7 articles General

Retention and new deposit promos, Alterna’s launch, and the bloom is off the EQ rose?

In January 2016, EQ Bank launched to great fanfare. After years of seeing continuously dropping high interest savings account rates, were things turning around for Canadian savers? EQ Bank made a splash with a 3% interest rate, and quieted some skeptics when it boldly stated that it “is not a promotional rate; it is our current everyday rate”.

It took only 3 months for that 3.00% rate to drop to 2.25%, and in August it dropped further to 2.00%.

In addition to dropping its rate, EQ Bank has received mixed reviews, closed off new registrations for weeks, has no TFSA account, is not available in Quebec, and has no transit number (so that transfers cannot be initiated outside of EQ). It also removed its $25 birthday bonus, leaving one of our forum members to lament that the bloom is off the EQ rose.

However, EQ Bank got a lot of customers, got a lot of publicity, and still has the highest interest rate on our comparison chart.

Another recent addition to our chart is Alterna Bank, which has in some ways been an anti-EQ offering. Alterna is available to Quebec residents, added a TFSA option in July, and quietly became the only Canadian financial institution to increase its rate in 2016 (at least among those that we track). It now sits #2 on our chart just 0.05% below EQ, yet you hear almost nothing about Alterna in the media.

For those chasing the highest rates, new deposit and retention promos continue to be the story at PC Financial and Tangerine. PC Financial’s latest promo is 2.25% on new deposits until December 31, 2016. Tangerine’s current new deposit promo expires on September 30, and offers somewhere between 1.75% and 3.25%. No one has yet discovered what Tangerine uses to determine what rate it will offer you. But many people have learned to play the game of withdrawing their money before a promo ends in order to maximize their return on the next new deposit promo. And for those who don’t want to move their money around, they’ve learned that Tangerine will often give you a higher rate… if you ask. Add savings account interest rates to the list of things you need to negotiate these days, along with mortgage rates and TV, internet, and cell phone bills.

All of this song and dance around PC Financial and Tangerine is necessary because their base rates are a paltry 0.80%. This puts them so far off the chart that we have completely dropped them off the page. Not everybody in our forums agree that those banks should have been dropped — after all, there is more to an account than an interest rate — but for now you’ll have to find them on the promos page.

And speaking of promos, many other banks have gotten into the game, especially around new deposits and new accounts. DUCA, Meridian Credit Union, Luminus Financial, and BC credit unions are among those with current promotions.

In other news, if you’re looking for a free chequing account, our long-time forum member Doug has done a huge update to the free chequing account comparison chart. Be sure to check that out, and thank Doug for his hard work!

CanadianForex review: great foreign exchange rates and support

I’ve been using XE Trade for a few years for personal currency exchange and international funds transfers for my small business. I started to try CanadianForex a few months ago and have been very pleased with its rates and support.

The basic premise is relatively straightforward and the same as XE Trade: you submit currency exchange deals through their online interface, send them the money in the source currency, and they deliver the money in the destination currency to your account or a foreign account within a few days. Therefore, you can use it for currency exchanges between your own accounts, or to send money internationally (as long as it’s between different currencies). Especially for sending money internationally on a regular basis, using an online service is often much more convenient than a traditional bank.

Here’s my review of CanadianForex, specifically compared against XE Trade.

Setup

Creating an account at CanadianForex is very straightforward, although just like XE Trade, you have to provide (for a business account, at least) some sensitive information to them, including:

  • A signed bank statement
  • A client agreement form signed by 2 directors
  • A copy of your driver’s licence

Exchange rates

I’ve found CanadianForex’s exchange rates to be better than XE Trade, at least for transferring between Canadian dollars and: US dollars, Euros, and Australian dollars. CanadianForex’s standard fee is $15 for transactions under $10,000 (and no fees for transactions above $10,000); while XE Trade usually charges no fees at all, CanadianForex is still better (as of January 2015) by a significant amount for trades that are more than a few hundred dollars.

Some example comparisons between CanadianForex and XE Trade after deducting the CanadianForex fee:

  • Sending approximately $5,500 CAD to Australia (AUD): the recipient got 40 AUD more with CanadianForex
  • Sending approximately $8,000 CAD to Germany (EUR): the recipient got 48 EUR more with CanadianForex
  • Sending approximately $7,000 CAD to the United States (USD): the recipient got 50 USD more with CanadianForex

In the case of sending money to Brazil, CanadianForex still charges the same $15 fee, whereas XE Trade charges an additional $22 wire fee. This resulted in similar savings as above with CanadianForex.

I’ve also found CanadianForex’s exchange rates to be slightly better than RBC’s foreign exchange rates, at least for transferring US dollars to Canadian dollars within my business account. However, the difference was only a few dollars for some of sample amounts I tested.

Process

The trades happen completely online, although you have to speak to a CanadianForex representative over the phone to complete your initial account setup, and you also receive a verification phone call from them after your first trade.

To book a trade, you must first set up recipients, including their bank account information. Then, you get a quote for the exchange you’d like to make, and click a “Finalise” button. If you’ve set up direct debit, the money will be removed from your account by the next business day. Otherwise, you send CanadianForex the money using your bank’s bill payment system. Once CanadianForex receives the money, they will send an Electronic Funds Transfer (EFT) or wire payment, depending on the destination country, to the recipient.

Customer service

You can contact CanadianForex by phone or e-mail. This is the same as with XE Trade. However, CanadianForex really emphasizes personal contact by assigning you a specific account manager (for a business account at least) and making you speak to them so that they can walk you through their services over the phone. With XE Trade you can set up your account and trade for years without ever needing talking to a person, let alone be assigned a specific contact.

I once had an issue when XE Trade mysteriously removed one of my recipient records without notifying me, and refused to tell me why when I phoned them. After I pushed for some explanation over the phone, they promised to follow up and never did. The recipient was eventually re-instated, although I was never notified about this. Of course, there is a chance that this could happen with CanadianForex, but I expect that they would be more communicative and cooperative with me in such a case. And to be fair, the situation with XE Trade might have been an edge case.

Other notes

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XE Trade: sending money internationally fee-free

After trying out XE Trade last year to convert Canadian dollars into US dollars for my own personal use, I decided to try it for business use. My company has a sub-contractor in the UK, and our alternatives were to send a wire transfer or a cheque. A wire transfer typically charges both the sender and the receiver fees, while a cheque takes time to send, deposit, and clear.

XE Trade was easy to use, fee-free, and fast. By “fee-free” I mean that they did not charge an extra fee on top of their regular currency exchange spread — and I’ve found their spread to be quite competitive. I just had to choose “ACH/EFT” as the sending method. I now intend to use XE Trade on a regular basis for my company.

The setup process required me to send XE Trade quite a few company documents electronically. Once set up, however, I just had to enter the recipient’s bank account information and then pay a bill as if it were any regular bill (such as a credit card bill). For more information on that general process, see my previous review.

Here is the timeline in business days for how long it took for me to set up a business account with XE Trade and send a payment in Canadian dollars from a Canadian bank to be deposited in British pounds in a UK bank.

Day 1: Registered for an XE Trade account
Day 1: Received an e-mail (in my spam folder) asking that I send over scanned documents (driver’s licence, certificate of incorporation, articles of association, names of shareholders owning 25% of more of the business) to verify my identity
Day 2: Received a reminder e-mail asking that I send over scanned documents to verify my identity
Day 3: I sent over scanned documents
Day 4: Received notification that the account was activated
Day 5: I initiated a trade (CAD in Canada to GBP in the UK) with a locked in rate based on that day, chose “ACH/EFT” as the sending method, and paid the bill through my bank’s online interface
Day 8: Received a notification e-mail that the money was sent to the recipient
Day 11: Money was deposited into the destination account; no fees were deducted on either end

The time between sending and receiving money took 6 business days.

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Review of OAS and strategies to reduce impact of the OAS clawback

Written by Anonymous

Old Age Security (OAS) benefits are available to anyone in Canada 65 years of age and older as long as they meet specific residence requirements. You do not need to be retired and employment history is not a factor when determining eligibility. The Old Age Security program is financed from Government of Canada general tax revenues. The maximum OAS pension is currently $546.07 per month.

For information on the eligibility requirements, visit http://www.servicecanada.gc.ca/eng/isp/oas/oasoverview.shtml.

When you are on the home page for OAS, click Find out more about the OAS changes in Budget 2012 on the right side of the page. This link provides you with changes made to the plan in 2012. One of the main changes is that the Government of Canada plans to gradually increase the age of eligibility for the OAS pension between the years 2023 and 2029, from 65 to 67. People currently receiving OAS benefits will not be affected by the changes. I was born in 1959 and thought that I would not be able to apply for the OAS pension until age 67. I was pleased to find out that I can apply at age 65 plus five months; therefore, I don’t have to wait until age 67.

Many people are concerned that once they are receiving OAS, a portion or all of their benefit might be “clawed back” if their income is too high. This clawback policy started in 1989 in order to reduce the benefit to those whose net income exceeds a specific annual threshold. In 2013 the threshold is $70,954. The annual benefit is reduced by 15% of the amount that the net income exceeds the threshold amount. For anyone whose net income exceeds $114,640 in 2013, the full amount of OAS is clawed back.

The clawback amount takes effect every July through June, taking into account the income for the previous calendar year (January through December). For example, if your net income in 2013 exceeds $114,650, your entire OAS benefit will be clawed back effective July 2014 to June 2015 (you will not receive an OAS benefit for one year). At the end of 2014, your net income will be reassessed which will determine your OAS benefit staring in July 2015.

It is important to consider all your income sources as you approach age 65. For example, if you are collecting OAS, CPP ($1012.50 is the maximum), a company pension of $25,000, have an RRIF of $200,000, and a non-registered account of $100,000, you would need to total these amounts:

OAS 546.07 x 12 months 6,552.84
CPP 1012.509 x 12 months 12,150.00
Company Pension

25,000.00
RRIF (based on a 5% withdrawal)

10,000.00
Non Registered Income (based on a 3% return if invested in GICs)

3,000.00

Your total income would be $56,702.84, which is starting to get close to the clawback threshold.

The following are some strategies to reduce your net income and the impact of the OAS clawback:

  • When to start your RRIF. Delay the conversion of your RRSP to a RRIF or annuity until age 71 to keep your net income as low as possible, as long as possible. There will be a minimum amount that will have to be withdrawn from an RRIF as soon as it is set up and the annuity will produce a monthly payment. Either of these coupled with OAS, CPP, and other pensions may push your net income over the clawback threshold.
  • Age of spouse RRIF. When opening an RRIF, base the withdrawal schedule on the age of the younger spouse. This will reduce the minimum amount that will have to be withdrawn each year, therefore reducing net income.
  • RRSP withdrawals. You may wish to withdraw some RRSP funds prior to age 65, especially in a year when your taxable income is expected to be low. Any funds withdrawn from your RRSP have to be claimed as income for that year, so by withdrawing funds prior to age 65 you will reduce your net income later on. Some people may not want to withdraw any funds from their RRSP between the ages 65 to 71 in order to minimize the effects of the clawback.
  • Apply to receive CPP/QPP as soon as eligible. The standard age that most people apply for CPP/QPP is age 65. At age 65, the maximum amount that you could receive from CPP/QPP is $1012.50 per month. Everyone has the option to apply at age 60 and receive a reduced benefit. Starting in 2012 to 2016, this early pension reduction will gradually increase from 0.52% to 0.6% per month. This means that if you start receiving your CPP pension in 2016 at age 60, your pension amount will be 36% less than it would have been had you taken it at age 65. You may want to keep your CPP/QPP benefits as low as possible so that your total net income does not exceed the threshold when you reach age 65 and become eligible for OAS.
  • CPP splitting. If you have a spouse receiving a higher CPP benefit, they can apply to share their CPP/QPP benefits with a lower income spouse, which will reduce their net income.
  • Income splitting. If you are 65 or older, the higher income spouse can also report a portion of their RRIF, employer pension, or annuity in the name of the lower income spouse to reduce net income.
  • Make use of your TFSA account. Income generated in your TFSA isn’t taxable nor are withdrawals from your account.
  • GIC and bond interest. GICs and bonds pay interest which is taxed at a higher rate than capital gains and dividends, so it is wise to even out your investment income. If you have GICs in a non-registered account you may want to consider a semi-annual or annual payout rather than compounding until the end of the term. For example, if you had $200,000 in a 5 year GIC paying 3% (compounded) paying interest at the end of the term, you would have to include interest of over $30,000 in your income at the end of year five. Compare this with an annual payout of $6,000.00 for the same GIC. Some institutions offer a high rate of interest on a compounding GIC, but do your calculations first to see how much income you are going to have to report at the end of the term. Any additional percentage that you receive on compounding may result in a clawback.
  • Capital gains. You may want to trigger capital gains on cottages, rental property, and non-registered investment prior to age 65. If you are over 65 and have a capital loss to carry forward on mutual funds or stocks, you can use this to reduce capital gains claimed for that year.
  • Dividends and taxable income. In your non-registered accounts, dividends incur less tax than interest. However you must “gross up” the amount of dividends you received in a way that increases your taxable income. For example, someone earning $1,000 in dividends now reports $1,450 in income on his or her tax return. They will be able to claim a dividend tax credit, but this may not compensate for any clawback of OAS. Prior to turning age 65, review your portfolio of dividend paying stocks and calculate what the grossed up value of your dividends will be for the year you begin collecting OAS. One strategy to reduce your taxable income is to have all your dividend paying stocks invested in a joint account. Then you can claim all dividends in the name of the spouse with the lowest income. If one spouse is under the age of 65, consider having the dividend paying stocks in the name of the younger spouse that is not yet collecting OAS. As most people age, they also prefer to lower the risk in their stock portfolio by re-balancing in the direction of more bonds and GICs. Although you must include all the interest in your taxable income, you do have more control over when the interest will be paid to you by laddering the terms of your bonds and GICs.
  • Defer OAS for up to 5 years. Starting July 1, 2013, you will be able to voluntarily defer receipt of OAS for up to 5 years. You will receive an increased amount of 0.6% to your OAS pension for every month you delay receipt, up to a maximum of 36% (60 months) at age 70. For example, someone who is going to turn 65 in December 2013 and decides to delay receiving their OAS pension of the full five years (the maximum deferral period) their monthly pension amount would increase by 36% at age 70. (0.6% x 60 months)
  • Mutual fund year end capital gain distributions. Be cautious of mutual funds that have large capital gain distributions in December. You don’t have any control over how much capital gain per unit will be paid out and this gain will have to be reported in your taxable income. When choosing mutual funds, check the fund’s past distribution history.
  • Mutual fund monthly income distribution. Be aware of whether your mutual funds pay monthly income as interest, dividends or capital gains in your non-registered investment accounts. You only need to include 50% of the capital gain in your income for the year, 100% of interest income, and the grossed up amount of dividends as discussed in an earlier point. Your strategies could include having the lower income or younger spouse (under age 65) hold the mutual funds.

The majority of Canadians do not have to be concerned about the clawback. However, I would suggest that anyone approaching age 65 review their sources of income to allow themselves the opportunity to take advantage of the strategies outlined in this article to lower their taxable income.

About the author: The author has completed the Canadian Securities Course and Professional Financial Planning and has worked in investment services for about 6 years.

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Savings account investment strategy: what are laddered term deposits / GICs?

I’ve seen the term “laddering” a lot on highinterestsavings.ca but many people don’t understand what it means. Many people, if asked whether they ladder their investments, will respond with “What is laddering?”. Here’s a short explanation of laddering in the context of term deposits aka GICs.

Laddering not a special type of account, nor something that is only available to some people, nor something you have to apply for. Rather, it is a simple strategy for increasing the interest rate earned on your savings using standard GICs.

Whether you are heavily invested in stocks or whether you are ultra-conservative and won’t put your money anywhere other than a savings account at a major bank, you’ve probably put money in a GIC or thought about it. There are a couple of common concerns regarding GICs:

  • What if you don’t want to lose access to your money for an extended period of time?
  • What if interest rates rise in the future and you miss out on a better rate?

Typically, the savings account offers the lowest rate, and the longer the term of the GIC, the higher the rate. If you’re looking at a 1.5% savings account and a 1.5% 1-year GIC, especially if you think interest rates have hit rock bottom, there is probably no point to investing in the GIC. With the 1-year GIC, you would be giving up liquidity (easy access to withdraw cash) for an arguably negligible benefit (being guaranteed 1.5% for a year and being better off were the savings account rate to drop during that time). And you might look at a 5-year GIC at 2.75% and decide that it’s not worth stashing away your money for so long. You struggle to try to “time” the market; in other words, how do you know when is the right moment to put all your money in a long term deposit? So your money ends up sitting in your savings account unto forever.

Laddering attempts to address those concerns and is best illustrated with an example. Suppose you have $5,000 in savings. You can split that into 5 x $1,000, and start by opening 5 separate GICs: a 1-year, a 2-year, a 3-year, a 4-year, and a 5-year. (Another common surprise for some is that every major financial institution offers: 1-year, 2-year, 3-year, 4-year, and 5-year GICs, and often shorter and/or longer terms as well.) This means that you can count on some money becoming available again every year. As each term matures, if you don’t need that money, you can invest it in another 5-year term. If you repeat this process (re-investing each $1,000 + interest amount in a new 5-year term when it matures), you will always be invested in the longest term at the highest rate.

In other words, with laddering you split your money into separate investment bundles, all with different terms and maturity dates, so that you can take advantage of higher rates without locking away all of your money. You can vary this approach in a multitude of ways, such as having 3 years as your longest term or making each bundle have unequal amounts. Also, this concept is not limited to GICs; it can be applied to other types of investments as well.

Forum/Topic Started Last post Posts

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GIC Discussions

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GIC Discussions

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GIC Discussions

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2