Global growth expected to improve but volatility likely to remain elevated Scotia Wealth Management

We expect global growth to gradually improve, supported by policy clarity, monetary and fiscal stimulus and vaccine developments. However, an upturn in global gross domestic product (GDP) growth is set to be concentrated in a handful of countries, underscoring the uneven nature of the recovery.

Major central banks are likely to keep policy rates low and may look through any transitory, near-term spikes in inflation that could occur during the year. As such, while we anticipate a modest increase in inflation and longer-term bond yields, financial conditions are likely to remain accommodative.

Wealth InsightsS P R I N G 2 0 2 1

Source: Scotia Wealth Management, Bloomberg.

On the fiscal side, most governments will likely continue to run deficits, but debt servicing costs should be manageable given that interest rates are low. Risks, however, will remain and, at a global level, growth prospects will depend on the successful distribution of the vaccine.

Equity markets are likely to remain volatile as risks linger and expectations reflect optimism. The persistent rise in equities over the fourth quarter appears set to continue in early 2021. However, as economic growth normalizes, stock markets may follow suit.

E Q U I T I E S A P P E A R FA I R LY VA L U E D

At present, equities appear fairly valued in the context of low inflation and interest rates, but optimistic earnings growth estimates leave very little room for error. That said, we are not inclined to view present conditions as being broadly indicative of long-term excesses.

Our analysis indicates that there is limited room for multiple expansion in 2021 and equity returns may be increasingly dependent on earnings growth. However,

there are pockets of opportunities given that the recent rally has been narrow. A broader economic recovery should help lift some of the more cyclical segments of the market that remain below their pre-crisis levels.

C O R P O R AT E E A R N I N G S T O R E C O V E R

As economic growth improves and broadens, corporate earnings should continue to recover.

In the second quarter of 2020, only 39% of stocks in the S&P 500 reported year-over-year earnings-per-share (EPS) growth as the worst of the shutdowns hammered fundamentals. In the third quarter of 2020, earnings breadth bounced back to a more respectable 53%.1

By the first quarter of 2021, analysts expect eight sectors to show growth, before all 11 mark year-over-year expansions in the second quarter. Indeed, after declining roughly 15% in 2020, consensus forecasts project 25% earnings growth in 2021, suggesting U.S. and international earnings will exceed 2019 levels by the end of the year.2

Furthermore, we believe regional leadership may shift from the higher-quality U.S. market to international equities that offer a relatively more cyclical exposure. While we believe a high-quality bias that emphasizes companies with strong balance sheets and sustainable

competitive advantages remains prudent, we also acknowledge that the outlook and valuations indicate an improvement in our expected long-term risk-adjusted returns outside of the U.S.

LO N G -T E R M Y I E L D I N C R E A S E U N L I K E LY

Policy rates are expected to remain near current levels, but longer-dated yields are likely to increase due to higher growth and inflation expectations and rising term premiums. However, in our opinion, a significant increase is unlikely, as the 30-year breakeven rates are already near 2%, which reduces the likelihood of a further significant (and sustained) rise in inflation expectations.

While there are additional factors that may contribute to higher long-term rates, we believe monetary authorities will likely target asset purchases or use yield curve control to offset a significant increase in longer yields.

Nevertheless, concerns about the tapering of the

asset purchase programs (quantitative easing) and inflation could ignite volatility. While government bonds may still provide portfolio ballast, the potential for a modest pickup in inflation and yield curve steepening may diminish the relative attractiveness of this asset class.

C O R P O R AT E B O N D S M AY O F F E R A H I G H E R Y I E L D

The growth outlook is supportive of corporate bonds, but credit spreads are near their long-term historical averages, underscoring the importance of managing credit risk. While room for additional spread compression may be limited, we believe that a significant spread widening is also unlikely given an improving growth outlook and continuing policy support.

As such, the credit segment of the bond market offers a higher yield compared to government bonds. Furthermore, risks are likely to subside as corporate fundamentals improve and default rates peak in 2021.

In the months ahead, volatility will likely remain elevated as risks persist. While market expectations reflect optimism, we feel inflation uncertainty may continue to rise. Long-term growth, inflation and interest rates should remain anchored by secular trends.

® Registered Trademark of The Bank of Nova Scotia, used under licence. ™ Trademark of The Bank of Nova Scotia, used under licence. Scotia Wealth Management® consists of a range of financial services provided by The Bank of Nova Scotia (Scotiabank®); The Bank of Nova Scotia Trust Company (Scotiatrust®); Private Investment Counsel, a service of 1832 Asset Management L.P.; 1832 Asset Management U.S. Inc.; Scotia Wealth Insurance Services Inc.; and ScotiaMcLeod®, a division of Scotia Capital Inc. Wealth advisory and brokerage services are provided by ScotiaMcLeod®, a division of Scotia Capital Inc. Scotia Capital Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.

0 0 0 0 01 GLOBAL GROWTH EXPECTED TO IMPROVE BUT VOLATILITY LIKELY TO REMAIN ELEVATED

2 SALARY OR DIVIDENDS: WHAT’S BEST FOR BUSINESS OWNERS?

3 PROTECTING YOUR FINANCIAL HEALTH DURING RETIREMENT

3 THREE WAYS WOMEN CAN TAKE CHARGE OF THEIR INVESTING

4 JOINT ACCOUNTS: WHAT YOU NEED TO KNOW

Figure 1: Two-speed equity recovery as IT, consumer discretionary, and materials dominate over energy, real estate and utilities

Figure 2: U.S. yield curve is likely to steepen, but upside may be capped by monetary policies

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Talk with your Scotia Wealth Management relationship manager about your portfolio and ask about our fully personalized total wealth offerings.

Wealth Insights Spring 2021 0 40 30 20 1

I N T E G R AT I O N

Income tax integration is based on the premise that an individual earning income through a corporation should be in the same tax position as if they earned the income personally. When a salary is paid, the company deducts the amount, resulting in the owner having it taxed at the applicable tax rate. In the case of a dividend, corporate income tax is paid first, and the after-tax amount is paid to the owner. A “grossing up” of the dividend amount, combined with a personal tax credit, accounts for the corporate tax paid.

PAY R O L L D E D U C T I O N S

Salaries offer a flexible way to redistribute business earnings when family members are employed in the business. Withholding and remittances for income tax, CPP, EI and provincial payroll taxes are required.

T A X O N S P L I T I N C O M E R U L E S ( T O S I )

Dividends involve less administration and do not require the recipient to perform services for the business. Paying dividends to shareholders who are minors should be avoided since these dividends are taxed at the highest personal tax rate, often referred to as Kiddie Tax. Under new TOSI rules, effective January 1, 2018, this is also extended to related adult family members (specified individuals) unless exclusions apply. The rules have been expanded to include certain debts, capital gains and second-generation income. TOSI applies to specified individuals who are not actively engaged in the business or do not contribute a “reasonable amount” of capital or labour to the related business. These changes are intended to reduce income splitting opportunities by taxing these

individuals at the highest marginal tax rates.

PA S S I V E I N C O M E R U L E

A salary may provide a benefit when the company is a Canadian-controlled private corporation (CCPC) earning active business income eligible for the small business deduction. This preferential tax treatment is currently limited to the first $500,000 of active business income, taxed at a reduced rate. Income above this threshold is taxed at the general corporate rate. Paying a salary (or bonus) to reduce the company’s business income to $500,000 may be advantageous.

For tax years after 2018, a new rule, known as the “passive income rule,” is a straight-line reduction to the small business limit for CCPCs when associated corporations earn adjusted aggregate investment income (AAII) of $50,000 or more. The small

business limit is reduced $5 for every $1 of AAII above the $50,000 threshold, such that the small business limit is eliminated when AAII reaches $150,000 in a tax year. Paying a salary would be a business deduction to reduce taxable income and minimize claw back due to passive income. Furthermore, it also provides a history of employment income required to implement another solution: an individual pension plan (IPP). This provides a tax-exempt vehicle for investments, such that passive income generated within an IPP isn’t considered in the AAII calculation.

R E G I S T E R E D R E T I R E M E N T S AV I N G S P L A N ( R R S P )

Another planning consideration is to pay a salary in order to contribute to an RRSP. A salary qualifies as earned income for RRSP purposes, whereas dividends do not. Spousal

RRSPs also offer an income splitting option (although the introduction of pension income splitting has restricted the effectiveness of spousal RRSPs to account owners under age 65.

W H E R E T O N E T O U T ?

The decision to receive income as dividends or salary should be made with the aid of a tax professional. A combination of the two often proves effective in taking advantage of lower effective personal tax rates on dividends while obtaining benefits from salary payments, such as CPP and RRSP participation. Factors such as household income requirements, other income sources for each spouse and province of residence must be considered in deciding the optimal mix of salary and dividend.

Salary or dividends: What’s best for business owners?Wealth Management Taxation, Scotia Capital Inc.

The choice to draw funds out of a corporation through salary or dividends often leaves Canadian small business owners wondering which option is best—regardless of the fact that, from an income tax perspective, there shouldn’t be any advantage with one over the other due to so-called “integration.”

Many factors need to be considered by business owners when deciding on receiving income as salary or dividends. Income tax along with other considerations typically require an analysis based on an individual’s situation, usually on an annual basis. The table below outlines several key differences between the two income options.

S A L A R Y D I V I D E N D S

Earned income generates RRSP contribution room Does not generate RRSP contribution room

Requires Canada Pension Plan (CPP) participation Not subject to CPP, Employment Insurance (EI) and payroll taxes

Treated as a tax deduction to the company No corporate deduction, paid out of after-tax profits

Reasonable salaries to family members taxed at their marginal tax rate

Dividends from a private corporation to related family members (specified individuals) may be subject to the highest marginal rate (TOSI rules – see below)

Recipients must provide a service to the business with the salary considered reasonable for duties performed

Recipients must be shareholders of the corporation, no duty to the business required

Speak with your tax advisor about your own tax situation before implementing any tax planning strategies.

0 40 30 20 1

Protecting your financial health during retirement

Three ways women can take charge of their investing

Total Wealth Planning, Scotia Capital Inc.

When it comes to saving enough for retirement, planning for health-related expenses is key to financial stability and success.

By 2030, it is projected that close to one in four Canadians will be a senior,1 and chronic conditions may be prevalent in more than 90% of the population over age 65.2 While we enjoy the privilege of a robust, publicly funded health care system in Canada, longer life expectancies, the need for long-term care and additional health-related costs may all have a significant impact on your retirement savings and lifestyle.

Here are some tips to anticipate health-related expenses and ensure your financial plan does not underestimate them.

Total Wealth Planning, Scotia Capital Inc.

More than ever, women are taking control of their wealth and making important finanical decisions for their family, business and future. With 97% of women involved in financial decision making for their household,1 this underscores the importance of women taking an active and prominent role in managing their investments, which can enhance their ability to build wealth, overcome financial challenges and handle unexpected expenses.

S TA R T W I T H A S T R O N G F O U N D AT I O N

At its core, proper planning ensures that your transition into retirement is a positive one without financial stress. Creating a Total Wealth Plan with your advisor requires you to be realistic about estimating your income and expenses across all stages of your retirement.

During retirement, income typically comes from these primary sources:

1. Government benefits, including the Canada/Quebec Pension Plan and Old Age Security

2. Employer-sponsored pension plans, group RRSPs and/or stock option plans

3. Individual savings and investments, including RRSP/RRIFs, TFSAs,

real estate, non- registered investments and savings

4. Self-employment or employment income from an encore career or passion project

Income projections usually anticipate changes in your spending as you age, with assumptions for inflation and investment returns. Unfortunately, too many plans overlook retirement goals.

You and your advisor should have meaningful discussions about your future and any related health considerations – all of which will impact your expenses. A Total Wealth Plan takes into account your vision of retirement, including health considerations and potential costs relating to health care.

A N T I C I PAT E H E A LT H C A R E - R E L AT E D E X P E N S E S

Health care costs are predicted to double from 2011 levels by 2031,3 making it essential to contemplate their impact on your retirement plan.

Everyone has out-of-pocket health care expenses. Throughout your life, these expenditures can become significant.

Provincial coverage varies widely for prescription drugs and restricts the types of medications covered. Consequently, you should assume that the government will not reimburse you for certain drug costs. More than likely, private nursing, specialized treatments or residential care facilities will also be out-of-pocket expenses.

I N V E S T I G AT E I N S U R A N C E O P T I O N S E A R LY

Workplace health and dental coverage typically end at retirement. Some retirees have ongoing coverage paid by their employer or the option of continuing coverage at their own expense.

To make an informed decision about health insurance, it is important to understand the available coverage. Prescriptions, paramedical services, vision care and dental care are often options, but there may be limits to annual or lifetime coverage. And pre-existing conditions before you purchase coverage may be entirely exempt from the benefits.

Critical illness insurance is a type of coverage that can protect your financial health. A typical policy covers a range of illnesses outlined in the contract and, if the insured is diagnosed with one of the conditions covered after a prescribed waiting period, the policy may pay a lump sum, tax-free benefit.

When long-term care is required, the costs can be high. The average cost for a long-term care facility in Canada can range from $800 to $8,000 a month, depending on the location and type of care. Over an extended period, these costs could

threaten the financial security that you’ve worked hard to achieve. Long-term care insurance provides a regular benefit that can be used to pay for the care required in your home or a care facility. A benefit would become payable when the insured cannot perform a certain number of daily living activities outlined in the contract.

E X P LO R E TA X C R E D I T S A N D D E D U C T I O N S

There are a range of tax credits and deductions available for individuals with disabilities, their supporting family members and caregivers. The purpose of these is to provide some relief for health care costs. Being eligible for these programs can also open the door to other federal or provincial programs, which could alleviate the pressure of expenses on your retirement savings.

P L A N A S U C C E S S F U L R E T I R E M E N T

When your transition to retirement is well planned out, it can be the most rewarding time of your life. Having a retirement plan built to accommodate any health care and comfort measures you may need down the road can reduce stress.

Our Total Wealth Planning process can help you capture the best way to achieve your goals with specialized advice. Contact your Scotia Wealth Management relationship manager for more information.

Wealth Insights Spring 2021

1 Seniors, Statistics Canada Publications 11-402-X www150.statcan.gc.ca/n1/pub/11-402-x/2011000/chap/seniors-aines/seniors-aines-eng.htm 2 Annual Report on State Public Health Canada 2010 Chapter 3 Chronic Conditions and Infectious Disease www.canada.ca/en/public-health/corporate/publications/chief-public-health-officer-reports-state-public-health-canada/annual-report-on-state-public-health-canada-2010/chapter-3.html 3 Manuel, Douglas & Garner, Rochelle & Finès, Philippe & Bancej, Christina & Flanagan, William & Tu, Karen & Reimer, Kim & Chambers, Larry & Bernier, Julie. (2016) https://pubmed.ncbi.nlm.nih.gov/27822143/

At the same time, women's lives are becoming more hectic and complex as they balance their careers and other life commitments. One common challenge is being pulled from the workforce to care for children or other loved ones. During this time, you may be naturally less focused on investing, which can be further compounded by reduced earnings and a lower saving rate.

With women living longer (an average of three to four years longer than men2), you may need to rely on your investments to support you through more years in

retirement. Having a sound investment plan will help you avoid the risk of a savings shortfall in retirement so you can maintain the lifestyle you are accustomed to, or expect to have.

There’s also the risk of other financial hardships like divorce or the death of a spouse. Not only can they affect your goals, but you may need to take sole control of your investing decisions when you might be less prepared to do so. Even if you are not actively seeking the responsibility, you may have no choice but to become the primary financial decision-maker.

Continued on page 4

This publication has been prepared by The Bank of Nova Scotia for Scotia Wealth Management clients and may not be redistributed. It is for general information purposes only and should not be considered or relied upon as personal and/or specific financial, tax, pension, insurance, legal or investment advice. We are not tax or legal advisors and we recommend that individuals consult with their qualified advisors, including tax and legal advisors, before taking any action based upon the information contained in this publication. Opinions and projections contained in this publication are our own as of the date hereof and are subject to change without notice. Scotia Wealth Management is under no obligation to update this commentary and readers should assume the information contained herein will not be updated. While care and attention has been taken to ensure the accuracy and reliability of the material in this publication, neither The Bank of Nova Scotia nor any of its affiliates or any of their respective directors, officers or employees make any representations or warranties, express or implied, as to the accuracy or completeness of such material and disclaim any liability resulting from any direct or consequential loss arising from any use of this publication or the information contained herein. This commentary may contain forward-looking statements based on current expectations and projections about future general economic factors. Forward-looking statements are subject to inherent risks and uncertainties which may be unforeseeable and such expectations and projections may be incorrect in the future. Forward-looking statements are not guarantees of future performance and you should avoid placing undue reliance upon them. This publication and all the information, opinions and conclusions contained herein are protected by copyright. This publication may not be reproduced in whole or in part without the prior express consent of The Bank of Nova Scotia. Private banking services are provided by The Bank of Nova Scotia. Estate and trust services are provided by The Bank of Nova Scotia Trust Company. Custodial services are provided by The Bank of Nova Scotia Trust Company. Portfolio management services are provided by 1832 Asset Management L.P. and 1832 Asset Management U.S. Inc. Insurance services are provided by Scotia Wealth Insurance Services Inc. Wealth advisory and brokerage services are provided by ScotiaMcLeod, a division of Scotia Capital Inc. International investment advisory services are provided by Scotia Capital Inc. Financial planning services are provided by The Bank of Nova Scotia and ScotiaMcLeod, a division of Scotia Capital Inc. Business and Family Advisory Services are provided by Scotia Capital Inc. All insurance products are sold through Scotia Wealth Insurance Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank group of companies. When discussing life insurance products, ScotiaMcLeod advisors are acting as Life Insurance Agents (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc.

0 40 30 20 1Wealth Insights Spring 2021

Joint accounts: What you need to knowScotiatrust,® The Bank of Nova Scotia Trust Company

At first glance, establishing a joint account may seem like a great strategy for managing financial affairs during your lifetime and/or to save probate fees at death. However, there are several factors you should consider first.

T W O T Y P E S O F J O I N T A C C O U N T S

1. Joint accounts with tenancy in common

With tenancy in common, each joint owner owns a part of the asset. When one joint owner dies, their share is left to their beneficiaries as set out in their Will.

2. Joint accounts with right of survivorship (not available in Quebec)

The more common type of joint ownership is joint tenancy with rights of survivorship. In this case, each individual has equal ownership and control of the assets. Upon the death of one joint owner, the surviving owner(s)

‘automatically’ receives ownership of the deceased’s portion of the assets. This structure is commonly seen between spouses or between parents and their adult children.

WHY OPEN A JOINT ACCOUNT WITH RIGHT OF SURVIVORSHIP?

There are several reasons people consider joint accounts. Between spouses, these accounts can be convenient and practical both during the couple’s lifetime and at death. Where all assets are jointly held, a Power of Attorney for Property may not be necessary, so long as at least

one owner can manage the assets. Because the asset ‘automatically’ passes to the survivor, the asset essentially bypasses the deceased’s estate and the probate process. Despite the attraction, there are some important issues that need to be considered:

• Generally, any joint owner can withdraw funds from the joint account at any time and does not need the permission of the other joint owner to do so.

• Where the asset is real property and the joint owner does not reside in the home, the transfer may result in a partial loss of the principal residence exemption.

• Assets held in a joint account may be subject to third-party claims if one of the joint account holders becomes insolvent or declares bankruptcy. The joint account may also become part of divorce proceedings.

W H AT A R E T H E TA X I M P L I C AT I O N S ?

The tax implications of setting up joint accounts differ depending on the relationship of the owners.

Under the Income Tax Act, a ‘disposition’ occurs when there has been a change in ‘beneficial’ ownership of an asset. For example, when an adult child is added to an investment account or cottage, capital gains tax may be triggered and payable by the parent.

If a joint account is set up with a spouse, the tax consequences of a deemed disposition can be avoided because federal tax laws permit property from being transferred between spouses at the adjusted cost base (instead of fair market value). As such, tax on the asset’s appreciated value can be deferred until the asset is sold. Where legal owners have beneficial ownership, each joint account holder is equally responsible for

the tax liability, and each owner should report earnings based on their portion of ownership. If the joint owners are spouses, income attribution rules may also apply.

C A N P R O B AT E B E AV O I D E D ?

While the legal arguments are complex, the short answer to this question is “it depends.” Generally, where the joint owners are spouses, the asset will flow to the survivor by right of survivorship outside of the estate and probate fees will not apply. This is not necessarily true where the surviving joint owner(s) is an adult child of the deceased. In that case, the surviving owner may be deemed to be holding the asset in trust for the deceased’s estate. If so, the asset will be subject to the probate process.

To learn more about joint accounts and whether they’re the right choice for you, speak with your Scotia Wealth Management relationship manager.

Contact us today to learn more about how Total Wealth Planning can help get your investments on the right track so you can feel confident in your path forward.

1 PMG Intelligence, Women & Investing, December 2019.2 www150.statcan.gc.ca/n1/pub/89-503-x/2010001/article/11441/tbl/tbl002-eng.htm3 Financial Planning Standards Council, The Value of Financial Planning, 2012.4 Tim Querengesser, “The Confidence Gap: Why aren’t there more women investors?” Alberta Venture, February 10, 2014.5 Investment Funds Institute of Canada, Advisor Insights, January 2018.

Here are three ways to help you take charge of your investments as you look to build, grow, and manage your wealth.

H AV E A F I N A N C I A L P L A N

A comprehensive financial plan that puts saving and investing at the forefront can go a long way in helping you meet life’s challenges, financial or otherwise. It can also empower you to have greater confidence about your money and your future.

Four out of five people who have a comprehensive plan are more likely to have confidence in their financial affairs compared to 44% who do limited or no planning.3

And with your finances in order, you can focus on other important life matters, be it your family, health and wellness or career.

G E T T H E R I G H T A D V I C E

Working with a financial advisor you trust can be just as important. Today, most widowed Canadian women (80%) leave their advisor within a year of their husband’s death, citing a lack of trust.4 However, an advisor can be an essential partner following the loss of a loved one—from helping you create a financial plan to being a valuable resource sharing finance-related expertise.

An advisor can also benefit your bottom line. Investors who work with an advisor are almost four times wealthier after 15 years than non-advised investors.5 This additional wealth can provide the bigger nest egg and financial stability you may need. An advisor can serve as a sounding board and offer trusted guidance to ensure your financial confidence remains high.

H O W T O TA L W E A LT H P L A N N I N G C A N H E L P Y O U S U C C E E D

At Scotia Wealth Management, our Total Wealth Planning process is designed to help ensure your long-term

financial success. More than just generating a basic financial plan, Total Wealth Planning begins with your Scotia Wealth Management relationship manager gaining a deep understanding of your entire financial picture, your immediate needs and your goals for the future. Working

with our team of specialists, your advisor serves as a financial partner to create a Total Wealth Plan. Your individualized plan will help guide your financial decisions and evolve as life changes, allowing you to realize your goals and ultimately continue to enjoy life on your terms.