Dr. Garth

The financial doc knows that lost in all this banter about macroeconomics, social justice and political outcomes are real people. With real questions.

In fact, most of us aren’t trying to change the world, only circumstances. So let’s get busy.

First crawling out of the GreaterFool ER waiting room is Warren, afflicted with a deadbeat dad.

“I just found out that my father (late 70’s) owes a significant amount of back taxes to the CRA (roughly $180,000.00) and his bank account and credit cards have been locked by the agency,” he writes. “Needless to say the news caught me off guard, knew there was an audit but wasn’t aware of the amount and assumed he had things under control.”

He is retired, has very little assets — an LIF totalling maybe 30K. He has no way of ever paying the back taxes owed and I’m wondering if a) jail time is in the cards and b) what you would recommend the best course of action for him to take would be.  Feel burned by the revelation but he has always lived a financially reckless life so it was simply a matter of time before things caught up with him. He owns no real-estate, is in a common law relationship (though they would both personally describe things as room mates), no pension and there may be credit card debt (amount unknown).  He collects OAS and CPP.

Nice example, Warren, of how parents almost always fail to be financially honest with their kids. Talking about money seems harder than explaining why there’s a red bra in your son’s sock drawer.

In this case your old man needs to declare bankruptcy. CRA debts (including penalties and interest) are treated like all other obligations, and can be wiped away through personal insolvency. He has no choice. Contact a trustee in bankruptcy, pay the modest fee, file the papers and get him into the process. Kick his ass a little, too. Deserves it.

Now here’s Andrea, who seems to think she and her family are doing just fine, But are they?

“We’re wondering where we should park some cash for a couple of years,” she says. “I will be receiving an inheritance of 400k in the next couple of months. Was planning on paying down our mortgage but it doesn’t make sense to do that until renewal (2026), given we got a 5 year, fixed @ 1.74%. Was hoping to tax shelter as much as possible until 2026, but we only have combined TFSA room of about 150k, which leaves us 250k to put somewhere for a couple of years. But where?”

Hubby and I are mid-forties with two kids in high school, plus a dog. Hubby works, earning 75k/yr, my only income is from my RRIF, about 1800/yr. We will owe 538k on our mortgage at renewal in 2026. We have over 500k in house equity and no other debt. We currently have about 300k in liquid assets (RESP, RRSP, RRIF & TFSA). Plus, a sweet sixties muscle car. What would you do?

Not so fast, A. This inheritance happens to be a lot bigger than your entire current liquid assets, so just throwing it at a mortgage – and becoming even more lop-sided in terms of net worth (with 75% in one single, non-income-producing asset) – may not be the best strategy.

Mid-forties with two kids who will be going to uni in a few years means you need to have a lot more liquidity in your lives, or you have fat DB pensions. What’s the plan for retirement if there are no such pension plans in place? Your offspring will likely be dependents for another decade (at least), and household income is modest. You could be staring 60 in the face with an almost paid-off house and wholly insufficient investments to provide enough cash flow to live on. What if there’s a real estate slump just when you have no option but to cash out and get funds to live on?

Consider taking the $400,000 and investing it in the correct fashion (you know how), filling up your tax shelters, as well as a non-registered account. Forget the mortgage. It’s two years away and at an absurdly low level. Let’s assess where things sit in 2026, because home loan rates could be far lower then than now. And, by the way, why have a RRIF at your age? The car I can understand. Not that.

Charity has a similar paying-off-the-mortgage dilemma, but she’s blessed with more cash.

“The loan comes due this year with about $100k left,” she says. “So, I’d have a payment still if I renew. Meanwhile in my taxable account I have about $600k.”

My thought is to pay the mortgage off and then turn around and get that Heloc/mortgage offer for $200k.  And now I can use the interest as a deduction against the divvies I collect? While upping my asset base. I honestly thought this is what they call the smith maneuver but I guess I was wrong. If I can’t write it off is it just better to pay the mortgage off at that time and be debt free?

No, it’s not the Smith thing – that more convoluted strategy involves harvesting systematic withdrawals from assets like mutual funds purchased by a home equity borrowing. In reality, anyone can take out an equity loan and use the funds to make investments that pay income – at which point all of the loan interest is deductible from taxable income. Easy, peasy.

So, yes, this would work for you. The biggest question is, why?

Home equity loans these days cost almost 8%. If you earn a few hundred grand a year, interest deductibility would drop the net cost by half. But for most, it’s too high a hurdle to leap over. Portfolios should do well in 2024, however a double-digit return is not guaranteed with guys like Trump and Putin in get around. Borrowing to invest involves risk. Without knowing anything else about you, C, it appears you have an almost-paid-off piece of real estate and six large in your non-reg accoun, suggesting you don’t need to be rolling the dice.

Remember, bulls make money. Bears make money. Pigs get eaten.

About the picture: “Hi Garth, not to hog the spotlight here – as Spike has starred in the GF before,” writes Jay, in LOndon, “but I couldn’t help thinking how this stock market and Spike both have “irrational exuberance”. Keep the good news and positive outlook coming.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.

Source: https://www.greaterfool.ca/2024/01/10/dr-garth-29/