• During tumultuous times investors can’t help but become antsy as to how their stocks are doing. Larry MacDonald suggests that sometimes it’s better not to track your stocks too closely.

• It’s the beginning of 2012 and already Canadians are pessimistic about how the economy will perform. Read about what Canada’s economists expect for 2012.

When you sell property that’s not your primary residence, a taxable capital gain is triggered, which can erode any potential profit from the sale of the land. Enter the eco-sensitive, philanthropic land donation.

According to the federal government, an eco-gift is any land donation that preserves and protects the Canadian landscape—and this can range, dramatically, from wetlands, shores and boreal forests to prairie grasslands and rocky cliffs.

But before you get too excited just know: this process can be time consuming. You’ll need to dedicate six to nine months to complete all the steps—and you may need the help of a few professionals, such as a financial adviser or lawyer, although many charities involved with this type of donation now provide help to the donor from their in-house experts.

So, it is worth it?

Yes, if you’re patient, persistent and want to avoid taxable capital gains.

For instance, if you want to sell a piece of land you bought for $5,000 a few decades ago (your intent was to build a house and retire, but you’ve decided the rural life is not for you) then you may be faced with paying tax on the appreciation of that land. Now, if that piece of land was located just outside a major metropolis that’s grown significantly over the last few decades, you may be faced with having to pay taxes on a big profit. For this example, we’ll assume that land appreciated to $100,000—you’d have to pay $23,750 in taxes! (That’s 25% on the $95,000 profit.)

Donate that land and you’ll receive a tax credit. If the land is deemed eco-sensitive you’ll receive an even bigger tax credit—typically 16% to 20% of the actual value of the donation. For the example above, that’s a credit of at least $15,200.  (Also, talk to your accountant as regular charitable contribution credits may only be applied to up to 75% of your net income, but ecologically sensitive donations may be applied to 100% of your annual income.)

But remember, these tax credits can only be applied to the income you earned in the year the eco-donation was made. Also, talk to the charitable organization to determine what costs, if any, they can cover. Many of these organizations will pay all legal bills, surveys and other expenses associated with land donation. If the organization is unable to provide these services, then consider a cash donation to the charity along with the land donation. The charity can use the cash for all the professional services required to complete the donation and you get a credit for both the cash and land donation.

You can also donate the stewardship of your primary residence property, if located in an ecologically sensitive area, but be aware that your property value will probably depreciate—typically by 10%.

There are approximately 160 eligible charities listed in the federal government’s Ecological Gifts program.

Steps for Land Donations

(1) Choose a recognized charitable organization to donate land or land use.
(2) The charity, on your behalf, makes a request for an appraisal of the land to determine if it’s ecologically sensitive.
(3) Talk to the charity (and your adviser) to determine what type of donation would best suit their needs (donation of land in entirety, easement, or covenant).
(4) Pay for the appraisal, survey, land transfer, and ecological study of the land.
(5) Obtain a fair market value evaluation of the land.
(6) Consult professionals, such as lawyers, accountants, and, in some cases, realtors to draw up documents for the donation of the land.
(7) Donate the land and receives two types of charitable tax benefits:

• one for the donation of the fair market value of the land (minus any easements that may devalue the property), and
• the second as recognition for the protection of ecologically sensitive land, under the Federal Government Ecological Gifts program (instituted in 1995).

Recent studies and newspaper headlines are enough to give any donor doubts. In 2008 the Hospital for Sick Children Foundation was criticized for giving former president Michael O’Mahoney a lavish $2.1-million golden parachute. A Toronto Star investigation in 2002 revealed that almost one in six Canadian charities was spending more money on running the organization than on the actual charitable work. Data from five American states shows that less than half the money collected by for-profit contract fundraisers actually reaches the charities. Meanwhile a 2003 study by Harvard Business Review and McKinsey & Co. found that non-profits in the U.S. could free up $100 billion a year by changing operating practices to become more efficient.

My family has strong ties to the non-profit sector, so I know that many organizations are lean and well-run, constantly stretching their limited dollars to push important causes forward. But a few bad apples can taint the barrel, and it’s tough to find out which apples are bad. The Canadian government tries to regulate charities through its tax collection arm, the Canada Revenue Agency (CRA), but with only 270 staffers overseeing 85,000 charities—and a mandate that’s more concerned with tax evasion than charitable program outcomes—mismanaged organizations and outright scams can and do slip through the cracks.

To me, it seems that part of the solution is to give potential donors more information so they can judge the charities for themselves. If an independent third party could delve into the charities’ financials and come up with a fair and easy-to-use ratings system, Canadians would be more likely to direct the $14 billion that they donate every year to the charities that most deserve their money. That’s why we have decided to attempt what many say is impossible: establish the country’s first ever grading system for Canada’s 100 largest charities. We know that such a system is controversial and doomed to be incomplete, but having some information is better than none—and the key financial indicators can be telling.

For instance, we think it’s useful to know how much of your money is absorbed by overhead, and how much goes directly to the cause. We understand that charities need to spend some of the money they receive on things like accountants and offices for support staff—but if a charity is spending more on such things than the cause itself, we think there’s some explaining to do. We also think it’s helpful to get an idea of how much a charity is spending to raise each additional dollar in its fundraising efforts. Imagine if you donated $10,000 to a charity, only to find out that all of your money was used to air annoying hospital lottery TV ads, rather than helping people. In our rating system, we also keep an eye out for charities that don’t seem to need your money, because they never use it. Believe it or not, some charities already have years of reserves in their vaults. Do you really want to add another $1,000 to a growing pile of dusty, unused money? Finally we look for red flags such as poor governance and secretive charities that won’t divulge what they do with your money, even when donors ask.

There are many other important things you need to know before giving to a charity, such as how valid its mission is and how successful it is at accomplishing its goals. But such factors are difficult to measure through hard numbers, so we weren’t able to incorporate them directly into our rating system. Instead, we did the best we could with the data currently available through the CRA’s 2008 charity information filings to come up with what we call the MoneySense Charity Standards Grade. This score is based on similar systems already in place at charity rating agencies in the U.S., and it’s designed to make it easier to spot when key financial ratios at a charity are out of line for its sector. It also helps donors identify charities with overly large or small reserves, or those without proper governance. By applying it to Canada’s largest 100 charities—as measured by the dollar amount of public donations they receive—we’re simply hoping to help our readers make the most effective use possible of the limited dollars they have available to give.

How much goes to the cause?
The first factor we looked at was how much of your donated money goes to the cause itself, versus administrative and fundraising costs. Yes, sometimes you need to spend money to raise money. But Kate Bahen, managing director of Charity Intelligence Canada, a Toronto organization that advises donors, says that charities can get carried away and spend more time empire-building than helping the people they’re supposed to help. “There are some organizations that are incredibly nimble and cost-efficient,” she says, “while others have an incredibly bloated cost structure.” Because of this, she says, the percentage of income an organization spends on administration and fundraising can be revealing.

In our rating system, charities receive 10 points if 85% or more of their overall annual expenses go to charitable programs, 7.5 points if 75% to 85% go to programs, and so on. Charities that spend less than 60% on charitable programs get zero points.

One wrinkle we ran into was how to grade fundraising organizations such as the United Way or hospital foundations, which don’t run charitable programs themselves. Such organizations exist mainly to funnel money to outside groups, so in these cases we decided to count the money they transferred to other organizations as program expenses. As well, fundraising organizations generally have lower overhead costs (as they are not running programs directly), so we held them to a higher standard, awarding top marks only if 90% or more of their expenses go to other charities. Fundraising organizations with less than 70% going to other charities received no points in this category.

How efficient is the fundraising?
Spending big bucks on galas, telemarketing, door-to-door campaigns and TV ads can raise awareness of a charity—which in turn can bring in even bigger bucks. But some charities are more efficient at this than others. So the next factor in our Charity 100 grade is how much each charity spends on fundraising for every $100 raised.

This is a controversial subject, because from a charity’s point of view, spending $90 to raise $100 makes perfect sense. After all, at the end of the day you end up with $10 more to spend on your charitable programs. “But from a donor’s perspective, do you want 90 cents of your dollar to go to fundraising costs, and only 10 cents to go to charitable programs?” asks Bahen. “It’s prudent to seek charities with low fundraising costs where your dollar will have more impact.”

To rate the charities on fundraising efficiency, we divided the amount spent on fundraising in a year by the amount raised. A charity gets a top mark of 10 points if it spends $10 or less to raise $100. It gets 7.5 points if it spends between $10 and $20 to raise $100, and so on. If it spends $35 or more, it gets zero points. That cutoff point may seem arbitrary, but both the American Institute of Philanthropy and the Better Business Bureau Wise Giving Alliance cite $35 as a reasonable upper limit to the amount that should be spent to raise $100. The CRA agrees, saying that a charity which spends $35 or less to raise $100 is unlikely to generate concerns about its fundraising costs.

For organizations that focus primarily on fundraising for outside causes, such as hospital foundations and the United Way, we again demand a higher level of efficiency, since fundraising is pretty much all they do. For these organizations, we awarded full points to those that spend less than $5 to raise $100, while organizations that spend more than $30 to raise $100 were given a zero.

When we looked at how efficient the top 100 charities were at fundraising, we were surprised to find that many big-name organizations spent far more than our $35 cutoff. For instance, the Heart and Stroke Foundation of Ontario spent $61, and the Canadian Cancer Society Ontario Division spent $43. When we looked closer, we quickly found out why their fundraising expenses were so high: lotteries.

It turns out that using lotteries to raise money is particularly costly, as they rely on pricey TV ads, cash prizes, cars and trips, all of which have to be paid for. But Heart and Stroke Foundation of Canada chair Irfhan Rawji argues that the Ontario lottery generates $10 million in profits—money it couldn’t raise otherwise. “Calculating a fundraising efficiency ratio from the information from the CRA doesn’t tell the whole story for an organization like the Heart and Stroke Foundation, which raises money in many different ways,” he says.

That’s a reasonable argument, but we still stuck to our $35 limit. That’s because we felt that lottery expenses really are a hard fundraising cost. Lotteries can be so expensive, in fact, that they can result in a huge waste of your donated money. In 2008, the BC Cancer Foundation lost more than $600,000 on an unsuccessful lottery.

When looking at the fundraising efficiency grades, however, keep in mind that there could be valid reasons for a low score. A new charity, or one working on a less popular cause, such as helping drug addicts, will usually have higher fundraising expenses, for example.

Is the charity run properly?
A charity is only as good as the men and women in charge, and “many have concluded that an organization with a strong and active board is less likely to have other problems,” says Bennett Weiner, of the Better Business Bureau Wise Giving Alliance. We agree, so we decided to make strong governance one of the categories in our rating.

Half of the points in this category are awarded based on a short governance questionnaire that we sent out to all 100 charities. We based our questions on the Better Business Bureau’s governance standards and adapted them based on the opinions of various Canadian experts about standard practices in well-run organizations. Organizations got half a point for every question they answered “yes” to. Twenty-nine of the 100 organizations we contacted responded to our questionnaire. Those which did not respond at all—even after a follow-up phone call—got zero.

The remaining points in the governance category were awarded for transparency. Susan Phillips from Ottawa’s Centre for Voluntary Sector Research and Development, says that of all the factors used for assessing charities, “transparency is the most important.” Charities should expect to be accountable to the public if they rely on the public for donations, and we felt it’s not right for a charity to ask you for money, then refuse to tell you how that money is spent.

While researching our rating system, we found a huge range in attitudes when it came to secrecy. Some charities were open with their financial information when we requested it. Others, however, had bare bones websites and refused requests to provide information. “Many organizations are not interested in transparency,” says Mark Blumberg, a charity lawyer with Blumberg Segal LLP. “They want to be private fiefdoms where they can secretly do what they want and put out the information they think you need to know.”

In order to rate the top 100 charities on transparency, we looked at both what information they provide automatically and how they deal with specific requests. For instance, if a charity posts complete audited financial statements on its website, it receives four points; if it posts only partial financial statements online, or if it agreed to provide us with complete audited financial statements only upon request, we gave them two points. If a charity refused to provide financial statements, or didn’t respond at all, it got zero points. If the organization had a privacy policy on its website explaining how personal information was used, it got another point. We awarded a bonus point in the governance category to charities that disclosed the exact salary of their executive director, as we believe that charity leaders—just like CEOs of public companies—should be transparent about their pay. Only 11 out of the 100 charities gave us this information.

Do they even need your money?
How would you feel if you found out your $10,000 donation to a charity from three years ago hadn’t been touched? Not too good, we imagine, yet it happens all the time. That’s because some charities build up massive reserve funds that sit in investment accounts for years. “It’s mind boggling,” says Bahen. “People think they’re making a difference and helping find a cure for disease in this lifetime, but the money’s being parked in investment accounts. It’s just going to Bay Street.”

Charities argue that large reserve funds give them long-term stability and provide income, which is true, but we felt that if reserve funds were ballooning beyond three years’ worth of expenses, it could mean that a charity is not in urgent need of new donations.

The American charity evaluator, Charity Navigator, believes that a healthy charity needs to have some rainy day funds on hand, so we decided that a charity should have at least three months’ reserve to get a top score of 10 points in this category. Organizations got no points if they ran a deficit and had no reserve funds (except for hospitals and major art galleries, which tend to have little money in reserve due to regular government funding), or if they had more than five years’ worth of funds on hand. Keep in mind that there could be some legitimate reasons for a charity to temporarily have a large amount of money in reserve, for example, if it is saving up for a new building or if it has just received an unusually large donation.

How to use our rating system
The MoneySense Charity 100 provides a quick way to tell if a charity is meeting industry standards for its finances and governance. But many people I spoke with warned me there are crucial things you need to know about a charity that can’t be captured by comparative data. There’s no quick solution. To find a charity you can support with confidence, you need to do some research, and some thinking.

Start with an issue that you’re passionate about. Don’t rely on telemarketers and door-to-door salespeople to tell you what’s important to you. Much of this type of soliciting is done by for-profit fundraisers, meaning a chunk of your donation will be skimmed off before it even reaches the charity. Instead, be proactive: look online or on our Charity 100 for organizations working in the area you’re interested in until you find a few that you think might be a good fit.

If the organizations you like are on the Charity 100, at this point you may want to see if they are meeting financial and governance standards. You’ll find that on our chart we have divided the charities up into sectors and awarded them easy-to-read letter grades, just like those awarded in school. (When calculating the overall grade, all categories were weighted at 100% except for the reserve fund score, which was weighted at 50%.)

One important point we’d like to make is that we only compared each charity to other charities within the same sector. So you can’t say that a charity that got an ‘A’ in the Fundraising Organizations category is necessarily better than a charity which got a ‘B’ in the Social Services category. Because we normalized the scores across each sector, it’s quite possible that a less efficient charity in one sector will get a higher grade than a more efficient charity in a different sector.

Finally, even if a charity you’re interested in receives a low overall grade, don’t write it off automatically—it’s possible the charity may have a legitimate explanation. Instead, look at the subcategories to see where the charity is weak and where it is strong, and read the charity’s website to make sure you have a clear understanding of what it does, how it is structured and its track record. As you do your research, it may become clear why it has unusually high fundraising costs, for instance, or no reserve fund. It doesn’t hurt to do a quick Google search to see what people are saying about the organization, and if you still have questions about the charity, you should call.

The most important thing is to get an understanding of the overall effectiveness of the organization’s programs. Good financial health and governance are irrelevant if an organization isn’t accomplishing anything. If it’s an addiction centre, find out how many addicts have been successfully rehabilitated in the last year. For a land trust, find out how much land has been purchased. Ensure that the organization has a long-term strategic plan, as well as regular evaluations to measure and improve the results of their programs.

We think our Charity 100 is a valuable tool for Canadian donors. But we know it’s far from perfect. More sophisticated systems, such as the one used by Charity Navigator in the U.S., have customized target ranges for program costs, fundraising efficiency and reserves for various sub-sectors within the charity field. They also use more than one year of data, to smooth out irregularities such as large one-time donations.

Any measurement system is only as good as the data it uses, and unfortunately, the data available to us was limited in both quantity and quality. In some cases, the numbers may not be accurate due to differences in how charities categorize costs, in others, because charities provided the CRA with misleading or erroneous data.

In fact, after completing this process, we feel strongly that the Canadian government needs to provide donors with more information and do more to ensure its accuracy. Both the U.S. and England have stronger disclosure requirements for charities. As well, while little governance information is collected in Canada, in the U.S. the IRS asks for detailed senior executive salary information as well as including questions similar to the ones in our governance questionnaire.

Charities need to do their part too. While many are doing a great job of being transparent, some are doing as little as possible. At the very least, large charities need to publish detailed annual reports and post their full audited financial statements online.

We feel that providing the public with high-quality easy-to-access data benefits everyone—except, of course, those charities that have something to hide. Pertinent information presented in a useful manner can save donors a lot of time too. My uncle Art in Buffalo spent years weeding out bad charities from his list. He looked at their finances, read appeals with a critical eye, and phoned and wrote when he had concerns. If a charity didn’t respond with credible answers, he stopped giving. Now he’s at the point where he feels confident that all the charities he gives to are doing good work, and he’s proud to support them. We hope our ratings will help you feel more confident about the charities you support too.

Research by Emma Marshall and Jacqueline Nelson

The actor, born-again Christian and youngest of the famous Baldwin clan, has set up a hilarious website, called Restore Stephen Baldwin, to — that’s right — restore Stephen Baldwin to his former, wealthy self.

The actor is soliciting donations from people to, presumably, live the lifestyle he lost when he filed for bankruptcy last year. The website is pretty unbelievable. It claims his new found love of Jesus resulted in less acting gigs; the website says he lost 70% of his income after he started proselytizing around the country.

The site, and this amazing video (see below), uses Christian themes — he compares himself to Job — to justify this donation campaign. The suggested donation amount is $4.21, which the site says is because “Job 42:10-11 is the model and inspiration for this movement.”

According to this must-read Q&A, “100% goes directly into his bank account through online gifting.”

In fact, retirement for many of us is going to be an exercise in calculating odds and balancing one probability against another. Should we treat ourselves to that grand tour of Europe? Or deny ourselves because we may need the money years from now to pay for a nursing home? Should we invest aggressively to increase our chances of growing our nest egg? Or play it safe and take as few chances as possible?

These are anxiety-inducing questions and, ironically, you can blame that anxiety on the long, healthy lives we’re now living. Back in the 1920s, a newborn Canadian could expect to live for less than 65 years. Today, a baby born in Canada can expect to live to 80. So while our grandparents and great-grandparents didn’t spend a lot of time thinking about retirement—and with good reason!—we now have to budget and plan for 20 years or more of not working.

A lot can go wrong over a couple of decades. And even if you set things up perfectly for a nice 20-year retirement, fate has an odd sense of humor. After years of planning, you may die young—or live long, long past what you thought would be your expiry date.

One of the most common mistakes that people make in retirement planning is basing everything on the notion that they will live to what they believe to be the average life expectancy. You should remember that the average life expectancy is just the midpoint in a huge range of possibilities.

Among other things, bear in mind that the life expectancy figure you read in the newspaper is usually expressed in terms of what a newborn child can expect. The figure assumes there will be a steady number of deaths at every age along the way—a few people will die in childhood, a few others in adolescence, and so on. Those early deaths drag down the overall figure. So if you’ve dodged disease and accidents and made it all the way to 65, your life expectancy is considerably greater than the average for a newborn would suggest. Someone who is 65 today has a better than even chance of living to 85.

Remember, too, that the average life expectancy figures are just that: averages. Some people enjoy far fewer years; some enjoy many more. The average life expectancy for seniors may be 85, but that doesn’t mean you can ignore anything past 85. About half of seniors will live beyond that point— sometimes well beyond. The 30-year retirement is not uncommon and you have to be prepared for the possibility that you’ll be blowing out the candles on your 100th birthday.

The problem, from a financial perspective, is that there are no guarantees. Moshe Milevsky, associate professor of finance at York University in Toronto, points out that a 65-year-old man who retires today faces an 8% chance of dying before he turns 70. He also faces a nearly identical 8% chance of living past 95.

Think about the practical implications of those figures. Our 65-year-old man may expect to die relatively young. He may burn through his cash and treat himself to lots of expensive indulgences—only to find that, gosh, he’s a Methuselah who has to live the last quarter century of his life trying to make ends meet on a meager budget.

On the other hand, he could play it safe and pinch pennies to ensure he will have enough to last until he’s a centenarian. But, if so, he faces a real possibility of finding himself in a hospital bed at 68 or 69, listening to a doctor deliver a grim diagnosis, and cursing himself for not enjoying life more when he had the chance. The odds of disappointment are identical no matter which option our hypothetical 65-year-old chooses, so how does he—or you—make a choice? The following plan can help you make the most of the retirement odds.

Calculate your must-haves

You often hear retirement planning boiled down a single figure: “you need $1 million to retire well.” A smarter approach is to think of your retirement plans as consisting of two separate figures: one for things you must have, the other for things it would be nice to have.

The first and most important part of retirement planning is taking care of things you must have. You want to ensure you have enough to live on without feeling deprived of anything vital.

You can estimate your target figure by toting up how much you spend in all areas, then deducting the expenses that will disappear in retirement, i.e. no more mortgage payments (because the house will be paid off), no more child care or tuition payments (because the kids will be adults), no more retirement savings (because you will be retired). You should also deduct any luxuries you could live without in retirement, such as a second car. You can also subtract the cost of commuting to the office, work clothes, and so on.

The amount that’s left represents what it would cost you to maintain the essentials of your current lifestyle in retirement, and that figure is probably a lot lower than you think. Most middle-class couples arrive at a must-have figure of $30,000 to $40,000 in after-tax income.

Calculate your nice-to-haves

We all have dreams and you should budget for those, too. Maybe you want to take that African safari, golf every day, or winter down south. You should size up what it would take to pay for whatever bliss you desire and regard that figure as the second part of your retirement planning.

Just one tip: when assessing your nice-to-have list, remember that age takes its toll. Right now you may dream of traveling the globe. Once you’re past your early seventies, however, you’re likely to discover that your wanderlust is diminished. Similarly, you may find that golfing every day is no longer a pleasure once you’ve hit 75. So by all means budget for luxuries, but keep things within reason. You’re not likely to be globe-trotting for 30 years nor whacking iron shots to the green on your 95th birthday.

Count on government

Despite what the fear mongers would have you believe, Canada Pension Plan (which is funded by contributions from you and me) is in fine shape. Old Age Security (which is funded out of general government revenues) looks to be on solid ground, as well.

If you’ve worked in Canada all your life, you can expect to receive $11,000 to $16,000 a year from those two sources, depending upon what you made during your working years and how early you start collecting your pension cheques. A husband and wife who have both worked until retirement at 65 can expect $22,000 a year or more between the two of them. That money will keep pouring in as long as you live, with no particular planning required on your part.

You should compare what government will provide you with what you figure your minimum retirement needs will be. If you and your spouse figure you can maintain the must-have parts of your current life on, say, $33,000 a year, the good news is that retirement becomes a very affordable proposition. You may have to add only $11,000 a year in after-tax income from corporate pensions or savings to ensure the key components of your retirement plan.

Factor in pensions and RRSPs This brings us to the thorny issue of pensions. You may be fortunate enough, if you’re a public servant or work in the right industry, to be the recipient of a pension that guarantees you a “defined benefit” in retirement. If so, you can simply contact your employer’s human resources department to find out the size of the monthly retirement cheque you can expect.

If that amount is enough to bridge the gap between government stipends and your retirement needs, then congratulations! Your retirement planning is largely done. You may still want to contribute to an RRSP to finance luxuries, to provide you with a buffer against inflation, and to guard against the possibility that your employer will go bust and renege on its pension promises, but, in all probability, those RRSP contributions will simply increase your security, not determine your retirement lifestyle.

Most of us, though, aren’t in that position. Maybe you don’t have a pension plan. Or perhaps your employer’s pension plan is a “defined contribution plan” that only promises how much your employer will contribute each year you work, but leaves the actual investing up to you. Or maybe your employer’s defined benefit payouts aren’t enough to bridge the gap between government pensions and what you need. In any of those cases, you’re going to have to deal with uncertainty.

So get a handle on risk

This is where playing the odds becomes vital. Some retirees insist on playing it safe and keeping all their money in bonds and GICs. Others go for the gusto by betting on high-yield real estate investment trusts, penny stocks and small growth firms in hopes these high-risk, high-reward bets will provide them with the income they want.

Both approaches are flawed. Stashing everything in bonds and GICs raises the risk that inflation will whittle away the real value of your savings. On the other hand, betting on high-risk stocks or trusts raises the odds that you’ll make a big mistake and wipe out a chunk of your savings.

The best solution for nearly everyone is a well-diversified portfolio that has 30% to 50% of its assets in various fixed-income investments, such as bonds and GICs, and the remainder in a wide variety of stocks from Canada and other countries. One good approach to building such a portfolio is outlined in our article about couch potato investing.

No portfolio, though, can guarantee a given return. What makes retirement planning so difficult is that you’re drawing down your portfolio for living expenses at the same time as the markets are bobbing up and down. The first few years of your retirement are particularly crucial. If you have the bad luck to retire at just the moment that the markets head into a bear market plunge, your withdrawals combined with stock market losses could put a hole in your portfolio from which it will never recover. On the other hand, if you retire at the same moment the markets decide to go on a tear, the surging market returns may more than cover your early withdrawals. You may actually increase your net worth in retirement.

If you want to make your money last for 30 years, count on withdrawing no more than 4% of its initial value each year, adjusted for inflation. You should begin your retirement by withdrawing $4,000 a year for each $100,000 you start with. If inflation is running at 2% a year, you would withdraw $4,080 the next year, $4,162 the following year, and so on.

The 4% figure comes as a shock to many people, who assume that they can count on their portfolio for 10% or more in the way of annual payouts. To read more about the reasoning behind the smaller figure, refer to The 4% Solution below.

Balance the present and the future

Here’s where individual preferences become important. While a 4% withdrawal rate gives a well-balanced portfolio an excellent chance of surviving 30 years, it’s very much a pessimist’s strategy. Chances are that things will turn out better than the worst case. If they do, you stand a good chance of leaving behind a tidy fortune. Your heirs will no doubt like this arrangement and if you want to leave them a big bequest, that’s fine—but it’s probably not the optimal deal for you. In fact, if you apply the 4% withdrawal figure to your entire portfolio, you’re probably erring on the side of caution and living on less than you could in retirement.

A better idea is to treat the must-have and nice-to-have portions of your portfolio in different ways. When it comes to your must-have portion, play it safe and count on a 4% annual withdrawal rate. If you calculate, for instance, that you’re going to need to generate $16,000 a year on top of CPP and OAS to provide you with the necessities of your life, you should accumulate at least $400,000 in RRSP savings or the equivalent in corporate pension plans. That $400,000 should be able to fund an inflation-adjusted withdrawal rate of $16,000 for as long as you live.

If you don’t want to worry about the ups and downs of a portfolio, you can use some of your must-have savings to purchase an annuity that will provide you with a guaranteed payout for the rest of your life. Be sure to compare annuities from different companies to get the best possible deal. Look at all the different options available. Some annuities pay your heirs a lump sum if you die early; some are inflation-protected; some cover both you and your spouse. Seek the advice of a good fee-only financial planner before buying. Put particular emphasis on making sure that the insurance company that offers the annuity is as financially sound as possible. (Look for at least an AA rating from a rating firm such as A.M. Best. To learn more about these ratings, go to Ambest.com.) You may even want to split the annuity portion of your musthave money between two or more companies to ensure no single disaster can swallow up your savings.

Once you’ve built a fortress around the must-have component of your portfolio, you can treat the nice-to-have portion with more freedom. You can and should plan to run through a chunk of your nice-to-have budget in the early years of retirement, when you’re going to be most active. By the time you turn 75, your appetite for travel and other luxuries is likely to diminish and by the time you hit 85, many of your discretionary expenses will have dropped away completely. If your nice-to-have money is running low at that point, so be it. You will have extracted maximum value from your nice-to-have money when you were still healthy enough to enjoy it, while protecting your future by ensuring that your must-have needs are well covered. That’s the retirement we all want and it’s well within your reach.

The 4% Solution: More on making your money last

William Bengen, a financial planner in California, is the author of a long, but easy-to-understand explanation of how different withdrawal rates can affect your retirement. Originally published in the Journal of Financial Planning, “Determining withdrawal rates using historical data” is a classic in its field. His key finding? A 4% withdrawal rate is the most a truly long-term investor should consider. If you’re looking for a shorter take on the same subject, go to Scottburns.com and check out the “The Spender’s Portfolio and Portfolio Survival” section. The examples used are from the U.S., but the same math applies to Canada.

What did I think about that? How about: “Who left me off the invite list for the tax avoidance party?”

Most Canadians regard avoiding taxes as something between a duty and an obsession. Certainly I don’t want to be paying any more than I absolutely have to. Paying nothing at all sounds even better to me. But is getting out of your taxes really as easy as Dave made it seem? And if so, why isn’t everybody doing it?

One of the first people I talk to in search of an answer is Shy Kurtz, a tax-shelter promoter with Freedman, Kurtz & Kron Financial in Montreal. He stresses that he’s not trying to peddle anything that’s against the law. He draws a distinction between tax avoidance (where you take advantage of the rules to minimize your tax bill) and tax evasion (where you deliberately try to hide income or deceive the taxman). “Tax avoidance is perfectly legal,” he says. “Tax evasion, on the other hand, is not.”

There are two major strategies you can use to legally sidestep taxes. The first is to put your money into certain types of investments that government wants to encourage. Government deliberately equips these “tax-assisted investments” with generous tax breaks precisely because it wants to help them attract investors. The second way you can give the taxman the miss is to exploit loopholes in tax laws in order to earn outsized tax deductions. Manoeuvres like this are termed tax shelters. They’re the work of sharp-eyed lawyers and accountants who spot unexpected ways to legally beat the system set up by legislators and bureaucrats.

While the two types of tax avoidance are quite different, they both involve risk. Consider, for instance, the sad history of MURBs — a bureaucratic designation for Multiple Unit Residential Buildings, or what most of us would call apartment buildings. Back in the 1970s, Ottawa decided to encourage investment in this sector by allowing investors in new apartment buildings to claim their annual depreciation against other income for tax purposes. Promoters quickly took advantage of that offer and constructed leveraged deals that allowed MURB investors to put down as little as 10% of their total investment while giving them an immediate tax break almost as big as their initial cash outlay.

All of which was fine until the real estate market crashed in the late 1980s, vacancy rates soared and a lot of clever taxpayers found they couldn’t sell those lovely tax-assisted MURBs for love or money. The lesson? “The prospects of immediate tax savings blinded people to the economic reality of the underlying investment,” says Robert Brown, former CEO of PriceWaterhouse Canada, former head of the Canadian Tax Foundation and a long-time observer of the tax planning industry. “Investors weren’t thinking about the long-term implications.”

That lesson went unheeded in the 1990s when investors flocked to Labour-Sponsored Investment Funds (LSIFs). These are essentially mutual funds that invest in small start-up firms. Investing in such businesses has always been notoriously risky, so federal and provincial governments decided to offer tax credits worth 30% or more of your initial investment to encourage as many investors as possible to take the plunge.

Unfortunately, most labour funds have turned out to be dogs. Even the 10 best funds with a minimum five-year track record have lost an average of 1.2% a year, according to the fund tracker Morningstar. Many LSIFs have done far worse. Adding misery to discontent, those who invest in labour funds have to hold these poorly performing investments for a minimum of eight years or pay back all the tax credits they have already claimed.

The dismal track records of MURBs and LSIFs demonstrate that no tax advantage can compensate for a fundamentally lousy investment. “Any investment you make should stand up on its own investment merits,” says Adrian Mastracci, portfolio manager of KCM Wealth Management in Vancouver, a fee-only advisory service. “You should ask yourself: ‘Would I want to own this without the tax goodies?’ If not, you should move on.” That brings us to tax shelters. While government approves of tax-assisted investing, it’s no fan of tax shelters. These shelters are the work of tax planners who build their businesses on their ability to dream up clever shortcuts through the Income Tax Act. In doing so, they often incur the wrath of the Canada Revenue Agency, which wants to collect as much tax as it can and views fancy tax avoidance schemes with deep suspicion.

This battle of wits between the government’s revenue agency and tax planners is something akin to the spy vs. spy clashes of the KGB and MI5 during the Cold War: a fascinating struggle between unseen foes who are constantly challenging the rules. To keep track of all the tax shelters in operation, the Canada Revenue Agency requires that promoters register with the government. Anyone claiming a shelter tax reduction must include an assigned tax shelter number on their tax returns.

Hard-working minds are constantly dreaming up new kinds of tax shelters. Something known as the “Little Egypt Bump” took advantage of depreciation charges during mergers and raised eyebrows at the federal Auditor-General’s office as far back as 1986. Around the same time, other tax shelters packaged the tax credits that were doled out to encourage Canadian movie production and scientific research and resold them to investors looking for a break on their taxes. More recently “buy low, donate high” schemes bought art at low prices, then used questionable valuation techniques to donate it to charity in return for a tax receipt based upon values as much as three times the original purchase price.

The advantage of tax shelters like these is that they can’t wipe out your capital the way a tax-assisted investment can. On the other hand, you run the risk that the Canada Revenue Agency will decide your shelter runs afoul of the law and challenge it in tax court. In fact, all the above tax shelters — from the Little Egypt Bump to the film tax credit to the art flip — were shut down when the government took action to either clarify or change its laws. “The Canada Revenue Agency has become very aggressive about tax shelters, particularly those that have an underlying component of charitable donations,” says David W. Chodikoff, a tax litigation specialist at law firm Goodman and Carr in Toronto.

If your tax shelter is successfully challenged by the Canada Revenue Agency, you can lose your deduction for that year. You may also face a penalty, depending upon your involvement in choosing the shelter. And that’s not to mention the stress, says Chodikoff, who spent 15 years working for the federal government, trying to shut down questionable tax shelters, before entering private practice: “One of the biggest things I see, having been on both sides of the fence, is what I call the worry factor. It’s not just about the dollars and cents saved on your taxes, but about your mental health. A long and difficult reassessment can take years off your life and you really have to ask yourself: ‘Is it worth it?’” In shutting down the art flip shelters, for instance, the Canada Revenue Agency reassessed approximately 10,000 tax returns, creating massive headaches for the people who had taken advantage of those shelters.

So should you play the tax avoidance game? The answer depends upon how you define your terms. The most popular tax-avoidance tool is the humble Registered Retirement Savings Plan (RRSP). You should definitely take advantage of this tax dodge.

But tax avoidance doesn’t end there. If you’re a high-income earner who doesn’t mind rolling the dice in search of some tax-assisted investing, you may want to consider investing in flow-through shares, which are issued by some oil, gas and mining companies. A flow-through share gives the investor, rather than the originating company, the right to claim various tax deductions.

Consider an oil and gas company that issues $1 million in flow-through shares. It commits to using that money exclusively for exploration expenses, which gives it the right to deduct that amount from its corporate taxes. However, rather than use the deduction itself, the company passes it along to people who buy the flow-through shares. The shareholders can then write off the entire amount against their taxes, usually in the first two years.

Sounds good, doesn’t it? But there is a catch. Because the exploration company is giving up its right to the deductions, it tends to price its shares higher than a normal common share. This means the underlying investment can decline in value. For example, shares in the 2005 EnerVest Flow-Through Shares Limited Partnership, a mutual fund of flow-through shares popular with oil and gas investors, were sold to investors at $25 apiece. A year later they are worth only $14, a loss which offsets much of the tax saving. Bottom line: before you invest in any flow-through stock, do your homework to ensure that you’re buying a promising company as well as a promising tax write-off.

If you have the stomach for extreme tax avoidance, an innovation called gifted trust arrangements has replaced the nowbanned art flip deals as the tax shelter du jour. These shelters, such as the Donations for Canada program offered by ParkLane Financial of Burlington, Ont., use a mind-boggling series of trusts and sub-trusts and offshore firms located in exotic locales such as Bermuda to swell the original value of your donation. In 2005, its first full year of operation, the Donations for Canada program helped 6,000 taxpayers get $175 million in donation receipts.

It doesn’t take a tax lawyer to spot the attraction. The essence of the deal is that ParkLane’s parent company will quadruple the size of any charitable donation you make, thus boosting the size of your tax receipt. Depending on your province and tax bracket, a $1 donation can provide about $1.80 in tax credits. (This is how my friend Dave got his envy-inducing tax deduction.)

Yes, there are strings attached. To benefit from the donation, you select a charity — only a few are eligible — and that charity has to enter into a complex repayment agreement with ParkLane’s parent company. The result is that for every $2,500 in cash you donate, the charity gets a much smaller amount deposited in a hedge fund account. Over the next 20 years it receives 80% of the monthly profits from this leveraged sum. ParkLane’s parent company keeps the principal. While the program thus delivers less to charities, it could also give donors more than they bargained for.

“Certainly there are risks with our program,” admits Ron Olsthoorn, president of ParkLane. The biggest risk, of course, is that the Canada Revenue Agency may decide it is too good to be true, as it did with the art flip deals, and challenge it in tax court. However, Olsthoorn argues his scheme is fully protected against any possible objections from the taxman. “Since we are dealing only with cash donations, there are no valuation problems with our program and nothing for the Canada Revenue Agency to challenge. We think we’ve built a better mousetrap here,” he says. Just in case, Olsthoorn has set up a $500,000 legal defence fund that clients may access if the government does decide to test his plan in court.

While the revenue agency has not yet taken the Donations for Canada tax shelter to court, some tax experts expect it to be just a matter of time. Financial adviser Mastracci refuses to recommend the deal to his clients. “Anyone who puts their money into one of these charitable donation schemes is just asking CRA to put a red flag on their return,” he says. Jacqueline Couture, a spokesperson for Canada Revenue Agency, suggests as much: “It is our position that the 2003 legislation [which was used to shut down the art-flip deals] will apply to all types of donation arrangements to limit the allowable donation to the amount of the donor’s cash.” Donations for Canada participants recently got a terse letter from the Canada Revenue Agency saying the program was being investigated. If the government acts on this stated position, Olsthoorn may soon get a chance to put his legal defence fund to work. But for now, it is one of the more aggressive, and inventive, tax shelters available.

Despite the fact that a tax break would look pretty good on my next tax return, I’ll be steering clear of anything racier than an RRSP. I’m the conservative type, I guess. But after talking to countless taxpayers, tax lawyers and tax planners, I’ve learned one thing. Even if the Canada Revenue Agency bulldozes the Donations for Canada gambit, another dodge will quickly take its place. Like Hockey Night in Canada or a Tim Hortons coffee, a tax shelter seems like one of life’s necessities for many Canadians. Or as my friend Dave put it: “I pay plenty of taxes as it is. If I can find a way to legally save on them, I’ll take it.”

When less truly is more

Here are the key terms any tax-phobic Canadian needs to know.

Tax avoidance: this is the perfectly legal practice of trying to arrange
your affairs so that you pay the least tax possible. Do you contribute to an RRSP? Then you’re a tax avoider.

Tax evasion: this is the perfectly illegal practice of lying to the taxman or trying to hide some of your income. If caught, you face penalties ranging from a fine to a jail term.

Tax-assisted investment: these are investments that either Ottawa
or the provinces want to encourage, so government doles out tax breaks to people who put money into them. Labour-sponsored investment funds, which invest in small start-up companies, are one example of a tax-assisted investment.

Tax shelter: these are deals set up by private entrepreneurs who spot a loophole in
the tax system. They can offer a big tax break, but are often challenged by the taxman. One current example is what as known as gifted trust arrangements that swell the value of your donation to charity through a complicated series of manoeuvres.