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Hubert RRIF Questions and Answers
April 27, 2019
9:44 pm
Loonie
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Doug said

A downside to having equities in your RRIF is stock market volatility and having to withdraw 4-5% or whatever your minimum withdrawal is when your positions are down 20% or more. Similarly, having to withdraw that same amount when your positions have increased in value results in you having to take out more money than you need and a bigger tax hit.

When I resume working full time, hopefully with a college library that will have a pension, I will have less need for RRSPs, but even if not, I'm giving serious consideration to just maxing out my TFSA with my equities (ETFs, stocks, etc.) and adding very little to my RRSPs. The balance of my retirement savings would be in non-registered accounts. If you had to do it over again, Loonie, and had access to a TFSA at an early age, might you have considered that instead?

Cheers,
Doug  

Absolutely, I would not touch RSPs if I had it to do over again. For a number of reasons which I have argued in other threads, I think RSPs are basically a scam, and that a fairly small percentage of people are likely to actually benefit from them.
There are a few specific situations where they are helpful. I don't buy the argument put forward by Norman1 and some guy named Heinzl, I think, who writes in the newspaper, that you always end up at worst a break-even position because of the assumptions made in their arguments.
A relatively small portfolio of RSPs might be OK - say 200K max. You can always add more later if you can see a good reason for it.
For you, as long as you remain single, at least you won't face the double whammy of inheriting a RSP from a spouse and ending up with a whopping tax liability.
RSPs may provide some protection against lawsuits etc (not sure about that), may be useful for some people in home ownership, may provide income averaging when out of work force (e.g. maternity), etc., but these are very specific situations.
There will be a certain proportion of people for whom the retirement income will be sufficiently lower than the earning income period that there will be a real reduction in taxes (as advertised and supposedly intended), but the broadening of tax brackets has made that less and less likely during my lifetime (I'm not sure how that will go in future, but beware of the "flat tax" advocates and others who want to "simplify" taxation.) Some people may require RSPs as a kind of crutch to force them to save, but this is not ideal. I think everyone who is considering them needs to take a long hard look at the question of when they will be cashing them in and how much it is going to cost them to do so in taxes, clawbacks and disentitlements. How much do you really know about what your income will be in retirement and what can you possibly know about what govt policies will prevail at that time? The answers to those questions will tell you what you should do about RSPs, but most of us don't and can't know the answers.
In fact, if I were you, presumably low income right now while you are a student, I would look into whether it made economic sense to cash in some of the RSPs now, if it didn't compromise your ability to get student aid if you are getting any. Fro someone who is disciplined about money, RSPs should be looked at primarily as an income-averaging system, so the goal is to find the right time to cash them in.

I'm not a stock market investor, as you know, but, if I were, I would do it outside of RSPs so that i could take advantage of cap gains and dividend tax breaks.

April 27, 2019
10:07 pm
Loonie
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Doug said

A downside to having equities in your RRIF is stock market volatility and having to withdraw 4-5% or whatever your minimum withdrawal is when your positions are down 20% or more. Similarly, having to withdraw that same amount when your positions have increased in value results in you having to take out more money than you need and a bigger tax hit.

When I resume working full time, hopefully with a college library that will have a pension, I will have less need for RRSPs, but even if not, I'm giving serious consideration to just maxing out my TFSA with my equities (ETFs, stocks, etc.) and adding very little to my RRSPs. The balance of my retirement savings would be in non-registered accounts. If you had to do it over again, Loonie, and had access to a TFSA at an early age, might you have considered that instead?

Cheers,
Doug  

Absolutely, I would not touch RSPs if I had it to do over again. For a number of reasons which I have argued in other threads, I think RSPs are basically a scam, and that a fairly small percentage of people are likely to actually benefit from them.
There are a few specific situations where they are helpful. I don't buy the argument put forward by Norman1 and some guy named Heinzl, I think, who writes in the newspaper, that you always end up at worst a break-even position because of the assumptions made in their arguments.
A relatively small portfolio of RSPs might be OK - say 200K max. You can always add more later if you can see a good reason for it.
For you, as long as you remain single, at least you won't face the double whammy of inheriting a RSP from a spouse and ending up with a whopping tax liability.
RSPs may provide some protection against lawsuits etc (not sure about that), may be useful for some people in home ownership, may provide income averaging when out of work force (e.g. maternity), etc., but these are very specific situations.
There will be a certain proportion of people for whom the retirement income will be sufficiently lower than the earning income period that there will be a real reduction in taxes (as advertised and supposedly intended), but the broadening of tax brackets has made that less and less likely during my lifetime (I'm not sure how that will go in future, but beware of the "flat tax" advocates and others who want to "simplify" taxation.) Some people may require RSPs as a kind of crutch to force them to save, but this is not ideal. I think everyone who is considering them needs to take a long hard look at the question of when they will be cashing them in and how much it is going to cost them to do so in taxes, clawbacks and disentitlements. How much do you really know about what your income will be in retirement and what can you possibly know about what govt policies will prevail at that time? The answers to those questions will tell you what you should do about RSPs, but most of us don't and can't know the answers.
In fact, if I were you, presumably low income right now while you are a student, I would look into whether it made economic sense to cash in some of the RSPs now, if it didn't compromise your ability to get student aid if you are getting any. Fro someone who is disciplined about money, RSPs should be looked at primarily as an income-averaging system, so the goal is to find the right time to cash them in.

I'm not a stock market investor, as you know, but, if I were, I would do it outside of RSPs so that i could take advantage of cap gains and dividend tax breaks.

GICinvestor said

I might be missing something, but if you are under 71 why bother moving from RRSP to RRIF to withdraw rather then just withdrawing from your RRSP?

For income splitting and to draw down RRSP/RRIF to be in a lower income bracket 71 onwards. RRIF you can split and RRSP you cannot so I have been told. And for estate planning which is thinking about the future too much......RRSP and RRIF is totally taxable at death if you don’t have a successor. But if you do have a successor it makes things easier on them too, to be in a lower income bracket.

It is my understanding that no matter what age you are when you create a RRIF, you must withdraw the minimum amount based on your age in the year after you open a RRIF.

Yes but ie. if I move $15,000 and leave $300 after withdrawals this year then comes December 31 my RRIF will be $300 plus a bit of interest and I will have to take 5% or so as that as my mandatory withdrawal. Keep in mind I am only 68.

I control the amount from RRSP to RRIF and will continue to do so until I am into the mandatory conversion of RRSP to RRIF.  

You probably know this, but don't forget that you can set the mandatory minimum rate to the age of the younger spouse. Some FIs do not make this easy as they fail to ask the question and a lot of people don't realize they have this option. I've seen more than one bank employee look surprised when I raised this question.

April 27, 2019
10:15 pm
Loonie
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Doug, it's true that RIFs can be more complicated than imagined, but that alone should not be a reason to avoid RSPs.
I wager that the vast majority of people have no idea whether they are better off with them or without them because they don't know what their tax bracket was when they bought them in the fist place. Most people don't keep their tax records more than seven years , if that.
I am weird; and I have ALL my tax records, so I am quite sure I am worse off with RSPs.
It's true you'll have more money with RSPs, but it won't all be your money as the govt has a lien on it which is variable. The "advisor" class likes RSPs because they prevent you from spending money and they increase your "investable assets" which they can play with. Hence, they are oversold.

And, to whoever it was who thought their successor would find it easier to inherit their RSP, this is not necessarily true. If the inheritor also has their own RSP, they will end up with a much larger RSP and a much higher tax liability than before you died, and quite possibly higher than you would have had on your own.

April 28, 2019
10:33 am
Doug
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Loonie said

Absolutely, I would not touch RSPs if I had it to do over again. For a number of reasons which I have argued in other threads, I think RSPs are basically a scam, and that a fairly small percentage of people are likely to actually benefit from them.
There are a few specific situations where they are helpful. I don't buy the argument put forward by Norman1 and some guy named Heinzl, I think, who writes in the newspaper, that you always end up at worst a break-even position because of the assumptions made in their arguments.
A relatively small portfolio of RSPs might be OK - say 200K max. You can always add more later if you can see a good reason for it.
For you, as long as you remain single, at least you won't face the double whammy of inheriting a RSP from a spouse and ending up with a whopping tax liability.
RSPs may provide some protection against lawsuits etc (not sure about that), may be useful for some people in home ownership, may provide income averaging when out of work force (e.g. maternity), etc., but these are very specific situations.
There will be a certain proportion of people for whom the retirement income will be sufficiently lower than the earning income period that there will be a real reduction in taxes (as advertised and supposedly intended), but the broadening of tax brackets has made that less and less likely during my lifetime (I'm not sure how that will go in future, but beware of the "flat tax" advocates and others who want to "simplify" taxation.) Some people may require RSPs as a kind of crutch to force them to save, but this is not ideal. I think everyone who is considering them needs to take a long hard look at the question of when they will be cashing them in and how much it is going to cost them to do so in taxes, clawbacks and disentitlements. How much do you really know about what your income will be in retirement and what can you possibly know about what govt policies will prevail at that time? The answers to those questions will tell you what you should do about RSPs, but most of us don't and can't know the answers.
In fact, if I were you, presumably low income right now while you are a student, I would look into whether it made economic sense to cash in some of the RSPs now, if it didn't compromise your ability to get student aid if you are getting any. Fro someone who is disciplined about money, RSPs should be looked at primarily as an income-averaging system, so the goal is to find the right time to cash them in.

I'm not a stock market investor, as you know, but, if I were, I would do it outside of RSPs so that i could take advantage of cap gains and dividend tax breaks.  

Thanks, Loonie, for your thoughts. I actually suspected that had you to do it over again, with access to TFSAs, you would've just ignore the whole RRSPs thing. sf-cool

I used to think they were great, but they're heavily promoted by banks, credit unions, and investment dealers. Even government promotes them, and why not? Instead of being able to take advantage of capital losses, the dividend tax credit, and the lower capital gains inclusion rate, now they get to take you as regular employment (or employment-related) income. All around, they really do benefit everyone but the RRSP annuitant (planholder). 😉

Even personal finance and investing blogs like Canadian Couch Potato, Canadian Capitalist or that Boomer & Echo (don't really like him; he reminds me a bit like Rob Carrick, who thinks his "shit doesn't stink," figuratively speaking, and is always hawking a new book) will lament the loss of RRSP contribution room earned on withdrawing from an RRSP. But, I have actually thought whether I should be withdrawing from my RRSP (would still be keeping it as savings and investments, whether in a TFSA or non-registered account) when I'm not working while going to college full-time, so it's encouraging to hear you give that your "thumbs up" as a sound strategy from an income averaging perspective. That's the sort of thing the federal government would prefer we not do, I'm sure. It wouldn't affect any student financial aid as I've not applied for any nor do I expect to, so no problem there. I'm just using a bit of my savings to fund my educational costs. I do have some non-registered interest (~$4000) and dividend income (~$1500-2000), but still have about $6000 before I'm above the federal basic personal exemption. Even withdrawing above the basic personal exemption would subject me to a bit of tax, but not much as it would still be the lowest bracket (15% federally and roughly 5% provincially in B.C.). I don't have the provincial tax brackets memorized, so not even sure what Ontario's lowest bracket is. 😉

Plus, even next year, when working part of the year, I'll have about ~$8000 in carried forward federal/provincial tuition credits and provincial educational amounts, which B.C. still has, that I can use to offset my income tax payable.

RRSPs are, I think, the single biggest tax expenditure, so you're right that future governments could decide to substantially change them (there's not a constitutionally protected provision that the courts could side with residents on, I think) in the middle of the game. They've done it before, with income trusts, and may well have done it again with proposed tax changes on total return swaps that would effect such instruments held by pension funds, in retirement accounts, and with synthetic, total return swap-based ETFs, so they could do well do it again in the future. I actually wouldn't mind it if the government did away with future RRSP contribution room if they replaced it with a doubling of the annual contribution room (to $12,000, or ideally to $15,000) and then kept it there.

Cheers,
Doug

April 28, 2019
10:45 am
Doug
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Loonie said
Doug, it's true that RIFs can be more complicated than imagined, but that alone should not be a reason to avoid RSPs.
I wager that the vast majority of people have no idea whether they are better off with them or without them because they don't know what their tax bracket was when they bought them in the fist place. Most people don't keep their tax records more than seven years , if that.

Very true!

I am weird; and I have ALL my tax records, so I am quite sure I am worse off with RSPs.

I have all my income tax records in paper form since 2003 (the first two years got shredded & recycled) and have much of them (T-slips, income tax returns, notices of assessment, etc.) in electronic PDF format since then as well. Some things like paystubs, charitable donations, and medical expenses I haven't digitized yet, but I'd like to do that eventually, as time permits, so that I can retain them indefinitely. sf-cool

It's true you'll have more money with RSPs, but it won't all be your money as the govt has a lien on it which is variable. The "advisor" class likes RSPs because they prevent you from spending money and they increase your "investable assets" which they can play with. Hence, they are oversold.

Agreed except you can still withdraw from RRSPs. If you're someone that's tempted dip into them or into your TFSAs regularly, then I do think something the Saskatchewan Pension Plan would benefit those folks because at least you're voluntarily agreeing to lock-in provision and their investment management fees are at least a bit more reasonable.

And, to whoever it was who thought their successor would find it easier to inherit their RSP, this is not necessarily true. If the inheritor also has their own RSP, they will end up with a much larger RSP and a much higher tax liability than before you died, and quite possibly higher than you would have had on your own.  

Great point! So, in that way, have you thought of not designating beneficiaries for each of you and your spouse so that you wouldn't effectively double your RRSP assets?

Cheers,
Doug

April 28, 2019
7:21 pm
Loonie
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On your last point, no, we haven't thought of doing that. It's something to think about though. It depends on how much money is involved at the time you die, which is hard to predict, especially since it's a diminishing asset as an RIF. If you live to be quite old, then it might be better to leave in the beneficiary if it's a spouse. Otherwise, i don't see that it matters much as it will just get dissolved and taxed anyway at death. I am not certain, but I don't think you can avoid probate unless it is passed directly to a spouse..
I think it's best to put one's energy into getting rid of the darn things as expeditiously as possible.

Yes, if I were in your shoes, I would cash in some RSP money, at least to get to the top of your current bracket. Look at it this way: if you know you will never be in a better bracket, then you should cash. Since you're in the lowest bracket, you can never be in a better one. The only possible variable is the tax rate or definition of brackets, but i doubt that woiill have an adverse effect.
I know this feels counter-intuitive. I delayed doing it because it seemed strange, but I now regret that and wish I'd started earlier.
This is especially true since you have yours invested in the stock market iinp part or whole , as I understand it. As a low income person, your dividends would likely be tax-free or close to it. And it doesn't sound like you ever intend on being a high income person, so you would continue to benefit from div tax credit.

It wouldn't matter to me if there were no TFSAs. I would still, in hindsight, avoid RSPs.

Yes, the govt can make all kinds of changes, particularly if under duress of any kind (e.g. climate change). You are more flexible if you are not tied to registered programmes. Most people don't realize the nasty changes they made to the CPP Survivor pension a few years ago when they did pension reform. They reduced the survivor pension substantially, in effect, but the gobbledygook in the legislation is almost impossible to decipher. Daryl Diamond, in his book on retirement income planning, second edition, notes that this is the first time a government has done that as far as he knows, and he considers it a red flag.

However, to be fair to yourself, you should probably read some of the older posts by Norman1, who disagrees with my perspective. Then you can make up your own mind.

April 29, 2019
10:59 am
Doug
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Interestingly, Hubert's parent company, Sunova Credit Union, offers a 1-year non-redeemable GIC in a RRIF, so it's not a matter of technological limitation that they don't offer a 1-year GIC on Hubert. 🙁

https://www.sunovacu.ca/rates/

I'm sure Loonie would take a 1-year non-redeemable GIC paying 2.60% in his or his spouse's RRIF, if it were on offer at Hubert. 😉

Cheers,
Doug

April 29, 2019
10:26 pm
Loonie
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Doug said
Interestingly, Hubert's parent company, Sunova Credit Union, offers a 1-year non-redeemable GIC in a RRIF, so it's not a matter of technological limitation that they don't offer a 1-year GIC on Hubert. 🙁

https://www.sunovacu.ca/rates/

I'm sure Loonie would take a 1-year non-redeemable GIC paying 2.60% in his or his spouse's RRIF, if it were on offer at Hubert. 😉

Cheers,
Doug  

Maybe, but that is a low rate in my view, and I'm now focused on motusbank. At this point, it would take more than 2.6 to get me back.

April 30, 2019
6:36 am
Doug
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Loonie said

Maybe, but that is a low rate in my view, and I'm now focused on motusbank. At this point, it would take more than 2.6 to get me back.  

That's true. Motus Bank is offering 3.10% in registered accounts for a 1-year GIC. I'll be curious to see how long they remain on top and whether they stick with the strategy of offering the same rate regardless of GIC term. GIC rates can go down (or up) with BoC decisions and the bond markets, so I wouldn't fault them for decreasing their rates, but what I'll be most interested to look at is this time next year, are they still the leader in GIC rates?

Also, when you said in another thread (or earlier in this one), that you're not in the stock market, do you mean you own no stocks or ETFs period? Have you ever owned stocks, index mutual funds, or index ETFs? If not, I'm just curious how you managed to build a retirement portfolio that would generate sufficient supplementary retirement income on GICs alone since you're lucky if you can maintain your purchasing power net of inflation over the long term in GICs.

Cheers,
Doug

April 30, 2019
7:44 am
GR
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"Motus Bank is offering 3.10% in registered accounts for a 1-year GIC."

Doug,
I believe you intended to state the registered accounts rate of 3.10% for 18 months, not for 1 year, and 2.80% for 1 year.

April 30, 2019
10:14 am
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Loonie said
I am not certain, but I don't think you can avoid probate unless it is passed directly to a spouse..

You can avoid your RRIF falling into your "estate" and subject to probate by naming an alternative beneficiary(ies) in the event your spouse predeceases. In this event your "estate" is still responsible for payment of income tax and if your estate does not have sufficient funds to pay the income tax owing as a result of the RRIF, the designated beneficiary(ies) are liable. Keeping the RRIF outside of your "estate" would likely also reduce probate/administration fees payable in Ontario.

Loonie said
Yes, if I were in your shoes, I would cash in some RSP money, at least to get to the top of your current bracket. Look at it this way: if you know you will never be in a better bracket, then you should cash. Since you're in the lowest bracket, you can never be in a better one.
I know this feels counter-intuitive. I delayed doing it because it seemed strange, but I now regret that and wish I'd started earlier.

I agree Loonie. I regret not melting down RRSP's more aggressively in lower tax years cause it "seemed strange".

Now considering whether hubby and I should use up unused RRSP deduction room, and carry forward the contribution deduction for future year(s) to reduce tax and clawbacks. This seems strange too!!

April 30, 2019
10:47 am
Doug
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GR said
"Motus Bank is offering 3.10% in registered accounts for a 1-year GIC."

Doug,
I believe you intended to state the registered accounts rate of 3.10% for 18 months, not for 1 year, and 2.80% for 1 year.  

Yeah, I can't keep track. Thanks, GR.

On that basis, then, technically, Peoples Trust Company tops the leaderboard at 3.10% for 15-months in non-registered and registered accounts.

Cheers,
Doug

April 30, 2019
11:01 am
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Just a note that math doesn't lie and you are better off investing in your rrsp if you will be in a lower tax bracket in retirement. I've also seen comparisons with a unregistered account and rrsp still comes out ahead. Having said that there are other considerations like the fact that you are taxed at your full rate at death and the lack of transparency of how much money you have when it is taxed in retirement. Personally as a single person it irks me that married people get to split pension income - the tfsa is much more equitable. I struggle with where to put my money but right now am splitting it between rrsp and tfsa. I'm not fifty yet and may change my mind as I get older. I actually think it is much more likely they will change the tfsa rather then rrsp - at least with rrsp they are getting their tax cut. Thanks for the discussion - it is interesting to hear what people would have done looking back.

Oops just to add that as people have said if you are already in the lowest income tax bracket then tfsa is better.

April 30, 2019
11:31 am
Doug
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christinad said
Just a note that math doesn't lie and you are better off investing in your rrsp if you will be in a lower tax bracket in retirement. I've also seen comparisons with a unregistered account and rrsp still comes out ahead. Having said that there are other considerations like the fact that you are taxed at your full rate at death and the lack of transparency of how much money you have when it is taxed in retirement. Personally as a single person it irks me that married people get to split pension income - the tfsa is much more equitable. I struggle with where to put my money but right now am splitting it between rrsp and tfsa. I'm not fifty yet and may change my mind as I get older. I actually think it is much more likely they will change the tfsa rather then rrsp - at least with rrsp they are getting their tax cut. Thanks for the discussion - it is interesting to hear what people would have done looking back.

Oops just to add that as people have said if you are already in the lowest income tax bracket then tfsa is better.  

Agree with you there re: income splitting. Married couples get all kinds of tax breaks, notwithstanding inheriting a deceased spouse's RRIF balance to add to one's own cash pile in their own RRIF that Loonie mentioned. sf-cool

As far as my future tax brackets, that's a tough one. I'd expect to be in a higher tax bracket in retirement than in my working life due to my aggressive savings rates, frugal lifestyle, and lack of any children. At a minimum, I expect to be in the same tax bracket as my working life (that is a combined 20% federal/provincial tax rate).

Cheers,
Doug

April 30, 2019
11:45 am
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Yes definitely if you are in the same tax bracket, I would go with tfsa. I make 60,000 and i find it hard to believe i will be in the same tax bracket. Who knows? I feel like only a financial planner can do these types of calculations but i'm too cheap to pay for one.

April 30, 2019
11:46 am
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christinad said
Personally as a single person it irks me that married people get to split pension income ...  

And because there is no book of life even that may be a limited time opportunity. The only way to limit taxes at death is to spend like hell now ... get that burn rate up.

April 30, 2019
11:52 am
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Top It Up said

And because there is no book of life even that may be a limited time opportunity. The only way to limit taxes at death is to spend like hell now ... get that burn rate up.  

And if you have nothing to spend it on, make a donation, possibly by setting up a perpetual endowment fund with a community foundation. 🙂

"I, name of donor, do hereby pledge amount in dollars to name of community foundation in perpetuity, with the annual investment returns, net of fees, to be disbursed as follows:
- name of charity # 1;
- name of charity # 2;
- name of charity # 3; and,
- to the operator of the highinterestsavings.ca to help to fund its operating costs in perpetuity."

Just kidding about the last one, but you never know. 😉

Cheers,
Doug

April 30, 2019
11:55 am
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Two distinct advantages I see to a higher burn rate now - decrease chance of government clawback of OAS and increase chance of getting in on the GIS ... and what's not to like about that?

April 30, 2019
1:28 pm
Doug
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Top It Up said
Two distinct advantages I see to a higher burn rate now - decrease chance of government clawback of OAS and increase chance of getting in on the GIS ... and what's not to like about that?  

Right, and I agree with you completely, but my understanding is the OAS clawback doesn't even begin to kick in until you get $75,001.00 per person (too high in my opinion; should be $50,000.00 per person as it is senior welfare after all 😉 ).

GIS is also for very low income seniors. If you're getting that, you need it and, arguably, this should be increased (believe there are plans to do so). We shouldn't be trying to get GIS or its cousin, the Spouses Allowance. 😉

Cheers,
Doug

April 30, 2019
7:26 pm
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Doug said

Yeah, I can't keep track. Thanks, GR.

On that basis, then, technically, Peoples Trust Company tops the leaderboard at 3.10% for 15-months in non-registered and registered accounts.

Cheers,
Doug  

but Peoples doesn't offer RIFs, which is under discussion.

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