Grow Together - September 2024

In this issue: Message from the CEO | Gems hidden in plain sight | Unlocking the power of Registered Education Savings Plans | The best kept secret in charitable giving

Message from the CEO

Matt Evans, CFA
Sr VP, Strategy & Integration, CWB Financial Group
(Former CEO, CWB Wealth & SVP Enterprise Strategy, CWB Financial Group)

As the vibrant colours of autumn begin to paint the Canadian landscape, this season of change reminds us of the transformations underway at our firm. We are entering a new and exciting chapter with our integration into National Bank.

With the resounding support of CWB’s shareholders—99.78% voting in favour of the acquisition—we are confident that this strategic alignment will strengthen our collective capabilities. National Bank has been a long-standing partner in providing back-office services to our wealth management operations, and now, by combining our expertise, we’re poised to elevate the client experience and build on the success we've achieved together.

To ensure a seamless integration, we’ve established a dedicated governance model that will guide us through the process. I’m honored to take on a new full-time role as the lead Integration Executive for CWB, drawing on my experience overseeing the successful acquisitions and integrations of T.E. Wealth, Doherty & Bryant Financial Strategists, and Leon Frazer & Associates. This is work I am deeply passionate about, and I look forward to the opportunities ahead.

As I transition to this new role in September, I will fully wind down my duties with CWB Wealth at the end of the month. This decision comes with mixed emotions. It’s been an incredible journey, and I’m pleased to announce that Jim Andrews, currently President of CWB Wealth, has stepped into the role of President and CEO. Jim has been instrumental in shaping our firm over the past four years, drawing on over two decades of experience in financial services to drive growth, transformation, and operational excellence. His leadership, strategic vision, and deep relationships within our teams make him the ideal choice to lead CWB Wealth into this next chapter.

Jim has a profound understanding of our clients' needs, and I am confident that under his stewardship, we will continue to provide the trusted, personalized service that our clients have relied on for generations.

On that note, I’m proud to share that the results of our most recent Voice of Client (VOC) survey were overwhelmingly positive. We’ve widened the margin between us and our competitors since 2022, and it’s clear that our clients appreciate the value we deliver. While we’re encouraged by this feedback, we remain committed to improving in the areas where we can do better.

Though we’re still somewhat of a “best kept secret” in the industry, we are determined to expand our reach, sharing our expertise with more families and business owners across Canada. This notion of “Best Kept Secrets” is our theme for the current issue of Grow Together. Our experts dive into lesser-known financial strategies that could significantly benefit our clients. Lilly Tzvetkova uncovers overlooked investment opportunities, Russ MacKay explores the potential of Donor Advised Funds in legacy planning, and Jojo Mitchell sheds light on surprising ways to maximize RESPs while avoiding overcontributions.

This will be my final message as CEO in Grow Together. I want to express my gratitude for the privilege of leading CWB Wealth and for your engagement with this publication. I leave knowing that our firm is in capable hands and that our clients will continue to be well cared for.

Jim will take the reins in the next issue. I am confident that he will guide the firm with a steady hand. Thank you for your trust and partnership as we embark on this exciting new chapter together.

Gems hidden in plain sight

Liliana Tzvetkova, CFA
Co-Head of U.S. Equities & Senior Portfolio Manager

Movie lovers know that in the world of espionage, the most effective hiding places are often the most obvious. Spies have long known that the best way to conceal something is to place it in plain sight. A note slipped into an ordinary document or a key hidden under a familiar stone—these tricks exploit a basic human tendency: we often overlook what’s right in front of us.

We believe this principle also applies to investing. By focusing on core fundamentals and ignoring the noise of the market, investors can uncover some of the best-kept secrets—those hiding in plain view.

Over the past decade, the most successful stock investments have included the usual suspects: NVIDIA, Amazon, Apple, and Netflix. But could you have guessed that Cintas, Progressive Corp, and Costco also made that list? What could a uniform rental company (Cintas), an auto and home insurance firm (Progressive Corp), and a big-box retailer (Costco) possibly have in common with the world’s top tech companies? As it turns out, some of the best-performing stocks share a few key characteristics that transcend industry boundaries. And if you can avoid the traps of market fads, and follow a good investment process, they’re not hard to spot. 

The power of compounding growth

One of the most powerful drivers of long-term investment returns is compounding growth. Companies that consistently demonstrate strong revenue and earnings growth are often handsomely rewarded over time.

Consider Cintas. Known for its dominance in the U.S. uniform rental and facility services market, Cintas has grown its earnings by double digits, benefiting from market consolidation and a continued shift toward outsourcing. The company’s ability to cross sell a variety of products to its existing customers, combined with management’s relentless focus on operating efficiency has been a key factor in its success. As a result, this seemingly mundane business has produced extraordinary results, with the company’s stock price multiplying tenfold over the last decade. 

It might come as a surprise to some, but Cintas’s stock performance has outpaced even some of the top tech companies, including Microsoft, Apple, and Amazon (see figure 1). While we recently sold Cintas from our internally managed U.S. portfolios due to valuation concerns, we continue to like the company’s business model and would consider re-adding it during a cyclical downturn.

Figure 1: Cintas’s performance outpaces Microsoft, Apple and Amazon

Source: FactSet

The value of a moat: competitive advantages that last

In investing, the term “economic moat” refers to a company’s ability to sustain its competitive advantage over time. This can take many forms: brand loyalty, cost advantages, network effects, or proprietary technology. Companies with wide moats are often able to sustain their profitability over long periods, ultimately producing exceptional long-term returns.

Costco is a prime example of a company with a wide moat. Its unique membership-based model, strong brand loyalty, and cost advantages from bulk purchasing create formidable barriers to entry for competitors. Offering products at prices that are hard to match, it’s no surprise that customers keep coming back. Despite operating in the low-margin retail industry, Costco’s high turnover, consistent profitability and capital smart allocation have resulted in steady profitable growth. 

While Costco’s performance may not be as spectacular as Cintas’s, it’s among the top 15 of the S&P 500 over the last decade, with its stock price increasing sevenfold during that time. A defensive business model coupled with strong earnings growth is a rare find.

Innovation: the engine of future growth

Innovation is often the engine that drives companies to new heights and some of the best-performing companies over the past decade didn’t just adapt to change—they actively drove it.

NVIDIA, for example, has been at the forefront of advancements in graphics processing and Artificial Intelligence, demonstrating how innovation can lead to outsized returns. Amazon, another innovator, essentially created many of the markets it currently dominates, from e-commerce to cloud computing. But innovation is not only for technology companies.

Progressive Corporation, an auto and home insurance company in the U.S. and one of the best-performing companies of the last decade, is known for its innovation-driven culture. The company was an early adopter of online quotes, cloud migration, and most recently, telematics which has helped it outgrow the industry. By collecting data that tracks when and how drivers operate their vehicles, Progressive has been able to better estimate risk levels and price insurance products more accurately. 

The best kept secrets 

Looking back, the common characteristics of the best-performing U.S. stocks over the last decade weren’t difficult to identify. After all, they’re the same ones that drove success in the previous decade—and the ones before that.

Whether it’s the steady growth of Cintas, the competitive advantage of Costco, or the innovation at Progressive Corp, the best investment opportunities are often right in front of us. The key is knowing where to look and having the discipline to focus on what really matters.

Unlocking the power of Registered Education Savings Plans (RESPs)

Jojo Mitchell, PFP®, CFP®, FCSI®, RIS®
Senior Manager and Client Lead, Financial Education and Employer Services

If you were to ask me about the best kept secret in financial planning today, I'd say it's understanding the potential of a Registered Education Savings Plan (RESP). This often overlooked, yet highly beneficial, investment tool is commonly associated with funding a child’s post-secondary education. But it can also be a versatile and powerful way to maximize your wealth’s long-term potential. In this article, we’ll explore three key strategies to optimize RESP benefits: contribution strategies, withdrawal strategies, and the flexibility of RESP use.

Contribution strategies: setting the foundation for growth

With a typical time horizon of over 15 years, an RESP offers ample opportunity for growth. Some strategies to help maximize growth include timing your contributions, front-loading them, and putting a system in place to track and manage them to avoid penalties.

Time your contributions – The timing of your RESP contributions is important to maximize government grants and investment growth. Government grant is cut off the year your child turns 17, meaning you should plan your contributions early to maximize grant eligibility. Even if you fall behind, Canada’s RESP program allows for catch-up contributions, so you can still qualify for missed grants. Note that the “catch up” for RESPs is not like RRSPs or TFSAs. With those, you can catch up as much as you want whenever you want. With an RESP, you can only catch up for a maximum one year of grant money at a time. So, be careful not to wait too long or you may not be able to catch up on total available grants before your child turns 17!

Front-load your contributions – One underutilized strategy is front-loading your RESP contributions. The RESP program would incentivize parents to contribute $2,500 per year for 14 years, with a final top-up of $1,000 in year 15 for $36,000 in contributions total. This is enough to meet the maximum lifetime grant match of $7,200. But, an RESP’s maximum contribution room is actually $50,000 – not $36,000! Not only that, but it can be beneficial to contribute the full maximum lifetime limit ($50,000) in one lump-sum up front, to take full advantage of compound growth over the duration of the RESP.

While this strategy permanently reduces the grant match to just $500 over the RESP’s lifetime (the first year’s match), the benefits of having a larger principal working for you can far outweigh that reduction in grant money. For family members (e.g., grandparents) who wish to make a substantial contribution, it’s ideal to encourage them to do so early on. 

Track and manage your contributions – One of the biggest concerns people have when using RESPs is understanding and observing contribution limits to avoid penalties. For families with multiple children, keeping track of RESP contributions can be complex. Exceeding the lifetime contribution limit of $50,000 per beneficiary incurs a 1% monthly tax on the excess amount until it’s withdrawn. To avoid penalties, consider using online platforms, apps, or work with your advisor to track contributions and stay within your limit.

Withdrawal strategies: maximizing tax efficiency

When it comes time to withdraw funds from your RESP, strategic planning is essential to minimize tax liabilities. There are two types of payments that can come from an RESP: Educational Assistance Payments (EAPs), which include the grants and any investment income earned in the RESP, and Post-Secondary Education (PSE) withdrawals which consist only of the contributions that were made to the plan originally. EAPs are taxable in the hands of the beneficiary while PSE withdrawals are not taxed at all. 

To optimize tax efficiency, it’s advisable to use up EAPs before other RESP funds. This approach minimizes tax because the beneficiary is likely to be in a very low tax bracket in their early schooling years. Even more importantly, though, it also ensures that all grants are used up before the beneficiary completes their education.

This is key because any grants that don’t get used up towards schooling must eventually be returned to the government. To avoid losing out on this government assistance, plan withdrawals carefully. By using EAPs early, you reduce the risk of leaving grant money on the table.

Flexibility of RESP use: beyond traditional education

Some families worry about ending up with “excess” RESP savings, often because they underestimate just how flexible the RESP program is. Understanding and using RESP options effectively can help families maximize the value of their RESP dollars, and even optimize tax, long term:

Long-term flexibility – Many people are surprised to learn that RESPs can remain open for up to 35 years, allowing a beneficiary to take advantage of educational opportunities well past their childhood and into adulthood. Not only that, but the RESP is not restricted to traditional post-secondary education. Adults returning to school, distance or part-time learners, those wishing to study internationally, and even those pursuing vocational or technical training can also benefit from RESP savings. 

Combine RESP savings with the RRSP Lifelong Learning Plan (LLP) – If you yourself are still the beneficiary of an RESP as an adult, you can consider pairing an RESP with the RRSP Lifelong Learning Plan (LLP). The LLP lets you withdraw up to $20,000 ($10,000 per year) from your RRSP to fund education without incurring taxes, providing even more flexibility in managing your educational savings.

Opening an RESP for yourself – If you are an adult pursuing a career change, higher level degree, or even a new interests in retirement, you can open an individual RESP for yourself at any age. This is especially useful for those whose other tax shelters (TFSA, RRSP) are already full and who want a designated, tax-sheltered space to save for education. Just beware that, sadly, adults do not qualify for grant matching!

Make the most of your RESP

When used strategically, RESPs can be a multi-faceted tool with significant benefits beyond merely funding a child’s education. From maximizing investment growth through strategic contributions to optimizing tax efficiency during withdrawals and exploring the flexibility of RESP usage, these strategies can unlock the full potential of your RESP. 

Ensure you’re making the most of an RESP by consulting with your financial advisor. They can help you navigate the complexities and align your strategy with your overall wealth management goals.

For more information on Registered Education Savings Plans, visit:
Registered Education Savings Plans and related benefits - Canada.ca 
Registered Education Savings Plans contributions - Canada.ca
Canada Education Savings Programs - Canada.ca

The best kept secret in charitable giving

Russ MacKay, CIM, MFA-P^TM
Private Wealth Advisor, Portfolio Manager, CWB Wealth Partners

Many people I speak with have taken part in some form of charitable giving in their lifetime, yet most are unaware of one of the best kept secrets for supporting causes close to them and their family – a Donor Advised Fund (DAF).

For me personally, my charitable giving approach changed later in my career. My wife and I had always wanted to be able to set aside a pool of capital to give back to the community, and if possible, involve our kids in the process. The stars aligned when three major events unfolded. First, we reached a financial point in our lives where a larger dollar amount to charity was doable. Second, our kids were in their late teens and we felt it was time to get them involved in giving. And third, the tax benefits of acting made good financial sense, so we established our own DAF.

Today, I enjoy helping others incorporate present and future planned giving goals into their wealth and estate plan. In doing so, we address thoughtful questions, such as:

• How can I support causes important to me while I am alive, so that I can see the benefit from my contributions?
• If I sell my business (or other significant asset), is there a benefit to plan a donation at the same time?
• Is it better to donate while I am alive, or through my estate?
• How can I involve my family in my charitable and community giving, and create a lasting legacy?
• How can I maximize the tax advantages of my giving?
• Is there a simple yet flexible way to organize my giving?

As you begin to explore answers to these questions, you may discover that one of the best kept secrets in philanthropy lies in using a DAF.

What is a DAF?

Simply put, a DAF is an account that you open to manage your donations through, and it has two key partners. The first is the administrative host, which would be a registered charitable foundation such as Canada Gives, Charitable Impact, or Philantra.* While registered charities themselves, these types of foundations mainly provide infrastructure and support to make it easier for Canadians to give to the causes that matter to them. They do this by handling the legal and administrative functions of giving, which includes all reporting to the CRA. They can also help you research and connect with charities that match your philanthropic interests.

The second partner is the investment manager, who will be responsible for managing the money and investments which get donated to the DAF. CWB Wealth & CWB Wealth Partners have helped many clients in this role.

Once your fund is established, you and others can make donations to it. These could consist of cash, securities, RRSP/RRIFs, insurance policies, or could even include other assets like private shares and real estate. Each time a donation is made into your DAF, the donor receives a tax receipt and the proceeds of the donation are invested in the fund. But remember, once you donate the money, it now belongs to your charity. You have control over which charities you will grant money to from your DAF, but you can no longer access the funds for personal reasons.

Finally, there will be a minimum disbursement quota, which is the amount of money that needs to be granted from your DAF each year to the charity(s) of your choice. You can grant more than this amount, and the remaining money will stay invested in your DAF to grow and support your future giving.

Figure 2: DAF Steps and Flows

Source: Canada Gives

Let’s look at a simplified example in Alberta. A retired couple in their 70s decided to sell their recreational property, which they had purchased for $500,000. They wanted to use a portion of the proceeds to set up a DAF as a legacy for the family, something they could involve their adult children and grandchildren in. The property sold for $2,000,000, resulting in a capital gain of $1,500,000.** Figure 3 outlines the tax implications of the process. 

Figure 3: How a $500K donation could cost just $229,958 

Source: CWB Wealth Partners

What makes a DAF attractive? 

• Easy to create and manage 
• Provides tax receipts and reports
• Ability to select the investment advisor to manage your fund
• Flexibility in the types of donations accepted
• Ability to grow your DAF by donating more to it over time
• Simplify gifting to single or multiple charities
• Choice of anonymous or named giving recognition
• Ideal for involving family or creating an intergenerational giving platform  

Tax strategies to consider

A DAF can be considered when there’s a personal desire to be charitable, an opportunity to make a sizable donation in a single year, and the tax benefits align with your broader wealth plan. Always consult with your tax advisor prior to major donations, to ensure you maximize your tax efficiencies. 

Here are some ways that DAFs can be a tax-efficient way to take your giving to a new level.** 

• Donations can reduce taxes by over 50%.
• Donating appreciated securities avoids the capital gains taxation.
• Personal donations are limited to 75% of your net income for the year. Donation tax credits can be carried forward up to five years.
• Donations made in the year of death, and those bequeathed in the will, can be claimed up to 100% of the taxpayer’s net income in year of death, or carried back one year. (Graduated rate estates offer additional planning flexibility.)
• Corporations & holding companies have unique tax planning opportunities.

Is a DAF right for you?

There are many ways to maximize the joy of giving back. Your advisor can help you find ones that are best suited to your legacy goals and overall wealth plan. Consider a Donor Advised Fund if you and your family would like to transition from making ad hoc gifts to charities, to becoming engaged philanthropists. The best part is, you can actually see the difference that your charitable dollars make.

* These are some of the charitable foundations we may work with. There are others that your advisor may have relationships with, and we encourage you to consult with them if interested in setting up a Donor Advised Fund.  
**There could be an additional Alternative Minimum Tax applied (AMT), depending on the breakdown of other sources of income. Speak with your tax advisor for details on this.