Dr. Garth

Had enough moaning yet? Me too. Let’s talk about some stuff that actually matters.

“I stumbled upon your blog a couple of years ago and have enjoyed it daily ever since,” writes Jim, in his opening MSU. “I wish I had found it sooner! Love the humour and the dogs.”

My wife and I are retired and would like to set up some investments for our two grandchildren. Their parents are taking care of RESPs; this is something for them to have some “fun” money for themselves when they’re older without having to touch their RESPs. If I set up accounts in my name and just cash it out when they’re older I’ll be the one paying the taxes on gains. What would be the best way to set this up so that they would pay the taxes, since their income at the time would likely be low to nil? The investment time horizon would be 15-20 years.

The best choice is probably an informal trust account. It’s a non-registered, taxable investment account that can be opened without a lawyer or cost. This “In Trust For” (or ITF) account has a few great advantages. As mentioned, it’s easy and cheap to establish. You (the trustee) have unfettered decision-making authority over it. The assets in there are protected for the minor beneficiary. When the kids hits the age of majority, they assume ownership.

Be aware, however, that any withdrawals from the account must be used for the benefit of the child, not you. Otherwise the CRA will consider the account is the property of the parent/grandparent and make all gains fully taxable in their hands.

Speaking of tax, all interest or dividend income thrown off by a ITF account is taxable in the hands of the account-holder, which is you, Jim. You must add this to your annual return. But the good news is that all capital gains are taxed in the hands of the child – they are not attributed back to the trustee. If the kid has no other income (and is old enough) they’d have to earn more than $20,000 a year to even be subject to tax payable.

So, obviously, if this is a long-term project, structure the account more for capital gains rather than interest or dividend income. When the age of majority is reached, the account proceeds are handed over. And she can buy a Porsche.

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The Doctor has noted some confusion lately when it comes to the protection investors are afforded by the CIPF – Canadian Investment Protection Fund. This is a different animal than the CDIC, a federal agency which covers bank accounts and GICs in case of financial institution failure.

“CIPF is for replacement of assets, investments in your cash account for example up to $1 million but not the value of the account,” Janey writes. “If you have over $1 million in bonds, GICs, stocks, preferred shares, ETFs etc. and are worth say $1.5 million you would not be replaced the $500,000 over the $ 1 million. This is what CIPF explained to me.”

Nope. Not exactly.

Understand that if your bank fails (not gonna happen, ever) CDIC will replace any interest-bearing or cash asset to a limit of $100,000 (you can shove this a lot higher with individual and joint accounts, or breaking up GICs by division). The feds do not cover any bank mutual fund that might collapse if the place goes down, however.

CIPF is not a government plan, but rather one set up and funded by the investment industry. It’s intended to provide coverage if a broker goes paws-up. It is not there to make up any losses that occur from market activity, the actions of a rogue advisor or bad advice.

So if the broker (or robo advisor, or bank-owned brokerage etc) collapses while possessing property owned by you, CIPF may make you whole up to a limit of $1 million. This could include (normally) cash balances within accounts, segregated funds, futures contracts or other securities pledged to you but not in your name. It is not blanket coverage, up to a million, on the whole portfolio. (Remember that most things in a portfolio – like stocks or ETFs, bonds or REITs – are owned by you directly and publicly-traded. The broker can crash but you still own these assets.)

CIPF does not cover losses. It’s won’t protect you from lousy advice or an unsuitable trade. (For that you need to bang on the regulator – IIROC.) To collect anything, the broker first must go insolvent and proceed through the bankruptcy process. After assets are distributed to creditors (including clients) CIPF will make up the shortfall – to the coverage limit. That’s a million for on taxable accounts and another million for registered ones. Check out its site.

By the way, missing crypto is not covered. But did it ever really exist?

About the picture: “Hi Garth:  Long time reader, and had the pleasure of speaking to you once,” writes Greg. “Attached is a picture of our mini poodle Cosmo. Cosmo recently turned 14. He is always alert to protect us from squirrels and the mail man, much like how you try to protect us all from bad financial decisions. Thanks so much for your great advice over the years.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2024/08/27/dr-garth-45/