January 2025 LifeSpring Insights

These are unusual times for investors across BC (and Canada). Tariff threats dominate the headlines. But there are other factors we need to watch as we move into the new year, too.

Inflation still a burden for Canadians…

A big one? Inflation. The pace of price increases has moderated, with the consumer price index (CPI) at 1.8% in December. That more-modest rise comes on top of the big price jumps we’ve seen on most products since the pandemic.

To be sure, interest-rate cuts from the Bank of Canada have brought some relief. However, they’ve also reduced interest paid to investors who take out new guaranteed investments, like term deposits and guaranteed investment certificates (GICs), many of which paid above 5% in recent years.  

With interest rates still historically high, those who took out (or renewed) a mortgage in 2020 and 2021 are facing higher rates on their next renewal.

…But strong stock markets are a silver lining

With all that, there has been good news – especially for stock investors. As the saying goes, markets climb a wall of worry, and the S&P 500 and TSX Composite Index have done that, rising 25% and 21%, respectively, in the last year, as of this writing.

The truth is, no one knows what the future holds. But there are some simple things we can all do to prepare our finances for what lies ahead. (And if you have any concerns about your risk exposure, we recommend speaking with a financial advisor right away.)

1) Diversification is critical – especially now

Let’s start with those stock-market gains and tariff threats.

As you no doubt know, the gain in the S&P 500 has been largely powered by the so-called “Magnificent 7” tech stocks: Alphabet (GOOGL), Apple (AAPL), Amazon.com (AMZN), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA).

That’s great for investors who hold them, but it does mean they may now make up an outsized part of many investors’ portfolios. That raises the risk of significant losses if or when tech stocks face a correction.

This is where one of the cornerstones of successful investing – diversification – comes in.

Now is a great time to review your portfolio and consider trimming some tech holdings and spreading those gains into other sectors. It’s never easy to sell a winner, but doing so to maintain proper balance is proven to cut risk. Your future self will thank you.

The same goes for tariffs: If you hold assets you feel may be overly exposed (such as manufacturing, resource or transportation stocks), now is the time to look at how much of your overall holdings these stocks make up.

You should speak with your financial advisor. They can provide a vital outside perspective, helping you find the right asset balance for your goals and risk tolerance.

2) GICs are still a strong option, but consider bonds, too

Now let’s talk term deposits. Even though rates on new term deposits have fallen, these investments are still a good way to cut the overall volatility of your portfolio (as your principle is guaranteed). They may also work for those who need access to their money relatively soon.

Another option? Investment-grade corporate bonds.

These bonds still guarantee your principal, so long as you hold the bond to maturity (there is a risk of loss, but firms in the investment-grade category are considered very low risk). And you’ll still collect term-deposit-like interest, which is taxed as regular income at your marginal tax rate, as is the case with a term deposit.

But there’s a tax advantage: Unlike term deposits, the value of existing bonds tends to rise as interest rates fall. That capital gain is taxed at a lower rate than income.

You can hold bonds individually or through a fund. Your financial advisor can help you decide if bonds are right for you and, if so, the best way for you to hold them.

3) Hold stocks through your employer? Do this to hedge against a “double risk”

Some companies let employees automatically buy shares of the firm through an employee stock purchase plan, often at a discount. It can be a great way to save.

You do need to be careful: If these purchases grow to be a large part of your overall portfolio, you could face a “double risk” – of losing your employment income and part of your investment – if your company faces financial pressure.

Let’s say an investor works for a publicly traded forestry firm that allows them to purchase shares automatically. They’ve taken advantage of the plan for years, and their holdings have grown a lot.

Now let’s say that lumber demand drops, prompting layoffs. That could leave our investor with both a loss of income and a drop in the share price, harming their savings, too.

That’s not to say employees shouldn’t use these programs. The key is to always view them in the context of your broader portfolio – and resist the temptation to “set and forget” here.

4) Capital-gains-tax changes are up in the air. Make sure you pay them anyway.

The Canadian government passed new capital-gains-tax rules last year, bringing the inclusion rate (or the percentage of any gain on an asset, such as a stock, mutual fund or recreational property, that’s subject to tax) to 66.67% from 50% for corporations. For individuals, the 66.67% rate applies to gains above $250,000.

However, when Prime Minister Justin Trudeau announced his resignation in early January, he also prorogued Parliament until March 24. That wipes out all legislation before the house – including the capital-gains-tax changes.

So what do you do if you have a capital gain that’s subject to the new rate in 2024? Simple: Follow the new rules. If not, you could face a penalty.

There’s a big caveat here: A federal election is likely to come soon, and the Conservatives, who lead in the polls, as well as some Liberal leadership hopefuls, have announced plans to repeal the changes. If that happens, you could see a refund on your capital gains tax paid.

5) TFSAs, RRSPs and FHSAs have extra appeal in 2025

Finally, the start of a new year is always a good time to consider the various tax shelters available to us. For example, you can contribute up to $7,000 in the year to a tax-free savings account (TFSA) . Plus, any unused room from previous years carries forward.

TFSAs, in which your investments can grow tax-free and be withdrawn at any time (also tax-free) are a useful tool for any investor. You can hold a wide range of investments in your TFSA, including Canadian stocks, mutual funds and exchange-traded funds (ETFs). 
 

Holding some of your emergency fund – something we recommend building, due to the uncertainty ahead – in your TFSA could also make sense, so long as it’s in a guaranteed, liquid investment, such as a high-interest savings account or cashable term deposit.

And if a registered retirement savings plan (RRSP) is part of your strategy, you have until March 3, 2025, to contribute and have it count toward the 2024 tax year. Like TFSAs, your contributions grow inside an RRSP and you can hold a range of investments. Unlike a TFSA, though, all contributions are tax-deductible. So emphasizing RRSPs might make sense if you were in a higher tax bracket last year.

Finally, there’s the first-home savings account (FHSA), which was launched in 2023 and provides another $8,000 of contribution room, plus carry-forwards from previous years, up to $16,000. It’s useful for savers, with a maximum lifetime contribution limit of $40,000.

As with TFSAs, you can hold a range of investments here, but if you’re looking to buy relatively soon, focus on lower-risk investments, like term deposits or government bonds.

Get the right investment mix for safety and growth for 2025 – Talk to your advisor

Using the right mix of TFSAs, FHSAs and RRSPs is key to making the most of them, and every investor is different. To make sure you’re reaping the most benefits – and that your finances are prepared for the potentially volatile years ahead – make an appointment with your financial advisor today.