Wealth Building Strategies For Vancouver Investors

by Brahma S. Varma
(Surrey, BC, Canada)

By Brahma Swarup Varma,
President, Pro-financial Planners Ltd.

We all need to feel financially secure. In practical terms, it means we want to have access to money as and whenever we want it. Wanting and wishing are not enough. We should have a plan and work on it. The basic ingredients for wealth building are:

? PAY YOURSELF FIRST. Vast majority of people earn to only spend. That is why people after working for 20 years do not have $20,000 in savings. They lack discipline and saving habits. The basic rule is to commit to set aside certain amount of money for the Future ? preferably, 10% of your earnings.

? WEALTH BUILDERS do not have to start with a pile of money. For example, if you invest $5,000 annually in your TFSA, and also in your spouse?s TFSA, by earning 12% p.a. return, together, you will have

o > $900,000 in 20 years
o > $3 million in 30 years, and
o > $9,5 million in 40 years
The secret lies in high returns. Banks are not geared to do it. Mutual funds go through the market volatility. The 20-year average return may not be even 6%.
The Wealth Accumulation formula is
WEALTH (accumulated) = Capital X Rate of Return X Time
W = C X R X T
The following table shows the accumulated values of one-time $10,000 investment (in RRSP or TFSA accounts) in 10, 20, 30 and 40 years:

YEARS LOW Returns HIGH Returns
3% 4% 10% 12% 15% 20%
10 13,440 16,290 25,940 31,058 40,460 61,920
20 18.060 25,530 67,270 96,463 163,670 383,370
30 24,270 43,220 174,490 299,599 662,120 2.37 Mn
40 32,620 70,400 452,590 930,510 2.67 Mn.14,69 Mn.
By adopting high return strategy, one can build up HUGE amounts of money.
Just imagine you are 40. You have $100,000 in your RRSP.
In 30 years, at 12%, it will grow to $299,599, and
At 15%, it will become $662,120
? TAX PLANNING goes hand in hand with wealth accumulation. That is why RRSP is so popular.
o The growth within the RRSP is tax-sheltered. You get a tax refund, too.
o Similarly, money accumulating inside a life insurance policy is tax-exempt. The most fascinating feature of life insurance wealth is that you may not pay any tax in your lifetime, and on death, your beneficiaries may get it Tax-free.
o The above-mentioned feature of life insurance as a wealth-building tool is widely used in Estate Planning.

Hear are some consequences of wealth building without tax-planning:
1. TAX ON ACCRUED INCOME: Any growth of money by an individual, or a company is taxable income in the year it is accrued. Even if you do not get the money in your hands, you will get a T-5 showing taxable income.
a. For example, you have invested $100,000 in 5-year debenture earning 12% p.a. You will be required pay income-tax on $12,000 every year. You will be subject to paying income-tax of over $5,000 per year.
b. Paid income-tax cannot come back to you while you can find ways to reduce the Tax-bite on tax-deferrals. So try to defer tax-payments as long as possible.
c. Federal and provincial governments give tax-incentives to selected industries like Energy and mining sectors. Energy or mining Flow-Through Shares (FTSs) are 100% tax-deductible. Remember, $1 in tax-savings equals $1.68 earned income.
d. Some financial planning companies bring out programs which they believe would qualify as tax-shelters. In real life, Canada Revenue Agency, almost invariably, disputes them. If a tax-shelter is declined, you lose money you invested plus you are liable to pay interest and penalties. People should be careful in buying any such tax-shelter.

2. ESTATE PLANNING is the most ignored aspect of wealth management. But ignoring Estate Planning can destroy everything you would create for your heirs. What happens when someone dies?
a. All his assets, including bank accounts are frozen by the Court.
b. The Deemed Disposition Rule comes into force. The heirs must provide the court financial statements on various estate assets of the deceased.
c. All assets are deemed to have been disposed of at the time of death. Any and all growth in the assets is taxable. In the case of financially affluent people, the figures can reach millions. For example,
i. Mr. X today owns $5 million in properties and other assets. As a good manager, he boosts up the asset values by 6% per year.
ii. He dies after 36 years. Assuming that he doesn?t add any new assets, at 6% compounding rate, the value of his estate will be $40 million. His heirs will have to pay over $10-million income-tax for the clearance of the estate. No estate maintains that kind of cash. Since the assets are frozen, it is impossible to obtain a bank loan either.
iii. It is under such circumstances, the estate administrator orders an Estate Sale. That results in very high drop in estate values. At the end, after paying the tax, the heirs might inherit less than one-half the value.
The wonderful estate he created in his lifetime could be destroyed unceremoniously simply because he ignored Estate Planning. In all financial planning matters, people procrastinate and cause irreparable damage to their wealth.

Wiser people take early professional help in building and protecting their wealth.


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