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Pension reform and tax tips

As you’ve likely heard, Prime Minister Steven Harper has been musing about adjusting Canadian pension rules. Those doggone baby boomers are at it again. First they crowded the school system, then the housing system, then wouldn’t retire (keeping young folks out of jobs) and now by golly, when they do retire, they’ll endanger the Canadian pension system, especially Old Age Security.

Old age security

Most Canadians who reach the age of 65 receive an OAS payment of $540 per month. That payment is adjusted for inflation and if your income is over $68,000 per year, there’s a 15 per cent surtax on the money. For the well off, OAS can’t be put towards things such as vacations, but for some, this money is used to buy food and or pay the rent.

One idea being floated is to push back the age for OAS payments to 67 from 65. Let’s see… $540 times 12 months times two years comes to $12,960. Let’s adjust for inflation a bit and maybe the total is $13,500.

What can Canadians do to prevent this?

They could yell and scream at their MPs, but the federal government has to collect money from someone to pay for Old Age Security.

I think the prime minister and his colleagues blew an opportunity to introduce the idea of delaying pay day to seniors. I think the government should have said, “Hey folks, we started the Tax Free Savings Account (TFSA) four years ago to help you plan for your retirement.”

With a TFSA, you, your spouse or any Canadian over age 18 can contribute up to $5,000 a year and all of the investment gains are tax free. Since the plan is cumulative and has been around for four years, a person could now have $20,000 of his or her own money in the TFSA. We have readers who have grown the money very nicely. I put $5,000 into my TFSA and bought shares in a company called Consolidated Thompson (CLM). The fund grew to $11,000 and change. I gave back a couple grand last year because I bought shares in Copper Mountain Mining (CUM) which fell. But I’m still up 60 per cent or so, and my wife’s TFSA is up 30 per cent.

My point is this: Most Canadians have time to contribute to their TFSA. When they turn 65 and don’t collect the Old Age Security, they can take out over $6,000 a year and enjoy some tax-free money that will not attract any claw back.

But suppose a person doesn’t have $5,000 to put into a TFSA every year? If the OAS deferral is five years off, then a person needs to save $2,700 a year for the next five years to make up for the pension cheques that will not come. If the deferral is 10 years away, then a person would need to save $1,350 a year to have $13,500 sitting in an account when they turn 65. (Inflation may mean you have to save a bit more.)

The baby boomers I know certainly can save $1,000 or $2,000 a year if they put their mind to it. Too bad the prime minister’s spin doctors didn’t figure how to say all this. Now the opposition parties are doing their job (I guess) and scaring a bunch of seniors about how they might have to switch from beans, baloney and noodles to low-grade dog food.

TFSAs and farmers

Come next fall many farmers can manage their taxes one more way by using the TFSA. Let’s assume you have $22,000 in the TFSA and the money makes you another $1,000 so you have $23,000 in the account by December 2012. Let’s also assume you are in a taxable position. So, you could take the $23,000 out of the TFSA, tax free, and buy some tax deductible items for your farm while, at the same time, deferring $23,000 of farm income into 2013.

Come January 2013 you cash out the deferred income and replace the money into the TFSA. When you take money out of a TFSA you can replace it in the next tax year. And if your wife has a TFSA you can double these numbers.

I’d suggest you go to your main calendar and write down on November 30 to check out this strategy.

February often a bad month for stocks

True to form, many stocks are sliding as February moves along. One statistic I’ve heard was most stocks dropped in February every year for the past 10 years. I see no reason why this won’t be year number 11.

What am I doing about it? First I’m holding more cash. I sold all of our Microsoft shares early in 2012 because I was afraid the Canadian dollar was going to go up against the U.S. dollar and that has happened.

I’m also selling calls in the money, below the price of the day. That gives me some downside protection in case the shares do drop. In January, as I explained a couple articles ago, I owned a lot of silver shares (stock symbol FR) and sold calls into July at my cost. The premium on those stocks was around $2.50 per share for six months. At a cost of $18 that comes out to 13.8 per cent for half a year. When I subtract the premium of $2.50 from my cost of $18 it means my true paper cost has dropped to $15.50 which is lots of downside protection. And if the shares do go up and get sold, my total price will be $20.50 which is good money. This is another way I tried to get ahead of the bad month of February — just collect lots of cash ahead of time.

Silver Standard Resources

I also started buying shares in another silver company, Silver Standard Resources (SSO). This is an operating silver company with a nice mine in Argentina. Last fall, the company’s mill broke down so the company didn’t mine any silver for 11 weeks. That kicked the earnings down and the price of shares dropped from $35 to around $16.

In January, the company had the mill up and running so the earnings report should have some good news. If you know the cattle business, there is a term called compensatory gain. It goes like this: if steers have good genetic potential but are on poor pasture, they will gain at a below average rate. However, as soon as you put them on good feed, those same steers will grow at an above average rate. This is compensatory gain.

In my opinion, SSO will have compensatory gain. It was an operating mine, got shut down due to mechanical problems that are fixed, and so can be back in production without the usual start-up problems that often face new start ups.

I bought 2,000 shares at $17.32 and sold a call for February and collected 90 cents — you can see how the option buyers like this stock. That brought me a net of 58 cents or 3.4 per cent for a month. That, by the way, is two times the old age pension cheque and then some.

I suspect I will be buying more shares in this company. This stock could be a good growing steer later this year or a nice milk cow that brings in good cash flow month after month. †

About the author

Freelance Writer

Andy was a former Grainews editor and long-time Grainews columnist. He passed away in February 2017.

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