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How best to pay the investment management fee for your RRSP

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It seemed a victory for investors when the federal government allowed the cost of having RRSPs, RRIFs and TFSAs managed by an adviser to be paid with money from an outside account.

If your adviser works on a fee-based arrangement, you might pay 1 to 2 per cent of the value of your assets to have an account managed. Wouldn’t it be better to leave that money to grow over the years in your registered account and pay those fees with outside money?

The answer is yes for tax-free savings accounts, a new report from the tax and estate planning people at the Canadian Imperial Bank of Commerce says. For registered retirement savings plans and registered retirement income funds, it may actually make sense to pay your fees from within your plan. According to CIBC, it all depends on your tax bracket, age and the rate of return you’re targeting over the long term.

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“If you’re expecting high rates of return and your time horizon is in the decades, then it may make sense to pay RRSPs on the outside,” said Jamie Golombek, CIBC’s managing director of tax and estate planning and a co-author of the report with Debbie Pearl-Weinberg and Tess Francis.

The federal Department of Finance gave the all-clear to pay RRSP, RRIF and TFSA fees with outside money last fall after a review of whether people doing this would have an “unfair advantage” that artificially shifts value into a registered plan. A stiff penalty can be applied to an unfair advantage.

The analysis by CIBC notes that when you pay RRSP fees with outside money, you’re using after-tax dollars. If you pay from within an RRSP, you’re using pre-tax dollars. Remember: You get a tax deduction when you contribute to an RRSP, and you pay tax on your withdrawals later on in retirement.

CIBC built an example using someone who pays $100 in RRSP fees and is in the 30-per-cent tax bracket while working and in retirement. If this person pays the $100 fee from an outside account, then that’s the cost, period. If the fee is paid from within the RRSP, CIBC argues that the real cost is only $70.

Here’s CIBC’s reasoning: When you pay the $100 fee from within the RRSP, you never take that money out of the plan and incur a tax hit of 30 per cent. You could say that you’re paying $70 of the $100 fee and the government is paying $30 via the amount it would have taken as tax if you withdrew $100.

The counter-argument is that paying fees out of your RRSP depletes the amount of money that can compound in your account over the years on a tax-sheltered basis. The CIBC report said it’s possible to calculate a break-even point where you get more benefit from paying fees outside your RRSP than you do from inside.

Someone in the 30-per-cent tax bracket who pays $100 in fees in Year One from within an RRSP that has an initial value of $10,000 would need 25 years to break even on those fees, if we assume average annual returns of 5 per cent. With a higher rate of return, the break-even point comes sooner.

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Your tax rate also affects the break-even point. The higher your tax rate on RRSP withdrawals, the better the tax savings from paying your fees from within your plan.

For TFSAs, “it seems pretty clear they should be paid from outside to maximize the tax-free growth from within the plan,” the CIBC report concludes. “For RRSPs and RRIFs, this is not an easy question to answer, as it will depend on your investment time horizon, expected rates of return and tax rates.”

All of this suggests it may be fine to continue to pay fees from within an RRSP if you’re retired. You might have decades ahead of you, but your portfolio is likely to be conservatively built and not generating big returns. Younger people, with many decades ahead of them and more aggressive portfolios, should consider paying their RRSP fees outside the plan.

Paying your RRSP advice fees isn’t a make-or-break thing, though. “Many, many people would be just fine over the long term by keeping things as they are, which means paying from the RRSP,” Mr. Golombek said.

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Bank of Montreal CEO sees growth in U.S. share of earnings

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Bank of Montreal expects its earnings contribution from the U.S. to keep growing, even without any mergers and acquisitions, driven by a much smaller market share than at home and nearly C$1 trillion ($823.38 billion) of assets, Chief Executive Officer Darryl White said on Monday.

“We do think we have plenty of scale,” and the ability to compete with both banks of similar as well as smaller size, White said at a Morgan Stanley conference, adding that the bank’s U.S. market share is between 1% and 5% based on the business line, versus 10% to 35% in Canada. “And we do it off the scale of our global balance sheet of C$950 billion.”

($1 = 1.2145 Canadian dollars)

 

(Reporting by Nichola Saminather; Editing by Leslie Adler)

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GameStop falls 27% on potential share sale

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Shares of GameStop Corp lost more than a quarter of their value on Thursday and other so-called meme stocks also declined in a sell-off that hit a broad range of names favored by retail investors.

The video game retailer’s shares closed down 27.16% at $220.39, their biggest one-day percentage loss in 11 weeks. The drop came a day after GameStop said in a quarterly report that it may sell up to 5 million new shares, sparking concerns of potential dilution for existing shareholders.

“The threat of dilution from the five million-share sale is the dagger in the hearts of GameStop shareholders,” said Jake Dollarhide, chief executive officer of Longbow Asset Management. “The meme trade is not working today, so logic for at least one day has returned.”

Soaring rallies in the shares of GameStop and AMC Entertainment Holdings over the past month have helped reinvigorate the meme stock frenzy that began earlier this year and fueled big moves in a fresh crop of names popular with investors on forums such as Reddit’s WallStreetBets.

Many of those names traded lower on Thursday, with shares of Clover Health Investments Corp down 15.2%, burger chain Wendy’s falling 3.1% and prison operator Geo Group Inc, one of the more recently minted meme stocks, down nearly 20% after surging more than 38% on Wednesday. AMC shares were off more than 13%.

Worries that other companies could leverage recent stock price gains by announcing share sales may be rippling out to the broader meme stock universe, said Jack Ablin, chief investment officer at Cresset Capital.

AMC last week took advantage of a 400% surge in its share price since mid-May to announce a pair of stock offerings.

“It appears that other companies, like GameStop, are hoping to follow AMC’s lead by issuing shares and otherwise profit from the meme stocks run-up,” Ablin said. “Investors are taking a dim view of that strategy.”

Wedbush Securities on Thursday raised its price target on GameStop to $50, from $39. GameStop will likely sell all 5 million new shares but that amount only represents a “modest” dilution of 7%, Wedbush analysts wrote.

GameStop on Wednesday reported stronger-than-expected earnings, and named the former head of Amazon.com Inc’s Australian business as its chief executive officer.

GameStop’s shares rallied more than 1,600% in January when a surge of buying forced bearish investors to unwind their bets in a phenomenon known as a short squeeze.

The company on Wednesday said the U.S. Securities and Exchange Commission had requested documents and information related to an investigation into that trading.

In the past two weeks, the so-called “meme stocks” have received $1.27 billion of retail inflows, Vanda Research said on Wednesday, matching their January peak.

 

(Reporting by Aaron Saldanha and Sagarika Jaisinghani in Bengaluru and Sinead Carew in New York; Additional reporting by Ira Iosebashvili; Editing by Sriraj Kalluvila, Shounak Dasgupta, Jonathan Oatis and Nick Zieminski)

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U.S. to work with allies to secure electric vehicle metals

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The United States must work with allies to secure the minerals needed for electric vehicle batteries and process them domestically in light of environmental and other competing interests, the White House said on Tuesday.

The strategy, first reported by Reuters in late May, will include new funding to expand international investments in electric vehicles (EV) metal projects through the U.S. Development Finance Corporation, as well as new efforts to boost supply from recycling batteries.

The U.S. has been working to secure minerals from allied countries, including Canada and Finland. The 250-page report outlining policy recommendations mentioned large lithium supplies in Chile and Australia, the world’s two largest producers of the white battery metal.

President Joe Biden‘s administration will also launch a working group to identify where minerals used in EV batteries and other technologies can be produced and processed domestically.

Securing enough copper, lithium and other raw materials to make EV batteries is a major obstacle to Biden’s aggressive EV adoption plans, with domestic mines facing extensive regulatory hurdles and environmental opposition.

The White House acknowledged China’s role as the world’s largest processor of EV metals and said it would expand efforts to lessen that dependency.

“The United States cannot and does not need to mine and process all critical battery inputs at home. It can and should work with allies and partners to expand global production and to ensure secure global supplies,” it said in the report.

The White House also said the Department of the Interior and others agencies will work to identify gaps in mine permitting laws to ensure any new production “meets strong standards” in terms of both the environment and community input.

The report noted Native American opposition to Lithium Americas Corp’s Thacker Pass lithium project in Nevada, as well as plans by automaker Tesla Inc to produce its own lithium.

The steps come after Biden, who has made fighting climate change and competing with China centerpieces of his agenda, ordered a 100-day review of gaps in supply chains in key areas, including EVs.

Democrats are pushing aggressive climate goals to have a majority of U.S.-manufactured cars be electric by 2030 and every car on the road to be electric by 2040.

As part of the recommendations from four executive branch agencies, Biden is being advised to take steps to restore the country’s strategic mineral stockpile and expand funding to map the mineral resources available domestically.

Some of those steps would require the support of Congress, where Biden’s fellow Democrats have only slim majorities.

The Energy Department already has $17 billion in authority through its Advanced Technology Vehicles Manufacturing Loan program to fund some investments.

The program’s administrators will focus on financing battery manufacturers and companies that refine, recycle and process critical minerals, the White House said.

(Reporting by Trevor Hunnicutt in Washington and Ernest Scheyder in Houston; Editing by Mary Milliken, Aurora Ellis and Sonya Hepinstall)

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