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investor clinic

I am retired and have enough savings that I could just live comfortably drawing down the principal. But all my retirement money is invested in the markets. So I am looking for a safe place to move my money. My No. 1 goal: Don’t lose my principal. My No. 2 goal: Make a 2-per-cent to 3-per-cent return after taxes. Any suggestions?

I’m not sure your two goals are compatible. According to ratehub.ca and ratesupermarket.ca, the top interest rate on a one-year GIC is currently 2.5 per cent. Even if you lock up your money for five years, the best GIC rate you’ll get is 2.85 per cent. Government bond yields are even lower. In a non-registered account, income taxes will take a bite out of these already meagre fixed-income returns. If your marginal tax rate is, say, 40 per cent, the after-tax yield on a five-year GIC would be about 1.7 per cent.

Even with such low fixed-income rates, however, I would agree that having 100 per cent of your retirement savings in the stock market is probably not the best strategy – unless you’re supremely confident in your ability to ride out a market downturn without getting rattled and selling at the wrong time. Moving a portion of your money into a high-interest savings account (to maximize flexibility), GICs or bonds will help to control your risk and keep your emotions in check. The percentage you allocate to stocks compared with fixed-income depends on factors including your age, risk tolerance and whether you are receiving income from a defined benefit pension, the Canada Pension Plan and Old Age Security programs. Generally, the more sources of guaranteed income you have, the more you can allocate to equities.

It isn’t just the proportion of stocks that matters, however; quality is also important. I suggest that you review your stock holdings with the goal of reducing or eliminating your exposure to speculative investments and focusing on high-quality companies such as utilities, power producers, telecoms, banks and others that pay dividends and raise them regularly. Although stock prices bounce around, many dividend-paying companies have yields that are substantially higher than GICs. In my experience, receiving steady cash flow that grows over time is one of the best ways to build your wealth and stay calm during market downturns. You can see examples of such stocks in my model Yield Hog Dividend Growth Portfolio. Investing in broadly diversified exchange-traded funds is also a good strategy if you would prefer not to hold individual companies.


My friends contributed a total of $10,000 to a registered education savings plan (RESP) for their son and received $2,000 of Canada Education Savings Grants (CESGs). They have since moved to another country and their son is now attending university outside of Canada. Their mutual-fund company told them, correctly, that they can get their $10,000 of contributions back, but will have to return the $2,000 of CESGs. However, the fund company also said that the $6,000 of growth in the RESP has to be forfeited and given to a designated Canadian postsecondary institution. I thought my friends could withdraw the growth, too, and pay withholding tax, but the fund company won’t let them. Who’s right?

I forwarded this question to a couple of financial experts, both of whom said the financial institution appears to be mistaken.

“Your reader is correct,” said Mike Holman, author of The RESP Book. “If the family moves out of Canada, they can still receive EAPs [educational assistance payments] of the non-contribution money. They can’t receive any grants as they will be returned to the government. But they can get their original contribution amount plus any growth in the account.”

However, a flat withholding tax would be applied to the growth portion of the account, Mr. Holman said. According to an RESP guide prepared by RBC Wealth Management, “withdrawals of investment income and growth will be subject to non-resident withholding tax at a rate of 25 per cent, unless reduced by a tax treaty.” RBC added that "tax legislation in the beneficiary’s country of residence may also apply.”

Dorothy Kelt of TaxTips.ca agreed that, if the family is making an EAP withdrawal and the son is enrolled in a qualifying postsecondary institution outside the country, they are entitled to the growth of the account, minus tax withheld by the Canadian government. “I think they’re just confused,” Ms. Kelt said of the financial institution.

When the subscriber (the parents in this case) is a non-resident and decides to close the plan, the growth must be paid out to a designated Canadian educational institution. However, that’s not the case here as the family wants to make an EAP withdrawal, not close the plan.

“I think this RESP provider is either mistaken on how to handle EAPs for non-residents or perhaps they think the family is trying to close the account. They need to clarify this with the provider,” Mr. Holman said.

E-mail your questions to jheinzl@globeandmail.com.