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Dec 15, 2021

Grow Together - December 2021

In this issue of Grow Together, our experts revisit the theme of unknowable futures and share guidance on how to minimize potential risks while maximizing opportunities for positive outcomes.

In this issue: President's message | The problem with going all inThe lowdown on early RRSP/RRIF drawdown | Tax-efficient corporate estate distribution


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President's message

Matt Evans, CFA
President & CEO, CWB Wealth Management

The holiday season is a natural time to reflect on the past and look ahead to the coming new year. Usually, we compartmentalize our reflection in calendar year segments, but it’s an interesting thought experiment to go back a little further, to the end of June 2020.

Eighteen months ago, we were about three months into the COVID-19 pandemic. We were weathering the first wave of the very serious public health crisis, and the pandemic had already resulted in a major disruption to the global economy and global markets. If we had invited you to do so, where would you have placed your bets on the following questions:


  • What would the world look like on the cusp of 2022? Would companies be “back to normal,” or would workforces still largely be working from home to minimize spread of the virus?
  • Where would global stocks have traded compared to the market bottom in March of 2020?
  • What about interest rates?
  • What about commodities like oil and gold?


Would you have bet that we’d still be routinely discovering new COVID-19 variants? And, despite the prevalence of vaccines, many corporate workers would still primarily be working from home? And at the same time, that the US S&P 500 index and the S&P TSX composite index would each be just a few points off all-time highs, up 104% and 84%, respectively, from the March 2020 lows? Would you have bet the 5-year Government of Canada bond would be trading with a yield of 1.395%, even as core inflation rates hit multi-year highs?* Based on the uncertain economic outlook in mid-2020, would you have bet that the price of crude oil would be up almost 100% over the next eighteen months? If you knew those eighteen months would include record monetary stimulus and increasing rates of inflation, would you have bet the price of gold would be relatively unchanged?

Certainly, it would have been difficult to win these bets across the board. Taking gold as one example, conventional wisdom and consensus thinking would have predicted a much higher price in the face of inflationary pressure and aggressive monetary policy from global central banks. These past 18 months have reminded us, yet again, that the world is far from black and white. Most of our decisions are made through uncertainty, and there are no guarantees.

But we proceed as rational optimists. As optimists, we believe in growth, innovation and positive change through time. Sometimes incremental, sometimes sudden. Because we are rational, we understand that bad things happen and even the most positive change can result in unintended consequences. We know we must constantly maintain safeguards against unexpected negative developments.

Every day, our client families trust us to help them plan for an unpredictable future, and this is a recurring theme through the current issue of Grow Together/Strategies. Scott Blair, our Chief Investment Officer, addresses this subject in his piece, The Problem with Going All In. Trevor Fennessy, Senior Planner with T.E. Wealth and CWB McLean & Partners, wrestles with the sometimes uncertain trade-offs required for retirement income planning to optimize for tax, while maximizing government benefits and minimizing potential government clawbacks. Finally, Kim Stevens, Wealth Preservation Advisor, introduces business or holding company owners to the concept of the Corporate Estate Bond, which can reduce uncertainty around the tax efficient disbursement of corporate assets from estates.

In differing ways, each of these thoughtful pieces introduces a value-creating technique to help generate positive, relatively predictable outcomes from an unpredictable world. From our core philosophy for diversified asset allocation within portfolios, to proactive retirement income planning, to specific estate planning tools, this issue signals the breadth of our commitment to provide our client families with peace of mind.

Looking ahead, we’re excited about what’s to come in 2022. We remain fully committed to find creative ways to provide richer, more vibrant experiences for our clients and our people, with continuous positive renewal.

We continue to prioritize continuity and stability as we do so, to ensure that any change our clients experience is positive.

I’ll close with gratitude to our clients for your continuing trust in CWB Wealth Management, CWB McLean & Partners, T.E. Wealth, including Doherty & Bryant and T.E. Wealth Indigenous Services, and Leon Frazer & Associates. Our enduring commitment is to provide you with thoughtful advice, sound planning and professional investment management customized to meet your family’s needs. We appreciate every moment of the time you engage with us, including the time you may spend with this issue. Please enjoy.

*Rates of return and yields as at November 30, 2021.

The problem with going all in

Scott Blair, CFA
Chief Investment Officer, CWB Wealth Management


It’s been over a year since Pfizer announced positive results for its COVID-19 vaccine. The rollout was slow to start in many countries, but there’s no doubt that the global vaccination effort has been a huge logistical success in developed nations. While it was common to expect this would happen eventually, it was less easy to predict the effects on stock markets and inflation. When we look at each of these, a time-tested approach to investing proves its merits once again – diversification.

There have now been around 8 billion shots administered globally and over half the world has now received at least one dose. Canada has been a leader in vaccinations, with 76% of Canadians fully vaccinated. While there’s still much to do (only 11% of people in Africa have received at least one dose), the vaccines have kickstarted the global economy and are leading us on a path to normality.

Since the pandemic started, two groups of stocks have captured the imagination of many investors. One group, known as the “work-from-home” trade, consists of businesses that benefit from our more restricted lifestyles. Home improvement, ecommerce and video conferencing firms would be some examples in this basket. The other group is referred to as the “reopening” trade and includes travel businesses, airlines, hotels, and restaurant chains among others.

When the vaccines became imminent, it was common to think that 2021 would be the year of the reopening trade. After all, the work-from-home group had performed well since the pandemic began as we scrambled to set up our home offices, renovate our houses and generally make our lockdown lives more enjoyable. We were going to move back to normal, so it was logical to assume that it would be a big year for reopening.


It’s risky to put all your eggs in one basket

Let’s look at two stocks as potential proxies for how each of these baskets have performed. From the work-from-home group, we’ve picked Home Depot which grew its sales by 20% in the twelve-month period ended January 2021. It’s an unheard-of growth rate for such a large retailer (the previous year sales had grown by 2%). From the reopening trade group, we’ve picked Delta Air Lines which saw sales plummet 64% in 2020 as travel crawled to a standstill. Figure 1 shows the year-to-date returns up to November 25th, 2021.

Figure 1: Year-to-date-returns (up to November 25, 2021)

Source: FactSet

Home Depot has dramatically outperformed both Delta Air Lines and the market this year. Delta shares are essentially flat, yet many investors would have expected the opposite outcome. There could be several reasons why Delta underperformed Home Depot. Here are a few:


  • Air traffic in the U.S. is up 133% from a year ago as of September, but it’s still down 20% from pre-pandemic levels. Investors in Delta were likely expecting the world to open up at a faster pace
  • Energy prices have risen, and fuel is an important input for airlines, so their costs have risen
  • Rock-bottom interest rates have caused a housing boom. Housing activity is a key driver for Home Depot. First, they had renovations as we stayed home and now they have the spending that comes from moving
  • Home Depot is an outstanding firm and airlines just aren’t of the same quality. In the end, that matters more than anything else


Of course, there are many other companies we could have picked in this analysis that would have given us the opposite result. For instance, energy companies have benefited from the reopening as expected (Suncor is up 60%) while Zoom, which is almost synonymous with the work-from-home environment, is down 40% this year. We picked Delta and Home Depot to make a point that we all know: it’s risky to put all your eggs in one basket.

At the start of the year, the common wisdom was on the reopening trade. In the case of airlines, common wisdom was wrong. A smarter decision would have been to diversify across both companies, or better yet, both baskets.


Inflation duration

We’re closing in on the two-year anniversary of the pandemic and investors are very concerned about inflation. Conventional wisdom states that high inflation is here to stay and many clients are asking, “How do I protect my portfolio against inflation?” It’s a good question, but as investors we believe there’s another equally relevant question: what if conventional wisdom is wrong?

There’s no certainty with regards to inflation. Central banks believe high inflation is not permanent and that it will start to subside as we move through next year. We tend to agree, but also know the situation is rapidly changing and we could be wrong.

Given this, we build our portfolios with multiple outcomes in mind. The best ways to do that is to buy quality companies that have pricing power.

To add proper diversification across asset classes (such as bonds), companies, end drivers and geographies where appropriate, while also owning firms with great cash flow.

Only in hindsight will we know whether today’s high inflation is temporary or a long-term issue. As with most things in investing, the range of outcomes is just too broad to go all in one way or the other.


The lowdown on early RRSP/RRIF drawdown

Trevor Fennessy, BBA, CFP
Senior Planner, T.E. Wealth


In retirement, we’re faced with new strategic choices about how to draw income from our investments while optimizing for tax. While there are many retirement roads to Rome, so to speak, people often choose to convert their RRSP to a RRIF as a key component of their drawdown strategy. In this piece, we’ll look at why it might make sense to do this sooner than later, and some of the points to consider in making this decision.


Understanding the basics

According to Statistics Canada, 5.9 million Canadians contributed $44.3B to their RRSPs in 2019. Current legislation requires that you close your RRSP by the end of the year in which you turn 71. From there, you can choose to withdraw the funds, purchase an annuity, convert to a Registered Retirement Income Fund (RRIF), or a combination thereof.

Once converted to a RRIF, mandatory minimum withdrawals must begin the following year (at age 72). Mandatory withdrawals are determined using a withdrawal factor (based on age) and the account balance on December 31 of the prior year. The withdrawal factor will increase gradually each year as you get older, from 5.28% at age 71 to 20% at age 95. If you have a younger spouse, you have the option to base the withdrawal factor on their age to reduce your minimum withdrawals.

For savers with very large RRSP balances, advance planning is often needed. In some cases, if the registered assets are left to grow tax-deferred until the forced conversion, it can become quite punitive from a tax perspective, forcing income levels into a much higher marginal tax bracket and/or clawing back government benefits and tax credits.

This poses a few questions. Could withdrawals be taken earlier than age 72 to smooth out your income in retirement? What are some of the considerations that would go into deciding when to begin withdrawals? Is there any benefit in converting to a RRIF rather than taking withdrawals from the RRSP?


Reviewing your individual cash flow needs

When entering retirement, it may take a few years before you have a good handle of your spending needs.

It takes time to transition from receiving a pay cheque to designing your pay cheque and understanding the tax implications of your various income sources.

It is common practice to begin drawing from non-registered accounts first, then turning to the registered accounts, and lastly to the TFSA accounts.

This withdrawal order is an oversimplification and may not reflect your individual tax situation. For some, early registered withdrawals are a powerful tool to effectively meet their income needs, while also optimizing for tax.


Pay now vs. pay later

As your registered account has been funded with pre-tax dollars, we can’t avoid the inevitable. You will need to settle with CRA today or in the future.

Ideally, an optimal drawdown will result in the lowest taxes payable over your lifetime and for your estate. Some strategies might include using your registered withdrawals to bring your income up to the basic personal exemption, a given marginal tax bracket, or benefit threshold.

If your future marginal tax rate will be higher than it is today, an early registered withdrawal might be something to consider. However, the choice to make an early registered withdrawal is a trade-off between the lower taxes paid today and the benefit of future tax-deferred growth if the funds are left in the account.

In many cases, the tax-deferred growth can outweigh the increase in your marginal tax bracket, so the account should be left to grow for as long as possible.

While reviewing your tax situation, retirees must focus on more than just their federal and provincial tax brackets. They should also review the impact of the following breakpoints:


Source: Government of Canada

Note: These amounts are for the 2021 tax year and are updated each year by the Government of Canada. Retirees should also review the impact of their eligibility for various provincial tax credits.

These decisions should be reviewed at a household level, as each spouse’s income can have an impact on eligibility for certain benefits and credits. Additional mechanisms such as CPP sharing and pension income splitting should also be taken into consideration as they can greatly reduce a couple’s overall tax burden in retirement.


Why should you convert to a RRIF before beginning your withdrawals?

After the age of 65, RRIF withdrawals are considered eligible pension income, providing some additional benefits. This allows the individual to claim the pension income amount (potential tax savings of $351 - $449 in 2021 depending on your province) and split up to 50% of the income with their spouse.

If you are between the age of 65 and 71 with no pension income, a partial conversion of your RRSP to a RRIF could be beneficial to gain access to this credit, or the ability to split withdrawals with your spouse.


Defining your path forward

The timing of your registered withdrawals is just one of many levers at your disposal as you progress through retirement, and will be entirely unique to your financial circumstances. As your tax situation is managed on an annual basis, adjustments can be made along the way to best suit your needs.

Along with your accountant, a comprehensive financial plan prepared by one of our Financial Planning experts can be used to understand your long-term path. Please reach out to your Portfolio Manager or Consultant today if you are curious about whether early RRSP/RRIF withdrawals are appropriate for you.


Tax-efficient corporate estate distribution

Kim Stevens, CFP®, CLU®, CHS
Wealth Preservation Advisor, CWB Insurance Solutions


In more than 25 years of providing financial advice to business owners, the most frequent question I’ve been asked is, “What can I do to get money out of my corporation in a tax-efficient or tax-free manner?” One of the most efficient mechanisms is something called the Corporate Estate Bond strategy.

This strategy uses corporately-owned, cash-value life insurance to transform taxable assets into a tax-exempt asset class that earns an attractive internal rate of return which isn’t subject to the potential for loss. If you’re an owner of a mature Canadian Controlled Private Corporation (CCPC) holding estate-bound assets or with surplus cash flow, this concept may be of interest.


Three key features make the Corporate Estate Bond strategy an attractive one:

1. Passive assets are turned into tax-exempt ones

Income from passive corporate assets is taxed at a high rate. Most provinces have corporate tax rates of 50% - 54% (in Alberta, it’s 46.67%). The Corporate Estate Bond strategy turns passive assets, which generate taxable income within the corporation, into tax-exempt corporate assets.

2. It can help you retain the small business deduction

Passive corporate investment income exceeding $50,000/year causes a grind on the small business deduction. The small business deduction reduces corporate tax rates for CCPCs and is applicable to active business income up to the corporation’s annual business limit. The federal business limit is $500,000.

The small business deduction is lost at the rate of $5 for every $1 of passive investment income earned in excess of $50,000 during the previous fiscal year. At $150,000 of passive investment income, the small business deduction is completely lost. If the small business deduction is lost, active business income is taxed at a higher rate, for instance, it would be 23% instead of 11% in Alberta.

The Corporate Estate Bond strategy can reduce or eliminate the loss of the small business deduction because it effectively results in passive assets producing tax-exempt income, where the growth is not subject to the $50,000 passive income test.

3. Heirs can receive a tax-free capital dividend

Typically, heirs don’t receive cash even after the estate has paid the capital gains tax on the deemed disposition of shares. They get cash by paying themselves a taxable dividend. By comparison, the Corporate Estate Bond strategy creates a mechanism whereby heirs can receive a tax-free capital dividend on the death of the insured shareholder.

If set up properly, the owner and beneficiary of the policy will be the corporation. On the death of the insured owner, the death benefit proceeds will pay into the Holdco. The Capital Dividend Account (CDA) will be credited with the death benefit proceeds less the adjusted cost basis (ACB) of the policy. The estate or the heirs of the shares can then declare a tax-free capital dividend out of the CDA. Thus, the heirs receive tax-free money. The portion of the death benefit represented by the ACB may be paid out, but as a taxable dividend. Fortunately, the ACB is only a small fraction of the death benefit.

How does the Corporate Estate Bond strategy work?

This strategy involves using surplus corporate assets/cash flow to fund a permanent life insurance policy that has cash value. Premiums are paid into the policy from the corporate asset base or from corporate cash flow. Cash value growth in the policy is tax-exempt. By paying the premiums, passive assets generating taxable income are transformed into a tax-exempt asset class.

Participating Whole Life insurance is often the policy type of choice for this strategy. It has guaranteed cash value growth and attracts policy dividends which may be used in a variety of ways. The most common way is to purchase additional permanent insurance, called paid-up additions. Once posted to the policy, this dividend-dependent non-guaranteed cash value growth vests immediately. Policy values for both cash value and death benefit can only go up, never down – unless the policy owner elects to remove some of the cash themselves.

In the early years, the Equivalent Internal Rate of Return (IRR) required in a traditional investment vehicle to net the same cash value result as is provided by the whole life policy is very low. In fact, it’s hugely negative. Conversely, the equivalent IRR on the death benefit is incredibly high. In the long run, the equivalent IRR for both cash value and death benefit settles at about 7%. Keep in mind that this is in a tax-exempt vehicle that cannot go down in value. As shown above, this means the policy value growth is not slowed by high corporate passive income tax rates, nor is the growth counted toward the $50,000 passive corporate income limit allowed before the small business deduction begins to grind away.

This strategy offers many benefits to shareholders and their heirs, which makes it an attractive option for business owners seeking greater tax efficiency in their estate plan. To demonstrate, here’s an example:

Matthew (a 52-year-old male non-smoker) and Courtney (a 50-year-old female non-smoker) have $3.4 million of surplus estate-bound conservative investments in their Holding Company. They also have considerable personal wealth. They know they’ll never need to use all of this money and want to pass it onto their adult children in a tax-efficient way.

Their Wealth Preservation Advisor at CWB Wealth Management proposes they consider reallocating $100,000 per year for 20 years from their passive corporate assets toward funding a whole life insurance contract. This represents a draw rate of less than 3% and will allow them to purchase a policy with an original face amount of $3.66 million.

The policy has guaranteed annual cash value growth and non-guaranteed policy dividend growth that vests immediately, so it cannot go down in value – only up! The policy dividends provide a growing death benefit and cash value.

Using Courtney’s age, let’s compare 20 annual deposits of $100,000 into a life insurance contract with 20 annual deposits of the same amount into a traditional balanced investment portfolio. In the chart below, values for the Corporate Estate Bond strategy are based on the current performance bonus rate of 5.5%, so we’ll use this rate for the traditional investment alternative as well to make a clean comparison. The column labelled “Corp Estate Bond Net Estate” represents the Death Benefit less the ACB paid out as a tax-free capital dividend via the CDA, plus the after-tax value of the ACB paid out as a taxable dividend.

As you can see, at each age the net estate value created by the Corporate Estate Bond insurance strategy significantly surpasses the net estate value created by traditional investments.

So, this is clearly the winner for Matthew and Courtney, should they qualify to implement it with their good health.

To see if a Corporate Estate Bond or other planning strategies could help move you closer to your business and estate planning goals, please reach out to one of our CWB Senior Planners or a CWB Wealth Preservation Advisor for a conversation about your particular needs.

Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of CWB Wealth Management (CWB WM) or its affiliates. CWB WM does not assume any duty to update any of the information. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk. Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer, accountant or other advisor before making any financial decision. Quoted yields should not be construed as an amount an investor would receive from the Fund and are subject to change. Investors should consult their financial advisor before making a decision as to whether mutual funds are a suitable investment for them. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus, which contains detailed investment information, before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. CWB WM uses third parties to provide certain data used to produce this report. We believe the data to be accurate, however, cannot guarantee its accuracy. Visit cwbwealth.com/disclosures for our full disclaimer.