This is article one in a five part series on the topic of RISK. The articles will be as follows:

  1. Determining the Appropriate Risk Level for a Portfolio
  2. Why have bonds (a ‘safer’ asset) gone down in price recently?
  3. Why equities are ‘riskier’, but offer higher potential long-term returns
  4. Understanding volatility (risk vs. reward)
  5. Countering Investor Behavioural Biases (How to protect yourself and your portfolio from making emotional mistakes)


Part one – Determining the Appropriate Risk Level for a Portfolio

10922382_s2One of the greatest disconnects between investment professionals and their clients is understanding and interpreting risk.  For most investors, risk is essentially the potential that an investment could lose money (typically over a short time period).  In particular, an investment is considered more risky if there is a greater probability of a loss (negative return) and if that loss could be substantial.   But, focusing solely on this singular view could lead an investor to miss out on opportunities for higher return and the danger of not having sufficient funds for retirement.

For example, an investor owning a portfolio of only GICs believes she is taking on zero risk as the GICs, if held to maturity, should give her back her principal investment plus a small amount of interest.  But, if the investor needs to earn a return of 5% per annum to fund her retirement, a portfolio of GICs paying 2% actually has a great deal of risk – the hazard of not meeting her investment goal.  In this scenario, the investor is at a 100% risk of not meeting her retirement goals, requiring her to work longer or reduce expenses substantially during retirement.

Determining Risk Level in Your Investment Portfolio

Instead of focusing solely on short-term losses or gains, you should consider the following three questions to determine your appropriate investment portfolio for retirement planning:

  1. What is the minimum return / level of income needed in retirement?
  2. What is the desired return / level of income wanted during retirement?
  3. How much loss (as a percentage or total dollar amount) can I withstand (typically over a short time frame)?

The first question addresses the minimum amount of return that needs to be earned to ensure that you can enjoy a basic lifestyle in retirement.  This is the amount that must be safeguarded against.  But the key issue here is time horizon.  If you are in or near retirement, AND you cannot risk losing a significant amount in a short time period, the portfolio would generally be income oriented and conservative.  By contrast, if you are in your early 40s, you can invest more in assets that have a higher return potential, but still have more chance of a potential loss in the short-term, such as equities (stocks).  The younger investor can accept a decline because she has a longer period to recoup those losses when market returns are stronger.  This occurs over nearly all medium-term and longer term periods (5 yrs +), where riskier assets like equities have provided higher total returns.

The second question addresses the kind of lifestyle you would like to have in retirement and then placing a dollar value on it in terms of after-tax income to ensure there is enough money for travel, entertaining and gifts.  A higher return is often necessary to attain the desired lifestyle.  Risk is managed by rebalancing, so taking profits (selling) when equities have gone up and over time increasing the allocation to more income oriented and conservative investments.   Often the cash (or GIC) position is increased for near retirees to ensure the minimum level of income is attained, but then taking a bit more aggressive approach with the remaining investments to attain the desired lifestyle.

The third question requires complete honesty, because investors are most tempted to stray from their investment plan when markets decline.  These are often the times when it is most important to stay on the plan, particularly as equities (stocks) tend to go up after markets have gone down.  If you cannot accept any loss greater than 5% without wanting to sell everything and becoming extremely nervous and agitated, then you should have a zero percent allocation to equities and a low allocation to longer maturity and/or higher yielding bonds .  It is better, if you are highly risk averse to forego potential  gains in order to save yourself from the pain of losses.  If you are working with a financial planner / investment advisor, he /she should set your equity or riskier asset weighting based on a typical bear market (20-25% decline) to an extreme bear market (50% decline).  E.g. if an investor is willing to accept a potential 15-20% decline in their investments than an equity (stock) allocation of approximately 50% would be appropriate (a 35% decline, which is the midpoint between the two decline scenarios of 20% and 50% multiplied by .5).

A TriDelta Financial planner can work with you to determine the proper investment allocation to meet your goals and to set a plan in place to meet those goals by working with you to answer the three questions listed above, but being forthright and honest about current net worth, income, attitude towards loss, retirement expectations and any unique circumstances (health concerns, an inheritance, selling or buying of a property, etc.) will make this process and your financial plan more successful.

Lorne can be reached at and by phone at 416-733-3292 x225.

Child Support Payments – Are they tax deductible?


19319035_sWe’re often asked about child support payments and thought it would be helpful to get an explanation from a local lawyer.

The government changed the tax treatment on Child Support payments on May 1, 1997. Whitney Smith Chadder is a lawyer specializing in family law issues, here is her explanation:

Subject to a few exceptions, the amount of child support paid is determined by the government Child Support Guidelines.  These are based on the payor’s income (line 150) and the number of children to be supported.

In addition to the base amount of support, parents are typically required to share the cost of section 7 expenses on a pro rata basis based on their respective incomes.  Section 7 expenses refer to expenses that are in excess of what the base amount of support could reasonably cover; they include day care costs and significant extra-curricular activity costs.

The general rule with respect to child support is that it is not tax deductible to the payor, or taxable as income to the recipient.  However, this has not always been the case.  Prior to May 1, 1997, when the new law came into effect, child support was tax deductible to the payor and taxable as income to the recipient.

This has several important implications.  The first is that if parties continue to be bound by a pre May 1, 1997 child support order, then their child support payments are subject to the above tax rules.  Such parties can submit a joint election via Form T1157 to the Canada Revenue Agency requesting that the new rules apply with respect to their child support payments such that there are no tax consequences.  It should be noted, however, that once such an election is submitted, it cannot be cancelled.

The child support tax rules differ from those of spousal support in the following respects:  Spousal support is treated differently for tax purposes based on whether the support is paid in a lump sum or in ongoing, monthly installments.   Where spousal support is paid in monthly installments, it is taxable as income to the recipient and tax deductible to the payor.  Where support is paid in a lump sum, there are no tax consequences; however, in such circumstances the lump sum amount will often be netted down to account for the tax consequences to the payor.

For further information with respect to the income tax rules associated with support payments, please refer to Canada Revenue Agency’s interpretation bulletin IT-530R, dated July 17, 2003, or seek legal advice from a lawyer.

Whitney Smith Chadder is a family law lawyer with Stephen Durbin Professional Corporation in Oakville.  She can be reached at (905) 847-0888 or

TriDelta Investment Counsel Q2 Review – Interest Rates are only part of the picture


How did the markets perform?

The second quarter of 2013 was very mixed across the globe.

  • The Toronto indices were all negative for the quarter, the TSX was down 4.1% and the TSX Small Cap was down 8%.
  • The Canadian Bond Universe was down about 2.4%
  • The U.S. stock markets continued to perform well. The S&P 500 was up 2.9% in local terms and 6.5% in Canadian currency as the Canadian dollar was weak during the quarter.
  • Global stocks were generally down in local terms but still positive when factoring in the weaker Canadian dollar. The EAFE Index (Europe, Australa, Far East) was down almost 1% in local currency and up 2.8% when priced in Canadian dollars.
  • The MSCI Emerging markets index was down 8% and down 4.7% with currency.

So the message for the quarter:

Many markets were down and the Canadian markets were in the middle of the pack.


How did TriDelta perform?

Overall, the second quarter was fairly flat for TriDelta clients – but very positive in comparison to the Canadian market for stocks and bonds.

Virtually all clients outperformed the Canadian Stock and bond markets during the quarter with a range of returns from 1.0% to -2.5%.

The range of performance was primarily determined by model selection and asset mix. The Core (Growth) bond and equities portfolios outperformed the Pension equivalent and portfolios. Those with higher stock allocations outperformed portfolios holding more bonds.

The rationale for Pension underperforming Core during the quarter relates to some of the more defensive and stable dividend paying sectors like Utilities and Telecom which were two of the three worst performing sectors down 5.5% and 9.4% respectively. The worst performing sector for the quarter was Materials which includes mining stocks, was down 23%.

Once again all of our portfolios performed reasonably well under poor stock market conditions.

The key reasons for our decent performance would include:

  1. Meaningful stock exposure to the U.S. Market. At some point this may decline if we feel that the US market valuations are getting ahead of themselves, but we do not believe that is the case today. In addition, the US market gives us strong global exposure to several sectors that Canada lacks.
  2. Very low exposure to Materials stocks, especially precious metals. We never say never when it comes to sectors of the market. There may come a time when we begin to build more in these sectors.
  3. Growth outperformed Value. In general stocks with strong earnings growth profiles performed much better than stocks with very cheap valuations as investors looked for more certainty during the volatile quarter.

What are we doing about rising interest rates?
This seems to be the big question of the day. Clearly one of the big challenges in the quarter was the significant increase in long term interest rates.

This increase that reached a full percentage point for 10 year government bonds was the largest short term increase since 1994.

The immediate impact was for bond prices to fall. Longer term bonds fell more than short term, and corporates fell a little more than government bonds.

In addition, stocks that are deemed interest rate sensitive such as utilities and telecom stocks also fell with the rise in interest rates.5197885_s

The first thing to know is that we believe that the interest rate moves were overdone, and expect bonds to actually perform quite well over the next quarter. We do believe that interest rates will ultimately rise, but it will happen over time and not in major jumps. As a result, we expect the major jump in yields that we just experienced to slowly move lower over the coming months, before it moves ahead further.

We did make a move in late April to shorten the term of our bond holdings, and that helped our performance. We are now moving again to lengthen the term of bond holdings. This is not necessarily a long term move, but one that we believe will bring outperformance through the rest of the year.

In terms of stocks, we continue to believe in dividend growers, strong balance sheets, and consistent earnings, but we are also looking at some sector shifts within these parameters. From a historical perspective, certain sectors do tend to outperform during mid stages of a market recovery and in rising interest rate scenarios. We will continue to be looking for some opportunities in sectors like technology and energy. This is a slow shift that we believe will position portfolios better for growth in 2014.

For those who believe that it is time to sell all bonds and go into stocks, keep in mind the purpose of bonds is both for income and stability of the overall portfolio. Bonds can go down in value as they did last quarter, but in the last 61 years, the very worst period was from June 1980 to July 1981. During this unique time of soaring interest rates and high inflation, the prime rate surpassed 20%.

The total return for the bond market during that period was minus 11%. This is certainly a poor return, but keep in mind how different the inflation scenario is that we see today. In most years, bonds provide steady single digit returns. Stocks have been much more volatile. This basic fact leads to a fundamental investment belief.

The right mix of stocks and bonds for an individual can see some shifting based on markets, but in general, if you are risk averse, and holding 30% in stocks, we do not believe you should make a radical shift. The market will do its thing regardless of everyone’s beliefs, and you need to maintain your appropriate asset allocation and risk profile. To make major changes (often after the fact) is usually one of the biggest investment mistakes people can make.

More thoughts on Bonds

  • The latest bond sell-off was due to a combination of news that the US Fed sees “diminished downside risks to the outlook” and Bernanke’s comments that the Fed may trim its $85 billion bond buying initiative. The timing suggested it could start this year and end around mid-2014 if the economy grows in line with their forecast. This was not new news. This news has been in the market place as early as the turn of 2013. However, it certainly triggered a flight from bonds.
  • Fast money, ETF trading, and new pricing levels were the catalyst for the extreme ranges traded in such a short period. Get me out – now – mentality prevailed, and once that trade has passed, more rational trading ensued.
  • Tame inflation expectations and mixed economic releases argue for a new trading range with 10-yr yields between 2.00% and 2.50%, but not for the higher yields doomsayers are suggesting. If the recovery continues, ending of Quantitative Easing is still not tightening of US monetary policy. It’s a move to neutrality, and if history is a guide, central banks could be neutral for quite a while.
  • As active managers, and with an extremely liquid portfolio of holdings, we have positioned our portfolios to take advantage of the volatility that will be the norm until the markets enter the next interest rate cycle.

Why less Quantitative Easing is Just a Shell Game

We believe that a reduction in Quantitative Easing purchases will potentially overlap with reduced borrowing requirements of the US government. How ironic would this be if the pay down of debt matches the gradual reduction to Quantitative Easing? At some point, the disappearance of Quantitative Easing will overshadow the reduction of supply; however, by then, market participants will be focused on the next big issue.


What about the rest of the year?

For the rest of 2013 we expect the markets to move around in the ranges already established during the first half of the year. In other words we see limited upside and a couple of short term corrections that will provide some decent buying opportunities.

The risks and news items that may cause a correction are many and are well know to the market as they have been climbing these walls of worry since late 2012 and include the following:

  • The U.S. Fed slowing quantitative easing
  • Sequestration in the U.S. continues and is a drag on economic growth
  • Portugal, Italy and Greece continue to struggle
  • Growth in China slows
  • Continued political turmoil in many Emerging Market economies

Overall we continue to see the positive side winning out in the longer term:

  • Earnings growth continues to be positive
  • The U.S. jobs and economic data continue to improve
  • Stocks are still attractively priced
  • Few alternatives for investment dollars since GIC and cash rates are still very low
  • Global support from central banks to stimulate the economy continues to be in place

We have been raising cash in all portfolios recently and are continuing to looking for opportunities to sell call options for some clients on a number of holdings to help generate excess return and income if the markets pull back.

Dividend changes

Many of our holdings continued to increase their dividends during the second quarter. The following nine companies increased dividends and none of our holdings decreased their dividend paid over the last three months.

Company Name % Dividend Increase
Suncor Energy 53.80%
Potash Corp 25.00%
Apple Inc. 15.09%
Exxon Mobile 10.53%
Weston 10.50%
Baxter Intl 8.90%
Johnson & Johnson 8.20%
National Bank 4.80%
Canadian Imperial Bank 2.10%



Investment management is never easy, and the rush to get out of bonds is a great example of emotional decision making. It can be very hard to act against the emotional pull to sell something when everyone seems to be bailing.

When we step back and look at the world in July 2013, we see reasonable market valuations. Keep in mind that from deep recessions come long recoveries. We believe we remain solidly in this recovery phase. It won’t rise in a straight line, and we may very well see more volatility this summer, but the general trend remains positive for stock markets, with room for decent bond returns on an actively managed basis.


TriDelta Investment Management Committee

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income

Ted Rechtshaffen

President and CEO

Anton Tucker

Executive VP

How Your Tax Bracket affects your Investment Decisions


16560163_sEveryone is aware of their tax bracket. It affects us every spring when we calculate how much we have to pay to Ottawa and our provincial government. However, your tax bracket also has implications for your investment strategy. Here are a few items to consider.

Note: Examples below are based on 2013 tax rates/tax brackets using Ontario rates for the provincial portion.

  1. We have all been brought up to think that we should put away money in RRSPs and claim them on our annual tax filing. However, perhaps you should be investing in a TFSA instead. If you are in a lower tax bracket today, and expect to be in a higher tax bracket in a few years, invest first in a TFSA today and save your RRSP contribution deduction until you are in a higher tax bracket and your tax deduction will be worth more. You can contribute to your RRSP this year, but postpone your deduction until next year if you expect to receive a salary increase or a bonus cheque in the following year that will put you in a higher tax bracket.
  2. Investing in US dividend generating securities in your TFSA is generally not advised because of the US withholding tax of 30% on the dividends. However, you can file a W-8Ben which will reduce your withholding tax to 15%. Then if you expect to be in a tax bracket higher than 35% in retirement, it is advised to put the US equity investment into your TFSA (assumes holding for 20 years and a 5% annual earnings). Note, historically the US S&P500 has outperformed the Cdn S&P/TSX which might be the primary reason to consider including US investments in your portfolio.
  3. Capital Gains and eligible dividends are generally understood to have the lowest tax rates in Canada. But which one is lowest? There are dramatic differences between the two depending on what your taxable income/marginal tax rate is. A general rule of thumb: if you are in a lower tax bracket, dividends will have a tax advantage over capital gains; and if you are in a higher tax bracket, capital gains will have a better tax treatment. For example: If you are in the 24% tax bracket (taxable income between $39,724 and $43,561) eligible dividends will have the lower tax rate (3.77% vs 12.075%). If you are in the 43% tax bracket, (taxable income between $87,124 and $135,054), capital gains will have the lower tax rate (21.705% vs 25.4%).

    Note: the point at which capital gains are taxed at a lower rate than eligible dividends varies quite a bit by province because each province has a different dividend tax credit as well as different tax brackets. At the extremes, Alberta always favours dividends over capital gains from a tax point of view at every tax bracket; Manitoba, Quebec and Nova Scotia have some of the lowest taxable income levels at which point capital gains are favoured over dividends.

Tax Strategy is only one of many things that should be considered when formulating your investment strategy. Your goals, lifestyle needs, family considerations, risk tolerance and cash flow all need to be considered. Having a comprehensive financial plan which considers all of these factors, both today, 10 years from now, and in your retirement is critical to making smart investment decisions today for your long-term financial success. At TriDelta we do our best to ensure that your investments are being managed tax efficiently for your personal circumstances.
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Posted by Gail Cosman, Senior Wealth Advisor, Tridelta Financial

TriDelta Investment Counsel – Q1 2013 Investment Review and Outlook


How did the Markets Perform?

The first quarter of 2013 was one of degrees of good for stock markets.

  • For the U.S. stock markets it was great. S&P 500 was up 10.5% (in Canadian currency).
  • For Global stock markets it was very good. The Global (outside of the Americas) EAFE was up 8.3% (in Canadian currency).
  • For the Toronto stock market it was good. The TSX ended the quarter up 3.3%.

The Canadian Bond Universe was up about 0.6%.

So the message for the quarter:

Everything was up, but Canada was a bit of a laggard versus the rest of the world.


How did TriDelta Perform?

The first quarter of 2013 was a very good one for TriDelta.

Virtually all clients outperformed both the Toronto Stock market and the Canadian bond index. Returns ranged from 3% to 7%.

This range of performances is tied closely to the clients risk tolerance.  Those with more of a stock & growth focus have outperformed to a larger extent than those with a conservative, fixed income weighted portfolio.

What is key for TriDelta is that our portfolios overall have a lower risk profile designed to outperform in poor stock markets. This is why we are particularly pleased that we also managed to outperform in strong markets.

The key reasons for our strong performance would include:

  1. Meaningful stock exposure to the U.S. Market. This has been a focus for TriDelta, and will likely continue for the foreseeable future. Among the reasons is that for risk management, we believe that Canadians need greater diversification than the Toronto market provides, and that at this point, there still remains many cases of better value outside of Canada.
  2. Focus on corporate bonds vs. Governments, and a belief that greater returns will be found in longer term bonds. We believe that long term interest rates will continue to remain low for the near future, and will allow us to deliver better bond returns than in the short term end of the market. This view may change during the course of 2013, but not today.
  3. Focus on companies with growing cash flows, which leads to growing dividends. This is not a get rich quick strategy. This is a ‘slow and steady wins the race’ strategy. This quarter, 16 of our holdings raised dividends and not one lowered. These are signs of stable growth.


Will we see Good Markets the rest of the Year?

In 2iStock_000000674097XSmall010, markets were up over 10%. However, there was still a period of over 15% decline during the year.

In 2012, the S&P 500 was up over 10%. During the year, it still had a 10% decline during the year.

The answer to the question is that at some point in 2013 there will likely be a meaningful decline. Possibly trading down to a 10% decline from its high. We’re unlikely to see consistently good markets for the rest of the year, but the key word is ‘consistently’. The markets remain volatile as they trend higher or lower, but we see many reasons to be positive for the rest of the year.

They include:

  • The U.S. economic trend is positive. There is growing house prices and an improvement in the unemployment numbers.
  • This positive economic trend is coupled with U.S. Government economic stimulus which is allowing companies (and individuals) to borrow funds at incredibly low rates. This combination is very rare and leads to extra strong stock market returns. The U.S. government is essentially committed to most of this stimulus through the end of the year.
  • If not investing in the market, you can only earn 1% or 2% (if invested well) on GICs and cash. The safe alternative is looking much weaker.
  • Europe is bad but stable. The Cyprus banking ‘crisis’ was met with a yawn from Global markets.  This was because of the confidence that is now in place in the European Central Bank and major governments to be able to stick handle their way through. Perhaps this confidence is unfounded, but it seems to be in place.
  • Asian growth appears to be on track despite some bumps over the past year.

One other note might be helpful for those looking for more positive signals.

There have been nine years since 1960 in which the S&P 500 rose more than 5% in January. 2013 is the tenth year it has happened. In eight of those nine instances, the market finished those years higher, with the lone outlier coming in 1987, due to the October crash.

The S&P 500 has averaged a 13% gain from February through the end of the year in those nine years.


When will Canadian Markets catch up?
This is a tough one to answer. Because of the concentrated nature of the Toronto Stock Exchange, the question really is, “When Will Energy, Mining and Precious Metals Do Better than the US Market?”

There are certainly components of the Canadian market that remain strong and steady, but Energy and particularly Mining and Precious Metals has underperformed. The Global Gold index is down 22% over the last year!! The Energy index is down 2%, while the Global Mining Index is down 12%.

These areas of the market are very cyclical and because of their volatility, tend to be areas that TriDelta is often underweight. We’re typically overweight companies that are under-valued, have good balanced sheets and have growing dividends. While these aren’t the hallmarks of energy and metals stocks, because of the downturn, there are several names that are looking more attractive.

While we are not going to predict when this cycle will turn, the catalysts will include strong growth signs from China and India, along with the natural sector rotation from a hot sector like Health Care (up 28% in the past year) to a cold sector. We consistently seek value among names regardless of sector, and look to sell some winners that become expensive. Given what has been happening in the market, this may involve some new money going into energy and metals in the coming months.


Dividend changes

We are strong believers in the power of dividend growth, and look to hold stocks that based on our analysis, are good bets to grow their dividends over time. This quarter was no exception, with 16 companies increasing dividends, and none decreasing.


Company Name % Dividend Increase
Cisco Systems 21%
Magna International 16%
Canadian National Railways 15%
Atco 15%
Rogers Communications 10%
Colgate Palmolive 10%
Canadian Utilities 10%
United Parcel Service (UPS) 9%
3M 8%
Pason Systems 8%
Lorillard 6%
Bank of Nova Scotia 5%
TD Bank 5%
RBC 5%
Transcanada Corp. 5%
BCE 3%


At TriDelta we look forward to providing our current clients and new clients with three key deliverables:

  • A financial plan that gives you a roadmap, financial peace of mind to do more with your wealth and smart tax planning.
  • An investment plan that fits within your larger financial plan. An investment plan that will help you to achieve the long term life goals that you have set out.
  • An investment approach that lowers volatility, delivers increasing income, and uses proven financial discipline and mathematics to underscore buy and sell decisions.

The first quarter extends our strong 2012 performance, and has been a great example of achieving above average risk adjusted returns. In a world of low interest rates and low growth, we strongly believe our investment approach and philosophy is well suited to outperform.

We look forward to the challenges and celebrations in front of us in the remaining 9 months of 2013.


TriDelta Investment Management Committee

Cameron Winser

VP, Equities

Edward Jong

VP, Fixed Income


Ted Rechtshaffen

President and CEO

Anton Tucker

VP, Business Development


Ever Considered Loaning your Spouse Money?


Here’s why you might.

We all look for ways to reduce the amount of tax we pay.  Sometimes I come across situations where one spouse has accumulated a larger non-registered investment account than the other.  This can happen over time when one spouse has a higher income than the other, or perhaps when one spouse receives an inheritance.

This often leads to higher taxes being paid by the household.  In an effort to reduce taxes, income splitting strategies can help shift income from a high tax bracket family member to a low tax bracket family member.

This is not as simple as making a non-registered account ‘joint’ with a lower income spouse or minor child.  CRA would consider this a gift to a non-arm’s-length person and attribution rules would apply, essentially attributing most if not all of the income back to the higher income individual and taxing it in their hands.

One income splitting strategy where attribution rules would not apply is to use a spousal loan.

A spousal loan works like this:

  •  The higher tax bracket spouse (lender) loans funds to the lower tax bracket spouse (borrower) at the prescribed rate.
  • The prescribed rate is set quarterly and is based on the 90-day Treasury bill rate.  Today that rate is at a historic low of only 1%!
  • The borrower must pay interest on the loan annually by January 30 of the following year ($1,000 for a $100,000 loan).
  • The investment income generated is taxed in the hands of the borrower, not the lender.
  • The interest paid on the loan can be deducted by the borrower and is taxed in the hands of the lender.
  • A written agreement should be put in place documenting the loan.  This also locks in the rate of 1% for the life of the loan, regardless if the prescribed rate increases in the future.

coupleTo illustrate the potential benefits of this strategy, let’s look at a hypothetical couple Tom & Mary Connor.

Tom recently inherited $500,000 from his mother.  Tom faces a marginal tax rate of 46.41% while his wife Mary’s marginal tax rate is 31.15%.  Tom plans on investing the money and can earn 5%.  For simplicity, let’s assume the 5% return is simple interest.

If Tom invests the funds himself, his after-tax return would be $13,397.

$500,000 x 5% x (1 – 46.41%) = $13,397.

Instead, Tom can lend Mary $500,000 at the prescribed rate of 1%, thereby shifting the growth on the money to Mary who is in a lower tax bracket while avoiding attribution rules.

Tom would include the $5,000 in interest on the loan as income, providing an after-tax return of $2,680.

Mary would include $20,000 in interest as income (5% return less 1% in interest costs), providing an after-tax return of $13,770

The total after-tax return for the household is $16,450.

The spousal loan strategy has provided an incremental family return of $3,053 after one year.  As the portfolio grows and the resulting income from the portfolio increases, the incremental improvement in family return also increases.

This tax-planning strategy does however have potential non-tax consequences that should be considered:

  • You may be more likely to be reassessed by CRA.
  • Tax returns become a bit more complicated.
  • If the marriage breaks down, the situation will become more complex and will be subject to family law provisions.

Your entire financial situation, goals & objectives should be considered before employing any strategy.  If you find yourself in a similar situation to Tom, a spousal loan may work very well, especially considering the historically low prescribed rate of 1% that can be locked in today.

Written by Brad Mol, Senior Wealth Advisor, TriDelta Financial