Christine: Hi everyone and welcome to It’s Personal Finance Canada. This is Christine and today, Cameron and I are going to be talking to you about year end planning for your personal finances. As well as just some ways to get yourself thinking and ready for the New Year.
Cameron: It’s Christmas time spend all the money, no worries, no consequences.
Christine: That can be part of the problem. You know a lot of people get caught up in the season and what a season it is, especially after all of us been that have been locked down for so long. You know we want to see family, we’re missing our friends and it is so easy to spend that money and then just kind of wait for the credit card statements to roll in in January.
Cameron: But it’s so easy to go spend money right now. Even last week I was out at a toy store. Like eight thirty at night it was still full of people. This is just the mood people are in right now. They just want to spend now and just worry about the consequences tomorrow. That is a future me problem.
Christine: Well and with COVID, a lot of people actually were saving quite a bit of money when they were spending less on discretionary purchases. So eating out. you know the things that we like to do going to the mall going to the movies. Of course, that’s not everyone. Some people legitimately had very hard times if there were job losses and things like that, but I think that with this Christmas season, Tis the season to spend. So let’s take a quick look about how to keep some of your income, and some of that can be done through some planning, quick disclaimer, of course, we’re not accountants, we’re not lawyers. We kind of just touch on these things for planning purposes, and then we always encourage people to talk to your own accountant or lawyer as relevant to get kind of the absolutely perfect response, that’s appropriate to you.
Cameron: So we’re going to talk about how to make the most of this time of year. Well, do you promise it’ll be 100 hundred percent Grinch free though?
Christine: I don’t think the season is ever completely Grinch free. So when I’m talking to people at the end of the year we’re looking at the ways things have changed over the past year and there’s a number of things that can actually affect you from a tax point of view. And you know when we’re caught up in the Christmas season. A lot of us aren’t really thinking about tax season. That’s just around the corner in the spring, but a lot of the planning that we do today can make that next season a little bit easier to handle.
Cameron: Tax season, an aka this season after the credit card bills come in.
Christine: That’s right so think of December. As your last looks and what I mean by that is, I usually kind of like to run through a little bit of a checklist with people to see what has changed and how some of those changes might have affected them in this past tax year. So, let’s first talk about COVIDI mean a lot of people were working from home in 2020 and 2021.
Cameron: Including us of all people.
Christine: Absolutely you know our office was part of that as well. We got closed down in March of 2020 and well we are reopen, and there is someone in there every day, five days a week now. We are still doing some flexible work from home hours as needed, because I think it did prove the model to a certain extent, but the government, the CRA, has actually acknowledged that people have different expenses. You know in these last couple years because of COVID and there’s an ability to deduct some of your work from home expenses up to a maximum of four hundred dollars. That came in in 2020 that we have again this year as well in 2021. Even if you don’t get the traditional slip, which is the T2200, that you usually need to get work from home deductions. So the CRA has a nice and fancy calculator on their website that can kind of help you through it, but it’ll it’ll. Let you take into account things like your phone costs, Internet, property taxes, some supplies that you might have had to spend a little bit of extra on all of the extras. So extra heating costs maybe if you’re in your house a little bit longer. Not necessarily furniture or the mortgage that kind of thing, but there is an allowance to kind of take that little bit of bite out for the extra costs that we had to incur to be home throughout COVID .
Cameron: Well, for us personally one of those costs included a new printer for you, because you had to replace your big fancy Ricoh Printer with something you can use in the house, so that would have fallen to on those expenses right.
Christine: Right and a lot of people will use cell phones right. That’s pretty common as well. Maybe it’s a call forwarding that’s been done from your place of employment to your phone at home. And a lot of employers I mean they still have the costs of maintaining their office space. So the employees are kind of on their own in terms of managing their own costs. The offset, of course, is you’re not commuting. There is some savings in terms of your wardrobe, your fuel, you know, maybe the depreciation, the wear and terror that could be happening on your automobile, but that being said, yeah, it costs a few bucks to live here and and eat here and and kind of continue business as usual from the home. Another thing that was very common throughout COVID is a lot of people switched jobs. I mean for some people they were laid off. They had to look for employment elsewhere for other people. There was just a change in their industry and I may be going forward. They kind of saw that the work arrangement was not going to be sustainable long term, so they were looking for something better and, to be very honest, a lot of people just love the work from home and are looking for a new situation that caters to that, so we’re seeing a lot of people change jobs at this point in time.
Cameron: This whole thing is kind of fueling the whole anti work movement even if you go on Reddit at any time r/antiwork is the big hot thing right now and a lot of people have gotten used to some of the changes. That’s happened in the last year. Some people want more out of their jobs, they want more out of their careers and lives. And all this is just creating a perfect storm where people just don’t want to work in the job they worked in before they want more, they want better. So it’s kind of make things more interesting going forward.
Christine: I think it also shone a light on work life balance. You know we were all on the great big treadmill before and we never took a break. It was just this continuous working all the time and no one questioned it. We had never really had a model before where it was feasible to finish at four o’clock or five o’clock or six o’clock shut, your laptop walk into the living room and be done for the day. Right or roll out of bed at eight o’clock and start at nine kind of thing, and I think people appreciate that especially families with young children, where maybe they need that flexibility and that little bit of extra time to help the kids get ready for school in the morning or off to day care. And I think it really has changed how we prioritize what’s important but from a tax point of view. It’s interesting because if you have had a job change, every employer that you work for, they really don’t know what you did before right. So how much you got paid at your previous employer and specifically how much tax was withheld. So let’s say you made eighty grand last year, but you worked two jobs and you made $40,000 at each of them. Well, each of those jobs is not taking into account the other, so there withholding tax at a tax rate that is appropriate for you having a $40,000 income that year and of course, they don’t know that you actually had $80,000 of income. So, even though you’ve had tax come off your paycheck regularly throughout the season throughout your working year, it might not fully capture the higher amount of income that you actually had. Because the tax rates in Canada are progressive and all of that means is, as you make more money, you pay a higher percentage of tax, both provincially and federally
Cameron: It’s sort of like a teared structure. It’s a certain percentage from like ten to twenty another percentage from thirty four of us to like everything is at thirty or forty is like the first ten is at a certain rate and then twenty to thirty is at a certain rate. It just kind of stacks on top of each other. And yeah, if your employers don’t know they could have slipped you in the wrong bracket, so it would take some adjustment at the end of the year With the flip sides, true with even things like EI where there’s certain caps where they may have overcharged you. So all his has to get bounced out at some point. So it’s not a huge surprise for you come April.
Christine: That’s right and yeah. Well, the decisions that each employer made have made were perfectly correct for their situation. It might not have taken into account the whole picture. Another thing that we saw a lot of this past year in 2020 as well were severance payments right all people that were getting let go often they would receive the letter, the big ominous letter, but also the package. So a lump some payment part of it is usually tax deferred. So you could put it in an RRSP, or a locked in account for later. Meaning it doesn’t affect your taxes in the year that it was received, but there’s usually a portion of that that is added as taxable income. And it’s a big chunk, that’s usually representing, depending on how long you’ve been with your employers anywhere from a couple weeks to several months worth of pay right. If you’ve been there a good long time, it can really add up and some employers kind of increase that because they have to account for the years that you’ve spent with them.
Cameron: Especially if you’ve been there longer and they’re trying to push you out, bringing someone to do the same job for half the rate.
Christine: That is a sad reality right. Cost of labor for a business that struggling is labor is usually one of the largest line items for any business. So it’s something that has had to be controlled if a business is maybe not bringing in that same level of revenue, even with all the coved benefits that they were pre pandemic. So if you received a severance, you would want to really make sure that you have a clear understanding of what portion of it was taxable and how much is going to add to your taxable income that year and then, like Cameron was saying, think of it like a stack. Stack that income on top of the income that you’ve earned at your other jobs and find out how much additional tax you’ll owe for that portion.
Christine: And there’s a kind of a quick, easy way to check one of the tax websites that I like and don’t hesitate just because I called it a tax website. “Tax Tips” is a great resource and they put out a combined provincial and federal tax bracket chart every year. You know it sounds a little tedious, but it’s very very clear. You can kind of look at it and say I’m at $40,000, this is what tax I will have to pay I’m at $80,000 this is what tax I will have to pay. And if you get your year end, your final tax pay stub and you can kind of see what’s come off throughout the year from all jobs. Plus you’ve looked at your severance as well now. You can kind of figure out what remains and then you’ve got a few options right like there’s, always RRSP contributions that can be made. So that’s a double benefit. Your helping future. You save for your retirement that big, long stretch of time where there won’t be a pay check, so there’s a huge benefit there, but there’s also the benefit of that deduction that you’ll get right, because once the money is in the RRSP you get your tax deduction and then future growth becomes tax deferred until you take it out one day. And if you’re feeling philanthropic charitable giving if you have the means, is another wonderful way to earn some tax credits that can be helpful to you. There are both federal and provincial credits up for grabs, so the federal one is the one that everyone talks about on your first two hundred bucks. It’s fifteen percent; okay, that’s not that exciting, but it’s twenty nine percent! For the remainder after that, and if you look at us here in BC, I mean okay you’re only getting 5.06% percent on your first two hundred, but after that it jumps up again as well to 16.8%. So when you combine these, it’s a nice little bit of a tax break and you’re doing a good thing as well, and that’s a that’s kind of a nice way to end the year.
Cameron: Well, that’s sort of the whole reason why you get tax credits, it’s supposed to be some funds donated to some organization to better or benefit society, to essentially take some of the burden off of the government. So that’s why they give you these credits to encourage you to go out and help these other people, so they don’t have to use your own tax income to solve the same problems.
Christine: Now, let’s move on to other changes that happen in people’s lives as well. I mean we just got through a period of time where people were spending unprecedented amounts of time kind of locked, literally in their houses with their families. And I think, unfortunately, as a result of that, we’ve seen a lot more separation and divorces come out of this pandemic time. And there’s, of course, the stress of the pandemic. There’s the stress of the new work from home arrangement. Lack of child care with a lot of the day cares that were closed.
Cameron: Or the flip side could be you weren’t able to work from home. So you have the added stress of being out in public with people who are already stressed out, so some people have the stress from being home, but a lot of other people have the stress of having to have been on the front lines during all this, and then you just bring that stress home.
Christine: Absolutely and that’s definitely something that we don’t want to forget or ignore right. Those people that were out there working have all of our respect because they kept society running at a time that was incredibly difficult and usually for very little extra pay right, if it all. But back to back to the planning point of view when we’re looking over our year and we’re looking at things that have changed if you’ve gone through a separation or a divorce. As a result of this, this can have implications on your tax return as well. I mean, if you’ve got young kids at home there are government benefits that are income tested and they’ll, be looking at your family net income. So things like the Canada child benefit or even GST/HST credits, that’s based on family income. So if your family income situation has changed, there may be a different eligibility in the following year for, for tax credits. That can be helpful, especially if you find yourself in a situation where you’re going from duel income household to maybe stepping out on your own for the first time in a while, which can be scary and challenging as well. If spousal support is something that you kind of foresee in your future or that you’re coming up to next year, I mean that is taxable as well, so that will be a change to your personal taxable income and, to my knowledge, child support is not taxable. So if there’s care being received in terms of a monetary amount for the children and that’s usually something that’s not claimed on your income tax.
Christine: Another thing you might want to look at is capital gains or capital loss planning, and this is typically done at year end, because that’s the point in time, if you have stocks or mutual funds or other types of funds that have capital games or loss, they will put out their distributions reports at towards the end of the year. So that you can kind of take a look at how much either you made or didn’t make over that period of time.
Cameron: And on the stock market this tends to be the time of year, where a lot of holding companies and hedge funds and mutual fund companies tend to dump some assets just to lower their own capital gains, so keep an eye out for that too.
Christine: That’s right! This is definitely seasonal and there is some capital loss selling that will be done very strategically to offset capital gains. And I mean you can’t really have the capital gains conversation without talking about the capital gains tax rate. Right now, it’s at 50%, but there’s been a lot of talk and, of course talk is just talk until it becomes policy, but there’s a lot of talk about using capital gains, a higher rate it. So it’s been, it’s been more than 50% previously and there’s talk of having it go back to 75% to pay for some of the COVID spending, and things like that. So I think that’s something that’s going to be on people’s minds as well this year, because we know that it’s not changed for 2021 , but we have no idea what it’ll be at later points of time in the future.
Cameron: It is a minority government right now so really expect the unexpected.
Christine: Well, that’s true! Everything can be negotiated right. It puts a lot of extra things on the table, and I mean budget management is going to be something that is coming up in conversation with all of the debt that we’ve incurred as a nation over the last couple of years.
Christine: Speaking of COVID benefits, if you’ve received some keep in mind that the most common ones are taxable. So the CERB benefit that was very widely received is didn’t have tax come off of it right? So you received a gross amount, but that will also be added to your taxable income. So it didn’t get added to your taxable income, but you’ll have to do the job of making sure that you have enough money set aside to pay that tax bill when it comes.
Cameron: And on the flip side, CRA seem to be pretty active on just taking it back if they don’t agree with the reasoning that you applied to CERB in the first place, so you have to make sure you squirrel away at least a third of what you had and CERB come in over the past year. So you can pay that tax bill and just make sure you actually applied honestly for CERB, or you like to pay back all of it.
Christine: Well, and I think that stands for a lot of the benefits that were received. They were handed out very, very liberally during that period of time, and you know I guess that had to be done to make sure that there was money in the hands of people that needed it so that they could eat and keep house keep their housing expenses paid, roof over their heads kind of thing. But I think now the sentiment has shifted and if you speak to a few accountants, you kind of get the sentiment that there is a day of reckoning coming and there was a letter that was floated around someone had received an audit from the CRA. And I mean you’ve seen a few stories I’m sure about this in the news as well, where I think there’s going to be a lot more review of, and audit of these benefits because well, the purpose was to get money in people’s hands quickly. Now the government’s job is going to have to be to make sure that the people that received it were actually the people that needed it and that it wasn’t kind of just given out willingly to the wrong people. Or to the people that were technically not qualified. So that’s something to kind of keep in the back of your mind as well right. We’ll see what they do and how hard of a line they draw with this, and it may be different for businesses. It may be different for individuals; we don’t know yet the reality is we haven’t seen it.
Christine: But let’s, let’s switch focuses now and let’s talk more about the positive with the year and there’s always a new beginning. So that means January is coming right around the corner and we’ll go from saying merry Christmas to happy New Year and this period of time for a lot of people is a period of reflection. So you’ve looked back and we’ve talked a little bit about the tax implications. But after looking back, it’s always great to look forward, and by that, I mean this is when people will kind of set their intention for the year to come. And I don’t necessarily mean the New Year’s resolutions that you know seem to be quick to fade out into the future. But we do like the idea of using December as a great month to set some measurable benchmarks for personal finance goals. And I talked about this a little bit in our first episode, where I love to see goals that are both measurable by money and measurable by time. Because you’re wanting to make sure that you’re doing everything in your power to get there and when people kind of have high and lofty goals or even just goals that are not clearly defined in terms of how much effort or money. How much work is it going to take to get there? Then it’s usually a lot less likely that they’ll follow through, whereas if you’ve kind of done the work ahead of time, you’ve costed it out in terms of money in terms of effort in terms of time and then you’ve stuck a timeline on it. So that’s to say, I’m going to have this done in you know three months, I’m going to have this done in a year. I’m going to have this one done in two years or if it’s a longer term retirement goal. I’m going to take this step to figure out how much money I need to be putting aside every month so that I can retire at my current income level.
Cameron: I guess you can say this is the difference between a goal and a wish. I wish you just kind of think it up in your head. You think, oh I wouldn’t be great. If I did this, it’d be great if I did that. But there’s no follow through You just kind of have this great idea or this half-assed idea in your head, but nothing materialize as this is why you need to be honest and take initiative in your life. A lot of people have made a lot of money writing all kinds of books on this subject, and all of it boils down to just write it down and be intentional. Figure out what you want come up with a couple ways you can get there and just keep yourself accountable, either yourself or someone you know, or even just put it on your wall with some Gold Stars tracking your way. Just to take it from a desire or a wish into something that’s real and attainable, which is what a goal is supposed to be.
Christine: That’s right, and I think your comment about just tracking your steps. Tracking your progress is one of the areas that people miss quite a bit. Every goal should have some milestones. It should have some definable and measurable points. Not the arrival at the goal, but on the way towards the goal where you can kind of say: Yes, you know what I’m not there yet, but I’ve done this, so maybe it’s I’ve saved my first $1,000 or I’ve paid off half of my credit card. So, rather than just waiting until you get to the very end, it’s making sure that you’re celebrating these little victories that happen along the way.
Cameron: But to give you an example, one of my personal, personal finance goals is to knock off my student loan this year. You figured out how much we to contribute. How much you need to work, how much we need to save and be disciplined and every single month we have our target goal that will hopefully entirely pay off my Master’s degree by the end of the year.
Christine: That’s right and that’s a worthwhile goal, because not only do we know that that money is now working towards paying off that debt. And the added bonus is it’s currently interest free. So we want to absolutely take care of that or take advantage of that period as long as possible.
Cameron: This is one of those COVID benefits. In BC and some other places both federally and provincially they’ve turned off interest up until, it’s either March 2022 or March 2023 It sounds like they’re going to hold up till March 2023. So this isn’t an excuse not to pay off your student loans. If you don’t have it, I’m saying this is a great time to power through it before the interest turns back on.
Christine: And the added benefit for us is once we’ve achieved that goal at the end of this year I mean a we’re not going to have that debt anymore. But B the money that we’ve allocated to that debt that we’re now used to not having as part of our regular spending, is available for the next goal. So what you do is you eventually get in the habit of having a certain percentage of your income or a certain dollar amount of your income? That’s working for you to help you achieve the things that are important to you, so one of my big things is to ask people to cost out their major goals and what’s it going to cost all in, because that number is crucial to figure out how long, how many months of payments at that rate? Is it going to take you to achieve that role and then from there you can say. Yes, this is reasonable or no it’s not, I better add more money each month towards this goal, but it kind of gets into this very positive cycle where your goals start to snowball. You’ve heard of the debt Snow Ball, where you pay off one and then another and another, and it feels like you know, your accomplishments are getting larger and larger. This can work in a positive way for your goals as well, because, like I said, the money is already going towards something positive that you value and that you can get excited about.
Cameron: Instead of having a debt avalanche, we’re trying to build something positive for the future by getting these habits and these practices in place so that you’re not always being chased by debt. You can actually be proactive in your life. Start saving, get ready for retirement, get ready for whatever expenditures you’ve got your eye o. Whether it’s something that’s you need to do for the house, something you want to do for fun, something you want to buy for yourself or you just want to start stalking stuff aside, so you’re ready to retire later or even early.
Christine: It’s all about momentum, and then, after that, once you’ve got that momentum going it’s everything that you think is important to you to focus on one. So keep that momentum up, and hopefully it can carry you into the new year and years beyond, and you can start setting and achieving your financial goals and if you’re in New Westminster or even in the lower mainland or anywhere in B C, we do we love to talk to people. We love to kind of help them get on track to achieving the things that are important to them, whether that’s retirement or some other goal. So give us a shout. We do virtual meetings as well as meetings in person. You can also visit us on our website at braunfinancial.com, and until then, all the best.