As you’re approaching retirement, you’ve no doubt wondered when you should take the benefit that you can receive from the Canada Pension Plan. The decision can be tricky. Here are some things to think about when you’re making the decision.
Have you stopped working or have you reduced your hours?
If you’re choosing to retire before age 65, or if you decide to reduce your working hours, you may begin to notice that cash flow is a bit tighter than it used to be. This is the difference between the lifestyle your income had you accustomed to and the amount of income that you’re bringing in now. The early years of retirement will also often lead to extra spending which is part of the adjustment to having more time leisure and new activities. You now have a choice: should you be dipping into personal savings or taking early CPP?
If you choose to use personal savings, you’ll need to look at the total that you’ve saved. If you start taking income now, will you have enough later on? Will your taxable income increase again later through pension income or government benefits? Are there any advantages such as de-registering RRSPs while you’re in a lower tax bracket? As a planning point, personal savings will pass to a beneficiary after death, while the CPP benefit will stop, or will pay a reduced amount to your spouse.
How about taking it while still working?
If you don’t have an immediate cash flow need due to good planning or the decision to work longer, there are merits to waiting to take your CPP. The CPP benefit is fully taxable, so it needs to be added to your income. If you already have high income, you’ll keep more in your pocket if you wait until you retire and take it when your income is lower. You will also receive a benefit that is up to 36% higher if you wait to age 65.
CPP is a benefit that is just one layer of the retirement income picture that you’ll need to consider. Once all the factors have been taken into account, there is a break-even point that can be calculated that will show after what age it makes more sense to take it early over taking it later. We can help by showing you how this decision integrates with the rest of your financial picture.
Have you been thinking about giving money to a registered charity for the first time?
In an attempt to increase the amount of giving taking place in Canada, the federal government has introduced a new, temporary ‘super credit’. It’s called the First Time Donor’s Super Credit. If you haven’t made a charitable contribution in the last 5 years, you qualify.
It works like this:
Without the super credit, if you make a contribution to a registered charity, the credit is 15% of the first $200 and 29% of any amount above $200, up to 75% of your net income.
With the super credit, which is available until 2017, an extra 25% is added to the credit. This means that you would get a credit of 40% on the first $200 and 54% above $200, up to a donated maximum of $1,000.
The credit is non-refundable, so it is only of benefit if you would otherwise have taxes owing.
With November being financial literacy month, bloggers across Canada are putting forward their best tips from about everything from investment and retirement to financial planning and insurance.
There are no shortage of tips about the latest, greatest investment, but the best thing that an investor can do is come up with a good understanding of their goals and objectives before they make an investment decision. So investor, my advice to you is to know thyself. It’s only when you understand where you are and where you want to go that you can draw a proper road map.
To get to know your own personal investment style a little better, here are a few questions to ask yourself:
1) How Comfortable am I with Risk?
Risk is a word that is so overused that it became financial jargon. Merriam-Webster’s defines risk as “the possibility of loss”. So if it makes it simpler, use the words interchangeably. How comfortable are you with loss? When you invest are you just looking for a great rate of return? Do you know what a great return would be, given the level of risk that you’re comfortable with? High rates of return usually go hand in hand with more risk. A suitable investment should help you comfortably meet your goals, while also letting you sleep at night.
2) What are my Financial Priorities?
Every investor wants to have their money work hard to make more good money. But in tough economic times, with an economy on the defensive, do you have other goals that could help you come out further ahead? If you have non-deductible debts and the interest rate is higher, would you ultimately have more money in your hands if the debts were gone? If you want to own a house, does buying make sense for you over renting and investing the difference? Financial goals are good, but prioritizing those goals will give you added focus. Debt reduction, home ownership, adequate insurance are all good uses of dollars. A financial plan with clear priorities help you decide what you should be working on first.
3) Does it Fit with the Long Term Plan?
This is where it all comes together. One day, you will want to stop working. When you do, what you’ve done or haven’t done today will affect your lifestyle during retirement. There are few great pensions remaining and government benefits will undergo cuts and revisions in the years to come. What do you envision your retirement looking like and what will it take to get there? Investments have a place in every good financial plan, but knowing what you can expect and prioritizing keeps your vision clear.
Sometimes the most important thing to be aware of is that you don’t have to go it alone. If you’re not sure how to set and reach a financial goal, balance a budget, or project your retirement income, we’re here to help.
In 2011, the Canadian Payroll Associate (CPA) did a study that confirmed what
banks and various news sources had been reporting since 2010. Approximately 60%
of Canadians live paycheck to paycheck. If their income stopped, they would
have difficulty paying the essential bills. The study varied by region (64% in
Ontario) and family status (nearly 74% in single parent households).
These are scary statistics for anyone. As a financial advisor, talks about debt
repayment, saving for retirement and budgeting are a part of prudent financial
management. But even the best laid plans come to a screeching halt when the
When a change of health or ability means that you have to stop working, even
temporarily, the long term effect on the financial plan can be disastrous.
Retirement may have to be delayed, and the quality of life enjoyed both then
and now can decrease. The need to maintain our standard of living can create
all kinds of stress during a time when stress should be minimized and the focus
should be on family.
In Canada, there are some sources of income that may be helpful during this time:
Depending on your circumstances, EI may be able to pay you a temporary benefit and/or
help you re-train to a job that is suited for you.
Worker’s Compensation can provide some relief as well, but only if the issue that arose
was directly related to, and as a result of your employment.
Beyond that, there are personal savings. But according to the Canadian Payroll
Association’s study, consistent saving is difficult for the majority of
The other option to protect your income earning ability is a disability insurance
policy – which outsources the risk to the insurance company. The premium can be
considered as the price you pay to protect your biggest asset – your ability to
If you are the primary wage earner for your family or if your household relies on
two paychecks, the responsibility of making sure that the bills get paid
continues, even if you have to stop working. Changes in our ability to earn
income are almost always unforeseen but proper planning can help you to be
prepared. Take an inventory of your assets and liabilities, in particular, the
obligations that would continue even if your income did not. If you don’t have
a reliable Plan B, talk to a professional versed in disability insurance. Look
for a designation such as the Certified Health Insurance Specialist (CHS) which
indicates that the advisor has been well trained in this area. Advisors in our
office hold this designation, and as always, you are very welcome to talk with
For a link to the CPA study, please click here.
With the sun shining outside, we’re all looking for ways to make the most of it. Trips to the beach, hiking and impromptu games of tennis seem to fill up the long summer days. With school out, kids seem to be itching to get active as well. A healthy dose of sunshine and interaction with friends keeps us healthy, no matter what our age.
The good new is, if your children are under the age of 16 (or 18 with a qualifying disability), you could receive a tax credit on a maximum of $500 paid for helping them stay active. The Children’s Fitness Tax Credit has the following criteria:
The program must be ongoing, which is defined by the CRA as a minimum 8 weeks consecutive (5 days if it is a camp). The activities must be supervised, and must involve an element of cardio and muscle strength/endurance/flexibility or balance.
Starting late? This program is not exclusively for the summer and can be enjoyed year round. So view it as an added benefit to raising healthy, active kids!
Losing a job is a tough thing. In this day and age and with the state of the economy, it also seems far too common. If you’ve recently been given the pink slip, here are a few quick tips to ensure you protect your pension benefits.
The first thing you’ll notice is that your pension is registered either provincially or federally. This is important because each jurisdiction has different pension rules. What follows is a brief overview of things to be aware of when you’re taking that first step of investigating your options. It is not specific to any particular jurisdiction.
That Lump Sum Option
The gut reaction when you know your next paycheck may be a ways off is to look for ways to get cash now. But that may be to the detriment of future benefits. Pension plans try to protect you from being your own worst enemy by disallowing you to take this option if your pension exceeds a certain amount. Usually, a cash payment may be taken only if you’ve been with the company for a few years, and don’t have a lot of pension benefits accumulated.
Taxation for the Year
If you’re terminated near the end of the year and get a lump sum severance, it may bump you into a higher tax bracket. This is because it’s taxable and added to the income that you’ve already earned from working for the better part of the year. If you are terminated earlier in the year and receive a lump sum severance, from a tax perspective the transition between jobs may work in your favor.
When someone loses a job by no fault of their own EI can provide a temporary income benefit while you are looking for work.
If you’re near retirement age, think twice about triggering a pension plan early. Depending on the type of payout you choose, the pension could reduce the amount of EI benefit that you’re eligible to receive. It may be a better idea to defer taking your pension until after EI benefits have been paid.
The Importance for Your Beneficiaries
Your pension represents a significant benefit – not only for yourself, but also for your spouse or common law partner, and in some cases, for other beneficiaries. When you’re reviewing your pension options, take the time to think about how the payout from the new contract will affect your beneficiaries. Will payments continue to them after your death? Will the amount of pension be reduced on first death, and if so, by how much?
Future Value & Indexing
The popular saying ‘a dollar today is worth more than a dollar tomorrow’ is not necessarily true in the pension world. Your pension contract may have valuable features that make those future dollars worth more than they would be outside of your pension plan. One of these would be indexing. Indexing means that your payments could increase with the cost of living. As prices for food, housing and transportation go up, it can be valuable to have a pension that will keep up.
So as you can see, there are a lot of things to consider before you make a decision about which pension option would be best for both you and your family. It is always good to get qualified advice. If you need to speak to someone about your own situation, we can help.
If you ask the average person what they spend all their money on, they’ll likely have trouble telling you. Bills, the kids, entertainment. At the end of the month, few people really know where the money went. The nearly empty bank account is eagerly waiting for the next paycheck to be deposited so that it can also vanish, as if into thin air.
If I were to ask you how much you earn, you could give me salary that you and your employer agreed on. But, be it $40,000, $60,000 or $100,000, the lifestyle will be right up there with the level of earnings. With the quest to own the nicest car, home and clothing that they can afford, people often lose sight of the future, and how the choices made today impact their quality of life later on.
You don’t Make as Much Money as You Think You Do
It’s hard to hear, and I’m sorry to be the one to tell you. But if you don’t believe me, look at your paystub. It tells a story. It shows you the amount of tax that is taken off at source, as well as your contribution for the Canadian Pension Plan (CPP) and EI. Do you belong to a union? Are you part of a pension plan? The details and their costs, are all there waiting to be discovered. The true amount that you earn, often referred to the net amount, is what you have left in your hands to spend after all deductions and taxes have been taken. A successful budget uses this number to determine actual annual income, and what percentage of that money is being spent on the things you need versus things you want.
Your Needs Versus Your Wants
Your budget can be broken into two categories: needs and wants. Generally speaking, your fixed expenses should be your needs and your variable expenses your wants.
Fixed expenses are the things that are necessary to live which are difficult to change over the short term: your rent or mortgage, heat & electricity and a basic amount of food and clothing costs. Variable expenses are everything else: the entertainment budget, eating out, and any indulgences. After going through a bugeting exercise, you become aware of what you can’t immediately change without longer term planning. This lets you focus on what you can.
To get a realistic picture of your expenses, first look at the amount on your paycheck that you actually take home. Compare that to your bills. You can quickly see which categories are eating up the largest percentage of your earnings. Or, you may find that your fixed expenses don’t make up that much of what you spend and you still don’t know where your money goes. A monthly budgeting exercise of simply tracking all your expenditures can open your eyes to the impact of lifestyle indulgences.
Debt & Savings
Not to be ignored, debt and savings need to be in balance in your budget as well. The interest owed on your debt is the premium that you pay to use someone else’s money before you’ve earned it yourself. Your savings, on the other hand, give you the chance to be the lender and have a bank pay you for the funds in the account which they can then lend to someone else.
Understanding where your money is spent is a crucial first step to the peace of mind that comes with a balanced budget. The clarity it brings can help you live a lifestyle that you can afford that will allow you to save to meet your goals, and have a promising future.
I know you think it’s the right thing to do. Your mother, father, teachers and anyone who cares about your financial future probably set you on the path of doing it with diligence. It’s not something that you hear from your financial advisor every day. But today you’ll hear it from me. Please, please, please, for the love of all things sacred, stop putting all of your money into your RRSPs.
Now before you take this the wrong way, understand that I’m most certainly not telling you to stop saving. Rather I’m suggesting an alternative to the conventional way of thinking. This post is for those who took Mom & Dad’s advice. The hands of time have them marching steadily towards retirement and they have fat RRSPs, full from years of contributions… and little else.
My message to them is as follows. Please continue to save. In that regard, you’ve been doing the right thing. RRSPs have served you well in that they have grown tax-deferred all these years. You never received a tax slip when the funds do well, but the day is coming when you will have to start taking income, and for that reason, it’s a good time to review your strategy.
Here are a few reasons why having all of your money in RRSPs can be a bad thing during retirement:
Potential for taxation in a higher tax bracket
When all of your money is in RRSPs, there is no where else to go when you need money for a large purchase. A lump sum withdrawal is taxable at the your highest tax bracket. It’s added to your other taxable income for the year, and this can bump you up into the next tax bracket.
More taxes withheld OR larger quarterly installments
When you make a withdrawal from registered money, withholding tax is taken off the top before you get the withdrawal in your hands. It’s as if the CRA is saying – okay, we’ve let you defer taxes this long, now that you’re taking money out of the RRSP, we’ll take some of the tax that we know you’ll have owing off the top, and we’ll square the rest with you at tax time. The percentage they take depends on the size of your withdrawal: up to $5,000-10% is withheld, $5001 to $15,000, 20% is withheld and $15,001 +, 30% is taken off. So if you wanted to make a $20,000 withdrawal, taxes would be $8,571.42, which means you’d have to take out $28,571.42 to end up with the same $20,000 in hand.
Potential for OAS Clawback
When income during retirement starts to exceed $69,562 (2012 rate), part of your Old Age Security will begin to be clawed back. If you’re saying to yourself that your income during retirement won’t be that high, consider those lump sum withdrawals – to fix a roof, go on vacation, buy a new car – that could put you over the threshold and cause you to start having to repay your OAS.
What Should you Do?
Now that I’ve told you what you shouldn’t do, here’s what you should do. Talk to a financial advisor about a Tax Free Savings Account and when those are maxed out, non-registered savings. You can think of both of these as having tax paid capital. In a Tax Free Savings Account, your growth didn’t cost you anything. In a non-registered savings plan, you will receive a tax slip for growth every year, but this means you won’t get one when you make a withdrawal. Well balanced income during retirement is about having RRSPs and other investment vehicles so that you can structure your withdrawals in the most tax efficient way.
I remember when I was younger and getting my taxes done always felt like a bit of a gamble. Would I walk out owing money or would I get a refund? As the years have gone by and I’ve learnt more about taxes, my attitude towards them has changed. But when I talk about them with friends I often see that same look of apprehension that I once had. Like spinning the wheel at the roulette table, no one seems to know what they’re going to get and everyone seems to have their fingers crossed, hoping for the best.
I’m not much of a gambler myself and the good news is, the tax system is set up so that it doesn’t have to be either. Here are some guidelines as to whether or not you’re on track to writing a cheque or getting a refund. This is not tax advice, so please consult your accountant for advice specific to your situation.
As an Employee
If you punch the clock from nine to five and get a T4 for doing it, the company you work for is responsible for deducting enough tax at source to make sure that the government gets their cut of what you earn before the end of the tax year. Here are some situations where this would not be the case:
- If you work a second job From a tax standpoint, each employer you work for will act as if they are your only employer. This may mean that your second employer is withholding less tax than you would owe. This is because in Canada, the percentage of tax that you owe, (your tax bracket) increases with the amount of money that you make. So your second employer could be deducting tax at a lower rate, since they have no way of knowing what you earn at your other job.
- If you changed jobs during the year Similar to the point above, with a job and salary change, the amount of tax withheld at your new employer may not accurately reflect the total income that you earned during the year.
- If you told the CRA you were going to make RRSP contributions and didn’t Some folks that want to make RRSP contributions but can’t find the cash in their day to day budget can apply to the CRA to reduce the tax withheld so that they can make a contribution directly into their RRSP. The deduction that you get should offset the taxes that were not paid. If you decide to do this, get proper authorization and don’t follow through, the CRA can penalize you, and wont authorize it again.
If You’re Self Employed
If you’re self employed, not only are you responsible for all of your taxes, but also for government benefits such as both the employer and the employee portion of the CPP that is automatically deducted from an employee’s paycheque. As a self employed individual, taxes have to be budgeted for as income is earned throughout the year.
Once You’ve Retired
If the amount of taxes you had owing for the previous year was over $3,000, you will have to pay the government quarterly installments. This means that every three months you have to send them a cheque for taxes owing. An alternative to this is having the tax automatically withheld before you receive payments from your pension, annuities and other benefits like CPP and OAS. This will only work if your income comes from sources that allow the withholding.
So there you have it. A few quick tips to see if you’re on track, and to let you know what you can expect whether you’re an employee or newly self employed or retired. But whatever your case may be, if you tax return provides you with a hefty refund you’ve paid too much tax during the year and should engage in some planning to take advantage of missed opportunities.
What is the difference between refundable tax credits and non-refundable tax credits?
Most tax credits are non-refundable. This means that once you’ve reduced the income tax that you owe to $0, any remaining credits can’t be used. Another way to think of it, is that you can never use a non-refundable tax credit to get a refund.
On the other hand, a refundable tax credit will pay out even if your taxable income is $0. A common example of this is the GST/HST credit. This credit is based on your family income, which means the combined total of both you & your spouse or common law partner’s net income. The GST/HST credit has to be applied for every year on your tax return form. If you missed filling it out, you can file a T1 Adjustment at any point during the year. So if you are over the age of 19, be sure to file a tax return to gain access to these credits.
If you want more information about the income levels for the GST/HST credit, click here.
Why would I contribute to a Spousal RRSP instead of or in addition to a Personal RRSP?
A personal RRSP works on the concept that your taxable income during your working years will be higher than your taxable income during retirement. When you make an RRSP contribution, you get a tax deduction. By making an RRSP contribution while you are still working, you get the benefit of not having to pay tax on the amount of money that you put into your RRSP. The tax becomes deferred until you make a withdrawal, as does the taxes on any gains that you earn while you are still in the plan.
A spousal RRSP is similar. You put the funds in on your spouse’s behalf and the contribution reduces your taxable income – which means that you get the deduction. The concept here is that when your spouse makes a withdrawal in the future, he or she will pay less tax due to his or her tax bracket being lower than yours. Your taxable income will also be lower in retirement, as you’ve shifted some of these registered assets into your spouse’s name. There are other good reasons to have retirement income in both your name and your spouse’s name. Here are a few:
After age 65, money coming out of the RRSP in the form of a Registered Retirement Income Fund or Annuity allows your spouse to gain access to the Pension Income amount, which is a non-refundable tax credit. There are two benefits to this strategy. By making contributions and splitting income early on, you set yourself up to pay less tax during your retirement, as money that would be in your name is now in your spouse’s name. Secondly, your tax rate is usually lower during your retirement than during your working years.
What are Attribution Rules?
The money that you put into a spousal RRSP is supposed to be earmarked for retirement. If a deposit is made into a spousal RRSP and the other spouse withdraws the money within three years of the deposit, the money that is withdrawn will be taxable in the hands of the contributing spouse. The CRA came up with attribution rules to keep the higher income earner from putting money in, taking the deduction, and having the lower income spouse take the money out in the following year.
Is it a Good Idea?
While every situation is unique, a spousal RRSP can be a good tool. It is useful when there is a substantial difference between the amount of income that you make and the amount of income your spouse makes. It also has a place when one spouse is enrolled in a pension plan and the other is not. If you will have tax owing this year, it makes even more sense to contribute. Spousal RRSPs are a good way to save tax now and split income during retirement.
Happy New Year!
A good way to kick off the New Year is to make sure that you’ve made plans to pay as little tax as possible when it’s time to file your 2011 tax return. RRSPs provide a great way to reduce the taxes that you owe for the previous year. You have until Feb 29th, 2012 to make an RRSP contribution for 2011. Some benefits of investing in RRSPs are:
All of the Growth is Tax Deferred
Your money grows at an increased rate since you don’t have to pay tax on the gains. The tax becomes payable when you withdraw the money.
You have the Opportunity to Split Income with Your Spouse
If your spouse is in a lower tax bracket, you can make a contribution to a spousal RRSP on his or her behalf. You would save the tax at your higher tax rate. When the money is withdrawn, it becomes taxable to your spouse at his or her lower tax rate, providing that the withdrawal happens more than three years after the last spousal deposit. The end result is that the family pays less tax overall, both now and in the future.
You are Providing a Source of Income for Your Retirement
Fewer individuals have pension plans and government benefits aren’t sufficient to maintain the lifestyle that most of us now enjoy. Did you know that those who qualify for full CPP in 2012 will receive $986 per month? However, not everyone qualifies for the full payment, since the amount you have contributed is based on your salary. The average monthly payment received in 2011 was $534. It is the responsibility of each family to make sure they can maintain their lifestyle and provide for future care.
RRSP Loans are Available
For those that want to contribute to RRSPs but don’t have the extra cash on hand, RRSP loans are available. With interest rates being so low, this is a good time to take advantage of them, if they makes sense when the rest of your finances are taken into consideration.
If you’re like most people, you’ve gone to the bank do your investing. You didn’t realize that you had other options. If you weren’t interested in GICs, you were likely sold a mutual fund.
What’s a Mutual Fund?
A mutual fund is a collection of stocks and bonds that are put together into a portfolio. A fund manager and a team of analysts actively watch all the companies within the fund and make the decisions regarding when to buy or sell each company. It can also hold fixed income products like government or corporate bonds. The fund has to be run according to a given set of parameters which indicate if the fund is for a conservative, moderate or more aggressive investor. The funds are categorized by these parameters.
In most cases, when you’re invested in a mutual fund, you are actively invested in the market. You can make money if the fund does well, but you can also lose money if the fund does poorly.
How about a Segregated Fund?
Segregated funds are essentially mutual funds sold through insurance companies. You get the same active management, and in some cases the same management companies but with one big difference. Segregated funds have a way of managing your long term risk by adding a component of insurance to your investment. Let me explain.
Like a mutual fund, you can lose money if the markets go down. But, when you initially purchase the fund you get to choose how much of your money you want to guarantee that you’ll get back at a point of time in the future. You can guarantee 75% or 100% of your deposits, and the guaranteed amount becomes payable either on death or 10 or 15 years from when you opened the contract, respectively. Now that in and of itself isn’t incredibly exciting but, what does get exciting is an additional feature that allows you to reset your guaranteed level when the markets have done well. When the value of your account has gone up, you can tell the insurance company that you want that new higher level to become the new level of guarantee. If the markets subsequently go back down, you get the new guaranteed amount, after a new 10 to 15 year period. These contracts do have age restrictions for these resets, and there is also a cost for this feature. The management expense ratio, which is the fee that you pay to the fund company to manage your funds for you, is higher to account for the additional insurance protection provided by the guarantees. The insurance company is actually putting the extra money aside to ensure they can live up to their guarantee.
Preparing for the Future
Segregated funds work best with long term time horizons and can be very helpful during retirement planning, as you know ahead of time the amount of the guarantee. When timed correctly, the purchase of these funds can help protect your nest egg from an untimely down market right before retirement. Segregated funds also have death benefit guarantees to make sure that on your death, your beneficiary will receive at least all the money you deposited, less withdrawals. In addition, as segregated funds are insurance company contracts, at your death, your money passes outside of your will directly to a named beneficiary. The advantage of having your money pass outside of the will is that the money does not become subject to probate fees. You beneficiary designation is part of a private contract, so there is confidentiality around who has been named as beneficiary and how much they will receive.
Investing is a long term process. It works best when you have a goal in mind and a professional by your side to walk you through it. Investing may feel like a rollercoaster when you go it alone, but working with a financial professional who understands the process makes it a different experience.
Your advisor should be asking you a series of questions to make sure that you both have a clear picture of what you want to accomplish. This would include both short term and long term goals, with checkpoints along the way to monitor your progress. The questions that will help this process can include variations of the following:
What the money will be used for? When you will need the money? Will you be dependant on it at a future date, such as during retirement? Other questions would be: How comfortable you are with loss? (They say that the pain of loss is much worse than the pleasure of a gain). Are there other people depending on it as well? The decisions are also best made in context of your portfolio as a whole, as well as your net worth.
Your advisor should also talk to you about how you would react to hypothetical situations like events in the news or an untimely loss. Risk and reward do go hand in hand, but it’s never good if your risk makes it hard to sleep at night. A calculated risk, based on solid information, is a lot less risky than making an uninformed decision.
Your progress towards achieving your goals can be more important to define and measure than the actual rate of return on your portfolio. By determining clear goals and checkpoints to see your progress can take much of the day to day stress of the market out of your investment experience.
Even the most solid company with stellar management will have some years that are better than others. Sometimes the movements in the market has nothing to do with the companies themselves, but are determined by the broader economic landscape, or even by major fund manager buying or selling large volumes of a particular holding. Often, the perspective that helps during a particularly scary event is ‘this too shall pass’. Everything is temporary. Keep your goals in mind, review your progress regularly and you’ll be well on your way to long term success.
As the markets turn and churn, the stock-picking advice that has resonated across the board from advisors and analysts alike has been: If you’re going to invest in equities, look for dividend payers. Choose companies with strong balance sheets that are also paying a dividend. You’ll also hear that a large percentage of the increase in the value of the stock comes from re-investing those dividends. But what does that mean? What is this dividend, where does it come from? Is there anything to guarantee that they will keep getting paid? What are you doing when you re-invest your dividends?
What is a dividend?
To put is simply, as an investor, a dividend is your share of the company profits. Corporations exist for one reason alone – to make money for their shareholders. It can be debated that corporations exist to provide a good or service, but the management of every successful company knows that once the daily business is done, their job is on the line if they haven’t turned a profit. Who are these shareholders to whom they are accountable? If you own stock in a publicly traded company, it’s you.
Where does a dividend come from?
Once the company has become profitable, the management has to make one of two choices. The first is that they can keep the money that they’ve made and say that at some point in time they will reinvest it into the company to make more money. When they do this, the funds on the balance sheet are called ‘retained earnings’. The second option is to pay it out to the shareholders. If you own stock, each share that you own will have an amount of dividend attributable to it. This makes sure that all shareholders of publicly traded companies receive the same percentage of compensation for their ownership.
Is there anything to guarantee that dividends will keep getting paid?
Unfortunately, no. Dividend payments are made when there is sufficient cashflow to pay them out. However, management knows that missing or reducing a dividend payment is looked on unfavorably by analysts and the investment community, and can be a sign that the company is in trouble. They will do everything in their power to make sure that the company is able to meet what they view as an obligation to their owners, the shareholders.
What are you doing when you re-invest your dividends?
Re-investing your dividend means you’ve indicated that, you would like to use the money to increase your ownership in the company, instead of taking a cash payment. The dividend payment is used to purchase more shares which does two things:
1) Increase the amount of dividends that you will receive in the future, as the dividend is paid out on a per-share basis.
2) Give you the opportunity to have a greater participation in the company growth, as your ownership has increased.
The decision is yours. Whether you take them in cash, or reinvest them, a dividend is a good way of receiving value in return for your investment in a publicly traded company.
Does someone you know need help doing the things that we take for granted? Or, over the past year, has age or an unforeseen event affected the way you do the necessary activities of each day? Activities like hearing, speaking, walking, feeding and dressing in the morning.
The cost of caregivers or devices to keep us going can add up. Any extra help that we can get is a good thing. Assistance in the form of the disability tax credit may be available. This credit is available to people that qualify, regardless of their age.
What’s the Credit Worth?
If you were claiming for yourself, and are eligible in 2011 you can received a non-refundable tax credit of $7,341. The credit is used to reduce your income tax payable and is not received in cash. Non-refundable means that if you don’t use some or all of it, you lose it. It can’t be used against income in future years, it can only be used in the year that you are eligible to receive it.
If you have a family member (namely your spouse, common-law partner, child, parent, grandparent, grandchild, brother, sister, aunt, uncle, niece, or nephew) that relies on you to survive and is earning no income of their own or a low income, you can make the claim on their behalf. Your taxable income would be reduced instead of theirs.
If the disabled dependant is under the age of 18, there is an additional $4,282 that may be available. This is subject to reduction based on other claimed expenses.
That would be helpful, how do I qualify?
Your Doctor (or a certified specialist) needs to conduct an assessment of your abilities. They will have to complete a Disability Tax Credit Certificate, which you would then submit to the CRA for review. The required certification form can be sent in at any point in the year – in fact, the CRA encourages it so their verification doesn’t delay processing of your income tax at tax time.
You hear a lot about saving for retirement these days. Perhaps it’s a sign of the times, with baby boomers starting the first wave of the mass retirement that will sweep across Canada in the years to come. During the last few years before retirement, people start to take a much closer look at what they’ve got. The bits and pieces of pensions, former pensions from old jobs that became locked in accounts, RRSPs, spousal RRSPs, a few non-registered accounts, and the still relatively new Tax Free Savings Account for good measure.
Among the collection of accounts, having a pension plan is a beautiful thing. But as people approach their retirement, they may try to stuff as much money as possible into their RRSP. It makes sense to do it while their income is high, since their income will be lower when it is taken out during retirement. Plus they’ll get a tax refund, which can further their retirement plans by being used to purchase more investments. But when they decide to start this cash-stashing program, they may be surprise to find out that they have very little RRSP room left. They’ve become subject to the great equalizer known as the pension adjustment.
RRSPs and the Pension Adjustment
RRSPs allow all working individuals to defer paying tax on 18% of their earned income by earmarking it for retirement. Not every Canadian has a pension plan, and those who do know that they provide a great range of benefits, depending on the type of plan. This created the need for the pension adjustment. It was determined that it wouldn’t be fair for a person who had a pension plan to also be able to stock away an additional 18% of their income on a tax deferred basis. So, in the simplest of forms, the amount that you’re allowed to contribute to your RRSP gets reduced in accordance with the amount that has been attributed to your pension plan for retirement purposes. This is subject to an annual maximum that changes every year.
A Tax Free Solution
Having that gold plated pension plan is still a very, very good thing. But you should also take it to mean that a lot of your income will be taxable income during your retirement years. Those additional dollars that you’re looking to save can be put to good use through a Tax Free Savings Account. This strategy will give you greater access to your money without increasing your taxable income during retirement.
Your Power of Attorney is the document that allows the person that you name the ability to make decisions on your behalf. The type and limits of this authority are granted while you are of sound mind and can give authority to make business, medical or financial decisions.
There have been some changes made to the Power of Attorney Act that took effect in Sept 2011. Today we’re going to talk specifically about the Enduring Power of Attorney. This gives the named individual authority to make decisions over legal and business affairs and will stay in effect even after you become incapacitated.
It is very important you recognize the power that is being given before naming an Enduring Power of Attorney, so you can choose an individual that will act with your best interests in mind.
The first step is going to see a good lawyer. They will help you take an objective look at all of the assets that you have under your control, and any obligations that you may have to other people. They’ll explain to you that your named attorney can do anything on your behalf that you would be able to do yourself, unless it’s specifically excluded in the agreement. This can mean changing beneficiary designations outside of your will. If the agreement gives permission, they can give money as gifts to others, to charities or even to themselves. The only document that an Enduring Power of Attorney can’t change is your will.
Who Can be Name Enduring Power of Attorney?
In BC, anyone over the age of 19 can be named, excluding a professional health care worker or provider who is taking care of you.
Accountability of the Attorney
Attorneys can be held responsible by any other beneficiaries or family members who feel that they are misusing their power. This can be either as a result of an action that they took or, as an action that they failed to take. Here’s an example. An investment decision needed to be made and the delay of the decision led to a loss. The beneficiary can go to court and hold the Attorney personally responsible for the loss that was as a result of an action not being taken. To mitigate some of this risk, the Power of Attorney is allowed to get help from a qualified investment advisor.
A Triggering Event
Since a lot of responsibility comes along with the Power of Attorney, it is helpful to name an event that will put the POA into effect. For example, a triggering event could be a deemed incapacity by two Doctors. This keeps the Enduring Power of Attorney from acting on your behalf before you want them to. Unless a triggering event is specified, the named individual has the ability to act on your behalf immediately after the documents are signed.
Rights of the Attorney
The person that you have named as your Attorney may have a change of heart after they realize all of the personal responsibility that they are taking on. A named Attorney does have the right to resign from the position, but must take the steps to properly give notice. Make sure that you’ve had a heart to heart with this person beforehand so they can make the decision fully informed. This will keep you in control and give you the option to consider someone else if you first choice is not willing.
Finally, if you feel that it is your Attorney’s right to be compensated, you should state this in the agreement. Unless it is written in, your Attorney may not be able to receive any monetary reward for the service they have provided and liability they have accepted on your behalf.
The saying goes, the best way to care for others is to care for yourself first. It’s critical. Think of all the people that are depending on you at any given point in time. Spouses, children, friends, bosses, co-workers. It occasionally feels like a circus act, with the juggling and balance required to keep everything going.
For one reason or another, we can only keep juggling for so long. Sometimes, it’s life itself taking us down a path that we didn’t expect. After all the wear and tear of our fast paced society, the body slows down. Our doctor sits us down and looks us in the eye. It’s critical. We’ve seen it happen to others. Priorities change in an instant and all that matters is getting better and finding a way to take care of the family.
One of the steps in a sound financial plan is opening up the discussion of how you will protect yourself and your loved ones from life’s risks. If you were no longer able to work at your job or bring in the same level of income, what would happen to your family? Could all the bills get paid? Would your family fall behind? Could you deal with additional costs or lifestyle changes that an illness brings? It’s not an easy thing to talk about. We’re all filled with the illusion of our own immortality. It’s uncomfortable to think otherwise.
When looking at options of how to manage the risk of a critical illness, there are really only three choices:
-Look into a temporary or permanent critical illness insurance policy and pay someone to take the risk for you. This needs to be done when you’re healthy. Once there are signs or symptoms that there may be trouble brewing, it reduces your chances of qualifying and you may not be eligible for the insurance.
-Build the savings yourself. Make sure that you have enough put away to take care of a situation like this, and that it wouldn’t be putting your family into debt. The trouble with this method is that the savings tend to get used for other unexpected expenses as they come up, and it can be hard to keep the savings at a level that will eliminate the risk.
-Procrastinate. This one’s the easiest to do. Or, you can hope that the situation never occurs and that you’re one of the lucky few. Unfortunately, this can let us down when life hands us the unexpected.
What will you do?
We’ve talked about how relationships of the past can create ties that last into the future. Another example of this is spousal support. In BC, after a legal separation, the party wanting spousal support has 2 years to make their claim. Our system in Canada also says that payments are to be made regardless of the cause for the divorce.
When dealing with spousal support, the Department of Justice of Canada states that the dissolved marriages are divided into 2 categories: and those with children and those without.
If a couple did not have children, the length of the marriage and the difference in gross income are considered.
If a couple had children, the issue gets more complex. If the child lives with the former partner who receives child support, part of the spousal support may include a portion to make sure that the conditions and standard of living are appropriate for that child. They look at how old the child is at the time, which helps to determine the length of time the child will be with that parent. The amount of child support being paid is also considered.
If the partners had been married a long time, the courts will try to provide a standard of living similar to what was shared during the marriage. Emphasis is placed on encouraging the recipient to do what they can to become self sufficient. However, if the recipient was unemployed for a long period of time during the marriage, self sufficiency may not be possible.
There were 2 court cases that shaped the way spousal support claims are handled today. The first was Moge vs. Moge in 1992, followed by Bracklow vs. Brackow in 1999.
In Moge vs. Moge, the husband was the primary income earner for the family. The wife stayed home with their three children and worked evenings cleaning offices. Upon their separation after a 16 year marriage, she received both child support and spousal support. Once the children were all grown and moved out, the husband appealed to terminate support, and payments were stopped. However, the wife appealed the court decision, claiming that due to her time given to her family, she would never be able to achieve the same standard of living that she had with her former husband. The Supreme Court agreed, and she was awarded a continuing spousal support payment.
However, in Bracklow vs. Bracklow, the partners were together for a total of 7 years, and 3 of those were as a married couple. She suffered from an illness and became disabled though the illness was not related to, or as a result of the marriage. During the first 2 years of their relationship, she had paid most of the bills. After that, they split the bills until she became unemployed and he became the sole provider for the family. Due to her illness she was unable to work, and began to receive a disability pension as she was not expected to be able to work again. As a result of the pension, it was determined that she could sustain a very modest existence. However, she continued to pursue an equalization payment even though she was receiving a small temporary payment amount from him during the court proceedings. A trial judge decided that larger payment should continue for 2 years after the appeal. The Court of Appeal upheld the decision.
This decision has since raised a series of questions with regards to spousal support. Spousal support had previously been given to keep the spouse out of financial hardship, as a direct result of their contribution to the marriage or family. If after a short marriage, a partner wants a support payment, how much should they receive and for how long? If they are no longer able to become self sufficient does that become the responsibility of the previous marriage partner? This case seems to have opened the door as precedent for more like it. It is interesting to see how the interpretation of the law develops with the cases that are presented. However, the harsh reality of lengthy battles around divorce and separation seem to caution us towards the penning of a solid prenuptial agreement. As they say… if you can’t talk about it when things are going well….
Families come in all difference shapes and sizes these days. It seems now more than ever there is no cookie cutter model with the beautiful home on an acreage, white picket fence and 2.4 adorable children running around in coveralls or a Sunday dress. Over the years Mommy & Daddy may have divorced and re-married. As new families form, ties to the past continue. And out of the old, come new obligations. Child support often needs to be dealt with in today’s family. Is it deductible? What can be claimed?
Child support used to be a deductable expense for the parent paying the bill and taxable to the parent receiving it. In order to deduct a child support payment, there had to be a registered written agreement or court order. In May of 1997 the rules changed. Under the new rules, child support payments are neither a deductable expense for the payor or taxable for the recipient. Agreements that were made before that date and are still upheld and subject to the past rules. However, if both the payor and the recipient agree and sign the required form, they can make and receive payments under the new rules without having to re-write their existing agreement.
Child Care Expenses
There is also the issue of Child Care Expenses. This deduction is allowable for the parent with whom the child is living. The CRA says: ‘you can claim child care expenses you incurred while the eligible child was living with you.’ If there are two parents, it must be claimed by the lower income spouse.
An eligible expense includes the cost associated with:
-Daycare or nursery schools
-Day camps/schools/sports camps/boarding schools that exist mainly to care for the children, and not just as a recreational activity.
Expenses that can’t be deducted under this provision include:
- Hospital or medical expenses
There is also the Child Fitness Tax Credit program that allows a claim of up to $500 per child (in 2010) for those who participated in a qualifying activity program. It’s pretty easy to find a qualifying program. It has to be 8 consecutive weeks, or 5 consecutive days of building muscular strength, endurance, balance or flexibility. The child has to be under the age of 16 (or 18 if disabled) and the claiming parent has to meet the requirement necessary to claim the Child Care Expense.
Old Age Security is a taxable pension paid out to Canadians that have lived in Canada for 40 years or more after age 18. A pro-rated amount is payable for those that have been residents for less than that amount of time. Old Age Security is a great place to start when we begin layering the sources of income that you will have during your retirement. The maximum monthly amount that can be received at the time of this writing is $533.70. But this social benefit has claws. By that I mean it can be clawed back if your income exceeds a certain amount.
When managing your income during retirement, it becomes important to look at the sources of your income that are taxable. The claws that will reduce your Old Age Security are based on the taxable amount of income that you report. In the case of Old Age Security, once your income exceeds $67,668 for 2011, this benefit will begin to be reduced.
What can be done? If you’re still in the phase of your life before retirement, we can help you determine if you have enough money saved in Tax Free Savings Accounts and other non-registered vehicles that will allow you more control over the amount of taxable income that you’ll receive during retirement. The best retirement planning starts years before you actually retire.
Some things you may want to know about the Old Age Security include the following:
Here is a link to Service Canada’s website for additional information about the OAS.
Most people think about EI when they’re between jobs as a result of being laid off. However Employment Insurance provides other benefits that should not be overlooked – if only because the responsibility is ours to apply for them in the time of need.
With EI, the benefit you receive is related to your earned income. This is up to a maximum amount that can change every year. In 2011, the maximum was $44,200. This provides a weekly benefit amount of $468. The type of claim determines the length of time for which you can receive it. Here are the different types of benefits:
The most well known EI benefit beyond the loss of a job is the maternity benefit. It can be paid for up to 15 weeks for a maximum total of $7,020 in 2011.
In addition to the maternity benefit, either parent can claim parental benefit if they have or adopt a child. The new mother has the option to receive both the maternity and parental amounts. The father may take time off as well, but the 35 weeks of payment has to be shared between the two of them. If they were paid the maximum for 35 weeks, this couple would receive an additional $16,380.
If you find yourself unable to work due to sickness, injury or quarantine, and your doctor is willing to substantiate this, a maximum benefit of $7,020 is payable over 15 weeks.
Compassionate Care Benefit
If you need time off work to take care of a family member who is terminally ill, this benefit can help. It will provide benefits for up to 6 weeks, to a maximum of $2,808.
Multiple types of benefits can be received in the same year.
For an employee who qualifies, taking these benefits is an easy decision since contribution into the program is mandatory. The qualification period is based on a drop in income of at least 40% and a minimum of 600 hours worked over a period of 52 weeks. Before you put in a claim, be sure to visit Service Canada’s website to make sure that this requirement hasn’t changed.
Please also remember that EI is taxable, so you can either request to have taxes deducted when you receive the benefit or you can prepare to pay any additional amount owing at tax time.
For the Self Employed
These benefits have also become available for self employed individuals, but thought should be given to the relevance of the benefits and the cost.
The self employed individual will get the same benefit as an employee. That is: 55% of your average weekly earnings, to the maximum. On the contribution side, earning the maximum income of $44,200 means an annual premium of $786.76.
To qualify, a self employed individual has to earn a minimum amount of income in the previous year. For 2010, that amount was $6,000. They also can’t make a claim for their first 12 months in the program.
Here is the caveat – as a self employed individual, if you have not claimed any benefits you can cancel your participation in the program at any time. However, if you have claimed benefits, you will have to continue to pay into the program for as long as you stay self-employed.
EI definitely has its place. When it’s needed, it’s good to have. I hope this post has made you more aware of the benefits that exist.
Here is theEmployment Insurance link to Service Canada’s website
Getting a gift is always a good thing. Understanding the tax law so that you won’t have to pay more in the future, makes it even better.
By definition, a gift is something that you received for free- at cost to the giver. This also holds true with regards to its taxation. A gift of property will not be taxed to the recipient, but it is taxable to the giver. When gifting property to a family member, the way that the property is valued when it is given may end up costing everyone more money in tax dollars. To make sure this doesn’t happen to you, read on.
Gifts of a home other than a principal residence
Gifts of property are usually from a family member. That beloved cottage that holds so many summer memories or Mom & Dad’s place once they’ve moved on. Family members often want to give these places that have come to mean so much to their children as a gift. But the giver will have to pay taxes on the gift as if it were sold. Depending on their own personal financial situation, this can be a problem when no money was actually received.
How does this affect the taxation?
The giver of the gift may try to lower the transfer price of the property to pay less taxes. However, because of the nature of their relationship with the recipient, they will still be taxed as if they were paid fair market value. For the giver, the gift is not as sweet, because in this case there is no way to avoid paying the full amount of tax.
How long are your arms?
As a measure of relationship, the term “arm’s length” is often used to determine if an existing relationship with the other person would affect the valuation of the property in question. If I were at arm’s length from someone I would not have any bias towards them in a transaction. As such, it is assumed that the fair market value of the item was used. If I have a pre-existing relationship with someone, like a child or other family member, we are not at arm’s length and so a lower price might have been given to them than would have been provided to any other impartial individual.
What does this mean for the recipient?
Since the giver is going to have to make preparations to pay full taxes on the gift regardless, it is in their best interest to transfer the property at fair market value. Here’s why:
While the gift of property is tax free when it is received, it will be sold or given away one day. If you receive the property for a lower amount now, you will be exposed to having to pay more taxes later. This is because the taxable portion is the difference between the price when you sell and the value at which you received the property, minus any deductions. This portion then has the potential to be taxed twice.
So if the giver has to pay all the taxes anyways and the recipient will have to pay them on disposition of the property in the future, fair market value should be used to make sure that as a family, you don’t pay your taxes twice.
Have you recently transferred or changed investments in your investment account, given a gift of property or shares, or had something of value stolen or destroyed? Were you thinking of changing your country of residence? All of these actions can lead to the creation of a capital gain or loss. In this post we’ll look at the capital loss, and how it can be used to its fullest potential.
First off, how do I know if I will have a capital gain or loss?
In the simplest terms, you can determine if you will have a capital gain or loss by asking yourself three questions:
1. What price did you sell the item in question for?
2. What price did you originally buy it for?
3. Did you have any expenses that can now be deducted?
The first two questions are easy. The third might lead to a bit of research. The deductions will depend on the type of property that has been sold, given away or exchanged. Once you have all three pieces of information, take the sell price and subtract the original buy price and any deductions. A positive number means that you have a capital gain, while a negative number is a capital loss. This of course is a rough calculation for your personal knowledge, so that you can prepare for the tax consequences. The actual calculation for tax purposes should be left to the professionals.
What do I do with it?
A capital loss has to be declared on your tax return in the year that it’s acquired. It then has to be applied against all the capital gains that you also had during the same tax year. After that, if you have a loss remaining, you have a choice: A loss can be carried back three years or forward indefinitely.
First year aside, when would I want to take the capital loss?
If you had capitals gains in the past three years, it is good to use the capital losses as soon as possible. Here are a few reasons why:
1. You get back the money that you’d paid out in capital gains tax, up to the amount of the loss. A dollar today is worth more than one in the future. This becomes true because of inflation changing the amount of goods we can buy with that dollar. It could also be invested to earn interest or pay down a debt that’s currently costing you money.
2. The inclusion rate might change. We know the inclusion rate as the 50% that we multiply our gain or loss by to get our taxable amount. From 1990-1999 the inclusion rate was 75%. If there is a difference in rates, you’ll have to multiply them together and divide your capital loss by that amount. Sound complicated? If the inclusion rate hasn’t changed (and it hasn’t since 2001), you can skip this step, but it’s good to go the CRA website to check it out anyway.
The Silver Lining
Capital losses are a bit of a blessing in disguise in that they eliminate an equivalent amount of capital gain. And paying less tax is always a good thing!
Defined benefit, defined contribution. You’ve likely heard the terms tossed around before. But what’s in a name? And more importantly, what’s in your pension plan?
So they’ve offered you a pension plan… what kind did you get?
While any form of pension is a good thing, they’re not all created equal. The two basic types are defined benefit and defined contribution. Simply put, with a defined benefit plan, you know exactly how much you’re going to get during your retirement. With a defined contribution, you don’t know. You’ll receive whatever stream of income that your pool of money can purchase when you retire. This will depend on how well the markets have done, how your money was invested and what the interest rates are doing at the time that you retire.
When does it become yours?
Look for an area on your latest statement that mentions the term ‘vesting’. This will let you know how long you have to stay with the company before that money becomes your property. A vesting period is usually 2 years. It’s good to know in case you’re planning to leave an employer, for whatever reason, around the vesting period mark. It works like this: Say your plan was contributory – meaning you and your employer put money in. If you leave your employer before the funds are vested, then you will only get a return of the money you put in. If you leave after the vesting period you will get to keep the employer’s contribution as well as your own. The catch would be that you can’t just take and spend this money. It will be put in a locked in account that is designed to limit your access to the money until your retirement.
Will it adjust to the cost of living?
Try to find a reference to indexing on your pension statement. Indexing means that the amount of benefit paid out to you will increase along with the price of everything else. To do this, indexed pensions will use a measure, like the Consumer Price Index (CPI) and will also specify the frequency of the indexing (usually annually). This is a very nice feature to have since people are living longer. If you retire at 60 and live well into your 80s, price changes could be substantial. An indexed pension will help you keep up.
Does it adjust for other government benefits that you’ll receive?
If you’re planning to retire before age 65, try to find out if your pension has bridging benefits. A bridging benefit is like a temporary supplement. It’s an additional dollar amount designed to mimick government benefits like CPP and OAS until you begin to receive them. For a visual that’s true to its name, picture the age that you want to retire at one end of a bridge and normal retirement age, as defined in your plan, on the other side. As you’re crossing the bridge, at the ages between your retirement and the normal retirement age you’re given additional money. Once you’ve crossed the bridge, it’s gone. With all of the changes to CPP, it can be to your advantage to defer taking it until age 65 if you have this pension provision.
From the general terms that have been described: vesting, indexing and bridging there are many variations on the type of pension plan that you can receive. Be sure to read definitions in your plan carefully and talk to someone who can explain the implications of their subtleties. Your pension is a foundational part of your retirement plan. So if you don’t have one – be sure to find out how much you would need save to create a sufficient stream of income during retirement. Your retirement depends on it!
The old axiom goes: failing to plan is planning to fail. But it doesn’t have to be that way. HSBC has compiled a global report focused on retirement. It’s in its 6th edition and they have surveyed over 17,000 respondents globally. 1,033 Canadian households volunteered their views, with some eye opening results. According to this report, only 35% of Canadians have a financial plan. Roughly half of the Canadians surveyed have sought financial advice.
A trending demographic and a history in Canadian benefits
The number of retirees is steadily increasing. From the 9% in 1984 to 14% in 2009 the increase in number of retirees has led to changes in the government benefits available.
The Old Age Security Act was enacted in 1952. This replaced a previous system started in 1927 that was funded by both the federal and provincial governments, but was run by the provinces. It was designed to provide benefits only to those in dire need and was not widely used to support a certain lifestyle during retirement.
The CPP started in 1966. It is a contributory plan and initially the contribution rate was 1.8% of gross income, up to a maximum limit. Today, contribution rate clocks in at 9.9%. Half of that is paid by the employee and the other half is paid by the employer to an income maximum ($48,300 in 2011). There are currently changes that are reducing the amount of benefits to younger retirees and encouraging people to take their pension later. There is no doubt that these changes are a result of the shifting demographic.
The HSBC report goes on to say that by 2050 25% of the population will be retired. This is a date that I’ve seen before, as the CPP Actuarial Report cites it as the date that the Canadian Pension Plan finds itself on wobbly legs. And the projections continue: by 2056 the ratio of working employees to retirees gets startlingly close to half.
What’s the solution?
My heart goes out to the 65% of Canadians that don’t have a plan. While the federal government attempts to make changes to accommodate the aging population, it is still so important that people take their own initiative. While political campaigns may promise additional retirement benefits, the money has to come from somewhere. Even with a re-structuring of the current system, if the employment projections are accurate, it will be too heavy a weight on the working population. So talk to a financial planner. Get quality, qualified advice. It’s the best thing that you can do for your future and your family.
Here is a link to Canadian edition of the HSBC survey which was the source for much of this content. It’s titled “The Future of Retirement”.
Here is a link to Canada’s Old Age Security Act .
The Financial Planning Standards Council also has some great publications and surveys about the benefits of qualified financial planning
The more involved I get with Tax Free Savings Accounts the more I see and appreciate the benefits that they have to offer. It’s refreshing to see a product bringing equal benefits to individuals of all income levels.
Truth be told, Canadians need to take more initiative to save for their own retirement. RRSPs are the traditional vehicle of choice. It can be argued that RRSPs hold a greater benefit for those in a higher tax bracket. They get a larger tax refund, as they have paid a higher percentage of tax. For those in the lower tax brackets, the refund has always been smaller, if any. The danger has been that they will pay more tax when they need to take a lump sum withdrawal or if they are in a higher tax bracket during retirement. Still, RRSPs were a good idea because of the deferral of taxes paid on any gains held within the plan. Even if that means losing the preferential tax treatment on some types of investments. Let me explain.
Let’s say I have a stock portfolio in my RRSP. One of the stocks has done well so I want to sell it and buy a different one, which I think has better growth potential. I sell it, buy the other one and… as if by magic, pay no taxes. If the stock was not held in the RRSP I would have owed taxes on 50% of the gain payable at my tax bracket.
Similarly, if my stocks pay dividends and I choose to have them reinvested, I pay no taxes as long as the dividends are re-invested within my RRSP.
Compound that over several years of holding this plan. That’s the beauty of tax deferral.
Enter the TFSA. Minus the tax refund that you’d get on the initial deposit to an RRSP, the tax deferral within the TFSA works the same way. With one major difference.
When I take a withdrawal from an RRSP I pay tax on 100% of the money I take out. There’s no more preferential tax treatment. No 50% for capital gains, no grossing up for dividends. 100% of your withdrawal is taxable. And to make sure that the CRA gets the taxes as soon as possible, they will keep a portion of the taxes at the same time you get your withdrawal. This is call withholding tax.
With a Tax Free Savings Account, when you withdraw the money there are no taxes on any gains. Period. All the deferral. None of the taxes. How does this work? Remember how I said that with a TFSA you wouldn’t be getting a refund? Since you didn’t get the taxes back, your contribution was made using after tax dollars.
RRSPs definitely have their place. If you’re confident that your tax bracket later in life will be lower than it is now, you can take your refund and invest it. This gives you more funds to grow tax deferred over time. You could even invest your refund in a TFSA. And that would make your RRSP contribution twice as effective.
Pension splitting is one of those generally accepted good things. When your tax preparer or financial planner says “I think there’s an opportunity to split your pension here” you dutifully nod your head. “Oh, yes, good idea, please go ahead.” You might even brag about it to your friends later over dinner. “We were able to split our pension income and did we ever save money on our taxes this year!” They too will dutifully nod, and comment how good that is. But what does it mean? How is it done? And how much better off did it really make you?
If you’re a Canadian resident either married or in a common law relationship and you are both over the age of 65, you’re eligible.
What can be split?
Income from the taxable part of an annuity, Registered Retirement Income Funds (RRIF), pensions, deferred profit sharing plans, foreign pensions that haven’t already been deducted, US Social Security, but not US IRAs or OAS. A link to the CRA website for further detail is at the end of this post.
How does it work?
On form T1032 you take the number of months you & your partner lived together in the past year. Divide that by the 12 months in the year. Then divide that by two – splitting the amount of pension in half for the time you were together. If you and your partner have been separated for 90 days or more due to the relationship breaking down, you won’t be eligible to split income.
How do you benefit?
If you’ve split your pension income with your spouse and he or she is in a lower tax bracket, you’ve benefited by shifting the income out of your higher tax bracket into your partner’s lower bracket. If your partner did not have any other pension income he or she will also be eligible for the $2,000 pension income amount. Finally, some government benefits like Old Age Security won’t get paid after your income reaches a certain level. Shifting some income to your spouse may allow you to continue to collect a partial benefit.
Before a Pension Split:
Taxable Income for 2010: $93,590 comprised of pension income, RRIF’s and investments
Social benefits repayment (Old Age Security): $4,024
Federal tax rate: 26%
Pension income amount of $2,000
Total payable: $23,621
Taxable income for 2010: $21,650
Federal tax rate: 15%
No pension income amount
Total payable: $571
Combined Total Tax Payable: $24,192
After the split:
Maximum split amount: $35,994
Taxable income for 2010: $57,596
No Social benefits repayment of Old Age Security
Federal tax rate: 22%
Total Payable: $8,754
Taxable income for 2010: $57,644
Tax rate: 22%
Total payable $10,088
Total combined tax payable: $18,842
With no pension split their combined taxes owing: $24,192
With a 50% pension split, their combined taxes owing: $18,842
So here’s what they’ve actually done:
1. They’ve equalized their tax brackets so that he’s not overpaying and saved $5,350.
2. Since his income dropped, less of his Old Age Security was clawed back. This means they get to keep an additional $4,024.
For simplicities sake, this example doesn’t take into account provincial tax savings. So between federal taxes and OAS benefit, this couple gained $9,374 which would have otherwise been payable as tax or clawed back.
Pension splitting is good because no money actually has to change hands for it to be attributable to your spouse. The tax savings can be substantial. So if it’s an available option… why not take advantage?
Here is a link to the types of income that qualify as pension income.
We live in a time where good retirement benefits are hard to find. One of the best ways to get the most out of what you have is to really understand it. There’s nothing quite like searching for the answer to your problem, only to find that it had always been available, patiently waiting for you to take notice. This post is about government benefits – the CPP in particular – and how it can help you through a trying time in your life.
Losing a spouse or common law partner
Losing a partner can be a devastating time for anyone, but the blow can feel twice as hard if they were the primary breadwinner. Here is a look at the different components of the CPP and how they may be able to help you.
The Canadian Pension Plan (CPP)
Benefits are available for different family members of a CPP contributor, even if the contributor wasn’t yet at retirement age. The CPP deals with this in three distinct ways:
1) A Lump Sum Payment
A one-time lump sum payment equal to 6 months of CPP benefits to a maximum of $2,500 will be paid out. If CPP had not yet been collected, the‘6 months of CPP benefits’ is based on the amount of CPP that would have been received if the deceased were 65 at the time of death. The amount of CPP that a person stands to receive is based on the amount and length of time that they have been contributing into the program. That means the death benefit may be less than the $2,500. This benefit is payable to the estate.
2) Survivor Benefit
It can be troubling for a partner that didn’t work very much over the course of the relationship to find out that the partners CPP will be paid for the month of death, but will be stopped afterward. If the survivor is over 65, he or she can collect up to 60% of the partner’s CPP for the remainder of his or her life. If the deceased was receiving full CPP benefits that would be a maximum benefit of $576 payable in 2011. The survivor benefit and their own personal benefit will combine into one monthly payment. However, the total amount of that combined payment can’t exceed the posted maximum CPP retirement benefit for that year. There is also a reduced benefit of 37.5% of the deceased’s CPP, payable to spouses between age 45-64, and an even smaller amount if the survivor is under 45. CPP survivor benefits continue even if the spouse remarries.
3) Child Benefit
A benefit of $218.50 (in 2011) is payable for every child survivor. The child benefit stops when the child either turns 18 or age 25 if they go to a qualifying educational program full time. This benefit is not based on the income of the child, so if he or she gets a summer job, it remains intact. After the age of 18, the child has to apply to continue to receive the benefit by filling out a “Declaration of Attendance at School or University”. If our now young adult decides to take some time off of University and later goes back, they can make application for this benefit again. After age 18, the benefit is paid directly to the child and is taxable to them.
These benefits do get put to good use. According to the HRSDC, in 2009 15% of CPP benefits were paid out either as a death or survivor benefits – and that’s no small amount. In 2010 over one million survivor benefits were paid out. It’s also good to note that a CPP contributor has to be paying into the plan for a minimum of three years before his or her family becomes eligible to collect a survivor benefit.
Here is a link to the Annual Report of the Canadian Pension Plan for 2008-2009 as published by the Human Resources Skills and Development Canada.
CPP maximum benefit payment rates for 2011.
Payout rates for the numerically inclined.
Getting back to our discussion about federal tax credits. Here are a few more, for you to peruse and see if they apply.
The Age Amount
Are you 65 or over this year? If you are and your net income was less than $32,506, you qualify for the federal tax credit of $6,446. If your income is over $32,506 but under $75,480, you can still qualify for a partial credit. You or your tax planner will have to use the Worksheet for the 2010 Personal Tax Credits Return to calculate your credit based on your income.
Pension Income Amount
If you are receiving pension income, you can apply for a credit of up to $2,000. You would, of course, need to be receiving qualified pension income. If you are under age 65, this includes amounts from a Registered Pension Plan (RPP) that provides lifetime retirement benefits, or from a qualified pension of a deceased spouse or common law partner. If you are over age 65, income from pensions, annuities, Registered Retirement Income Funds (RRIF), Life Income funds (LIFs) will qualify. Old Age Security and CPP do not qualify as pensions under this credit.
Not to be confused with the dependant amount, the disability amount is a non-refundable tax credit that is available for those that can complete a T2201. There are two parts to this form. Part A is where the tax payer or Power of Attorney completes the basic information. The health information in part B needs to be completed, verified and signed by a physician. As such, this credit is only available to those whose condition is deemed ‘severe and prolonged’. In 2010, the disability amount was $7,239.
This credit is for you if you were a student this year or if you have tuition amounts carried over from a previous year. You must study at a post-secondary university, college or qualified educational program that has been approved by the HRSDC (Human Resources and Skills Development Canada). One of the requirements for the tuition amount is that the program can last no less than three weeks.
Please note that you will get a different amount dependant on whether you’re full time or a part time student. Full time students can claim $400 per month, while part times students can claim $120 per month. On top of the tuition amount, you will also be eligible for a textbook amount. This works out to $65 per month for full time students and $20 per month for those taking classes part time.
Other things to keep in mind: You cannot claim the tuition amount if your employer has paid for the courses, or if this course was part of a federal or provincial job training program where the amount was not included in your income.
Getting ready to file your tax return? Here’s a quick overview of the personal tax credits that help reduce your federal income tax. This list provides a brief description so that you can figure out if they will apply to you. More to follow next week, so stay tuned to make sure that you’re taking advantage of as many of them as you can!
Basic Personal Amount
Every Canadian resident can claim a basic personal deduction. This amount can change every year. For the 2010 tax year, it is $10,382. If you’ve been out of town a lot this year, know that you’re still considered a resident for the entire year if you’ve stayed in Canada for 183 days or more. You’re also still considered to be a resident even if you don’t have a house, personal property or spouse in Canada. Please note that even as a non-resident, you still have to file a return and pay taxes on any Canadian income.
Have children under the age of 18? The parent that the child is living with can claim a credit of $2,101 per child. If custody of the child(ren) is shared, the credit has to be shared too. You should only claim the full amount if you know the other parent isn’t claiming it at all.
Spouse or Common-Law Partner Amount
If your spouse or common-law partner (which includes same sex partners) has income that is less that the basic personal amount, you can claim a spousal or common-law partner amount. This credit is reduced by the net amount of income that your partner earned in 2010. Take the $10,382 and subtract their net income. Your credit will be the federal tax on the difference. If your spouse earns even a dollar over the basic personal amount, you’re not eligible for this credit.
What if you recently separated from a spouse or common law partner who earned less than the basic amount in 2010? You’re still eligible to claim the spouse or common-law partner amount. But if you find yourself in the position where you now have to pay spousal support, you’ll have a decision to make. You cannot claim both the spousal amount and the spousal support payment in the same year. Since you have the freedom to choose, figure out which provides you with a higher tax benefit and go with that.
Amount for an eligible dependant
Working in a similar fashion to the spouse or common-law partner amount is the eligible dependant amount. This credit can be used in two ways. It can either be used for a child under the age of 18 or a family member with a mental or physical impairment that cannot live on their own. Either way, the eligible dependant has to live with you for you to qualify for this credit. Please also note that you can only claim this credit if you had not claimed the spousal or common law partner amount. You have to be related to the eligible dependant by blood, adoption, marriage (or a common-law relationship). Please also note that only one member of the household can make this claim, so you and your spouse can’t both claim it in the same year.
This has just been a brief overview of a few of the more common federal credits. Please visit the CRA website if you would like to run a search for these credits to read up on them in greater detail.
We’ve all heard the old adage “Don’t put all your eggs in one basket.” Usually, when talking about investments, the proverbial basket of eggs is used to demonstrate risk. If all your eggs are in one basket and you accidentally drop the basket, life is not so good. If you have several smaller baskets and one slips, the net loss is much more manageable.
Let’s take that analogy and apply it to your retirement planning. Imagine that the baskets represent the different types of accounts that you have. You hold an RRSP basket, a non-registered basket and new Tax Free Savings Account (TFSA) basket. When most people think about retirement planning they think about filling up that RRSP. The post today is not about risk, taxes or investment allocation (which are very much influenced by the individual investor). Instead, we’ll put a twist on it and look at how spreading the eggs into different baskets can make your retirement years a little more golden.
The first thing you need to know is how the different sources of income that you’ll receive during your retirement are taxed. The Canadian Pension Plan (CPP)? Taxable. Old Age Security? Yes, it’s taxable. The Guaranteed Income Supplement (GIS) and the Allowance? Not taxable, but they need to be reported on your tax return.
Here’s the tricky part. At age 71, money has to start coming out of your RRSP. There is a minimum amount that has to be withdrawn every year. This minimum increases with your age and is a percentage of the total value of the account. Since this money is registered, the withdrawals will be taxed. And your amount of taxable income affects some of the government benefits that you stand to receive.
Your eligibility for the Guaranteed Income Supplement (GIS) is based on the combination of both your income and your spouse’s income. It has to be re-applied for on an annual basis. If you have no other savings and have to take a lump sum from your RRSP, you may not qualify for the GIS in the following year.
The Old Age Security (OAS) is another government benefit that can be affected by the amount of income that you take. In this case, if your income exceeds $67,668 in 2011, you’ll have to pay back a portion of the benefit. That’s $0.15 on each dollar that exceeds that maximum income amount until the benefit completely disappears. The repayment will be divided by the twelve months of the year and subtracted from next year’s benefit. *
You want to make the most of the government benefits that you stand to receive. This is where the other baskets fit in. If you hold non-registered accounts, you’ve already paid tax on the money that you’ve put in. It won’t be taxed twice. However, you will have to pay taxes on gains, interest income and dividends.
Tax Free Savings Accounts do even better. You’ve already paid tax on the money you put in and also don’t have to pay tax on those capital gains, interest income and dividends. Not a bad type of account to have in your arsenal of baskets!
Having money available in non-registered accounts (including your TFSA) gives you a lot more flexibility when it comes to withdrawing money during your retirement. While you can’t count your chickens before they’re hatched, you can keep those eggs diversified by account type. And as far as counting chickens goes, that’s where asset allocation comes in… and that’s a discussion for another time.
Here’s a link to Service Canada’s website that shows the maximum annual income limits and maximum monthly benefits for OAS, GIS and the Allowance.
*The information provided with regards to OAS clawback is a rough guideline and not the full calculation. This link to Service Canada will help you find out how much of your OAS will be clawed back next year if your income exceeds the maximum income limit. Please refer to the CRA federal worksheet link on that page.
Did you know that if you earned $50,000 of income in 2010 you will have paid $8,922 in federal & BC provincial taxes over the year?* Most of that tax is deducted seemingly painlessly from your pay check every two weeks, so seeing the number, all added up and in one place can be surprising. Take a look at that number again. Now get this: your tax refund means that you overpaid.
You won’t catch anybody saying that they enjoy having to write the CRA a cheque at tax time. But temporary pain aside, these folks have managed to do one thing right. They’ve held on to their money as long as possible. In the right hands, those dollars can be working on that individuals’ behalf, earning interest or paying down a debt that would be charging interest. As counter-intuitive as it may seem, that’s why you shouldn’t want a tax refund.
Does that mean that you should try and defer paying all of your taxes until April 30th? No, and since most taxes are withheld, you wouldn’t be able to do that anyway. There is a better way to keep your money working on your behalf and in your own hands.
Your RRSP can be a great tool for tax planning. Remember, that an RRSP is just a type of account that allows you to defer paying taxes until the money is withdrawn. We can help you figure out roughly how much tax will be owed for the year and work out a plan to make monthly deposits into your RRSP. The amount of tax you get back on your RRSP contribution will offset the amount of tax owed.
Again, while an RRSP can be a good tool to plan your taxes, make sure that you look at your entire portfolio to ensure that you have non-registered money as well for easier access during your retirement. Depending on your tax bracket, if you have money to spare once the taxes have been taken care of, a Tax Free Savings Account is also an excellent investment choice.
So if you remember one thing, remember this. It’s best to plan for tax time at the beginning of the year and take the appropriate steps throughout the year, so that when you do go to get your taxes done, you know what to expect.
*This number was taken from CCH Financial Advisor’s pocket reference and includes the basic federal credit and BC’s basic credit.
It’s February 1st, 2011. RRSP season is in full swing and every year there is much hype around making your RRSP contribution to reduce your taxes. But do you understand how these plans work? I mean, really understand? With all the investment options out there, here are some important facts about RRSPs, how they affect your investment strategy and when they might be a good idea for you.
Consider the name. A Registered Retirement Savings Plans is a retirement savings plan that is registered with the CRA according to the Canadian Income Tax Act. By saying to them that you are earmarking this money for your retirement, they allow you to defer paying all taxes on this money until you either make a withdrawal or turn 71. This deferral of taxes can be a huge advantage. Depending on how you choose to invest your money within the RRSP, the tax savings can be considerable, compounded over time.
In any other account, when you sell a fund, switch between funds, or collect investment income, taxes need to be paid. This is not the case within your RRSP. But the deferral of taxes comes with a price. When you make a withdrawal, you no longer receive the favorable tax treatment that you would have on a capital gain, or dividend income. On sale, regardless of the type of investment held within your RRSP, it will be taxed fully at your tax rate.
The trick with RRSPs is to make sure that you’re in a higher tax bracket now than you will be in retirement, so that you pay less taxes taking money out than you would have putting it in. To sweeten the pot, you’ll get the amount of tax paid on your contribution back as a refund when you file your tax return . (This is of course, working with all of the other things going on in your return). If you know that in a few years your taxable income will go up, you can make the RRSP deposit today, but not claim the deduction until a later year. If that’s the case, make sure that you file a Schedule 7 with your return. It’s the way that you tell the CRA that you’re doing just that, so that your contributions can count for future years. You also need to be aware that your RRSP contribution is based on last year’s earned income. You can go to the CRA’s website if you have any questions about what counts towards ‘earned income’.
For those of you with the money to spare, the upper dollar limit that you can put into your RRSP in 2011 is $22,450. For the rest of us, it’s the lower of that amount or 18% of your earned income. If you’re fortunate enough to have a pension plan at work, know that the total put away for your retirement into both your RRSP and these plans can’t equal more than that 18% of your earned income or dollar limit above. A calculation known as the pension adjustment will need to be made, but you may have more contribution room available from previous years in which you didn’t contribute the maximum.
Here’s a link to the CRA’s website for all things RRSP related.
Twenty nine billion dollars. Pardon me, approximately 29 billion dollars were paid out in 2009 by the Canadian Pension Plan (CPP). Between retirees, survivors, and those collecting for disability, your pension plan did that. Our pension plan. To keep this post brief, we’ll only be looking at the retirement portion of this plan.
What is the Canadian Pension Plan?
It’s a nation-wide pension where contributions are mandatory for every employer and employee in Canada. This pension plan is a big pool of money into which you and your employer make deposits. Slightly under 5% of your wages are taken off your pay check automatically, matched by your employer and deposited into the plan. Contributions are not required to be made on income above $48,300 (for 2011). Self-employed individuals need to pay both the employee and the employer portions.
What does it do?
The CPP is designed to replace 25% of your average earnings up to the average industrial wage. While the average industrial wage can change every year, this year it’s $48,300.
How does it work?
Contributing workers support those that are retired. All the money pouring in is invested into a mix of short term assets to pay out current retirees and long term assets to get a bit of growth. Your benefit is based on the length of time you were working and contributing into the plan, but the variables can change. The formula that is used to determine your benefit is not directly related to the dollar amount of your contributions.
Is it sustainable?
Every three years, the Chief Actuary looks at the plan and asks questions to make sure the plan stays sustainable. Questions like, are the benefits that will be paid out if the future too high or low based on the number of people that will be contributing? Do we need to adjust the percentage of your income being contributed? There are many variables, like unemployment rates, actual wages earned and growth in the population (by either new births or immigration). They can also change the asset allocation of the plan between equities, real estate and fixed income. Investment vehicles that take on more risk have the opportunity to earn a greater return, and this is taken into account.
What changes do I need to know about?
Here is a link to the 25th Actuarial Report of the Canadian Pension Plan .
Here is a piece published by the Department of Finance in 2009 addressing the financial soundness of the CPP.
When it comes time to choose your financial planner, the letters after our names can sometimes be just as confusing as the rest of the jargon in the financial industry. You know you want a professional who is well versed in matters of tax, estate planning, investments and retirement planning. But how do you know if your advisor has dedicated the time required to learn all this material, if they have experience and bind themselves to a code of ethics?
The Financial Planning Standards Council is a non-profit organization that addresses this issue. While anyone can call themselves a financial planner, designations like the CFP help identify those that have gone through an extended process of education and experience. By committing themselves to a rigorous program, they’ve shown a commitment to the industry.
The letters ‘CFP’ stand for Certified Financial Planner. This designation is recognized internationally and is intended to let you know that we have your best interests at heart. To keep the CFP designation, we’re required to keep up to date on developments in the industry by spending a minimum of 30 hours a year in continuing education. We must also follow a comprehensive code of ethics, which is required to remain in good standing with the Financial Planning Standards Council.
What we can do for you:
A Certified Financial Planner is trained to look at your whole financial situation. We give advice about how to manage your finances to meet your goals. By coming to us with a specific goal in mind, we can let you know if you are on track to meeting that goal, or what it will take to get you there. We can also help you take a comprehensive look at your family’s finances to help paint a picture of your retirement years and beyond. So if you have any questions, give us a call. You’ll find the CFP at the end of my name. The three financial planners in this office are CFPs. So if they say two heads are better than one, I’ll say that three CFPs must be exponentially better.
Here is a link to the Financial Planning Standards Council’s website in case you’d like to read more about the Certified Financial Planner designation.
This is a link listing other common designations in the industry with a brief explanation of each.
In the world of investing the descriptive terms ‘bears’ & ‘bulls’ are used to describe movement in the stock market. A bull market means that stock prices are rising. A bear market means the stocks are in a decline. This isn’t a commentary about the markets. It’s a commentary about a different kind of bear. A rare breed of the human variety that meets by the water on January 1st every year to plunge into its icy depths. Polar Bears. Some do it for fun. Others do it for charity. The Polar Bear swim in Vancouver meets downtown at English Bay at 2:30 on New Years Day. This tradition was started in the 1920s and now about 2,000 people make the run into the water every year while another 5,000-10,000 watch. It’s quite the crowd- and quite the experience.
Last year was my first polar bear swim. I had no idea how I would react when my body hit the water, so I can up with a plan. Run in quickly. Get into the water to my waist, then up to my shoulders, finally a quick breath. Head under the water, swim out 10 strokes and 10 strokes back. It was followed by tripping over myself as I ran out of the water as quickly as possible. (That last part was improvised). The water was shocking, but I stuck to the plan. I was too cold to think about anything but the plan. And for those few moments of pain – I felt proud.
This year was different. We got there early. I tried not to think about the plunge ahead. Drank hot coffee and left my coat on as long as possible. Fifteen minutes before the swim we stood in the crowd in front of the water. I had no plan. All I could think about was how cold I already felt. The horn sounded early. What? My friends were running into the water so I ran too. It felt like a thousand tiny knives. System shocked, the only thought I could think was ‘there is no way I’m putting my head under that water’. Determined to stay in for a few minutes, I splashed around with all the grace of a polar bear that had stepped on a wasps nest. I had failed. On the walk back to the car, my dry hair told of my shame.
Back in the office a few days later, I was still thinking about the swim. We all get cold feet when we start feeling bearish. When the markets drop, like they did in 2008, you didn’t have to be standing out there with me at English Bay to feel the shock rush through your system. Having a plan makes all the difference. The market moves in cycles. As long as you are prepared for this, have taken on an appropriate amount of risk and know where those investments fit into your plan, you’ll make it through. If you’ve been actively re-balancing your asset allocation and have kept us up to date on changes in your goals and time horizons, it will be easier to keep the situation in perspective. All these steps should be pieces of your plan. Bears will come and go, but sticking with the plan, especially when you don’t want to, is what makes it all work out in the end.
Just for fun, here’s a link to the Vancouver Board of Parks & Recreation’s website with stats and pictures about the swim.
It’s Christmas time. At least, it seems to be. The calendar shows the beloved day to be fast approaching and the malls are filled with bustle & Christmas carols. A Winnipegger at heart, this will be my second Christmas without snow. And how I miss it. Running to the window first thing in the morning, the untouched yard doesn’t gleam from the sunlight reflecting off a thousand white diamonds. Christmas just seems more festive when the world is lightly dusted with the sweet sugar coating that nips at your nose and makes you so grateful to be indoors. Fireplace blazing and cocoa in hand, the cold winters have always been my favourite time for reflection. I’ve always loved those days when the snow gave the perfect excuse to be nowhere but at home. And since home is here now, the crisp west coast air still calls me to reflection.
Christmas comes at the end of the year for a reason. If it’s an exercise in gratitude, what better time than now to look back at 2010? To look at the good times, the learning, and the people that make it all worthwhile. We all have to work, but something beautiful happens when work and a sense of purpose combine. I close my eyes and make a silent vow. To dedicate myself to pursuing and sharing the knowledge that will improve our clients lives. To develop my character, my manners and kindness so that my relationships will be built on respect. It’s my way of saying thank you. I owe it to all of you – and to myself. Merry Christmas.
At the beginning of a relationship we celebrate all the landmark dates. The one month anniversary, the six month anniversary (personally I think it’s just a great excuse to get flowers and go out for a nice dinner). Once the happy couple moves in together, young or old, the clock starts again – but for a different reason. The countdown to being common law has begun. While it just scratches the surface, this post will give you the CRAs definition of common law and the government benefits that will be affected by this change.
Although it takes two years in BC to be considered common law, the CRA sees your relationship as such after a year of living together. The two years cohabitation for BC residents holds a greater weight when dealing with a separation, since matters like dividing up property vary from province to province. The CRA will consider your relationship common law before the 12 months is up if you and your partner have a child together. They’ll also count you as common law right away if you have a child going into the relationship and your partner starts looking after the child both personally and economically.
What about those on again, off again relationships? The CRA has stated that the relationship has to be continuous. The couple is considered to have separated after 90 days of not living together as a result of the relationship ending (and not a work inconvenience). What about the time in between? The CRA has noted that if you are separated for less than the 90 days and then get back together, your relationship is still considered to be continuous. The reverse of this is also true. After having seperated, you’ll still be considered a common law couple for tax purposes until over 90 days have past.
When we’re looking at the government benefits that filing common law will affect, it’s easy to talk about the GST credit and Child Tax Benefit like we saw in the court cases mentioned in the previous post. The Universal Child Care Benefit and the Working Income Tax Benefit, for lower income earners, will also be affected.
But people begin relationships at all stages of life. If a common law relationship begins while you’re receiving benefits from the Canadian Pension Plan (CPP) or the Guaranteed Income Supplement (GIS), these amounts will change as well. The CPP has a death benefit of $2,500 for spouses which will not be paid if you’ve been filing single.
Pros & cons aside, filing common law isn’t optional. If you meet the criteria above and continue to file single, the CRA may notice that your home address is the same as your partner’s and can ask for a return of any additional benefits that had been paid. If you’re in a long term common law relationship and looking to do some income splitting with your significant other to save on taxes, your tax savings could be eroded by having to pay back overpaid benefits. And unfortunately an audit can leave you open to more calls from the tax man in the future.
If you need to contact Service Canada about more information regarding changes in your CPP or GIS benefits due to filing common law, you can click here.
When the words ‘common law’ come to mind, it’s easy to think of couples moving in with their sweetheart, as an alternative to marriage. Common law relationships in BC are defined as a couple living together in a marriage-like relationship for a minimum of 2 years. The word conjugal is often used to capture the sentiment of the ‘marriage-like’ requirement. I recently read an article in the Canadian Tax Planner that said as far as co-habitation was concerned, the Supreme Court has been making rulings that implied that a shared bedroom was not the most important part of defining a conjugal relationship. True, the intimacies that form any relationship would be difficult prove or disprove by even the shrewdest courts (or tax departments). But if being in a conjugal relationship is part of being common law, how do we know what they are interpreting ‘conjugal’ to mean?
Here’s a hint: decisions made in court cases are based on precedent. And in 1980, the groundbreaking case of Molodowich v. Penttinen set the stage for what we see today. The precedent was this: courts have to rely on the information they can gather. They ask questions like what economic benefits were combined? Did the couple in question act like a family in terms of sharing household responsibilities like cooking and chores? Who took care of any kids? Was money being given from one party to the other? Or was everything separate, the way it would be in a rental arrangement? Would an outsider look in and think this was a family?
I read up on two more recent cases, both of which referenced Molodowich v. Penttinen. The first, Brunette v. The Queen (2009) was an appeal by the taxpayer, Brunette saying that after her romantic relationship with her partner dissolved, she and her child continued the living arrangement for economic reasons. The CRA was treating her as if she were in a common law relationship and she was looking to file as ‘single’. Why go through all the hassle? She was looking to get the GST credit and Child Tax Benefit that she felt should be hers based on her income. Her request was denied. The alledged couple continued to act like a family, share household chores, went to social events together and he assisted her financially. It’s notable to mention that the court also took into consideration the fact that neither party was in another relationship during that time.
The next case I looked at was Rangwala v. The Queen (2000). This case dealt with a married couple that had divorced. Rangwala wanted to be treated as single while she lived in a separate area of the martial home. The ex-husband and child remained in the house as well. Like Brunette, she was wanting to receive the GST credit and Child Tax Benefit based on her own income. The marital home hadn’t been sold due to the ex-husband wanting to keep it and a disagreement about the fair value of her share. Her living area was separate from his, they did not communicate, go to social events together, share household tasks and their finances were separate. Appeal Approved.
Of course, the actual court proceedings and rulings were much more complex. If common law is defined as being in a ‘marriage-like’ relationship, the courts are acknowledging that there is much more to creating a marriage and a family than a shared bedroom. Although that question was never overlooked in the proceedings, it wasn’t the defining factor either.
Common law relationships can be tricky to define. If you’re in one, it’s important to understand the things that make it common law. It’s not necessarily as straightforward as we’d like to think. So if you decide it’s not a common law relationship that you want…. don’t do the laundry. You never know, it might help your case.
Here are the links to the Tax Court of Canada’s decisions on the mentioned cases. Brunette v. The Queen (2009),Rangwala v. The Queen (2000)
If you’d like to look at this type of situation in more detail, check out Gagné v. The Queen (2001)
The last post was about renting out your house – all of it. So what happens when you rent out part of your house & keep living there? Here are some tips help you understand how this change works. But first, my disclaimer: your personal financial situation is unique. Please, please consult with a professional to make sure that you’ve handled it correctly – especially where taxes and potential audits are concerned.
When you start renting out part of your principal residence, you’ve changed the use. This means you will have to pay taxes on any gain on that portion of your house going forward. The taxes won’t come due until the property is sold or the use is changed again. With this in mind, most people try to take advantage of the deductions that come along with the rental income to the fullest. It’s a little counter-intuitive, but there are situations when you might want to give that a second thought.
There are two ways to determine how much of your home counts as a rental property: either by square feet or number of rooms. The square footage of the space you will be renting is divided into the total square footage to tell you what percentage of space is being used. Or you can do the same calculation, where the number of rooms being rented are divided by the number of rooms in the house. People typically want the greatest deductions possible and will use the higher of the two calculations to be able to write off more of their expenses.
Let me give you two circumstances where this might not be the best idea.
The first is found in CRAs rental income guide. They give us three conditions, which all have to be met, that will keep this property as your principal residence. Here they are, verbatim (parenthesis mine):
If that’s the case, chances are good that the tax-exempt gains would be more beneficial to you than the deductions that you would take. If you keep it as your principal residence, when you sell, you’ll pay no taxes.
What if your college aged son or daughter has moved into the basement and you’re charging them a small amount of rent to teach them responsibility? The CRA is looking for signs that you were trying to make a profit, and this likely isn’t the case with most family arrangements.
If the change of use is unavoidable, keep in mind that the percentage that you use to determine your write offs will be the same percentage of your property that will be subject to a capital gain or loss when it is sold. Refer to my last post for more details. To help you decide which is best for you, ask yourself a few questions:
How long before I sell or change the use of this property?
Approximately how much will it appreciate in value given its location, size, and the demand for houses in your neighborhood?
How much of a benefit would I actually get from the deductions I would be taking?
The CRA will let you deduct “reasonable expenses you incur to earn rental income”. Examples of this are the interest on that portion of your mortgage and any other loan that you needed to get the property in the condition it needed to be in to be rented out. Insurance, property taxes and maintenance cost are also deductible – but don’t try to deduct the cost of fixing it yourself. Paying yourself to do the work isn’t an eligible expense. Capital cost allowance (link attached to last post) can be deducted as well. Expenses are deductible the year they happened, even if you don’t pay the bill until the next tax year.
Here’s a link to the rental guide T4036. It is the source of the information in this post. You can find it here. And again, with all this in mind, the best advice that I can give is this: Please consult with a tax professional.
In the investment world, ‘change of use’ means one thing. Deemed disposition. And deemed disposition means this: you’ve triggered a taxable event. Be it a gain or loss, from this moment forward, the value of that investment is frozen in time. If the investment has appreciated, it comes with a tax bill. If it has depreciated, you can use the loss against future gains.
If your home is your principal residence and you’re looking to rent it out, your tax situation would look something like this: When you begin collecting rental income, the use of your property changes. For tax purposes the property is treated as if it were sold as your principal residence and then purchased again as an investment property. Since it was originally your principal residence, no taxes will be owning on any appreciation from the time it was purchased (or designated as your principal residence) to the day the use changed. If you were to leave it as an investment property, you can deduct the tax on the interest portion of the mortgage. You can also claim depreciation, known as the capital cost allowance. On the downside, your rental income is fully taxable.
What if the change is temporary? Say you know you’re going to be out of town for a year or so, but don’t want to sell your home or deal with the some of the future capital gains that would be incurred by changing the use. The income tax act addresses this issue in section 45(2). You can defer the gain for up to 4 years, by writing a letter to the CRA stating what you are doing, siting this part of the income tax act and including it with your tax return. Here are some of the rules:
- You need to own the property
- You must have inhabited it as your principal residence
- The ‘no change of use election’ is a written letter filed with your tax return, signed by the home owner. It must be filed the year of the change of use and ever year subsequent.
- You can elect to ‘not change’ the use for up to 4 years. If after 4 years, you do not change it back to your principal residence, a deemed disposition will occur at its fair market value and any appreciation from that date going forward will be taxable.
- You can’t claim the capital cost allowance (deprecation). To do so voids the election. You also can’t deduct the interest portion of your mortgage, as you have requested that this not be considered an investment property.
- If you’ve already begun to rent out your property and want to file the election retroactively, fees will be charged.
- You must remain a resident of Canada during this period of time.
- A family can only have one principal residence at any time. If you own more than one property, only one will qualify as your principal residence during any given period of time.
Subsection 54(1) will let you elect to keep the principal residence status on your home for more than 4 years, if you or your spouse were required to move for work. For this to take effect, your principal residence has to be a minimum of 40 kms further from your new place of employment than the place to which you re-located.
Please note that this works best if you intend to keep house as your principal residence. This election doesn’t do away with the gain, rather defers it. Here is a link to the CRA website showing what qualifies as capital cost allowance and how to calculate it for an investment property.
What’s an interest rate differential? If you’re looking to break the term of your mortgage, it’s a cost that might make you want to reconsider. Say you were interested in breaking your fixed term mortgage to take advantage of lower interest rates. Your lending institution doesn’t like the idea of giving up that stable stream of income: the interest payments on your mortgage. The way they get some of the money that you agreed to pay them when you signed up for the fixed term rate is through the interest rate differential. While every lending institution can have slightly different ways of making the calculation, here’s the basic formula.
Amount of the mortgage x difference between the fixed rate you have & the variable rate that you want x amount of time remaining on the term.
Pulling from the example in the last post, we’ll assume that you have a $200,000 mortgage amortized over 25 years, with a 5 year term. You want to break your mortgage while there are 2 years remaining on your term.
$200,000 x (5%-3.7%) x 2 years = $5,200. Ouch.
Have you really saved any money at all?
Again using the numbers from the last post and assuming a 25 year mortgage.
Let’s break down the interest payments:
Cost for the first 3 years at 5% fixed rate = $28,770.41
Cost for remaining 2 years at variable rate of 3.7% = $14,371.93
Interest rate differential = $5,200
Had you kept your fixed term, it would have cost $46,807.61. So in the attempt to save money, it actually ended up costing $1,534.73.
The lesson is this: before you break your mortgage, calculate the cost. The interest rate differential can be enough to make you think twice. Generally, the further along in the term you are the lower it will be. But if you’re nearing the end of your term, be sure to double check with your mortgage institution. Some will charge you a minimum of three months interest to break it early. Also be aware that the interest rate differential calculation doesn’t just apply to breaking your term, but also applies to mortgage overpayments.
There’s no shortage of articles out there expressing opinions about fixed and variable mortgages. Even after going through all of the information that you can find, you might still feel like you’re not equipped to make the decision. In my opinion, it’s because every person’s situation and risk tolerance are different. Unless you’ve consulted with the author, his or her advice might not be right for you (mine included!). So keeping that in mind, I’d like to briefly explain some of the features that these very different types of mortgages offer. Then I’ll give you some guidelines to help make the decision.
Fixed rates mortgages: You choose the length of your mortgage, known as your ‘amortization period.’ Let’s say you choose a 25 year amortization period. Within that time, you can ‘lock in’ a rate for a number of years. This is known as a fixed term within your mortgage. For that period of time, you will pay no more or less than the rate you agreed on.
Variable rates fluctuate with prime rate. Each bank can change their rates whenever they like, but the rate fluctuations are based around the overnight rate, which is set by the Bank of Canada.
The Biggest Difference:
We all want to know that as much of our money as possible is going towards our principal. That’s how we pay off our mortgage faster. In a fixed term mortgage, the blend of principal and interest is pre-determined. In a variable mortgage, it’s subject to change with the rates. Variable mortgages work with the assumption that rates will be lower than the fixed term rate some years, and higher in others. When you’re trying to decide which is better for you, look at the rates for the fixed term that you’re interested in. Compare it to the amount you would pay if you chose a variable rate. You then have to determine if that amount is worth the risk of rates increasing during the period of time that you would be locked in for. If rates increase more than the current fixed rate, a few years into your mortgage you might find yourself paying more than you expected.
As an Example:
On a $200,000 mortgage with an amortization period of 25 years, you would pay $46,807.61 in interest over a 5% fixed 5 year term.
With a 3.7% open variable rate, your interest payment over the term would cost $34,645.22. That’s a difference of $12,162.39. Applying the difference to your principal would reduce the length of the mortgage.
Let’s say you thought this looked good, and took out a variable mortgage. You made no additional payments, and after two years, the variable rate increased to 6%. You now have to pay interest cost of $34,873.40 for the remaining three years and that has to be added to the $14,446.41 paid during the first two years. Your total cost is now $49,319.81. The purpose of this illustration is to show that the length of your term and how far you are into it when rates change will determine your ultimate outcome. Lengthening the fixed term on your mortgage can compound the results. But as a generalization, if you are comfortable with the risk, you are able to pay off more principal with a lower interest rate. The interest payments due in this example were calculated as being at the very beginning of the mortgage. Interest payments decrease every year the further along you get. When interest rates do rise, a smaller amount of principal owing can make for a shorter mortgage, which helps remedy the higher rates.
How do you know what to do? Variable rates are tied to prime rates; banks determine their prime rates by the overnight rate set by the Bank of Canada. Watching the Bank of Canada and listening to the sentiment from those governing it can give you an indication where rates will be moving over the short term. If you have a variable mortgage, and are concerned, speak with you mortgage broker ahead of time to determine the process and any costs to lock it in. That way if you want to change your decision, you’ll know what you need to do.
You can visit the Bank of Canada’s website by clicking here.
The last post was about details to qualify for the home buyers plan.
So which is a better choice – letting my RRSP grow through compounding or taking the money out for use through the home buyers plan? Taking the money from your RRSP is like taking a loan from yourself. You won’t have to pay interest. You’ll also reduce the amount of interest on your mortgage over its life. Let’s look at a quick example.
Say you took out a $500,000 mortgage at 5.4% for 25 years. For simplicities sake, we’ll assume the rate doesn’t change. At the end of the 25 years, you will have paid $406,873.05 in interest. Now let’s pretend you took $25,000 out of your RRSP and your spouse did the same. The amount of your mortgage is now $450,000. Using the same simplified interest rate and 25 year term, your total interest cost is now $366,188.16. It works out to a total savings of $40,684.89 over 25 years. This is a conservative example since I’ve used low rates. In reality, the rates will go up and so will your cost.
Since you’ll be repaying your Home Buyers Plan, between the two of you, $3,334 will be going back into your RRSPs each year for 15 years. The growth of that money being put back in shouldn’t be ignored. For simplicities sake again, let say you were invested 100% in the stock market. When you withdraw the money, half of it will be taxable at your tax rate. Assuming you live in BC and during retirement, your income would be between $40,000 -$71,000. Not an impossibility if you’ve qualified for the $500,000 mortgage. Today’s combined federal and provincial tax rates would be 29.7%. Over 15 years the money you’ve recontributed grows to $77,586.57. It then continues to grow at 6% for the remaining 10 years of the term to a total of $138,973.51. With a 50% taxable capital gain and the tax rate of 29.7% your after tax gain is $48,849.19.
If we’d left the money in the RRSP, how would it have done? Take the $50,000 at 6% growth per year (and remember the 6% growth is added to the principal and then compounded again and again on top of itself). In 25 years, in this perfect world, the investment total would be $214,593.54. After the capital gains tax, that number is $107,296.77. And once you’ve subtracted your income tax, you keep $75,429.63. If you spouse is in a lower tax bracket, his or her portion of that might be lower. Remember, taxes aren’t paid until later in life when the funds are withdrawn.
Final comparison: By leaving the money in an RRSP you’ve ended up with $75,429.63 after tax. Using the home buyers plan you have saved $40,684.89 in interest payments on your mortgage and made $48,849.19 through your RRSP, totaling $89,534.08.
Which leads me to the following conclusion: Rates of return on your stock portfolio will vary. The interest payments on your mortgage are a sure thing. This simulation is not perfect, and should not be viewed as advice. Please give thought to your personal situation before making a decision. Factors to be considered are the amount of risk you’d be willing to take with your investment choices, which will affect rates of return. Your age and other assets and tax brackets will also change the results.
So you’ve decided to buy that new home. You’ve gone over the possible scenarios with your mortgage broker and are aware of the effect on your cash flow that rising interest rates will have.You’ve heard that putting some money down can take years off of the length of your mortgage. If only! But where to get the cash? The Canadian government offers the Home Buyers Plan as way to access money in your RRSP. Here are some details about the plan to see if you qualify.
The biggest advantage to the homebuyers plan is that that you don’t pay tax on the withdrawal from your RRSP. With the exception of other government programs, any time you make an RRSP withdrawal, the government will automatically keep a percentage of the tax owing. You are then required to pay any other taxes outstanding, based on your personal tax rate when you file your return. Not so with the homebuyers plan – as long as you follow the rules. But the rules can be tricky. Here’s a brief summary.
-This has to be your first home, or you can’t have owned a home for 5 years, starting on Jan 1st of the 5th year and this includes the year of withdrawal.
- The home doesn’t have to be a house. It can be a townhouse, condo, apartment, mobile home etc.
-The maximum that you can take out is $25,000 and all withdrawals have to be within the same year or during of January of the next year. If I make a withdrawal in August 2010, I’ll have until the end of January 2011 to make my final withdrawal.
-You or your spouse/common law partner cannot have owned the new home, or any other qualifying home (townhouse, condo, apartment, etc) for more than 30 days before you make the withdrawal.
-Both you and your spouse can make the maximum withdrawal. If you have a spousal RRSP, the person who would receive the benefits from the RRSP would be considered to be the one making the withdrawal.
-If your spouse or common law partner owned a home less than 5 years ago, and you lived with them, you will not qualify.
- Money that was deposited into the RRSP 89 days before the withdrawal is not accessible. After 90 days, it is.
-You have to have a written agreement to buy or build your home before October 1st, the year after you’ve made the withdrawal. This home also has to become your principal residence.
-The money has to be paid back over 15 years, starting the second year after the withdrawal. It’s simply calculated at the amount you took out divided by 15 (years). You can pay back more than this amount if you want, just be sure to designate it as a repayment.
-If you miss a payment, it is added to your income and is fully taxable within your current tax bracket.
More information about the Home Buyers Plan can be found on the CRA’s website. The information contained in this post has been taken from the Home Buyers Plan Guide on that source.
Qualifying for a mortgage now while considering the cost in the future
With interests rates so low, you might be wondering if it’s time to buy that new home. Even with the 0.25% rate increase by the Bank of Canada on September 8th, borrowing is still relatively inexpensive. But can you afford that new mortgage? When you go to a lending institution to qualify, they have a few benchmarks to make sure that you can afford the level of debt that you are taking on. The gross debt service ratio (GDSR) and total debt service ratio (TDSR) are two of the tests that lenders will look at to see if you will be able to afford the mortgage payments. Gross debt service ratio will take into account the potential mortgage payment + property tax and divide it by your gross family income. The target for this is that the mortgage payment, tax and interest that go with it should be no more than 30% of your pay. The total debt service ratio calculates the mortgage, property tax and interest + all other debts you might have outstanding, divided by your gross family income. The other debts could include credit cards, loans, student loans, child support and alimony. This ratio shouldn’t exceed 40% of your gross family income. Canadian banks also have a built in ‘safety feature’. Your mortgage institution might test your income against a ‘qualifying rate’. This rate will typically be a few percentage points higher than the published rate. But is this enough? Given the long term nature of this debt, take a look at historic rates. For a 5 year term, ask your mortgage broker what the cost would be at 8% or 12% and see how that would fit into your budget. Home ownership is part of the Canadian dream. It provides us with shelter and an appreciating asset that can be sold tax free if it’s your principle residence. Pursue that dream, but do the math first. After making such a big investment, you want to be sure that you won’t have to give your keys back to the bank a few years down the road.
I love money. I’m going to be honest, I adore it. But having money and understanding it are two completely different things. Unfortunately, I’m in love with the latter. I’m much more impressed by a car that’s paid for and a balance sheet that balances than the newest, shiniest, sportiest car with payments that make life uncomfortable. So welcome to my blog. Studying money is my obsession, and I want to share what I’ve learnt. Some lessons will be full of facts and some will be from life. The desired end result will always be to create understanding. When we understand something, we have the tools needed to take action. And since we’re being honest, secretly, I’m hoping that you’ll fall in love with understanding money too.