Is Bitcoin As Good As Gold?

Gold and Bitcoin have been used synonymously as safe havens and currencies. What is a safe haven? It is a place to park wealth or money when there is a high degree of uncertainty in the environment. It has to be something that everyone can believe in even if the current institutions, governments or players in the business game are not available. The wealth has to be kept safe in times of trouble. What are the risks to someone’s wealth? There is theft by robbery if it is a physical asset. There is damage by fire, flood or other elements. There is the legal issue in not being able to determine if the asset is really yours or not. There is access risk in that you may own the asset but may not be able to get your hands on it. You may own the asset but may not be able to use it due to some restriction. Who else do you have to rely on to be able to use your wealth – spending it, investing it or converting it into different units of measure (currencies)?

In cases like cash or currencies, you may have the asset and can freely use it, but it does not have value due to a systemic issue. There may be too many units of the currency such that using them would not purchase very much (hyperinflation). There is also devaluation – where a currency is arbitrarily devalued due to some economic or institution issue. Most of these issues come from too much debt and not enough assets to pay for them. A currency devaluation is like a partial or slow motion bankruptcy for a government or issuer. In a foreclosure scenario, the creditors (or users of the currency) would be getting a fraction of what the asset (or currency) was originally worth.

No Liability

One key aspect for both bitcoin and gold is that in creating either of them, there is no liability involved. National currencies are issued with interest attached, which means there is a liability to the issuer of the currency. The currencies due to being centralized can also be “delisted” or have their value altered, devalued or swapped for other currencies. With Bitcoin, there would have to be consensus among the players for this to happen. Gold is nature’s money, and since it was found, there is no one really in charge of how it works. Gold also has the history of being used as money for thousands of years in virtually every culture and society. Bitcoin does not have this reputation. The internet, technology and power grid are needed for Bitcoin to function, whereas gold just is. The value of gold is based on what it is being exchanged for. The value of Bitcoin is similar to buying a stock or a good: It is determined by what the buyer and seller agree it is worth.

Bitcoin Issues

Are there regulatory, institutional or systemic risks with Bitcoin? The answer is yes. What if a bunch of central banks or governments took over the Bitcoin issuance?  Would this not lead to control issues that could either stop the Bitcoin transactions or impair them? What if the justification was to stop terrorism or illegal activities? There are also technology issues like who controls the internet, the electrical energy involved in mining Bitcoins, or other issues in infrastructure (the electrical grid, the nuclear grid, the internet servers, the telecom companies etc.) Regulatory risks can also run the gamut from restricting who buys Bitcoins, how many can trade each day or perhaps issuing trillions of units of fiat currency and buying and selling Bitcoins with them which would cause convulsions in the prices of the unit, leading to mistrust and lack of use? Gold does not have these shortcomings. Once it is mined, it cannot get destroyed. It is not reliant on technology, infrastructure or any institution to make it valid. Since it is small and portable, it can be taken anywhere and still be useful without any other mechanism needed. The prevailing institutions can be changed many times and gold will still be valuable.

Gold is a classic safe haven because it does not need institutions to exist, is very hard to forge, cannot be destroyed by the elements and does not have issues of access or restrictions. Physical theft and restriction may be factors, but gold fares better than currencies or digital currencies at this point in time.


How Can Inheriting “Life Changing Assets” Affect Your Heirs?

Most people don’t consider what will happen after death. Why? Because it is scary. People don’t want to think about what will happen when they are not around and cannot influence whatever is going on in their environment. For this reason, many people do not have a will, funeral arrangements or a plan as to what will happen to their estate.

Aside from the tax consequences and keeping files organized, what else should you consider in terms of estate planning? There is a large personal element to estate planning because the effects of inheriting assets can be significant. This article focuses on how a large inheritance can affect someone receiving it.

Life Changing Assets

Does it matter what someone receives or how much it is worth as an inheritance? People think there are no consequences to inheriting large sums of money, businesses or real estate. This is not true! Larger assets or “complex” assets – things that need to be looked after – take energy and time to be managed, and some degree of knowledge. You can hire someone to do almost anything, but then there is the element of trust and fairness if there is more than one person who will inherit the asset. The ability to make decisions and have a degree of control is very important to a lot of people, and having to share this with another person (including spouses or family members) is challenging.

There is also the effect that comes from the inevitable changes that a business or sum of money can bring with it. Why? These things can be a permanent lifestyle changer. Inheriting a large sum of money is liked forced retirement. Would you like to be forced into having fun? Yes, it can be argued that you will continue your lifestyle as it was prior to the inheritance, but this rarely happens because it takes a lot of discipline. One of the key characteristics of something that is fun is that you have chosen to do it. If you have to run a business or a stock portfolio and you know nothing about it and do not like doing it, this can be a problem.

Quotations from the 1%

Looking at the quotations below gives you an idea of the issues involved in inheriting “life changing assets”.

“The first generation builds wealth, the second generation keeps the wealth, and the third generation spends the wealth. The fourth generation would have to start over again.”

“Leaving enough of an inheritance for someone to do something, but not to do nothing.”

“With more money comes more headaches.”

“You will have to spend as much time keeping the money as you did creating it.”

“You will not get rich working for someone else.”

“Owning things is not as wonderful as people think. The real symbol of power is how much control you have over these things. From a tax and estate perspective, owning things is quite a burden.”

“You don’t own things. The things own you.”

“Hold your friends close, and your enemies closer.”

Running a business or inheriting a large sum of money is a lifestyle. It is not just how much you can spend and what image to uphold, it is also how you can preserve your wealth, what legacy you will leave behind, who you will trust and how to make sure you are not a target of thieves, mostly from people closest to you. People are affected by large inheritances not just by what happens internally to them, but how other people perceive them. Evidence of this comes from big lottery winners. If you are not ready for a large lottery win, the typical outcomes are greed followed by bankruptcy, alienation due to jealousy, a total reinvention of one’s lifestyle and relationships, or perhaps a giant ego trip. Like most things, you need to be prepared to know what to do when a large asset arrives.

To Whom Do You Leave Your Estate?

Do you want to bypass family altogether and leave things to friends, charities, institutions etc.? There is a money and tax component to this decision, but the real driver would be: What is the purpose of including such and such a person or organization in my estate? There is typically something personal or special that is behind this type of decision. If someone is not inheriting something, why would that be? The consequences of both of these decisions will have lasting effects. Keeping things fair and justifying your decision will likely be the key to keeping your soul at rest when the time comes. Visualizing who will actually manage the assets and for what purpose may be helpful in determining how to lay out the estate.

Is Bitcoin Money?

What is money? Money is a measurement unit for the purpose of exchange. Money is used for valuation of goods, settling debts, accounting for work performed, and standardizing the measurement of production. Money has to be divisible, portable, stable in value, easy to obtain, durable over time and must be trusted by all parties using it. Imagine money that is too large to divide into pieces, heavy to carry, spoils after 2 days, gets damaged easily or can be eaten by animals? If these are the characteristics of the currency, it would not be that useful and many business deals would not happen.

The most important element of money is trust. If you work for someone and you are not sure if you will get paid, would you do the work? If you did the work, and you got paid in something that was not accepted in many places, is it a valid payment? The economy and money system is built on trust, and it can be broken by a lack of trust by the majority of people. A run on a bank is a classic example of people losing trust in a bank and it going bankrupt shortly thereafter. Trust is also the pinnacle of trade and business deals. It you don’t believe the person whom you are doing an exchange with is trustworthy, the deal would not be initiated. Privacy is an element of trust. If every deal you made was broadcasted in the public realm, a portion of trust would be lost. Someone may undercut (steal) your business deal or rob you of the proceeds after the deal is done. The best security is achieved through privacy. If someone knows you have made a lot of money, they will find a way to steal it from you if that is their intention.

In the case of bitcoin, does it function as money? It is portable, easily divisible, can be used to value assets and settle debts. Is the value stable? Since the price of Bitcoin moves around a lot versus other currencies, the answer is likely no. If you are trying to buy a basket of apples and are paying for them in Bitcoin, those apples can double in price in a week, then go down 30% the next week and then double in price shortly thereafter. If every transaction was this volatile, you would not be able to buy many goods and know how much you can spend. The same thing would happen with business deals. The price of all of the components would fluctuate wildly and create a lot of issues in making deals because the costs and revenues would vary too much.

Is Bitcoin trustworthy? Trust can be viewed in many ways. In the traditional money systems, the value of a currency is being eroded by inflation. This makes them unstable over the long term because they are losing purchasing power over time. Who is controlling this inflation? One school of thought blames it on higher labour, material and overhead costs over time – production inputs for business. Another school of thought says that inflation is a monetary phenomenon, which means that whoever issues the money is issuing more money than the goods being produced. Is inflation a legitimate characteristic of money or is it a slow theft over time?

If you don’t trust how the money system works, you may place more trust in Bitcoin since it is decentralized. The problem with decentralized systems is: Who will cover for fraud, scams or bad behaviour? The regulator or central authority acts as the referee to keep the game clean. If the referee is bribed or is biased however, suddenly the trust is lost and the game might as well be played without a referee if the players themselves are honest. If your bitcoin wallet is lost or your passwords lost, you will not be able to access your bitcoins either.

Other ways trust can be questioned include having limited access to money (capital controls or system malfunction if digital currency), having to give much of your money away to a third party (taxation, organized crime or perhaps coin miners and exchange operators), counterfeit money (physical or digital), identity theft or loss of a confidence in an issuer (bankruptcy).

Bitcoin is a contender to be a currency, but stability of price and trust for the average person has not been established yet.


Why Is the Blockchain Technology Important?

Let’s say that a new technology is developed that could allow many parties to transact a real estate deal. The parties get together and complete the details about timing, special circumstances and financing. How will these parties know they can trust each other? They would have to verify their agreement with third parties – banks, legal teams, government registration and so on. This brings them back to square one in terms of using the technology to save costs. In the next stage, the third parties are now invited to join the real estate deal and provide their input while the transaction is being created in real time. This reduces the role of the middleman significantly. If the deal is this transparent, the middleman can even be eliminated in some cases. The lawyers are there to prevent miscommunication and lawsuits. If the terms are disclosed upfront, these risks are greatly reduced. If the financing arrangements are secured upfront, it will be known in advance that the deal will be paid for and the parties will honour their payments. This brings us to the last stage of the example. If the terms of the deal and the arrangements have been completed, how will the deal be paid for? The unit of measure would be a currency issued by a central bank, which means dealing with the banks once again. Should this happen, the banks would not allow these deals to be completed without some sort of due diligence on their end and this would imply costs and delays. Is the technology that useful in creating efficiency up to this point? It is not likely. What is the solution? Create a digital currency that is not only just as transparent as the deal itself, but is in fact part of the terms of the deal. If this currency is interchangeable with currencies issued by central banks, the only requirement remaining is to convert the digital currency into a well-known currency like the Canadian dollar or the U.S. dollar which can be done at any time.

The technology being alluded to in the example is the blockchain technology. Trade is the backbone of the economy. A key reason why money exists is for the purpose of trade. Trade constitutes a large percentage of activity, production and taxes for various regions. Any savings in this area that can be applied across the world would be very significant. As an example, look at the idea of free trade. Prior to free trade, countries would import and export with other countries, but they had a tax system that would tax imports to restrict the effect that foreign goods had on the local country. After free trade, these taxes were eliminated and many more goods were produced. Even a small change in trade rules had a large effect on the world’s commerce. The word trade can be broken down into more specific areas like shipping, real estate, import/export and infrastructure and it is more obvious how lucrative the blockchain is if it can save even a small percentage of costs in these areas.


What Are the Tax Implications If I Leave Canada?

Leaving Canada

The first thing to consider if you leave Canada is whether you leave for good or whether you may come back. In CRA language, if you leave for good, they call this “severing ties” with Canada. Ties are immediate family, residence, assets or investments, bank accounts, drivers’ licences, OHIP cards or membership to Canadian associations. If you give up, sell or move all of these things to another country, you have severed ties with Canada and you would then be considered a non-resident. If you still have these things but temporarily leave Canada and may decide to return, you may still be considered a resident and you would be taxed as you would normally. There are a series of rules which try to determine if you really intend to leave Canada or not in case you have some ties in Canada and some ties in another country.  Depending on what the other country is, there are tax treaties between Canada and most countries to determine whether you are a resident of Canada, the other country or sometimes both or neither. This situation would have to be dealt when at the time when it arises. If you leave Canada, there is a tax form T1161 that would be filled out which is telling the CRA the assets that you have on the day you leave.

“Deemed Disposition” of Assets

The general rule for tax purposes in leaving Canada is that everything that you own is deemed to be sold. “Deemed to be sold” or “deemed disposition” means that you don’t necessarily have to sell everything, but taxes are calculated as if you had sold them. This only has an impact if you have assets that have capital gains and you did not sell them until the day you leave Canada.

As examples, for cash there are no capital gains if you leave at any time. If you are receiving dividends from anywhere, they are taxed each year so leaving Canada will not result in more taxes. If you have stocks or funds and they have gone up in value and you have not sold them, the amount of money that you made since buying them would be considered a gain or loss and there would be taxes to pay.

There are many exceptions to this rule in that some things do not need to be sold or taxed when you leave. The relevant examples are if you own a house, there are no taxes up until the time of leaving Canada. If you have RRSP, TFSA or pension accounts, these can stay as they are without paying any taxes until the money is withdrawn. You would not be able to contribute any more money to these accounts, but they can stay as they are without changes. The same rules apply to RESP accounts.


If you choose not to actually sell these assets, they can be sold later on as a non-resident. The capital gain would then be reported at that time. In the case of owning a house, if you do not live in Canada any longer, the capital gain would be taxable after the date of departure whereas if you live here, there would not be any tax. If you know you are leaving Canada, you can either have the house deemed sold until the day you leave and pay no tax, and then pay taxes on a capital gain later on if you keep the house, or sell the house before you leave and avoid paying taxes.

Any income that you have as a non-resident after you leave Canada is taxed at 25% and this is withheld at the source. This number may be different if there is a tax treaty between Canada and another country you may be a resident of. Examples of this income would be RRSP withdrawals and pension plan payments. You may or may not have to file a tax return as a non-resident. It depends on what kind of income you have and where it comes from. If taxes are withheld before you receive the income, you would not need to file a tax return, but if you are selling anything that creates a capital gain or loss, then you may have to file a tax return to report this.

Find Out More Information

This topic is very complex and situations can vary from one person to another. Make sure you have all of the facts relating to your situation before making any decisions. Ideally, it would be good to do this homework prior to deciding if you will leave Canada or not. If you decide to leave Canada, knowing if you are leaving for good or not will also make the research much easier. This article discusses the tax implications of giving up residency. Note that it does not mean you are giving up citizenship as the Canadian tax system is based on where you live, not on what passport you have. A passport may be considered as one of the ties in the CRA decision making process, but it is typically not a major factor.  Lastly, this type of decision has many personal and intangible factors pertaining to lifestyle, future prospects or what can happen in another country to name a few. Minimizing taxes may not be a priority if there is a more compelling reason to leave Canada.

Investment Fees Are Coming Into Focus

Investment fees are being scrutinized more often these days than in the past for a number of reasons. This can be boiled down to two main areas: Market performance and value relative to fees paid, and fee disclosure.

When the markets perform well, people do not care as much about costs because the high returns on their investments cover the expense. The fees can also be justified more easily as the returns would not be enjoyed without having this advisor or institution generating them. When the markets go south or stay flat, the psychology switches to the idea that the fees are not justified. Even though wealth is being lost, fees are still being paid! Markets do fluctuate so this phenomenon does not happen within months or a few years of poor performance. It may happen after the 3 year or 5 year mark as the “what have you done for me lately?” mantra sets in. The 5 year time period is the typical benchmark for when performance is scrutinized for “long term” results.

Fees are also being scrutinized because they are discussed more frequently than in the past and people are more aware of them. Many people do not realize how much they are paying for their investments because fees are subtracted from the returns for both advice and products they are investing in. The evolution of the Client Relationship Model (CRM) Phase 2 in January 2017 will make the fees more visible and more understood. Expressing fees as a percentage seems bland to most people because the percentages are small. Apply a small percentage to a large dollar balance, and now you have a large number of dollars being paid out each year.

The other side of the equation becomes: What am I getting for these dollars being spent? Another dimension to the fees is that there are many types of fees for different purposes. The challenge will be to get a handle on the total cost that you are paying and then ask the question of value. There are fees to the advisor (sales loads or commissions), the institution holding the accounts (account fees), the fees embedded in the product (management expense ratios or MERs) and fees for referrals and people helping the process (trailer and referral fees). If you cover these 4 areas and sum them up, you will have a good idea what you are paying.

Analyzing what you are getting boils down to answering some questions: How long does it take to manage my money? What skill is required in my case and in terms of my portfolio? In my case is key because if you have a simple portfolio that is relatively small in size, paying high fees will not be worthwhile. What other options are there in managing my money? Doing it myself? Doing part of it myself? Having a robo-advisor do it? Having my employer do it by contributing to my pension plan? You may also want to consider switching who gives you the advice – many institutions can do it – banks, insurance companies, brokers, discount brokers, fund companies, professionals like accountants, money coaches and flat-fee or fee-only advisors. Paying down debt may also be an option which is simple, cheap and effective for return if you have a lot of debt with a high interest rate. You also want to ask whether you are receiving good service and are having your financial needs met. Do you place a premium on expert advice and reassurance about your portfolio? Do you want the backing of a large institution handling your money? All of these considerations make up the value component of the fees.

Doing this analysis over time will reveal things like: Is your portfolio being churned? (Are your investments being traded frequently for no reason even though the original investments were sold to you as “buy and hold”?) Match up the decisions made about your portfolio with the fees being generated and if there is a correlation, it is time to ask why these securities were recommended.

The bottom line is that investment fees should be examined as a whole each year and over time. This amount should be weighed against what you are receiving in terms of return, service, how you are treated and how you feel about the experience.     

The Markets November 2016 A.T. (After Trump)

The behaviour of the markets before Donald Trump was elected as President of the United States of America is vastly different compared to after the election result.

Before the election, the following expectations were in place:

Bonds were in a low to zero interest rate environment prior to Donald Trump being elected. The belief was that even though rate hikes were discussed for 2 years by the Federal Reserve, not much has happened and not much will happen. Ultimate chaos was expected to happen in the equity markets due to the uncertainty that a Trump Presidency would bring compared to a relatively stable, predictable Clinton Presidency. Gold and silver were shoe-ins to hit multi-year highs of $1400 per ounce (USD) and $25 per ounce (USD) respectively. The US Dollar was expected to tank as world leaders would not endorse Trump and money would flee the US to places like Europe and gold.

After Donald Trump was elected we find:

Bond yields are accelerating because the talk is that Trump will spend a lot of money on infrastructure and allow inflation to accelerate. Markets actually rose the next day after Trump was elected not just in the US, but around the world as well. Sectors that were down like energy, pharmaceuticals, infrastructure and financials were up strongly after the Trump election victory. The reason for this is that Trump is believed to reduce regulation and create a lot of future business. With respect to gold and silver, after the initial highs, both metals are down significantly. The US dollar is stable and is trading slightly stronger.

What is happening here? Pollsters and the media had not predicted a Trump victory, let alone a landslide in the three areas of government (President, Senate and House). What happened to all of the fears that were present before the election? Does the market know after one day or one week what Trump is going to deliver? Do they see the landslide victory as positive because all of the houses will support him? The higher inflation expectations reflected in the bond market would lead to a large decline in bond prices which may be ugly. Why aren’t the equity markets factoring this in? Inflation is traditionally good for metals but they are down significantly. Inflation is presumed to happen with higher interest rates and more demand for goods. What is missing here? If the markets think inflation and higher interest rates are good – why wasn’t any of this priced in prior to the election? The expectation would have been that markets would go down significantly prior to an anticipated Clinton win, followed by a sharp rebound after the Trump win. The market focus has practically reversed on many key assumptions like interest rates and inflation. As an example, higher inflation is not good for business unless companies can pass on higher costs to consumers. Is that really easily achieved? If debt costs are going to rise, shouldn’t profitability be much lower for industries with higher debt? It will be very interesting to see how the markets react when President Trump is in office.