The coverage limits imposed by Canada Deposit Insurance Corp. never look so skimpy as when you’ve sold a house and need safe parking for the proceeds.
CDIC covers up to $100,000 in principal and interest in each of seven account categories, including deposits held in one name, in joint accounts and in a tax-free savings account. With a $603,344 national average resale house price nationally in November, it’s quite likely that someone who sells a house and wants to put the money in savings will not get CDIC protection for the entire amount at one bank.
A reader recently wondered about this balance of risk in exceeding CDIC limits and convenience of having money in one bank account. “How concerned should I be that CDIC only insures up to $100,000?” he asked. “I recently sold my house and want to put the proceeds in a high interest savings account, but I’d rather not have to open a separate account at a different institution for each $100,000.”
The risk of losing money in a savings account because a Big Six bank collapsed is very small, but not zero. It’s a personal judgment call whether the safety of dividing up the money into chunks and parcelling them out to separate banks is worth the effort.
But there’s another consideration here – the interest rate you’re getting from your bank. Big banks pay close to zero right now, whereas alternative banks paid as much as 1 per cent to 1.8 per cent as of mid-December. With proceeds of, let’s say, $500,000 from the sale of a home, 1.5-per-cent interest gets you $7,500 a year before taxes.
There are enough CDIC-member alternative banks with competitive rates to absorb the multiple deposits of $100,000 or so that would be generated by the sale of an average-price home. The inconvenience of managing these accounts is the price you pay for better rates and confidence that the risk of dealing with smaller financial institutions has been contained.
The reader who asked where to put the proceeds for a home sale is a resident of Ontario, where credit union deposits are insured for up to $250,000 by the Deposit Insurance Corp. of Ontario. There’s unlimited coverage in registered accounts, including TFSAs.
In other provinces, notably Manitoba (home to several online banks owned by credit unions), there is no limit on deposit insurance coverage. Read my take on how this Manitoba coverage compares with CDIC, online at tgam.ca/carrick-DGCM.
A question for home sellers: Would it bother you to park half-a-million dollars or more with a big bank and get next to no interest while it lends the money out for a much higher rate? Thought so. That’s why the preferred approach for home sellers who want to stash cash safely is to suck it up and use a bunch of alternative banks. It’s worth the effort to get deposit insurance and a better rate.
-- Rob Carrick, personal finance columnist
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Stocks to ponder
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The Rundown
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BlackRock’s chief strategist for Canada on how to invest for 2021 – and why it’s time to rethink the traditional 60-40 portfolio
In 2020, major stock market indexes around the world climbed a wall of worry – exhibiting remarkable resilience. The S&P/TSX Composite Index is trading just 2 per cent less than its record high and is closing out the year with an impressive broad-based rally of 9 per cent so far in the fourth quarter. Will stocks continue to charge higher next year on the reopening of economies worldwide? For his thoughts on this question, and several others, Jennifer Dowty spoke with Kurt Reiman, BlackRock’s chief investment strategist for Canada. (for subscribers)
Retail traders leave Wall Street for dust in 2020 stocks rally
Retail traders have ridden 2020′s stock market rally better than the professionals, with their most popular picks outperforming market indexes and well-resourced investors such as hedge funds. Online trading platforms have reported a retail rush since the COVID-19 pandemic hit markets in March, with near-zero interest rates and a roaring rebound luring a new generation of stuck-at-home traders wanting to sharpen their skills on stocks. And while the scramble into fast-growing but highly-valued stocks has echoes of the 2000 dotcom bubble, plentiful cheap cash means retail traders do not yet look ready to cash in. Tommy Wilkes and Thyagaraju Adinarayan of Reuters reports. (for subscribers)
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Tesla heads to the S&P after meteoric rise and some investors want more
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Reopening rally? Speculative bubble? These days, it’s hard to tell
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Ask Globe Investor
Question: I will be contributing $6,000 to my TFSA in early January. If I borrow to make my contribution, is the interest on the loan tax-deductible? If not, should I purchase $6,000 worth of stock in my non-registered account, using my line of credit, then transfer the stock in kind into my TFSA?
Answer: If you borrow money to invest in a TFSA or other registered account, the interest is not tax-deductible. If you borrow to invest in a non-registered account, the interest is deductible (as long as the investment generates income or there is a reasonable expectation that it will do so in the future). However, interest would cease to be deductible once you transfer the shares to your TFSA.
--John Heinzl
What’s up in the days ahead
Are Canadian banks poised to increase their dividend payouts next year after this year’s pause due to the pandemic? David Berman will share some insight.
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Compiled by Globe Investor Staff