When it comes to US tariffs on Canada, the headlines may paint a simple picture, but the reality is far more complex. Canada is a critical trading partner that directly supports US industries, jobs, and consumers in ways that aren’t always obvious. Here are five key facts about the Canada-US trade relationship that might surprise you.

1. The US Has a Merchandise Trade Surplus with Canada (When Energy Is Excluded)
While the overall US-Canada merchandise trade balance shows a deficit, this picture is skewed by energy imports. When energy is excluded, the US actually had a merchandise trade surplus of $28.6 billion with Canada in 2023, a trend which has held since 2007¹, driven by high-value sectors like manufacturing, machinery, and automotive parts.

Why it matters: This surplus supports thousands of American jobs and highlights how interdependent the two countries are. As Cumberland Chief Investment Officer Peter Jackson has commented, energy imports heavily influence the deficit figures, but in key sectors like manufacturing, the US gains more than it loses.

2. Canadian Crude Imports Create a Win-Win Through Refining Arbitrage
Canada exports about four million barrels of crude oil to the US every day, accounting for 21% of US daily consumption². Canadian heavy crude oil flows into US refineries at a discount that can generally be estimated at $10–$20 per barrel as compared to lighter WTI crude³. US refineries process this Canadian heavy crude into gasoline and diesel, which are sold in the domestic market at competitive prices. Meanwhile, the US exports some of its own lighter crude globally at a premium.

The takeaway: As we have noted, this refining arbitrage benefits US refiners, oil producers, and consumers by keeping fuel prices low while allowing the US to profit from exports.

3. Canada Buys More US Goods Than Any Other Country
In 2023, the US exported $449 billion worth of goods and services to Canada, making it the US’s #1 export destination⁴. From machinery to precision instruments and aircraft, Canadian businesses are major consumers of American innovation. And it’s not just confined to border states—it’s a national relationship. In fact, 36 US states, from Michigan to Texas, rely on Canada as their #1 export destination⁵.

The impact: Industries across the US depend on Canadian demand, and disruptions in trade could ripple through local economies nationwide.

4. Canadian Imports Drive US Manufacturing Efficiency
Nearly 70% of US imports from Canada are used as inputs for the production of American goods⁶. From automotive parts to metals and chemicals, Canadian imports fuel US factories, enabling them to remain competitive globally.

Why it’s important: Tariffs on Canada could increase input costs for US manufacturers, reducing their ability to compete internationally.

5. Tariffs on Canada May Hurt US Consumers More Than Canada
Because Canadian energy and raw materials play such a large role in US supply chains, imposing high tariffs would likely lead to higher costs for American manufacturers and consumers. Tariffs on key imports, like energy and automotive parts among others, could raise production costs, making American goods less competitive globally.

It’s also critical to note that, while Canada’s overall trade imbalance with the US has increased since Trump’s first term, largely driven by higher energy prices, it is still dwarfed by the imbalances with China (close to US$300 Billion) and the Euro Area and Mexico (each around US$200 billion +/-)⁷.

The twist: Canada’s close trade ties create efficiencies that directly benefit the US economy. And, while Canada has been portrayed as a major contributor to the US trade deficit—in reality, it is not. Targeting it with tariffs is more about political narratives than economic necessity.

In our view, a closer look at the trade data reveals that Canada is not just another trading partner—it’s an essential economic ally to the U.S. As tariff debates unfold, acknowledging this deep interdependence could pave the way for more strategic solutions that ultimately benefit both nations.

At Cumberland, we’re closely tracking these developments to assess their impact on markets and position our portfolios accordingly. Our focus remains on helping clients navigate uncertainty while balancing attractive investment opportunities and prudent risk management.

Impact investing continues to evolve as more charitable foundations dedicate time and resources to this transformative approach. On Tuesday, November 12th, Cumberland was honoured to host members of the philanthropic community for a dynamic panel discussion featuring three leaders making strides in impact investing.

The event opened with remarks from Alex von Schroeter, Cumberland partner, who welcomed both new and familiar faces to this second Cumberland Foundations Circle event of 2024. She introduced moderator Charlie Sims, CEO of Cumberland Private Wealth Management, and the esteemed panelists:

• Upkar Arora, Founder and CEO of Rally Assets and Managing Partner of Realize Fund L.P.
• Andrew Spence, Founder and CEO of Spence Strategic Consulting Group and Chair of the Investment Committee of Toronto Foundation
• Riz Ibrahim, President and CEO of The Counselling Foundation of Canada

Defining Impact Investing

The conversation began with Charlie asking Upkar to define impact investing. Upkar explained the “four dimensions” that his team uses in managing Rally Asset’s impact funds:

1.  A positive impact must be intentional from the start
2. The impact must be real and tangible
3. The impact should be measurable
4. There should be an expectation of financial return

Upkar also clarified impact investing versus some of its related categories:

“There are lots of other terms like sustainable, responsible, ethical and so forth. ESG (Environmental, Social, Governance) is often integrated or confused with impact investing and, from our perspective, ESG is not the same. [With ESG], you’re looking at how the world is affecting a company, whereas impact investing is about how a company is affecting the world.”

Transforming Portfolios

Andrew Spence shared the Toronto Foundation’s journey toward a target of 70% impact investments by 2030. This required shifting core beliefs, rewriting the Investment Policy Statement, and engaging specialized advisors.

“We have about $100 million out of our $400 million now invested in intentional impact opportunities. They are delivering the returns they promised, and we are doing more good while getting the return.”

Andrew also addressed some of the governance challenges that can come with impact investing:

“When does an investment become a grant? If a well-deserving enterprise cannot stand on its own and you write off $300,000, how do you justify that to the person you give $10,000 a year to? We’re slowly getting that evaluation process in place, but that’s what keeps me up at night as a board member.”

Mid-Journey Lessons

Riz Ibrahim shared how The Counselling Foundation of Canada began exploring impact investing about a decade ago, and described his progress as “mid-journey.” He highlighted their breakthrough moment – providing a $200,000 loan guarantee to skilled immigrants seeking accreditation in Canada:

“We were using our balance sheet, not our asset base. It was within our wheelhouse. We understood what the impact could be, and the risk was nominal. We really liked it, and it got people thinking, ‘Okay this is something we can get into.’”

Over nearly an hour, the panelists provided invaluable insights into the purpose, strategy, and governance of impact investing and philanthropy more broadly. Their expertise inspired meaningful reflection on how foundations can maximize their resources to drive positive change.

Join Us to Learn More

Cumberland Foundations Circle was created to help families, foundations, professionals, and experts come together in a dynamic set of discussions to share their knowledge and experiences across an array of philanthropic topics, including impact investing.

Interested in learning more? Contact us to access a video replay of this event or to join future discussions.

Traditionally, investing focuses on profit and charity is about improving the human condition and world. Impact investing can be likened to a hybrid way of giving that aims to generate positive social and environmental impacts with financial returns simultaneously.

Impact Investing Versus Charitable Giving

One way to compare impact investing with more traditional charitable giving is to imagine how you might assist a community organization that needs physical space to sustain its highly successful outreach program.

With traditional charitable giving, a donor might provide cash that the organization could use to lease space. With impact investing, a donor might instead purchase or even construct a building and allow the organization to occupy the space it needs for free or at a below-market rate. In this way, the impact investor benefits from owning the real estate asset while supporting the community at the same time.

Interest in impact investing has surged across institutional investors, family offices, and individual investors, spurred by growing recognition that it’s possible and desirable to make a positive difference without sacrificing returns.

Social Impact With a Financial Return

Impact investing often funds scalable solutions with long-term potential. This could be anything from a real estate project as in the above example to a business that provides social or environmental goods in a sustainable manner. Since impact investing may not offer the same immediate financial support as charitable giving, many philanthropists combine both approaches to maximize their impact.

Impact investments span a wide range of asset classes, from private equity and venture capital to fixed income and more, allowing investors to diversify their portfolios and align their values with their financial objectives. Many impact investments target a rate of return similar to the market, although some are structured to accept lower returns if it leads to a high level of positive impact.

Impact Investing Frameworks

The UN Sustainable Development Goals have provided a global framework for impact investing by outlining specific goals related to issues such as poverty, hunger, clean water, education, gender equality, and climate action. Many impact investors reference these goals as a way to shape their strategies and share a common language with other impact investors.

There are also frameworks for measuring outcomes, including the Global Impact Investing Network standards and the Impact Reporting and Investment Standards. These standards help investors avoid “greenwashing,” where companies may falsely claim sustainability efforts without substantiating them.

Join Us to Learn More

Cumberland Foundations Circle was created to help families, foundations, professionals, and experts come together in a dynamic set of discussions to share their knowledge and experiences across an array of philanthropic topics, including impact investing.

Our next event takes place in Toronto on Tuesday, November 12th and will feature a panel of experts on impact investing who will share their insights and discuss the issues of the day. Please contact us if you and/ or your foundation are interested in attending the event, or accessing a replay after the event.

Is artificial intelligence (AI) the disruptor we thought it would be? Last year, we hosted a discussion with AI specialist Barbara Gray, CFA of Brady Capital Research on its potential impact. Since then, AI-driven tools, public experimentation and investment have continued to grow rapidly. On September 20, 2024, Barbara rejoined our team and our invited guests to share her latest outlook on this evolving space.

Following an introduction by Alex von Schroeter, partner on the Cumberland leadership team, our Chief Investment Officer, Peter Jackson, took the podium to lead the conversation with Barbara, who was joined on stage by two members of the Cumberland investment team, Levon Barker, Portfolio Manager, US Equities, and Phil D’Iorio, Portfolio Manager, Global Equities.

Barbara fielded the first question by walking the audience through some of the main points from her eleventh book, Secrets of AI, published last year.

The Eight secrets of AI

Barbara laid out a convincing case for the disruption already underway and yet to come as a result of AI technology. She shared the following eight “secrets” of this disruption:

1. The Magic Beans. AI is growing faster than any technology in history. ChatGPT gained 100 million monthly users within two months of launching in 2022.
2. The Serpent. AI is super-powering long-tail search. Imagine being able to ask Spotify to curate a playlist that you will love, or AirBNB to find the perfect place to stay.
3. The Vinyl Record. AI is creating a second Napster moment. It can fake or replicate virtually any content. It can translate a movie or podcast into a dozen languages.
4. The Ancient Scroll. AI will replace much of the world’s intellectual and creative labour, just as machines replaced much of the world’s physical labour.
5. The Crucible. AI will unlock the value of long-tail proprietary data. Think of a social media platform with billions of samples of text and images with which to train AI.
6. The Eye. AI increasingly has “senses,” able to not only listen to users via voice prompts and respond with audible language, but also see and create images.
7. The Robot Factory. AI will enable robots to manufacture more robots. It is already being used to train existing robots on new skills.
8. 007. AI agents are the next emerging tool. Imagine having an AI assistant that knows your tastes and preferences and can handle tasks and communications for you.

Next up, Levon and Phil answered a series of questions about how to approach AI from an investment perspective. Here are a few highlights from their comments:

• Value will emerge over decades. The winners of today may not be the winners of tomorrow, and there will be secondary and tertiary beneficiaries over time. Levon shared the examples of Microsoft and IBM. At the dawn of personal computing in 1990, IBM was worth roughly 8x more than Microsoft, and seemed poised to dominate. By 2023, it had become apparent that software created more value than hardware, and Microsoft was worth almost 19x more than IBM.
• Tech stock valuations are relatively reasonable. Based on their price/earnings ratios, the Magnificent Seven tech stocks of today are in line with long-term norms and considerably less expensive than the tech bubble leaders of 2000, the Japan financial bubble stocks of 1989, and the Nifty 50 stocks of 1973. In addition, today’s top tech stocks are growing their earnings roughly 60% faster than the broader market.
• There will be direct and indirect beneficiaries. Phil shared his perspective that AI hardware makers such as Nvidia, Applied Materials and Broadcom, as well as chip-making software providers like Cadence, are obvious direct beneficiaries, as are companies with massive pools of AI training data, like Microsoft, Google and Meta Platforms. However, there are also opportunities among indirect beneficiaries, such as S&P Global, which has a vast cache of financial data, Thomson Reuters and RELX, which are using AI to enhance information services provided to legal, tax, accounting and compliance customers, and ThermoFisher, which is a health sciences provider with the potential to leverage AI to help develop drugs more quickly.

Questions and answers

The panel fielded a variety of questions from the moderator and the audience, addressing the accelerating rate of change in the space, the need for regulators to try to keep pace, the industries that may be most vulnerable to disruption, the potential trajectory of earnings growth among today’s leading technology stocks, and Cumberland’s approach to making investment decisions in such an environment.

All three panelists expressed optimism about the economic prospects for AI, while Barbara shared some concerns about the level of uncertainty that can accompany such a profound technological innovation, particularly as a parent to two young boys. One theme that emerged was the potential for AI-driven productivity gains to spur economic prosperity across companies and sectors well beyond the tech industry itself.

A lively conversation followed as guests and panelists mixed and mingled on our patio overlooking Yorkville on a mild September evening. If you have any questions about our approach to investing in the age of AI or would like access to a video replay of the event, please contact your Cumberland Portfolio Manager or Alexandra von Schroeter at [email protected].

On June 6, 2024, Cumberland hosted a webinar on a proposal in the last Federal Budget that would see the capital gains tax inclusion rate rise from 50% to 66.67%. A few days later, the government tabled legislation in Parliament to be voted into law. Here are some of the highlights.

Following an introduction by Cumberland partner and CEO, Charlie Sims, the discussion was kicked off by Peter Routly, CPA, CA; TEP, a Partner in the Canadian Tax practice at BDO who was in Ottawa for the unveiling of the budget.

He started by illustrating the impact of the higher inclusion rate using the example of someone who sold a stock for $100 that had originally been purchased for $10, thus realizing a capital gain of $90. Under the current rules, they would only add half of the gain, or $45, to their personal taxable income. Under the new rules, they would owe tax on two-thirds of the gain, or $60. For investors in Ontario’s top tax bracket, this equates to an 8.92% tax increase on capital gains.

He also outlined an important distinction: for individual tax filers, the higher capital gains tax inclusion rate is only applied to capital gains in excess of $250,000 in a given year, but for corporations and trusts, the higher rate is applied from the first dollar of capital gains.

Mitigating the financial impact

Mr. Routly provided an overview of some of the main considerations for those seeking to mitigate the financial impact of the higher tax, including:

• • Considering the sale of capital assets before the law comes into effect after June 24, 2024
  • The deemed disposition of capital assets that occurs upon death or emigration from Canada
  • Planning to crystallize accrued gains, and some of the complexities that can be involved, including Alternative Minimum Tax (AMT) rules
  • Intentionally triggering a gain inside a professional corporation, and the associated risks, such as the potential to lose the small business deduction
  • Expected changes to the Capital Dividend Account that would end the ability to withdraw 50% of a capital gain tax-free from a corporation, and reduce it to one-third

For many Canadians, selling capital assets before the deadline to take advantage of the 50% capital gains inclusion rate before it’s gone may have been the most straightforward tax mitigation strategy, and Mr. Routly outlined some key questions to help assess the potential appropriateness of this strategy:

• • How long were you originally planning to hold the asset?
  • Were it not for an imminent tax increase, would you even be considering a sale?
  • What will it cost you to sell it now?
  • What return would you have expected over your original time frame?
  • What is the total value of the asset versus its accrued gain?

It was suggested that, for many investors with significant private business interests and other valuable assets, the cost of selling before the rule change was not justified by the expected tax savings.

With so many issues to consider and the complexity of each individual situation, Mr. Routly said that it’s difficult to make blanket recommendations, and that each tax payer must conduct their own analysis along with their tax, legal and wealth advisors.

Questions and answers

Following Mr. Routly’s overview of the proposed tax, he was joined by Jeff Noble, CMC; FEW Director of Business & Wealth Transition Private Wealth at BDO for an in-depth Q&A session with Charlie and the webinar participants.

Some of the many topics covered included:

• • Comparing and contrasting the current legislation with the many changes that have been made to the capital gains tax rules dating back to the 1970s
  • The applicability of General Anti-Avoidance Rules (GAAR) to those who seek to sell and then immediately repurchase assets with the intent of avoiding the higher tax rate
  • Estate planning for families who will have significant capital gains from real estate and other assets upon death
  • Charitable giving strategies in the context of the higher capital gains tax inclusion rate and AMT
  • A deeper dive on tax planning considerations for those with capital gains inside a corporation, including the Capital Dividend Account
  • Insights into behind-the-scenes lobbying efforts that could have resulted in changes to the substance or timing of the new rule
  • Coping with the uncertainty of tax planning in a shifting legislative environment

If you have any questions about your personal tax planning situation or would like access to a video replay of the webinar, please contact your Cumberland Portfolio Manager or Financial Advisor.

The Canada Revenue Agency (CRA) will no longer require bare trusts to file a T3 Income Tax and Information Return (T3 return), including Schedule 15 (Beneficial Ownership Information of a Trust), unless they directly request these filings from an individual taxpayer.

This policy change was made to recognize that the new Bare Trust tax reporting requirements, which were only recently introduced for the 2023 tax year, would have had an onerous and unintended impact on many Canadians.

Over the coming months, the CRA will work with the Department of Finance to further clarify its guidance on this filing requirement. The CRA will communicate with Canadians as further information becomes available.

What is a Bare Trust?

A Bare Trustee corporation acts as the title holder to an asset for the benefit of someone else, such as holding the title to investments in a nominee corporation. This arrangement is often used in real estate development and oil and gas and resource exploration, but it is also used by many Canadian families for general estate and probate planning purposes.

Here are some examples of Bare Trusts that, until the recent policy reversal, would have required taxpayers to submit additional annual filings:

• • An individual holds an “in trust” bank or investment account for a child or a parent.
  • A parent corporation holds cash in trust for underlying subsidiaries, such as certain corporate “cash sweep” arrangements.
  • A general partner in a limited partnership arrangement is the title holder to the underlying assets of the partnership. This arrangement is typically used in real estate investments but may also include business operating partnerships.
  • An individual has purchased a property “in trust,” but the actual owner is not clearly identified. This arrangement is commonly used with real estate purchases or certain pooling of private investments where the title holder or purchaser is not the true underlying economic or beneficial owner of the property.
  • An individual is registered on the title of real estate they do not beneficially own, such as having a named interest on a child’s or parent’s home for estate planning purposes.

The above is not an exhaustive list, and legal counsel should be consulted to identify all informal trust arrangements and instances of a Bare Trust that may be subject to new tax reporting policies in the future.

Contact your Portfolio Manager

For now, the Bare Trust annual tax filing requirement is lifted for the 2023 tax year, and we will continue to monitor the situation for our clients. If you have any questions about Bare Trusts and how they might affect your tax, financial, and estate planning, please contact your Cumberland Portfolio Manager.

Many of us avoid discussing financial or health matters with our parents because these conversations can be uncomfortable. However, we believe they are often necessary to protect our parents’ personal and financial well-being.

Here are four specific topics that we recommend discussing with aging parents sooner rather than later, while they still have the physical and mental capacity to put the appropriate protective measures in place:

Name a Power of Attorney. Ensure that each of your parents has a financial Power of Attorney (“POA”) drawn up by a lawyer. This can usually be completed alongside their Will. The POA lets them appoint someone to have either limited or general authority to act on their behalf in financial matters if they are unable to effectively act on their own. The exact method of invoking the POA is specified in the document itself, but it usually involves a letter of opinion from a healthcare professional such as a family doctor or geriatric psychiatrist. The POA must be signed while your parent still has full cognitive capacity, so don’t delay or you may risk facing legal costs and delays.

Name an Attorney for Personal Care. Your parents should name an Attorney for Personal Care who is authorized to make decisions about their personal care in case they become incapable due to illness or injury. Your parents can spell out their specific wishes, such as whether they wish to be resuscitated in the event of a serious medical event, and if a situation arises that is not spelled out in their wishes, then the Attorney for Personal Care has a duty to act in their best interest.

Keep a “Green Sleeve” somewhere accessible. In Alberta, there is a campaign asking elder citizens to place their medical directives and other important information in a green folder on top of their refrigerator so that first responders will know where to find it in an emergency. Although there is no equivalent program in Ontario, you can still follow the spirit of this program by having your parents store copies of their Wills, Powers of Attorneys, medical contacts, and other critical information in a safe place that you can access if needed.

Appoint a Trusted Contact Person on their financial accounts. A Trusted Contact Person (TCP) is a simple safeguard to protect your parents from potential financial exploitation. A TCP does not have the authority to make any investment decisions or financial transactions, but rather is someone that their bank or financial advisor can contact if they detect any unusual behavior that could suggest impaired decision making or fraud, or if they are unable to get in touch with your parents for any reason. It is often suggested that the TCP be a different person than the one named as their POA.

At Cumberland, we believe in holistic wealth management that addresses health, wealth and also family dynamics. Having these recommended elements in place ahead of time will help your parents feel more prepared and in control and can provide clarity for you when it is needed most. If you have any questions or would like professional assistance with these four conversations, please get in touch with us.

With billions of dollars set to transition from Baby Boomers to their children and grandchildren in the coming years, many younger Canadians will grapple with the impact of an inheritance. While the impact will be mostly positive – more money that they can put towards goals such as home ownership and retirement – there is also a degree of pressure to avoid costly mistakes.

Here’s a look at some of the key changes that come with inheriting money, and how they can help you realize, protect and enhance your best life.

Realize your goals

The first fundamental wealth management step is realizing your goals. This requires you to define what you want out of life and set out intentionally to achieve it. When you inherit money, here are some of the areas of your wealth management plan that may need to be adjusted:

Revisit your goals. An inheritance can alter your goals for a number of reasons, including how it changes your personal perspective and how it changes your financial means. Before making any drastic changes to your investments, spend some time thinking about what you are truly aiming for.

Diversify your investments. An inheritance could allow you to consider new diversification strategies. For example, you might want to shift the proportion of your portfolio that it is geared towards ​creating regular income versus generating long-term growth. You might also wish to add alternative investment strategies or a new investment manager to the mix.

Update your risk profile. Your inheritance may have a material impact on the amount of risk that you need or are willing to take. For example, y​ou may be in a position to reduce risk if you no longer require as much growth to reach your goals. Alternatively, you may have new goals that push your time horizon out to future generations, and you may be willing to increase risk in service of achieving greater long-term returns.​

​Review your investment taxation. A final consideration is reviewing if your inheritance changes the taxation of your investments. Most of your current investment assets may be in registered accounts such as RRSPs or TFSAs that avoid annual taxation. Your inheritance may require you to invest outside of these tax-preferred accounts, leading to new forms of taxable income to manage.

Protect your assets

The second fundamental step of wealth management is protecting what you have built. This requires you to put guardrails in place to manage the risks that can impact your financial assets. Here are some key considerations:

Review your will and estate plan. If you have not created or updated your estate plan, make this a priority. Without one, the administration of your estate will be in the hands of the government, causing delays, costs, possible challenges, and the potential to sow the seeds of family dysfunction.​ Make sure your will, powers of attorney, account beneficiaries, and choice of executor are accurate, up-to-date, and consistent with your wishes.

Assess your tax situation. Your inheritance will no doubt be a positive for your financial position, but it will very likely increase the amount you send to the tax man each year. Potential tax implications to consider are​ being pushed into a higher tax bracket, possibly impacting your ability to collect Old Age Security. Potential workarounds include sheltering some of your inheritance via RRSP or TFSA contributions, considering charitable giving opportunities, and exploring legal structures such as family trusts.

Update your insurance coverage. Insurance allows you to transfer the financial risk of dying early, being diagnosed with a serious illness, or becoming disabled and losing the ability to earn an income. An inheritance can increase your financial resources and make you less vulnerable to these risks. When that happens, you may want to reassess the suitability of your current coverage or consider new insurance strategies.

Enhance your life

Once you have checked all the critical boxes like paying down debt, investing wisely, and protecting what you have built, it’s time to think about strategies that can create a richer life for you, your loved ones and your community. ​Here are some ideas:

Update your spending. A rather fun way an inheritance can enhance your life is by allowing you to spend more! This could mean more dinners out and more travel. It could mean achieving your bucket list, taking up a new hobby or educational pursuit, or spending more on your interests and passions. A word of caution though: make sure to stress test any new spending to make sure your primary objectives are not being sacrificed. ​

Define your philanthropic approach. You may wish to use your inheritance to support causes that are important to you or the individual from whom you received the inheritance. Philanthropic initiatives can take the form of individual or annual donations, and can be structured through the creation of a Donor Advised Fund or a foundation to create a lasting legacy of giving. ​

Support younger generations. You may wish to use your inheritance to help your children or other younger family members. There are lots of options to consider, including tax-advantaged investment strategies to fund a first home or post-secondary education, strategically supporting business ventures, and even insurance strategies that can be started when children are young.

Inheriting money can transform how you realize, protect, and enhance your financial life.​ It could wipe out debts​, transform how you invest​, reduce or eliminate your need for insurance​, expose you to more tax​, open up opportunities for your kids or grandkids​, and give you new choices around things like spending, charity, and how you live your life​.

At Cumberland Private Wealth, we help families navigate these changes and come out further ahead. Every situation is unique, so a good first step would be to sit down with one of our Portfolio Managers to discuss where you are in the process and where you want to be. We look forward to meeting you.

A Registered Retirement Savings Plan (RRSP) is a great way to accumulate tax-deferred investments. When you turn 71 years of age, it’s time to convert those investments into a source of retirement income. Here’s what you need to know.

Over your working life, an RRSP offers you a tremendous tax advantage: every dollar you contribute is tax-deductible, and every dollar you earn is tax-free until you eventually withdraw the money.

During the year in which you turn 71, you are required to convert your RRSP into a Registered Retirement Income Fund (RRIF), which effectively reverses its function. While the assets inside your RRIF are still allowed to grow on a tax-deferred basis, no more tax-deductible contributions can be made, and fully-taxable withdrawals must begin.

How much do I have to withdraw and when?

Your first RRIF withdrawal is required in the year after you turn 71, and is equal to 5.28% of the fair market value of your account at the start of the year. This percentage is set by the federal government and gradually increases as you age, surpassing 10% by age 88 and peaking at 20% for age 95 and beyond.

For example, if you turn 71 in 2024, you’d use the value of your RRIF on December 31, 2024 to calculate your minimum withdrawal for 2025. If your account was worth $1 million on that date, you’d be required to withdraw $52,800 ($1 million x 5.28%) in 2025.

Here are a few things to keep in mind:

• Convert before the end of the year. The process is not complicated, but it is crucial. If your RRIF is not established by the end of the year in which you turn 71, all the funds in your RRSP will become taxable income to you in that year.
• Set a withdrawal schedule. You can choose to make withdrawals monthly, quarterly, or annually. The timing you choose might depend on how you intend to use the income. Will it be needed monthly to offset expenses, or is it better to keep the money invested and growing as long as possible, then make one big withdrawal at the end of the year?
• Consider using your spouse’s age. If your spouse is not yet 71, you can use their age to calculate your minimum RRIF withdrawal, which might allow you to keep the funds in the account longer where they can remain tax-deferred.
• Be aware of income tax and withholding tax. All RRIF withdrawals are considered taxable income in the year they are received. If you decide to withdraw more than the minimum in a given year, withholding tax will be deducted from those withdrawals.
• Review your beneficiaries. If you pass away with a spouse or qualified dependent named as your beneficiary, they are eligible to receive the proceeds of your RRIF tax-free. Other beneficiaries will be taxed on any amount they receive.

If you are turning 71 this year, it’s a good time to sit down with your Cumberland Private Wealth advisor. We can help you convert your RRSP to a RRIF before the end of the year. We can also look at whether it makes sense to adjust your portfolio as you shift from accumulating savings to drawing income, and how best to use that income from a tax and cash flow perspective.

Your RRIF conversion year is also the perfect time for us to review your overall financial plan and estate plan, update your goals, and make sure that you are still on track for the financial future that you envision.

When life moves, your money moves. When you have a child, life starts moving. This article provides an overview of the Registered Education Savings Plan (RESP), an excellent tool to save for a child’s education. It explains the three phases of RESP planning and shares a novel approach to funding your RESP that could potentially accelerate its benefits.

The strategies discussed here may or may not be directly applicable to your wealth plan. But if saving for a child’s post-secondary education is in your plan, there’s no denying that an RESP can play a vital role.

A review of RESP basics

RESPs are designed to help parents save for their children’s post-secondary education at a university, college, trade school, or technical school in Canada or abroad. Contributions to the account grow on a tax-sheltered basis until withdrawals are made to support post-secondary education expenses. A unique feature of RESPs is that our federal government matches a portion of the funds contributed.

RESP Account Types

There are Family Plans and Individual Plans. A Family Plan consists of multiple qualified beneficiaries, who are children related by blood or adoption. An Individual Plan is for a single beneficiary. Family Plans offer more flexibility since the contributions, government grants, and growth of the investments can be shared between beneficiaries.

Who can open a RESP?

Anyone can open an RESP, including parents, grandparents, relatives, friends, or guardians. These are known as “subscribers.” It is generally best to open RESPs in the joint names of the beneficiaries’ parents and have others contribute to those RESPs. This can help avoid accidental over-contributions and also provide the most flexibility if a child does not pursue post-secondary education.

Contributions and grants

There is no annual RESP contribution limit, but there is a lifetime maximum contribution limit of $50,000 per beneficiary. RESP contributions are not tax deductible, but they attract a government grant known as the Canadian Education Savings Grant (CESG) equal to 20% of annual contributions, up to $2,500 per year and $7,200 per beneficiary over their lifetime.

The CESG is a federal program. British Columbia and Quebec also offer provincial programs that could be worth up to $1,200 and $3,600 respectively.

Phase one: Accumulation

The first phase of an RESP is all about making contributions, earning grants, and accumulating money. Due to the long-time horizon associated with RESPs, investment strategies focused on growth are generally the most suitable. But as in all investing, it is important to remain within your comfort level and risk tolerance.

The power of tax-sheltered compound growth

A key advantage of RESPs is being able to compound your investment and earn returns within a tax-sheltered environment. And, like all compounding, the sooner you start the better. The graph below compares what would happen if you started investing in 2024, 2026 or 2028 based on annual contributions of $2,500, an annual CESG of $500, and annualized investment growth of 5%.

If you start in 2024, the account will be worth just over $66,000 when the beneficiary turns 15 in 2038. This is $10,000 more than if you delayed two years and $20,000 more than delaying contributions for four years.

A novel approach: pre-funding your RESP

Since there is no annual contribution limit for RESPs, you can pre-fund your account and have more tax-sheltered money growing for longer. The extreme case would be contributing the full $ 50,000-lifetime limit all at once. In this scenario, you would maximize the amount of money that is able to grow in the plan and receive one $500 CESG payment for the initial contribution but sacrifice the remaining $6,700 in grants.

However, if you wanted to boost your tax-sheltered growth and also receive the maximum CESG, you could contribute $16,500 in year one and then contribute $2,500 annually until the $ 50,000-lifetime limit is reached. This mix of contributions will allow you to claim the maximum CESG of $7,200.

The graph below illustrates three scenarios: $50,000 all at once versus $16,500 in year one followed by $2,500 annually versus $2,500 annually and a final top-up in year 15. All three scenarios assume 5% annualized investment growth.

In this illustration, the $50,000 upfront contribution results in the highest end value. More money compounding for a longer period more than compensates for the government grants that were sacrificed. However, there is a caveat: this illustration assumes a level 5% annualized rate of return, and returns are more variable in the real world. This strategy could underperform if there is a period of lower investment performance, or outperform by an even greater margin if returns are higher.

Pre-funding strategies should be assessed in terms of your overall financial priorities, wealth, and life objectives. While post-secondary education is important, other financial commitments or strategies may need to be prioritized if excess funds or cash flow are available.

For the more risk-tolerant, making larger initial deposits may be appropriate. For the more risk-averse, making an initial $16,500 contribution followed by regular contributions to maximize the government grant may be more suitable.

Phase two: Transition

The transition phase is the 3 years leading up to the start of post-secondary education. During this period, you will want to assess the likelihood of your child attending a post-secondary education program, identify other sources of funding if your RESP alone is insufficient, and de-risk your investments as the withdrawal date gets closer

What if you child is not pursuing post-secondary education?

If you have a Family Plan with more than one child named as a beneficiary, you can use the RESP to support your other children’s post-secondary education plans. In a Family Plan CESG, contributions and growth can be shared between family members within certain limits.

If none of your children attend post-secondary education, you can withdraw your contributions and return the grants to the government, however, the growth of the RESP could be taxed at your marginal rate plus a 20% penalty. The way to avoid this tax is to transfer the RESP growth to your RRSP, provided that you have enough RRSP contribution room.

This scenario highlights the importance of naming both parents as joint subscribers to the RESP. If correctly timed, a couple can greatly reduce the amount of RESP growth that could be taxed and penalized. And, if some RESP growth needs to be included as income for tax purposes, you have two incomes to spread the tax over.

When the RESP isn’t enough: Other income sources

RESPs are rarely enough to cover all of a child’s post-secondary education expenses. When the start of the program nears, it is important to evaluate the potential expenses in comparison to your RESP value. If extra funds are required, you can start to plan their potential sources. This could be from your cash flow or savings (TFSAs or non-registered accounts are best).

De-risking your investment strategy

A sharp drop in your RESP’s value just when you need to start making withdrawals is a risk you want to minimize. Options to consider are shifting a year or two worth of expected expenses to cash, or changing your investment strategy to be more conservative overall. With a Family Plan, it’s wise not to get too conservative too quickly, as there are multiple beneficiaries to consider and a need to balance current and future needs.

Phase three: Withdrawal

The withdrawal phase is when you actively withdraw funds from the RESP to support post-secondary education expenses. This phase is all about taxation.

There are two types of RESP withdrawals, non-taxable withdrawals consisting of your contributions, and taxable withdrawals consisting of CESG and accumulated growth. The taxable withdrawals can be attributed to the beneficiary or to the subscriber.

To maximize the benefit of the RESP, you want to prioritize having taxable withdrawals attributed to beneficiaries, since these amounts will be included in their income and taxed at much lower marginal rates. This can be seen in the table below showing the combined Federal and Ontario Tax brackets for 2024.

There is also the Basic Personal Amount to consider, which is the amount of income that can be earned before any tax has to be paid. For 2024, this amount is $15,705, which means that if the child has no other income, they can take $15,705 from their RESP tax-free to cover education expenses.

It is also important to prioritize taxable withdrawals early to ensure all the CESG that has been received is paid out. If it has yet to be fully paid out by the time beneficiaries have finished post-secondary education, it will be returned to the government.

Another helpful tax tool is the Tuition Tax Credit. This is a non-refundable tax credit available for post-secondary students. The credit is equal to 15% of “eligible tuition and fees”. These amounts are usually provided by the post-secondary institution. Unused credit can be carried forward to future years or transferred to a parent.

Key RESP points to remember

• When you contribute to an RESP, you receive a 20% grant from the federal government. The more you contribute and the sooner, the greater the benefits of tax-sheltered compound investment growth.

• When post-secondary education nears, plan to de-risk your investment strategy and consider additional ways to pay for education expenses. If your child is unlikely to pursue post-secondary education, it’s time to implement a backup strategy.

• When it’s time to start withdrawing from the RESP, aim to have them taxed in your child’s name while he or she has little or no other income to maximize the after-tax benefits of the RESP.

If you have questions about the best RESP strategies and approach for your specific situation, a Cumberland Portfolio Manager is available to assist you. We seek ways to optimally integrate education savings goals with a family’s overall wealth management plan.