payment is the same.

Pre-payment Options – Essentially extra payments against the mortgage free of penalty fees, the terms and amount vary between lenders. As with a more frequent payment schedule, pre-payments help reduce the principal and the overall interest borrowing cost.

Read the next post in this series “Choosing a Realtor“.