No matter the business cycle or the trends, there are some things that never change when it comes to saving, building and managing money. Long-time Financial Post columnist Jonathan Chevreau presents the final instalment of the seven eternal truths of personal finance.
The final eternal truth of personal finance is to accept all offers of free money from the government.
True, where government is involved, opportunities for free money are few and far between. Most of us are in effect giving the government free money in the form of taxes. So any tax break can be viewed as a form of free money that should be maximized.
But before we get into that, let’s review the places where you really can get outright gifts of free money from the government. One that comes to mind is the RESP, or Registered Education Savings Plan. The 20 per cent Canada Education Savings Grant (CESG) is a $500 annual freebie as long as you contribute enough to your children’s education plans: 20 per cent of $2,500 is $500, so that’s the sweet spot.
Where the TFSA really shines is in retirement, because all withdrawals are totally free of tax
Then there are tax breaks targeted to certain citizens: users of public transit, fitness for youth, disability credits, child benefit, medical expenses and so on. Make sure you know what’s available to you and claim them. Refer to Evelyn Jacks’ Essential Tax Facts or other annual tax guides for a complete rundown.
Once in a blue moon, there may be freebies like the 2009 Home Renovation Tax Credit, which was meant to stimulate the economy in the aftermath of the 2008 financial crisis. The pond and waterfall in our backyard owes its existence to this $10,000 tax break.
The Ontario government’s $2,000 rebate on hybrid vehicles is another one, although it no longer applies. Some jurisdictions offer incentives to install solar energy panels or other forms of alternative energy. When these short-term freebies arise, you should jump on them.
Most Canadians will qualify as of age 65 (or 67 for younger folk) for Old Age Security (OAS) payments. Unlike CPP, you don’t have to pay into the OAS program: the money comes from general tax revenues, but you have to reside in the country for the stated minimum periods. This “freebie” may be clawed back if you have too much income coming from pensions, Registered Retirement Income Funds and non-registered savings.
On the other hand, those with no other financial resources may qualify for the Guaranteed Income Supplement to OAS, otherwise known as Senior’s Welfare. This one is a double gift: not only is it a freebie for the minority who qualify, but it’s also a tax-free gift. Of course, Ottawa has been criticized for not going out of its way to let seniors know about this program. As with OAS and CPP, once you’re old enough to qualify, you have to initiate the process, preferably six months in advance of the day you hope to start collecting benefits.
Next we come to ways of sheltering or deferring tax on investments. Now we’re definitely in the realm of tax minimization, not of getting an actual net benefit from government. The RRSP is the biggest example and has been around more than half a century.
Like many other government “freebies,” the RRSP is not an outright gift
As most readers know, the RRSP has two big tax benefits: first, it gives you an upfront tax deduction, which you can generate by making a contribution in the previous tax year and then filing your taxes on time. This especially benefits those in higher tax brackets, since the contribution immediately lowers your taxable income. The second benefit is ongoing sheltering of investment income that would otherwise generate annual tax on interest, dividend income and possibly capital gains.
Like many other government “freebies,” the RRSP is not an outright gift. The hitch is that one day when you want to withdraw the funds, you’ll be taxed at your top marginal rate, usually when the RRSP has been converted to a RRIF, and minimum annual withdrawals (fully taxable) commence after age 71. Fortunately, April’s federal budget slashed these minimum withdrawals by about 26 per cent, bringing them closer to today’s minuscule interest rates.
Certainly, all those years of tax-free compounding is better than being fully taxed each year on non-registered investments. And if you wind up in a lower tax bracket in retirement than you were when you were working, the difference in tax rates could be considered a type of government “gift.”
The mirror image of the RRSP is the newer TFSA, or Tax Free Savings Account, launched in 2009, annual contributions to which were bumped to $10,000 in the last budget. The TFSA offers no upfront tax deduction but does have the RRSP’s attribute of sheltering ongoing investment income from tax.
Where the TFSA really shines is in retirement, because all withdrawals are totally free of tax. This makes the TFSA the perfect “gift” to accompany lower-income seniors who are receiving OAS and in some cases GIS. Unlike RRSP and RRIF withdrawals, TFSA withdrawals won’t trigger claw backs of OAS or GIS benefits. So it’s a rare example of a double-freebie provided by government.
It’s worth singling out the capital gains tax exemption on principal residences too. Again, this is not so much a gift as it is a lower-than-usual form of punishment by taxation. But relative to most taxes, it’s a break that’s right up there with RRSPs, TFSAs and business ownership.
So those are our seven eternal truths of personal finance. No doubt the list could be expanded and I welcome reader suggestions. But I’d wager that anyone who takes this initial list of seven to heart and implements the ideas will be well on the way to financial independence.
Article: The Financial Post
It was Shakespeare who wrote, in Hamlet, “Neither a borrower nor a lender be; For loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.” Any time the words “dull” and “husband” are used in the same sentence, my wife, Carolyn, will sit up and take notice – as though there’s a cure for such a problem. Shakespeare, however, was writing about the folly of lending money to friends.
Let’s face it: Loans like this happen all the time. How many friends have helped out others who have had great business ideas, only to see those ideas fail? I’m not going to suggest that you avoid making these types of investments, but make sure you structure them properly so you’ll at least get some tax relief if things sour. A decision of the Tax Court of Canada from April 21 tells the story of one individual who could have done things differently and would have saved thousands in tax if he had done so.
Osborne Barnwell and Nicholas Austin had met in the early 1980s, were both from the island of St. Vincent and were living in Canada when they met. They developed a relationship over the years. When they first met, Mr. Austin had been operating a business called Carib-Can, which published children’s books.
Mr. Austin was well known in the local West Indian community, and was successful and passionate about his work. Any well-meaning, reasonable business person and friend might see fit to lend money to Mr. Austin for the purpose of starting what seemed like a good idea: a magazine targeting passengers on commercial airlines.
Between 2007 and 2009, Mr. Barnwell lent about $73,000 to Mr. Austin for the new venture. The I’s were dotted and the T’s were crossed in that the advances were evidenced by promissory notes. Although Mr. Austin had established a corporation to carry on the business, the loans from Mr. Barnwell were made directly to Mr. Austin.
By 2009, things were not going well for the new business. It became clear that Mr. Barnwell would likely not receive repayment of the loans he made. In 2011, Mr. Barnwell claimed an “allowable business investment loss” (ABIL) on his tax return for the debt that went bad.
The Tax Court of Canada (Osborne G. Barnwell v. The Queen, 2015 TCC 98) disallowed his ABIL claim, which cost him about $17,000 in lost tax dollars. A simple change to the loan could have put those dollars back in his pocket.
So, here’s the deal: Our tax law will allow an investor in many cases to claim an ABIL if he or she has suffered a loss by lending money to, or investing in the shares of, a small business. An ABIL is different from your typical capital loss. A capital loss can generally be applied only against capital gains. An ABIL, on the other hand, is given more favourable treatment and can be applied against any source of income.
What is an ABIL exactly? Simply put, an ABIL equals one half of money you might have lost by lending money to, or investing in the shares of, a small business corporation that has gone bankrupt or has become insolvent.
It’s important that, if you make a loan or invest in shares, the loan be made to or the shares be that of a “small business corporation” under our tax law (which includes most small companies that are Canadian-controlled private corporations where substantially all of the assets of the company are used in a business carried on primarily in Canada), rather than lending money to an individual. This was Mr. Barnwell’s problem. He lent the funds directly to Mr. Austin rather than to the corporation carrying on the business.
Similarly, Mr. Barnwell could have invested in the shares of Mr. Austin’s company, rather than extending a loan, and if it had been a small business corporation there could have been tax relief in the form of an ABIL.
There are a couple of other points worth noting here: First, virtually all ABIL claims are reviewed by the taxman. So, expect a letter from the Canada Revenue Agency if you make a claim. It’s not a big deal as long as you’ve dotted your I’s and crossed your T’s, so be sure to get tax advice before you make a claim. Finally, if you’ve used up any of your lifetime capital gains exemption in the past, all or a portion of your ABIL may be denied and converted to a capital loss instead.
Article: The Globe & Mail
Misunderstandings can often lead to unintended outcomes. I think of our neighbour, Geneviève. She’s originally from Quebec, is francophone and moved to Ontario a couple of years ago. Geneviève’s English was not very good when she first arrived. She heard her son talking one day about “skinny-dipping,” which she thought simply meant “a quick dip in the pool.”
Now, Geneviève is a very friendly and hospitable person, so she thought it would be a kind thing to invite the neighbours over for “skinny-dipping” one weekend last summer. When no one showed up, she thought we were a rude bunch and the rest of the neighbourhood wondered who had just moved into town – both unintended outcomes.
People often misunderstand certain areas of estate planning, which has also led to unintended outcomes. I think of joint ownership as a prime example. If I only had a dime for the number of times people have said they put assets into joint names to save income tax. The truth is, joint ownership can often be problematic. Here’s a reminder as to why.
1. You might trigger a tax bill.
When adding a person other than your spouse or common-law partner as a joint owner on an asset, you’ll be deemed to have sold that portion of the asset at fair market value, if beneficial ownership has changed. This could trigger a tax bill if the asset has appreciated in value.
2. Who gets what may be inappropriate.
If you hope to leave a particular asset to all of your children equally but have placed just one of them on title as a joint owner to avoid probate fees, there’s no requirement for that joint owner to share the asset with anyone else. This may not be your intention.
3. Family or legal disputes could result.
Thinking about the scenario in No. 2 above, any child who is effectively disinherited could dispute the distribution of your assets. This is quite possible if it’s felt that your intended distribution was different. Make your intentions clear, in writing, if you do choose to hold assets in joint names.
4. You may not save tax.
If you think that putting assets into joint names, perhaps with your spouse, will save you tax, you may be mistaken. Income earned by your spouse on his share of the assets will be attributed back to you unless you charge interest at the prescribed rate. In addition, owning assets jointly with a child will not allow you to avoid tax on your share of the assets when you die.
5. Assets could be exposed to creditors.
If the person who jointly owns an asset with you is subject to the claim of creditors, the value of the asset you hold jointly could be attacked by those creditors.
6. Testamentary trusts will be impossible.
|Although the 2014 federal budget eliminated some of the tax benefits of leaving assets to a trust for heirs when you die, it’s still possible for your heirs to split income with a trust for up to three years, which can save taxes. Further, testamentary trusts can make sense to protect assets for your heirs. The problem with assets owned jointly, with right of survivorship, is that the assets will pass directly to the joint owner with no opportunity to place those assets in a trust upon your death.
7. Control over assets could be gone.
Owning an asset jointly with another person means you’ll no longer have sole control over that asset.
8. Portfolio objectives could differ.
If two or more people jointly own an investment account, it could be difficult to invest in a manner that suits the risk appetite and objectives of everyone. Particularly where there is a big difference in ages, this challenge could be real.
9. A principal residence could become taxable.
If you choose to put your principal residence into joint names with, say, a child, it may be necessary for both of you to designate that property as your respective principal residences to avoid tax on a sale of the property later. This could be a problem if your child has, or will have, another property that he owns. It could expose one of the properties to tax.
10. Joint tenancy may be permanent.
You can forget about undoing the joint ownership unless the other owner, or owners, agree to this change.
If you have a reason to be concerned about one or more of these potential drawbacks to joint ownership, give careful thought to whether or not it makes sense for you.
Article: The Globe & Mail
It’s no secret that if you sell your principal residence, you might be able to sell it tax-free, thanks to the “principal residence exemption” (PRE). The problem? It’s not always clear what should count as a principal residence.
Take Andrew Thurnheer, for example. This man’s home outside Ithaca, N.Y., consisted of a tree house 40 feet in the air, which he built in the mid-1980s, and includes a generator-powered elevator, shower and propane heater. If some lucky buyer managed to acquire this home from him, would it count as a principal residence?
Okay, tree houses aside, there are other examples where it’s not clear that a place should be considered a principal residence. Consider the example where you buy a property, fix it up, live in it for a bit, then sell it for a profit. Many people think that a place like this should qualify as a principal residence and therefore a sale should be sheltered from tax using the PRE. And if not, the profit should at least be taxed as a capital gain, not business income. It seems that, every year, there are court cases in Canada that deal with this issue. Let me share the most recent case, and how the court approached it.
Nathalie Constantin purchased six properties in Quebec over three years – 2006, ’07 and ’08. Ms. Constantin sold the properties shortly after purchasing them. She held the properties for periods ranging from two months to 11 months. The average holding period was nine months.
In this story (see Nathalie Constantin v. The Queen, 2014 TCC 327), the issue was the tax treatment of the profit she realized when she sold the properties. The question was whether to tax the properties as though she were selling capital property that she owned (in which case the profits should be taxed as capital gains), or selling business inventory (in which case the profits should be taxed as business income).
I’ll pause here to mention that, if you hope to use your PRE to shelter income from a tax gain on the sale of a property, it has to be true that the property is a capital property in your hands, and not business inventory. Further, you have to ordinarily inhabit the property in order for it to be counted as a principal residence eligible for the PRE.
Back to the issue of capital property versus business inventory. Think of a tree and fruit analogy. If you were to buy a tree with the intention of growing fruit so that you could sell the fruit to earn income, you could say that the tree is a capital property. On the other hand, if you bought the tree to flip the tree itself for a profit, the tree would be more akin to business inventory. Ms. Constantin argued that it was her intention to keep the properties in order to earn rental income from them. Normally, in this case, a rental property would be considered capital property.
The court, however, disagreed with her. The court shared the criteria that should be looked at when determining whether a profit should be treated as a capital gain, or business income. These criteria were first introduced in the court case Happy Valley Farms Ltd. (1986). Here’s what the court will look at: (1) the nature of the property sold; (2) the length of period of ownership; (3) the frequency and number of similar transactions by the taxpayer; (4) the work expended to make the property more marketable or to attract purchasers; (5) the circumstances responsible for the sale of the property; and (6) the taxpayer’s intention or motive when the property was acquired.
In addition to these criteria, the courts have developed the doctrine of “secondary intention.” That is, even when your main intention was to hold a property as a long-term investment, it might be that you had in mind a possible sale of the property for a profit if your long-term objective couldn’t be achieved. This secondary intention could be enough for a court to say that your profit should be taxed as business income rather than a capital gain. In Ms. Constantin’s case, she would have been content with capital gains treatment, even if she couldn’t claim the PRE. She lost the case.
If you’re going to buy and flip a property for a profit, take a careful look at the criteria the courts – and taxman – will consider when taxing you. If possible, structure your purchase so that you’ll receive capital gains treatment, and perhaps even the PRE.
Article: The Globe & Mail
As a cottage owner, I’ve been careful not to make many mistakes. According to Carolyn, the biggest mistake I’ve made was trying to grow a Grizzly Adams beard last summer while relaxing at the lake for a week. If you own a cottage, or are thinking of buying one, be mindful of the following cottage-owner mistakes that can cost you big tax dollars if you’re not careful.
1. Failing to track capital improvements.
At some point, you’re going to dispose of your cottage – either by transferring ownership, selling it or by dying. When it comes time to calculate your tax bill on a disposition, it’s going to be important to understand your correct adjusted cost base (ACB). You see, the higher your ACB, the lower the taxable capital gain you’ll have to report. Your ACB should include the original cost amount of the property, plus capital improvements you make over time. So, be sure to track the amount of those improvements. It’ll save you tax later.
2. Owning the cottage in a corporation.
It’s generally a bad idea to own your cottage in a corporation. Why? First, the property won’t qualify for the principal-residence exemption if a corporation owns it. If you own it personally, you’ll generally have the option of designating the cottage as your principal residence to shelter from tax all or part of any capital gain on the property. Second, you could face a taxable shareholder benefit for using a corporate asset personally. The amount of the benefit is likely to be the fair market-value rent that you should have paid for personal use of the cottage. This amount could be added to your income. The moral? Owning a cottage personally, or perhaps through a trust, makes more sense.
3. Claiming capital losses related to the cottage.
If your cottage is like most, it will be considered a “personal use property” under our tax law. This means that any loss on the sale of the property cannot be claimed. Similarly, if you suffer losses because your cottage is destroyed by a fire or a flood, for example, the loss can’t be claimed if the property is for personal use. If the cottage is primarily a rental property, and not a personal-use property, it may be possible to claim a capital loss in these cases. But don’t be quick to rent the place out most of the time; this could jeopardize use of the principal-residence exemption if the place does appreciate in value and you want to shelter the gain from tax.
4. Changing use of the property to income-producing.
If you change the use of your cottage from personal use to primarily income-producing, you’ll be deemed to have sold the property on the date of the change in use, and to have reacquired it on that same day. This could trigger a tax liability if the cottage has appreciated in value. You might still choose to make this change in use, but beware that you should plan for a potential tax bill (perhaps using your principal-residence exemption is possible in my example here).
5. Selling to the kids for less than fair market value.
Suppose your property is worth $500,000 but you sell it to your kids for, say, $200,000. You’ll be deemed to have sold it for fair market value, so you’ll face tax as though you’ve collected $500,000. Your kids, on the other hand, will only be entitled to an ACB of $200,000 – the price they paid for the property. So, if your kids sell the property later for, say, $600,000, they could face tax on the difference between $600,000 and the ACB of $200,000. But you’ve already paid tax on up to $500,000 of value. As a family, you will have paid tax twice on the same value. This is a double-tax problem. A better solution is to sell it to the kids for full fair market value and take back cash for part of the selling price and a promissory note for the balance. You don’t ever have to collect on the note if you don’t want. You can forgive the note on death with no tax consequences. Your kids will now have an ACB for the full $500,000 in this example.
6. Renting the cottage for losses.
If you’re renting the cottage part-time to defray some of the costs of ownership, you’d be wise to avoid reporting rental expenses in excess of your rental income year after year. Those losses are a red flag on your tax return and will generally be denied.
Article: The Globe & Mail
Readers have spoken. Well, there were more than 650 comments at last check. I’m referring to the comments made online at theglobeandmail.com following the publication of my article Overtaxing the rich: A cautionary tale last Friday. In that article, I shared a parable to make a point: If you overtax the rich, and refuse to offer up tax breaks to the wealthy while the rest of Canadian taxpayers receive tax cuts, then don’t be surprised if the rich take meaningful steps to reduce their taxes. Some might get up and leave. In the end, we’ll all be worse off.
Some of you thought my comments were ridiculous. Some liked the parable and agreed with the moral. Some took great offence to the idea that the rich should get any tax breaks at all. Some tried to define what “rich” is. One reader shared a recipe for a terrific Bundt cake (thanks for that). In the end, there were some key themes that emerged in your comments. Let me speak to those now.
1. The parable was full of holes.
“Parables are a poor stand-in for a frank discussion about taxation policy in an open and democratic society,” wrote one reader called Realitychk. Another reader by the name of Canuklehead wrote, “The story that tries to carry this article is so strained that I think I’ll use it as an example of how not to write an opinion piece.” I have to say, I still like the parable. The story was simplified on purpose, to make the moral easy to understand. That’s the beauty of any parable. And its simplicity is what creates great debate afterward.
2. The rich won’t leave over taxes.
“Name one, just one [person who] will leave Canada as a result of a modest increase in their taxes,” wrote another reader, Bruce from Etobicoke. It’s important to realize that giving up Canadian residency is the ultimate tax-avoidance plan. Ask Eugene Melnyk, former head of Biovail Corp., who moved to Barbados in the 1990s, along with thousands of others, because of taxes. And even in the many cases where the wealthy won’t leave Canada, their capital is very mobile. There are structures – albeit aggressive – that can allow funds to be invested elsewhere and potentially escape the Canadian tax net. The higher marginal tax rates become, the more aggressive taxpayers become.
3. The rich consume more services and should pay more.
“It has to be asked, did they [the diners in the parable] all eat the same thing, or did the rich diner have a much more expensive meal? In reality, rich people use up far more in resources,” wrote another reader, Curiousgeorge. The thought that the rich use up more in resources (justice system, airports, housing, roads for cars and so on) is nonsensical. You could just as easily argue that the poor use up more in resources (hospitals, social and other services). I’m not going to suggest that anyone at any wealth level uses up more in resources and therefore should pay more tax. Taxation should be based on ability to pay and fairness.
4. A progressive tax system makes sense.
My experience in working with wealthy families is that they are content to pay a higher percentage of their income in taxes than those with less. That is, they absolutely are not complaining about a progressive tax system. One other option, of course, is a flat tax system, which could very well leave lower-income folks worse off (depending on the rate of tax). Most seem to agree that if you make more, you should pay more. And so it should work in reverse: When the government has the luxury of handing out tax breaks, the rich should receive the lion’s share in absolute dollars – the point of the parable last week.
5. There is a psychological barrier to taxation over 50 per cent.
You might recall the 1990s, when marginal tax rates in Canada exceeded 50 per cent in most provinces. In those days, the number of Canadians looking to aggressively reduce taxes through tax shelters and offshore investing was staggering. We’re getting perilously close to those rates again in some provinces. When Canadians start handing more of each additional dollar earned to the taxman than they keep for themselves, the incentive to work and pay taxes diminishes. One reader, KCS51wrote: “My wife and I pay hundreds of thousands of dollars a year in taxes. We don’t need to work. We can quit right this minute, and there is nothing anyone can do about it. Nobody will take our place, the revenue flow to the government will simply stop. A lot of our friends are in the same situation.”
One thing’s for sure: the debate about how to tax the wealthy will rage on – and your comments are always appreciated.
Article: The Globe & Mail
Some people will do anything for a large inheritance. Take Iowa lawyer Robert Allan Wright Jr., for example. Mr. Wright jumped at the chance to help a client collect an inheritance of $18-million (U.S.) in exchange for 10 per cent of the inherited amount. The problem? The inheritance was being offered up by a Nigerian Prince by way of a form letter sent to probably millions of people around the world. As it turns out, Mr. Wright borrowed money from several clients to pay the fees required to free-up the $18-million. The Nigerian letter was, of course, a scam. His clients never did get their money back. Mr. Wright was suspended from practising law, but honestly believed a truckload of cash was going to show up at his office some time soon.
There are easier ways than dealing with a Nigerian Prince to leave your heirs with a larger inheritance. Look no further than the recent federal budget, which increased the contribution limits to Tax-Free Savings Accounts (TFSAs), and an idea courtesy of Gerry Ramos, an adviser at Scotiabank. Let me explain.
If you expect to leave investment assets to your heirs upon your death, there may be steps you can take today to increase the amount of the inheritance they will one day receive. There are a few ways to accomplish this – some less palatable than others. You could, for example, live a more frugal lifestyle today so your kids inherit more later, but I suspect finding people willing to do this will be about as rare as finding teeth on patrons in the front row of a Willie Nelson concert (I had teeth, but I was the exception).
There’s another way to increase the inheritance you leave behind. The concept involves making withdrawals from your registered retirement income fund (RRIF) to fund contributions to your TFSA today. With the contribution limit for TFSAs increased to $10,000 annually thanks to the recent federal budget, there may be a greater opportunity to benefit from this idea. It’s not for everyone, but when it works, it works well.
Consider twin sisters, Samantha and Ruth, both widows. Both women turned 72 this year and have RRIFs that provide income annually. Both are expected to live to age 90. Both women can earn 5 per cent on their investment assets going forward and both have a marginal tax rate today of 30 per cent. Finally, both Samantha and Ruth expect to face tax at a marginal rate of 45 per cent in the year of death since they each have sufficient registered plan assets to be taxed on death that they will be in the top tax bracket in that year.
Samantha has decided to follow the advice of her financial adviser who has recommended that she withdraw extra funds each year from her RRIF and contribute those funds to her TFSA. At a marginal tax rate of 30 per cent, she’ll have to withdraw $14,286 from her RRIF to be left with $10,000 after taxes to contribute to her TFSA. Samantha is expected to have $305,390 in her TFSA at the time of her death at age 90, based on contributions of $10,000 starting this year and earning a 5-per-cent return annually. The after-tax value to her estate will be $305,390 since there is no tax on TFSA withdrawals at that time.
Ruth, on the other hand, decided not to follow the same advice. Ruth will keep the $14,286 inside her RRIF each year, growing it at the same 5 per cent rate. In the year of her death at age 90, those dollars will have grown to be worth $436,280 in her RRIF. Upon her death, taxes at her marginal tax rate will amount to $196,326 on those dollars, leaving her estate with $239,954 after taxes.
Did you catch that? Samantha, who chose to withdraw from her RRIF and contribute to her TFSA will end up with $65,436 ($305,390 less $239,954) or 27 per cent more after taxes in her estate than Ruth.
When your marginal tax rate today is significantly lower than what you expect in the year of your death (a 15-per-cent difference in my example above), it can make sense to withdraw extra funds from your RRIF each year to contribute to your TFSA over time. This can make sense even if you have other assets outside your RRIF that you can use to make a TFSA contribution since you’ll be minimizing the RRIF dollars subject to your high marginal tax rate in your year of death.
Article: The Globe & Mail
Receiving a tax refund can be a bit like finding money – the temptation to blow it on an Apple Watch or some other indulgence may be strong.
But before you let your tax refund burn a hole in your pocket, financial advisers urge you to take a step back and look at your financial plan.
Tim Cestnick, managing director for advanced wealth planning at Scotiabank, says paying down debt that carries a high interest rate and is not tax-deductible should be a top priority. “It is hard to argue with paying debt.”
Paying off that high-interest debt is like getting an after-tax investment return equal to the interest rate on the amount of debt you’re carrying, he added.
Jane Duchscher, a senior vice-president at TD Bank, says if you’re not saddled with credit-card debt, the case for making extra payments to pay down lower-interest borrowing such as mortgages and home equity lines of credit is a little more complicated.
“On the flip side of that, you want to weigh out ‘what can I get as a possible return,’ whether it’s on an RRSP, RESP or that tax-free savings account,” she said.
According to a survey by TD, 56 per cent of Canadians expect to receive a tax refund this year and 44 per cent of those see it as a boon to both saving and spending.
The survey also suggested the Top 3 ways that Canadians plan to use their tax refund included paying off credit-card debt, contributing to a retirement savings plan or tax-free savings account and adding money to an emergency fund.
For those who have already contributed the $5,500 to their TFSA before last week’s federal budget, Ottawa has also given them even more room by increasing the limit to $10,000.
If you have the contribution room, putting your tax refund into your RRSP could also help give your tax refund an extra boost next year, depending on your financial situation.
Other options could include topping up your children’s registered education savings plan to ensure you maximize the government’s matching grant or making a donation to your favourite charity, Cestnick said.
“If you donate $1,500 or $2,000 to a registered charity, unlike spending the money on yourself, you’ll actually get some tax money back from that, so you’ll end up with some money in your pocket next year when you file your tax return,” he said.
Duchscher, meantime, tells Canadians to make an informed and responsible choice about their tax refund before spending it on a quick trip to Vegas or a new iPad.
“It is about saying: ‘What can I do with this money?’ and being very thoughtful when you receive it,” she said.
Cestnick notes that while receiving a tax refund may feel like a gift from the government, in actual fact it simply means you overpaid your taxes for the year and Ottawa is only just now getting around to returning your money.
“In a perfect world, you’d file your tax return in April and you wouldn’t owe anything and you wouldn’t receive anything,” he said.
Article: The Globe and Mail
I remember when I was a kid, I broke a window at home with a baseball that I had hit. My father made me pay for the window which, as I recall, cost quite a few weeks of my allowance. Imagine if your employer made you do the same thing if you cost the company money. Then imagine a scenario where you cost the company millions. That’s a lot of overtime you’d have to put in to pay it all back.
Last Friday, April 24, an employee at the Canada Revenue Agency (CRA) may have cost the agency big bucks when he or she sent out a communication suggesting that the tax-filing deadline for 2014 is actually May 5, 2015, not the usual April 30 deadline. To be more accurate, it was Revenue Minister Kerry-Lynne Findlay that cost the government potentially millions when she announced that the CRA would give Canadians five extra days, until 3 a.m. on May 5, 2015, to file personal tax returns to avoid any confusion that was created by the April 24 announcement.
Don’t get me wrong. I’m not complaining that I’ve got extra time to file my tax return, but you have to question what’s going on at the CRA when there have been more than just a couple of incidents that point to questionable competence at the agency.
So, this is a recurring theme with the CRA. You might recall that last year there was a technology security breach, which caused the CRA to announced that taxpayers would have until May 5, 2014, to file their 2013 personal tax returns. Before that, there was 2008 when the CRA had an issue with its website and also extended the deadline to May 6 that year.
Is there really a cost to delaying tax filings by five days? Sure. When you’re talking about collecting billions of dollars of tax revenue on April 30, but you don’t collect it until May 5, the interest on those billions for even a five-day period can add up. Consider this: Statistics released by the CRA in 2013 show that the total taxes owing by individual Canadian taxpayers in 2011 (the most recent stats available) was $169.2-billion.
For fun, let’s assume that two-thirds of Canadians remit their taxes throughout the year in the form of payroll deductions or instalments. Suppose that one-third have to make a payment when they file their tax returns. Using my back-of-the-napkin math, the government can expect to collect, perhaps, $56.4-billion at the tax deadline. Using short-term government of Canada bond yields as a proxy, with a rate of 0.64 per cent, the lost revenue to the government for the five days extra time given to taxpayers would be in the neighbourhood of $4.9-million. Pocket change for the government, perhaps, but not for the many organizations or purposes that might have benefited from those dollars.
In talking with taxpayers, the true procrastinators are quite happy about the extended deadline. And who wouldn’t be if they would otherwise face penalties for filing late? Our tax law says that you’ll face a 5-per-cent penalty immediately on any taxes owing at the filing deadline if you fail to file your tax return on time. Further, you’ll face an additional 1 per cent a month for each month you have failed to file while owing taxes – to a maximum penalty of 12 per cent.
As for accountants and tax preparers, many may be crying the blues this morning – particularly those who had booked their all-inclusive vacations to the Caribbean with flights leaving May 1.
All of this comes at a time when the CRA is regularly criticized for being less than helpful when providing tax information to taxpayers. The Canadian Federation of Independent Business (CFIB) regularly issues a report card for the CRA. Based on the CFIB’s last survey, 73 per cent of respondents said they feel the CRA is not accountable for the mistakes they make, 60 per cent said the CRA treats taxpayers as though they’ve done something wrong, and the overall grade for the CRA was a “C” (up from “C-minus” in 2012).
You’ll never please all of the people all of the time, but the CRA’s track record is dismal. Sure, some things have improved over the past couple of years, but many things have become worse with the CRA trying to do more with less. These are our taxpayer dollars at work, and Canadians deserve more.
Article: The Globe & Mail
My father was telling me that he’s enjoying his retirement years. He gets discounts at the theatre, speed limits are no longer a challenge for him, his joints are pretty good at predicting the weather and his secrets are safe with his friends because none of them can remember what he’s told them. It’s all good.
As a senior, he’ll stand to benefit from some changes that were introduced in the 2015 federal budget this week.
If the truth be known, the budget included two specific changes that could meaningfully impact your retirement – for the better.
The challenge is to figure out how these changes should impact your saving for retirement. Let me explain.
The budget introduced changes to both tax-free savings accounts (TFSAs) and registered retirement income funds (RRIFs). Specifically, the contribution limit for TFSAs was increased from $5,500 to $10,000 for 2015 and future years (as an aside, this limit is no longer indexed to inflation as it was in the past). It means you’ll be able to set aside more inside a TFSA over time.
In fact, under the new limit the value of your TFSA over a 20-year period of time could be as much as 82 per cent higher. For example, if you were to invest $5,500 in your TFSA for the next 20 years and were to earn 7 per cent on your money, you’d end up with $241,258 at the end of that time. By contributing $10,000 annually instead, your TFSA jumps to $438,652 in value at that same rate of return.
As for RRIFs, there’s a minimum withdrawal you must make each year, but that amount has been reduced, which can allow you to leave more in your plan for longer. This will allow a deferral of tax in cases where you have other sources of income as well and don’t need to withdraw more than the minimum from your RRIF.
Take an example where, at the end of the year in which you turn 71, you have $300,000 in your RRIF. Under the old rules, you would have $132,633 left at the end of the year in which you turn 90, if you make the minimum withdrawal every year, assuming a 5 per cent return annually. Under the new minimum withdrawal requirement, you’d have $193,434 left at the end of that same time. That’s 46 per cent more in your RRIF in this example.
You have a task at hand here. It’s important that you take the time to figure out how much money you’ll need waiting for you on the day you retire (and from what sources), and how much you need to save or invest annually to accumulate that amount. If you’re not able to do this math, make sure you visit a professional who can. Maybe you’re already on course to have sufficient resources in retirement – but do you know for sure?
Your needs in retirement could be met by different sources of income in those years. These most commonly include: (1) employment or self-employment earnings, (2) non-registered investments (which can include securities, rental properties, and more), (3) RRSP or RRIF investments, (4) TFSA investments, (5) employer pensions, (6) government pension and benefits (Canada Pension Plan and Old Age Security benefits come to mind), (7) lifestyle assets you’re willing to sell to make ends meet (a home or cottage, for example) and (8) inheritances you know you’ll receive (unfortunately the timing and amount of inheritances is not often known, so relying on these may be a bad idea).
When I helped my father figure out his own retirement plan, we took a five-step approach: First, we figured out how much after-tax income he needed to make ends meet annually in retirement. Second, we determined how much after-tax income he could expect from his various sources (see the list above). Third, we then figured out how much additional after-tax income he would need annually (it’s simply the difference between the figures from steps one and two). Fourth, we figured out what pool of money he would need at the time of his retirement, to provide that additional after-tax income. Lastly, we figured out how much he needed to save annually to create that pool of money.
The tricky part is that income from different sources are taxed differently. RRIF withdrawals are fully taxable, while TFSA withdrawals are tax-free, giving rise to different amounts of after-tax income. Still, there’s good news this week; the 2015 federal budget created more flexibility now in how you can structure your sources of income for retirement. More on this in the weeks to come.
Article: The Globe & Mail