Today's blog is more of a question, rather than financial advice.
Our corporations are bound by governance, meaning that they cannot offer a product, like a pension plan for example, without explaining it to their employees. My questions is ~ how much should corporations get involved with their employees? Where is the line?
If a staff member is going through a divorce and is not preforming well at work due to emotional stresses ~ should the company pay for counselling? Again, in a divorce situation, should a corporation hire a financial specialist to help the employee with understanding how his/her soon to be split pension is going to affect the employees retirement? Or, is the employee left to find this out for themselves potentially placing themselves outside of a retirement solution during their lifetime?
Friday, November 26, 2010
Thursday, November 18, 2010
Negotiations for the Right Reasons in Divorce
Sometimes divorcing people seek to covenant certain assets for the wrong reasons, typically fueled by anger. "She cheated on me so I want her favourite......"(fill in the blank) is common. When looking at the financial aspects of divorce, however, emotions should be negated in favour of logic. Easy to say and hard to do, I realize. I know my example is stereo-typical but all too often this is the scenario. Wife wants to keep the house. Why? One reason is the way that women perceive money. Studies have shown that women equate money with security. A house has bricks and mortar and it provides shelter, after all. Another reason may be that she does not want the children to experience too much change, all at once. Dad is no longer at home and changing schools and the pressure of creating new friendships may prevail. Although this reasoning may have a lot of validity, is it reasonable. Maybe the house means a lot to him and she is angry but can she afford to keep the house? Will she deplete all her assets held outside of the home to try to keep the house, finding out a few years later that she is house rich and in debt?
Maybe more logical choices are available keeping in mind the reasons stated for wanting to keep the house. Perhaps less costly housing alternatives are available in the same neighbourhood so that that kids can go to the same school and have the same friends. Maybe the newer housing alternative may be a benefit from other points of view like, no memories of married life and less upkeep. Perhaps less expensive housing alternatives can also give her the opportunity to save for retirement, as well.
The power of the financial neutral in a divorce situation is to draw out these conclusions before the financial errors are set in motion. Often clients do not want to pay an additional professional (other than their lawyer) to help with the divorcing process but my argument is, "How can you afford not to?"
Maybe more logical choices are available keeping in mind the reasons stated for wanting to keep the house. Perhaps less costly housing alternatives are available in the same neighbourhood so that that kids can go to the same school and have the same friends. Maybe the newer housing alternative may be a benefit from other points of view like, no memories of married life and less upkeep. Perhaps less expensive housing alternatives can also give her the opportunity to save for retirement, as well.
In my example, I talked about the wife wanting to keep the house but men have other challenges in their financial decisions, especially if they are paying child and/or spousal support. A little less often but becoming more common place that in past years is the issue of the wife paying support to her husband, especially since women have been advancing in their business careers and the same types of issues need to be considered in this scenario.
The power of the financial neutral in a divorce situation is to draw out these conclusions before the financial errors are set in motion. Often clients do not want to pay an additional professional (other than their lawyer) to help with the divorcing process but my argument is, "How can you afford not to?"
Thursday, November 4, 2010
Life should be stop and go!
When all systems are a 'go' you have to sometimes stop and look out the rear view mirror. Often, I see clients who are so busy chasing future dollars but they don't stop to look after the wealth that they have already created. Remember, life is dynamic not static, so once you have your financial plan in place it doesn't mean that task should be off your radar forever. As we chug along we should stop, at intervals, to re-assess the validity of our previous financial commitments. A few things to reflect are:
1) Is my Will still up-to-date? What about my Power's of Attorney, both financial and medical?
2) Is my portfolio working for me? If not, is it time to consider a different strategy....????
3) Is my retirement planning in place? Will my pension be enough? If not how much do I have to supplement?
4) What will happen if I die tomorrow? Do I have enough insurance to ensure my family is not hit by financial hardship? How much is enough?
5) Do I want to help my kids with the cost of post-secondary education? Are they thinking of going to school and staying home or are they planning to leave the family home to attend school?
6) Do I have elder care issues? What is going to happen to my aging parents/grandparents?
So how often is reflection required? I advise my clients to reflect upon these issues on an annual basis. Pick a birthday, end of the year, June 1st (half way through the year), anniversary or some other date that is going to trigger you to remember. All too often these questions get ignored and then when we are faced with issues we are often ill-prepared. After all, spending a few hours every year ensuring the wealth you have already created is well looked after is worth putting aside the potential for a few hours worth of potential future value, isn't it?
1) Is my Will still up-to-date? What about my Power's of Attorney, both financial and medical?
2) Is my portfolio working for me? If not, is it time to consider a different strategy....????
3) Is my retirement planning in place? Will my pension be enough? If not how much do I have to supplement?
4) What will happen if I die tomorrow? Do I have enough insurance to ensure my family is not hit by financial hardship? How much is enough?
5) Do I want to help my kids with the cost of post-secondary education? Are they thinking of going to school and staying home or are they planning to leave the family home to attend school?
6) Do I have elder care issues? What is going to happen to my aging parents/grandparents?
So how often is reflection required? I advise my clients to reflect upon these issues on an annual basis. Pick a birthday, end of the year, June 1st (half way through the year), anniversary or some other date that is going to trigger you to remember. All too often these questions get ignored and then when we are faced with issues we are often ill-prepared. After all, spending a few hours every year ensuring the wealth you have already created is well looked after is worth putting aside the potential for a few hours worth of potential future value, isn't it?
Tuesday, October 26, 2010
The Secret of How to Negotiate the Waves of the Stock Market
Many people are already doing this, either directly or indirectly. Maybe they're doing it but they don't know they're doing it. The secret of how to take the nervousness out of investing is to make the conscious decision to allocate your investments in a strategic fashion.
For example, I'm a Balanced investor. What does that mean, for me? That means that my asset allocation is 60% equities (or stocks) and 40% fixed income (or investments with a stated rate of return). I stick to this asset allocation through good markets and through bad markets. If my equities become 65% of my portfolio then I take 5% out and allocate it to the fixed income component, and vis versa. This keeps me disciplined in my approach with my investment portfolio. It also does something else ~ it keeps me disciplined in the 'sell high' and 'buy low' strategy that tends to bring about successful investing.
Currently earning an income, I may not be so worried about the fluctuations of the market as I will be when I am retired. Without income replacement it is challenging to watch those dips in the market but my strategy of keeping 40% in fixed income will help me. While equities are out of favour the less volatile fixed income component of my portfolio can become my major source of cash flow. This way I can wait for the equity markets to return and I will not be forced to sell them while they are at their all time bottom price levels.
Having my portfolio balanced, from an asset allocation perspective, is the first step in negotiating the waves of the stock market.
For example, I'm a Balanced investor. What does that mean, for me? That means that my asset allocation is 60% equities (or stocks) and 40% fixed income (or investments with a stated rate of return). I stick to this asset allocation through good markets and through bad markets. If my equities become 65% of my portfolio then I take 5% out and allocate it to the fixed income component, and vis versa. This keeps me disciplined in my approach with my investment portfolio. It also does something else ~ it keeps me disciplined in the 'sell high' and 'buy low' strategy that tends to bring about successful investing.
Currently earning an income, I may not be so worried about the fluctuations of the market as I will be when I am retired. Without income replacement it is challenging to watch those dips in the market but my strategy of keeping 40% in fixed income will help me. While equities are out of favour the less volatile fixed income component of my portfolio can become my major source of cash flow. This way I can wait for the equity markets to return and I will not be forced to sell them while they are at their all time bottom price levels.
Having my portfolio balanced, from an asset allocation perspective, is the first step in negotiating the waves of the stock market.
Friday, October 1, 2010
Teaching Kids About Money ~ I'm not kidding!!!
It's interesting that I have been hearing a lot about how to teach kids about money. I know that when I counsel couples about budgeting I usually begin with how they think about money and what it means to them. Most of the psychological issues with money stem from our up-bringing. Typically, one person in the couple is the 'perceived' spender. I say 'percieved' because they may spend more than their partners but they can also be good savers and have a very disciplined saving and spending philosophy.
So, as parents or grandparents what can we do to ensure that we are instilling the "good" philosophies about spending money. Keep in mind that money is just paper. What we want to teach our children is the work ethic, the sense of constraint and the freedom of enjoyment in a healthy balance. That's the real lessons to be learnt.
Typically, we can start our very young off with the piggy bank and teach them how to save and how the savings add up, if not spent. I think it is important to let children spend their money, if they wish, so that lessons can be learnt about how things cost money and how we can make conscious decisions as to whether we want to budget for the bigger ticket items or whether some smaller ones are justifiable along the way. Letting children make their own decisions is a good one...but some guidance along the way is also important. "You sure you want to spend that money on a new toy instead of saving a little more for that teddy bear that you saw at the store with Grandma?" Remember, kids have short memories, especially when something immediately gratifying can be right in front of them. Allowing them to make their own choices will also give them a certain amount of independence and neither choice should be deemed a 'good' versus a 'bad' choice. Children must learn on their own, within limits.
Generally, after the age of about 5, it would be a good idea to set up a spending and a savings plan. This shows kids that they can still make the independent choice to spend but saving money is also important. Perhaps, some small chores can be incorporated, just enough to ensure that they understand that money must be earned. Of course, light chores are recommended at this age. You don't want an over-stressed child..but rather, something that is befitting their age and capabilities.
Once children are in their mid-teens you may want to add a little 'credit' to the situation. Give them a leeway of about $50 to 'over spend' with the intention of paying it back within a reasonable time frame. This will teach them that they can have that immediate gratification but the work must follow and payments must be made. You can even have the payments in increments. It is important, however, that you child gets 'paid' even though they owe you money because they may chose to only repay half instead of the whole 'pay-check' and this also helps them to manage their funds in a responsible way. Perhaps minimum payments should be understood and a 'credit' document be written up for them so they know their limits and expectations.
Once your children have entered their 20's they may well be ahead of their peers and they will make financially healthy decisions with their childhood experiences and your guidance, behind them.
So, as parents or grandparents what can we do to ensure that we are instilling the "good" philosophies about spending money. Keep in mind that money is just paper. What we want to teach our children is the work ethic, the sense of constraint and the freedom of enjoyment in a healthy balance. That's the real lessons to be learnt.
Typically, we can start our very young off with the piggy bank and teach them how to save and how the savings add up, if not spent. I think it is important to let children spend their money, if they wish, so that lessons can be learnt about how things cost money and how we can make conscious decisions as to whether we want to budget for the bigger ticket items or whether some smaller ones are justifiable along the way. Letting children make their own decisions is a good one...but some guidance along the way is also important. "You sure you want to spend that money on a new toy instead of saving a little more for that teddy bear that you saw at the store with Grandma?" Remember, kids have short memories, especially when something immediately gratifying can be right in front of them. Allowing them to make their own choices will also give them a certain amount of independence and neither choice should be deemed a 'good' versus a 'bad' choice. Children must learn on their own, within limits.
Generally, after the age of about 5, it would be a good idea to set up a spending and a savings plan. This shows kids that they can still make the independent choice to spend but saving money is also important. Perhaps, some small chores can be incorporated, just enough to ensure that they understand that money must be earned. Of course, light chores are recommended at this age. You don't want an over-stressed child..but rather, something that is befitting their age and capabilities.
Once children are in their mid-teens you may want to add a little 'credit' to the situation. Give them a leeway of about $50 to 'over spend' with the intention of paying it back within a reasonable time frame. This will teach them that they can have that immediate gratification but the work must follow and payments must be made. You can even have the payments in increments. It is important, however, that you child gets 'paid' even though they owe you money because they may chose to only repay half instead of the whole 'pay-check' and this also helps them to manage their funds in a responsible way. Perhaps minimum payments should be understood and a 'credit' document be written up for them so they know their limits and expectations.
Once your children have entered their 20's they may well be ahead of their peers and they will make financially healthy decisions with their childhood experiences and your guidance, behind them.
Wednesday, September 29, 2010
Tuesday, August 24, 2010
Does September mean turning over a new leaf?
As autumn approaches and we all have a renewed spirit of digging in our heels and approaching daunting tasks that we put off during the summer months we may also be thinking of the financial drain, if we are paying, or helping to pay, our children's tuition fees. These expenditures can really help with the 'digging in our heels' feeling when discretionary funds are so minimized that we have little else to respond to other than those daunting, inexpensive chores.
If the kids have been home for the summer or if the step children have been visiting more often during their summer vacation then entertainment, dinners out as well as clothing needs for our youngsters have already tapped into our 'fun' funds during the hazy days of summer.
What does it really cost to educate them? Well, of course, each university or college is different. Prices depend on whether your protege is going to attend school and stay at home or whether they will be going away for their education. If they stay in the country it is much less expensive than the hefty international tuition...unless your child has had the fortune to be born in France and returns for their free post-secondary education needs.
If they stay at home and go to school, in Canada, the average cost for tuition and books is in the $5,000 to $6,000 range. Of course, this does not include their housing or food requirements. If they go away to school then you are looking at an average of $20,000 which includes tuition, supplementing their food bill, books and rent. If we dare to add it up then the stay-at-home kid's 4 year degree is about $24,000 and the go-away-kid is costing about $80,000. Keep in mind that this is after-tax money! If you are paying tax according to Ontario's highest marginal tax rate then you have to make about $117,000, before tax, to fit this bill. .... and that's for one child!!!
Some children want to go on to graduate studies. If you are thinking to help out here, then consider that professional designations can be much more. Have a look at the link to Osgoode Hall's projected budget.
http://www.osgoode.yorku.ca/financial_services/enough_sample_budget.html
My advice? Start saving early for your children's RESP. It may be a drain on the pocket book when they are smaller but you will appreciate it when the times comes. If you happen to run out of RESP funds after they turn 21 years of age remember that they can apply for student loans as, once 21, parental income is no longer a factor in the application process. This allows you 'free' use of government funds until the child graduates and must commence repayment after 6 months.........maybe you can even save a little to help out!
OSAP
If the kids have been home for the summer or if the step children have been visiting more often during their summer vacation then entertainment, dinners out as well as clothing needs for our youngsters have already tapped into our 'fun' funds during the hazy days of summer.
What does it really cost to educate them? Well, of course, each university or college is different. Prices depend on whether your protege is going to attend school and stay at home or whether they will be going away for their education. If they stay in the country it is much less expensive than the hefty international tuition...unless your child has had the fortune to be born in France and returns for their free post-secondary education needs.
If they stay at home and go to school, in Canada, the average cost for tuition and books is in the $5,000 to $6,000 range. Of course, this does not include their housing or food requirements. If they go away to school then you are looking at an average of $20,000 which includes tuition, supplementing their food bill, books and rent. If we dare to add it up then the stay-at-home kid's 4 year degree is about $24,000 and the go-away-kid is costing about $80,000. Keep in mind that this is after-tax money! If you are paying tax according to Ontario's highest marginal tax rate then you have to make about $117,000, before tax, to fit this bill. .... and that's for one child!!!
Some children want to go on to graduate studies. If you are thinking to help out here, then consider that professional designations can be much more. Have a look at the link to Osgoode Hall's projected budget.
http://www.osgoode.yorku.ca/financial_services/enough_sample_budget.html
My advice? Start saving early for your children's RESP. It may be a drain on the pocket book when they are smaller but you will appreciate it when the times comes. If you happen to run out of RESP funds after they turn 21 years of age remember that they can apply for student loans as, once 21, parental income is no longer a factor in the application process. This allows you 'free' use of government funds until the child graduates and must commence repayment after 6 months.........maybe you can even save a little to help out!
OSAP
Wednesday, July 28, 2010
Divorce? Remarriage?
Remarriage? Who wants to think about the legalities of anything past signing the new marriage certificate when you are getting married again? For most, remarriage is a significant turning point of a renewed beginning with all the hopes and dreams that most of us lost during divorce or widowhood, hopefully, with the lessoned learnt from the first experience.
Who wants to think about legals issues and considerations of the impact on others when we want to be selfish and focus on our 'special day'? Before walking down this isle or, if you prefer, standing on a beach or overlooking a volcano to say your wedding vows you may want to consider the complications that might arise which may cloud your bright, shinny future. Ben Franklin said, "An ounce of prevention is worth a pound of cure". In this case having your remarriage legal issues well in place before you promise the rest of your life to another may add to the relief allowing you to actually enjoy your 'special day' and save you a lot of money should the unthinkable come to fruition.
Here's the link to my story......it may save you a fortune and your family many headaches to ensure you have everything well plannned out beforehand and that your estate is actually handled in the way you had intended it to be handled.
http://www.advisor.ca/advisors/news/industrynews/article.jsp?content=20100712_093205_4840
Who wants to think about legals issues and considerations of the impact on others when we want to be selfish and focus on our 'special day'? Before walking down this isle or, if you prefer, standing on a beach or overlooking a volcano to say your wedding vows you may want to consider the complications that might arise which may cloud your bright, shinny future. Ben Franklin said, "An ounce of prevention is worth a pound of cure". In this case having your remarriage legal issues well in place before you promise the rest of your life to another may add to the relief allowing you to actually enjoy your 'special day' and save you a lot of money should the unthinkable come to fruition.
Here's the link to my story......it may save you a fortune and your family many headaches to ensure you have everything well plannned out beforehand and that your estate is actually handled in the way you had intended it to be handled.
http://www.advisor.ca/advisors/news/industrynews/article.jsp?content=20100712_093205_4840
Monday, July 19, 2010
The Collaborative Movement in the GTA
Collaborative divorce sounds like a juxtaposition of terms but this divorce process can save lives! OK, that may sound a little dramatic but, in reality, it is the quality of life going forward, especially for children. There are many different divorce processes which I have explained in an early blog so I won't g through the detailed description of each but rather focus or highlight what the collaborative process is all about.
Each couple must sign the collaborative agreement or a participation agreement. In the agreement each spouse promises to be upfront, honest, respectful and most importantly not go to court. Both spouses must retain a collaboratively trained lawyer and, initially meet with their newly retained legal council. The first 4-way meeting which consists of both spouses and their lawyers discusses the process, how it works and the rules of conduct.
At the second meeting the issues are brought forward. Every divorce is different and some couples may agree, for example, on the financial issues and custody issues but not on access issues (access to the children). Wherever there is disagreement that is where the couple and their lawyers work to some form of resolve. The reason the lawyers are there is to ensure that the spouses are being fair to one another from a family law perspective. Sometimes people feel they will give away everything to make the divorce issues go away but later live to regret the decision. Lawyers help to ensure the fairness prevails and also correct any misconceptions. Collaborative divorce embraces the interdisciplinary model which simply means that other professionals may be invited to join the group. Often family professionals are necessary when access issues are at the forefront. They can work out parenting plans with the couple. Often times financial professionals can be brought into the group to help with budgeting issues and also to ensure that the assets you want to keep are the assets you can afford. Sometimes spouses will give away retirement funds, for example, to keep the house but they can't afford to keep the house and they have to work all their lives as they cannot afford to retire. Often there are solutions available at the beginning of the divorce that would negate these future issues.
What is really important in the collaborative process is that despite the bad feelings each spouse has for one another during this time because they have treated each other respectfully they can continue to co- parent after the divorce is over. There are studies that show that affectively co-parented children grow up to be just as stable and 'normal' as children of couples who remain together. High conflict divorces always create problems for children. Sometimes they are manipulated by one parent or the other and grow up to resent the parent who did so when they are old enough to understand. These children often end up with issues that they grapple with well into adulthood. So, therefore, my statement that collaborative divorce can save lives.
If you are going through a divorce or thinking about it here are some links to the GTA lawyers, family professionals and financial professionals who are collaboratively trained in this area.
www.peelcollaborative.com
www.collaborativepracticetoronto.com
If you are out of the Toronto area there is an international association that provides names of professionals as well as links to local groups.
www.collaborativepractice.com
These website also have a large amount of information available about the collaborative process.
Each couple must sign the collaborative agreement or a participation agreement. In the agreement each spouse promises to be upfront, honest, respectful and most importantly not go to court. Both spouses must retain a collaboratively trained lawyer and, initially meet with their newly retained legal council. The first 4-way meeting which consists of both spouses and their lawyers discusses the process, how it works and the rules of conduct.
At the second meeting the issues are brought forward. Every divorce is different and some couples may agree, for example, on the financial issues and custody issues but not on access issues (access to the children). Wherever there is disagreement that is where the couple and their lawyers work to some form of resolve. The reason the lawyers are there is to ensure that the spouses are being fair to one another from a family law perspective. Sometimes people feel they will give away everything to make the divorce issues go away but later live to regret the decision. Lawyers help to ensure the fairness prevails and also correct any misconceptions. Collaborative divorce embraces the interdisciplinary model which simply means that other professionals may be invited to join the group. Often family professionals are necessary when access issues are at the forefront. They can work out parenting plans with the couple. Often times financial professionals can be brought into the group to help with budgeting issues and also to ensure that the assets you want to keep are the assets you can afford. Sometimes spouses will give away retirement funds, for example, to keep the house but they can't afford to keep the house and they have to work all their lives as they cannot afford to retire. Often there are solutions available at the beginning of the divorce that would negate these future issues.
What is really important in the collaborative process is that despite the bad feelings each spouse has for one another during this time because they have treated each other respectfully they can continue to co- parent after the divorce is over. There are studies that show that affectively co-parented children grow up to be just as stable and 'normal' as children of couples who remain together. High conflict divorces always create problems for children. Sometimes they are manipulated by one parent or the other and grow up to resent the parent who did so when they are old enough to understand. These children often end up with issues that they grapple with well into adulthood. So, therefore, my statement that collaborative divorce can save lives.
If you are going through a divorce or thinking about it here are some links to the GTA lawyers, family professionals and financial professionals who are collaboratively trained in this area.
www.peelcollaborative.com
www.collaborativepracticetoronto.com
If you are out of the Toronto area there is an international association that provides names of professionals as well as links to local groups.
www.collaborativepractice.com
These website also have a large amount of information available about the collaborative process.
Wednesday, July 7, 2010
Spousal Loans ~ Potentially saving Thousands!!!
I saved a client over $23,000 a year employing this strategy, a YEAR, in taxes!!!!!
OK, so....this is how it works. You have to be married. Your spouse has to be unemployed or have a big variance in income to employ this strategy. It's a form of income splitting that is a way to avoid paying taxes that is completely legal.
Canada Revenue Agency (CRA) rules that a higher income earning wife, for example, cannot gift her husband a large sum of money to invest to take advantage of his lower marginal tax rate. Any investments made on his behalf must come from his earned income, otherwise the income (in the form of interest, dividends and capital gains) is attributable back to the wife. If, however, the lower income spouse does the savings and the higher income spouse pays the bills then it's OK to attribute any income from investments to the lower income earner PROVIDING that he does not invest, annually, more than her makes net of taxes.
If, however, you have a spouse who has no income then you can lend that spouse money at CRA's prescribed rate (currently 1%) and then that spouse can invest and any growth attributed from the investments are taxed at their lower marginal tax rate. Because the spouse is borrowing to invest and is earning income from the investment then the spouse can also write off the cost of borrowing (ie: the interest charges) on their income tax return. The lending spouse, however, must claim the interest as income but at the low rate of 1% the cost is more than offset by the spouses lower marginal tax rate.
OK, so....this is how it works. You have to be married. Your spouse has to be unemployed or have a big variance in income to employ this strategy. It's a form of income splitting that is a way to avoid paying taxes that is completely legal.
Canada Revenue Agency (CRA) rules that a higher income earning wife, for example, cannot gift her husband a large sum of money to invest to take advantage of his lower marginal tax rate. Any investments made on his behalf must come from his earned income, otherwise the income (in the form of interest, dividends and capital gains) is attributable back to the wife. If, however, the lower income spouse does the savings and the higher income spouse pays the bills then it's OK to attribute any income from investments to the lower income earner PROVIDING that he does not invest, annually, more than her makes net of taxes.
If, however, you have a spouse who has no income then you can lend that spouse money at CRA's prescribed rate (currently 1%) and then that spouse can invest and any growth attributed from the investments are taxed at their lower marginal tax rate. Because the spouse is borrowing to invest and is earning income from the investment then the spouse can also write off the cost of borrowing (ie: the interest charges) on their income tax return. The lending spouse, however, must claim the interest as income but at the low rate of 1% the cost is more than offset by the spouses lower marginal tax rate.
Wednesday, June 23, 2010
Managing Debt ~ The mortgage difference.
The least expensive way to borrow money, if you own a home, is through your mortgage. When your mortgage term is up you may want to look at some of the higher interest rate debt and lump it in with your mortgage. With the amorization spread out over a longer period of time this would mean that if you are making regular payments (to your credit card, for example) that you can continue to make those same payments on the mortgage and pay down the principle that much sooner. The reason why your mortgage is offered at a lower interest rate is because it is secured by your house. Some clients tell me they have no mortgage but when I dig in deeper I realize they have a secured line of credit. Folks....that IS a mortgage. Any debt secured by your home is a mortgage. The difference is that a term-oriented mortgage (fixed mortgage) is non-revolving. What this means is that you have an outstanding balance and you make payments to it but you cannot re-advance the difference. Also in a fixed mortgage your interest rate is known for whatever term you have selected. In a secured line of credit your payment fluctuates with the interest rate environment. You can also re-advance your line of credit so it is considered to be revolving debt. For example, if my secured line of credit is $100,000 and my balance is $25,000 then I can still advance $75,000. The fixed mortgage does not have that ability. Of course, one major difference I have not discussed is payment options. With a fixed rate mortgage you may be able to increase your payments by a certain percentage and also make a lump sum payment on the anniversary date but if you win the lottery you cannot payout that mortgage without penalty....and if you are in the early part of your term, maybe not at all. With the secured line of credit you can pay whatever you wish so if you win the LottoMax $50,000,000 this Friday you can pay off your secured line of credit with no problem!!!
Wednesday, June 9, 2010
Tax-Effective Investing
Not all investments are created equal. Some investments promise rates of return by the issuer (of the debt) and some have the promise of potential lofty returns (equities or stocks) but neither are they treated the same way by Canada Revenue Agency (CRA). Marginal tax rates in Ontario dictate that income, dividends and capital gains be treated differently, from a tax perspective. Income, like your salary is at your highest marginal tax rate and dividends and capital gains are taxed less. Capital gains applies to properties that are bought and then sold for a profit, such as real estate, stocks and even sometimes, bonds. Primary residences are excluded from capital gains tax but secondary residences and investment properties are not. Dividends are payable quarterly by larger corporations if you hold their stock on the dividend date.
In order to effectively utilize a tax strategy I put all my clients fixed income (bonds, coupons, bond funds) in their registered plans as much as possible. Why? Because any income generated in a registered plan, such as a registered pension plan or a registered retirement savings plan shelters any income from tax. Therefore, by placing the highest taxable investments inside the RRSP's where the income is not subject to tax, for example, the client gets to keep more of what she or he earned. By placing the growth investments that generate capital gains and dividends in their non-registered investments clients enjoy paying at a lower tax rate.
So if you live in Ontario your combined federal and provincial tax rates have you paying 31.15% on any interest income received (that's $0.31 on every dollar that you earn), 15.58% on capital gains and 9.76% on dividends. So why not shelter your interest income as much as possible?
(Of course, your asset allocation and geographical allocation should not be compromised when adhering to a tax strategy but it should be considered in the appropriate fashion.)
For your marginal tax rate, here is a link:
Marginal Tax Rates in Ontario
In order to effectively utilize a tax strategy I put all my clients fixed income (bonds, coupons, bond funds) in their registered plans as much as possible. Why? Because any income generated in a registered plan, such as a registered pension plan or a registered retirement savings plan shelters any income from tax. Therefore, by placing the highest taxable investments inside the RRSP's where the income is not subject to tax, for example, the client gets to keep more of what she or he earned. By placing the growth investments that generate capital gains and dividends in their non-registered investments clients enjoy paying at a lower tax rate.
So if you live in Ontario your combined federal and provincial tax rates have you paying 31.15% on any interest income received (that's $0.31 on every dollar that you earn), 15.58% on capital gains and 9.76% on dividends. So why not shelter your interest income as much as possible?
(Of course, your asset allocation and geographical allocation should not be compromised when adhering to a tax strategy but it should be considered in the appropriate fashion.)
For your marginal tax rate, here is a link:
Marginal Tax Rates in Ontario
Thursday, May 27, 2010
Ruling assets from the grave?????
We work hard all of our lives to create wealth and procure materialistic objects of either need or desire but when is it time to divest of our live's work and worldly possessions? What happens if something happens to you tomorrow? Is your Will up-to-date? What about your Powers of Attorney and Living Wills?
Ever consider a testamentary trust? A testamentary trust becomes a trust when you die (as opposed to an inervivos trust which is a trust while you are alive...not to be confused with a Living Will). If you have children, for example, you may not have the faith that they will spend your hard earned cash in a manner that is acceptable to you. Purchasing a Ferarri at the age of 19 may win your protegy some instant attraction from their peers but you refrained from purchasing one yourself in hopes of improving your child's standard of living and leaving a legacy. It was hoped to give them the additional boost to success and help them to strive to ensure your grandchildren have some additional benefits that you did not. (The world was built on the shoulder's of giants comes to mind).
You can write, in your Will, that you want your children to receive the funds in stages. Maybe something like 25% of the assets at the age of 25, another 25% at 30 and the remainder (50%) at age 35. In this way, if they misappropriate funds in their early years it is hoped that they have learnt a lesson and will continue to utilize the remaining 75% in a more responsible fashion. Trusts have some additional benefits in that they have their own marginal tax rates so if you have a child who is in the top marginal tax bracket the trust can provide some possible tax relief. Trusts are also considered not to be part of net family property so there may be some additional benefit in this regard. The downside is that once the trust is established it must file it's own tax return every year so that additional cost should be considered.
It may not be right or even relevent for some people but it is worth considering, if you have young children.
Ever consider a testamentary trust? A testamentary trust becomes a trust when you die (as opposed to an inervivos trust which is a trust while you are alive...not to be confused with a Living Will). If you have children, for example, you may not have the faith that they will spend your hard earned cash in a manner that is acceptable to you. Purchasing a Ferarri at the age of 19 may win your protegy some instant attraction from their peers but you refrained from purchasing one yourself in hopes of improving your child's standard of living and leaving a legacy. It was hoped to give them the additional boost to success and help them to strive to ensure your grandchildren have some additional benefits that you did not. (The world was built on the shoulder's of giants comes to mind).
You can write, in your Will, that you want your children to receive the funds in stages. Maybe something like 25% of the assets at the age of 25, another 25% at 30 and the remainder (50%) at age 35. In this way, if they misappropriate funds in their early years it is hoped that they have learnt a lesson and will continue to utilize the remaining 75% in a more responsible fashion. Trusts have some additional benefits in that they have their own marginal tax rates so if you have a child who is in the top marginal tax bracket the trust can provide some possible tax relief. Trusts are also considered not to be part of net family property so there may be some additional benefit in this regard. The downside is that once the trust is established it must file it's own tax return every year so that additional cost should be considered.
It may not be right or even relevent for some people but it is worth considering, if you have young children.
Wednesday, May 5, 2010
Understanding your pension plan....
If you are fortunate enough to have a pension you still have to understand how the stream of income works at retirement. There are two basic pension plans, defined contribution pension plan (sometimes referred to as a money purchase pension plan) and a defined benefit pension plan.
A defined benefit pension plan provides you a level stream of income at retirement regardless of what is going on in the financial markets. Of course, each plan is administered a little differently depending on what terms your employer works out with the provider. Some defined benefit plans (DB plans) have inflation adjustments or they have a bridge benefit which provides an additional income if you retire before the age of 65. (It is meant to supplement income until you reach the normal age of being a CPP beneficiary regardless of when you actually take your CPP).
Defined contribution plans (DC plans) are somewhat like RRSPs in that you chose your own investments and DC plans will experience the volatility of the financial markets before and during retirement. At retirement, you cannot take out all the funds, like you are allowed to in a RRSP situation, but rather you are restricted based on a percentage of the value of the account at the end of each year. The year end value will then dictate your income for the following year. As a result your cash flow will change year-to-year if you have a DC pension plan.
Understanding the basic concepts of each type of pension plan can help when trying to ascertain your income at retirement as a pension is, typically, one of the biggest building blocks of retirement income.
A defined benefit pension plan provides you a level stream of income at retirement regardless of what is going on in the financial markets. Of course, each plan is administered a little differently depending on what terms your employer works out with the provider. Some defined benefit plans (DB plans) have inflation adjustments or they have a bridge benefit which provides an additional income if you retire before the age of 65. (It is meant to supplement income until you reach the normal age of being a CPP beneficiary regardless of when you actually take your CPP).
Defined contribution plans (DC plans) are somewhat like RRSPs in that you chose your own investments and DC plans will experience the volatility of the financial markets before and during retirement. At retirement, you cannot take out all the funds, like you are allowed to in a RRSP situation, but rather you are restricted based on a percentage of the value of the account at the end of each year. The year end value will then dictate your income for the following year. As a result your cash flow will change year-to-year if you have a DC pension plan.
Understanding the basic concepts of each type of pension plan can help when trying to ascertain your income at retirement as a pension is, typically, one of the biggest building blocks of retirement income.
Thursday, April 29, 2010
How to Divorce?????
Most people panic when they first divorce and their knee-jerk reaction is to hire a lawyer. If you have never been through the divorce experience then talking to friends and searching the Internet become places for advice on where to turn. Unfortunately, hiring your best friend's lawyer who you have heard is good because they are a real fighter may not be your best option.
In a time of overwhelming emotion it is sometimes hard to make a rational decision. Racked with hurt, guilt or both can sometimes cloud judgement and enforce actions that you will later regret. I think it is important to understand your choices so that you own your own process rather than meeting a lawyer who, for example, is litigious and finding that you are paying a lot of money for even more grief...grief that you could have avoided. This may be especially important if you have to continue to co-parent in your post-divorce life.
Some clients prefer the 'per se' method, sometimes referred to as the 'kitchen table' method. I encourage clients to do this if their conversations are open and honest and they can work together in an agreeable manner. If they can figure out how to divide things up and they find it agreeable, that's great! However, I always ask them to get Independent Legal Advice (ILA). Remember those emotions that cloud one's thinking? Giving away the house (literally) because you feel that you were responsible for your spouses hurt feelings will turn to regret once you start to work on your own. ILA ensures that you are covered from a legal perspective and that you are not cheating yourself to what you are rightly due. It also ensures that you are both signing a contract that you understand and that a professional has helped you to think about other alternatives. I have had clients divorce using this approach and it works, in some circumstances.
Hiring that 'fighting' lawyer may be a good choice for someone who needs to be represented by a third person because there is an imbalance in the relationship or a huge sense of mistrust. A litigious lawyer will under turn every possible scenario and fight with vigour....for many hours to represent their client's rights. Although I am not sure that other alternatives would not work for couples who fit in this category.
Mediation is also a consideration. Mediation is when a couple will sit with a mediator and place all the issues to be resolved on the table (custody, access and financial issues) and they will try to get the couple to do a little give and take to settle their separation agreement. The clients come to their own resolve. Mediators can be lawyers but if they are they cannot give legal advice during mediation. There are also many good mediators who are not lawyers. My advice for clients who chose this method is to seek ILA once all the issues appear to be settled.
Arbitration is is similar in that the couple discuss their issues with a professional but the arbitrator will decide how to settle the issues. My opinion is that this is dangerous as the clients do not take ownership in the decision making. There is also a med/arb solution whereby the couple attempt to settle their difference and whatever they cannot settle is arbitrated for them.
Collaborative divorce is fairly new as it came to Toronto in about the year 2000. Collaborative lawyers are trained to approach divorce differently than their litigious predecessors. In a collaborative divorce each person hires a collaborative lawyer and all four meet to discuss the issues. What is important to note is that all participants must sign a collaborative agreement stating that they will be respectful, honest and forthright. Sounds civilized, right? I think this is a great alternative if you are co-parenting after the divorce. Litigation tends to be more of a shame/blame procedure, in my experience. Collaboration does not promote hostility which is carried over in your life after the ink on the separation agreement is dry. What's more is that the collaborative divorce process embraces the interdisciplinary. Collaboratively trained professionals, other than your family law lawyer, can be involved in your process depending on your needs. Family professionals can help develop an access plan commonly referred to as a parenting plan. Financial professionals can help to forecast your financial future with your portion of the assets that are split. Can you still afford to retire? Can you afford to keep the house?
I think it's important to understand that you have choices. In hiring your best friend's lawyer you may get 'sucked' into a process that isn't really suitable for you. I would urge you to 'interview' a few lawyers before you make a decision. If you are looking for a recommendation for a someone to help you with your dispute resolution let me know and I can give you a few referrals.
In a time of overwhelming emotion it is sometimes hard to make a rational decision. Racked with hurt, guilt or both can sometimes cloud judgement and enforce actions that you will later regret. I think it is important to understand your choices so that you own your own process rather than meeting a lawyer who, for example, is litigious and finding that you are paying a lot of money for even more grief...grief that you could have avoided. This may be especially important if you have to continue to co-parent in your post-divorce life.
Some clients prefer the 'per se' method, sometimes referred to as the 'kitchen table' method. I encourage clients to do this if their conversations are open and honest and they can work together in an agreeable manner. If they can figure out how to divide things up and they find it agreeable, that's great! However, I always ask them to get Independent Legal Advice (ILA). Remember those emotions that cloud one's thinking? Giving away the house (literally) because you feel that you were responsible for your spouses hurt feelings will turn to regret once you start to work on your own. ILA ensures that you are covered from a legal perspective and that you are not cheating yourself to what you are rightly due. It also ensures that you are both signing a contract that you understand and that a professional has helped you to think about other alternatives. I have had clients divorce using this approach and it works, in some circumstances.
Hiring that 'fighting' lawyer may be a good choice for someone who needs to be represented by a third person because there is an imbalance in the relationship or a huge sense of mistrust. A litigious lawyer will under turn every possible scenario and fight with vigour....for many hours to represent their client's rights. Although I am not sure that other alternatives would not work for couples who fit in this category.
Mediation is also a consideration. Mediation is when a couple will sit with a mediator and place all the issues to be resolved on the table (custody, access and financial issues) and they will try to get the couple to do a little give and take to settle their separation agreement. The clients come to their own resolve. Mediators can be lawyers but if they are they cannot give legal advice during mediation. There are also many good mediators who are not lawyers. My advice for clients who chose this method is to seek ILA once all the issues appear to be settled.
Arbitration is is similar in that the couple discuss their issues with a professional but the arbitrator will decide how to settle the issues. My opinion is that this is dangerous as the clients do not take ownership in the decision making. There is also a med/arb solution whereby the couple attempt to settle their difference and whatever they cannot settle is arbitrated for them.
Collaborative divorce is fairly new as it came to Toronto in about the year 2000. Collaborative lawyers are trained to approach divorce differently than their litigious predecessors. In a collaborative divorce each person hires a collaborative lawyer and all four meet to discuss the issues. What is important to note is that all participants must sign a collaborative agreement stating that they will be respectful, honest and forthright. Sounds civilized, right? I think this is a great alternative if you are co-parenting after the divorce. Litigation tends to be more of a shame/blame procedure, in my experience. Collaboration does not promote hostility which is carried over in your life after the ink on the separation agreement is dry. What's more is that the collaborative divorce process embraces the interdisciplinary. Collaboratively trained professionals, other than your family law lawyer, can be involved in your process depending on your needs. Family professionals can help develop an access plan commonly referred to as a parenting plan. Financial professionals can help to forecast your financial future with your portion of the assets that are split. Can you still afford to retire? Can you afford to keep the house?
I think it's important to understand that you have choices. In hiring your best friend's lawyer you may get 'sucked' into a process that isn't really suitable for you. I would urge you to 'interview' a few lawyers before you make a decision. If you are looking for a recommendation for a someone to help you with your dispute resolution let me know and I can give you a few referrals.
Wednesday, April 7, 2010
Locked-In Retirement Accounts
Did you know that you may be able to 'unlock' your Locked-In Retirement Account (LIRA)? Some people who have worked for a company for a period of time and left may have had a pension plan that they 'took with them' and deposited the funds into their own financial institution to manage on their own. These funds are invested similar to RRSP's as clients must choose their own investment selections, including asset mix and geographical mix. These LIRA's will eventually be transferred to Life Income Funds (LIF's) if you reside in Ontario (and some other provinces) to provide a stream of income at retirement with restrictions. In. other words, you are restricted as to what you can take out annually. However, if your LIRA is less than the Yearly Maximum Pensionable Earnings (YMPE) then you are able to take the funds out of your LIRA and transfer them to your RRSP. YMPE for 2010 is $47,200. Some clients have small LIRA's so moving them to your RRSP's means that you have no restriction as to how much you can take out at retirement!!!
Monday, April 5, 2010
Really want to help your kids understand how it all works?
OK, so you're getting closer and closer to retirement and maybe it's a fleeting thought or maybe it's outright panic but....have you saved enough? Thinking that most of us do not want to be living in our children's basements at retirement perhaps we can also help our kids to have the answers earlier in life, rather than have history repeat itself. The moment your young one comes home and says they have a job take 18% of their income from them in a form of savings. Open a RRSP for them and make a contribution, annually or monthly if there is enought to work with. There is no age limit to RRSP contributors. There may be limits on what types of accounts they have in that they cannot 'trade' in the market until they reach the age of majority but they can have a deposit type RRSP at your local bank as long as they have earned income.
Effective parenting comes from two different directions. One, you are 'forcing' your children to take an interest in learning about investments. Believe me, if it's their own money they will soon be asking about mutual funds, stocks, bonds and the like. The biggest effect, however, is their savings at retirement. OK, so what 17 year old is thinking about saving for life after 65 especially when there are so many things a young person wants to do NOW! If you save earlier it is much better than starting later. For example, a person age 25 saving $5,000 per year will have $1,000,000 at age 65 compared to a 45 year old saving double the amount ($10,000) which will end up with $400,000 at the same age (both based on a consistant 7% return). That's a valuable difference. But wait...there's more. Because your impressionable youngster does not have a big marginal tax rate you needn't deduct the RRSP contribution amount until they start working full-time in their future careers. You can carry-forward the contribution so that once they start working they can use all or some of all the accumulated contributions when they will receive more of a return for their money. Also, it may motivate your youngster to contribute to their own RRSP's if they are aware that they can use those funds towards a down payment for their new house.
Now wouldn't that be kinda cool? Down payment for their new house???? A RRSP account and a learning lesson about how to invest..........??? I think so.......
Effective parenting comes from two different directions. One, you are 'forcing' your children to take an interest in learning about investments. Believe me, if it's their own money they will soon be asking about mutual funds, stocks, bonds and the like. The biggest effect, however, is their savings at retirement. OK, so what 17 year old is thinking about saving for life after 65 especially when there are so many things a young person wants to do NOW! If you save earlier it is much better than starting later. For example, a person age 25 saving $5,000 per year will have $1,000,000 at age 65 compared to a 45 year old saving double the amount ($10,000) which will end up with $400,000 at the same age (both based on a consistant 7% return). That's a valuable difference. But wait...there's more. Because your impressionable youngster does not have a big marginal tax rate you needn't deduct the RRSP contribution amount until they start working full-time in their future careers. You can carry-forward the contribution so that once they start working they can use all or some of all the accumulated contributions when they will receive more of a return for their money. Also, it may motivate your youngster to contribute to their own RRSP's if they are aware that they can use those funds towards a down payment for their new house.
Now wouldn't that be kinda cool? Down payment for their new house???? A RRSP account and a learning lesson about how to invest..........??? I think so.......
Wednesday, March 24, 2010
Do YOU need a Financial Planner?
Of course I am biased, but I think everyone needs some financial guidance and the timing of the advice can be just as crucial. My most dreaded appointments are with people who are about to retire and they haven't saved enough for retirement. What a difficult thing to tell a person who is in their 60's!!! Doing the analyis while you are in your 40's (or earlier) is a much better option because, at least if you are short, you still have some income generating years to do something about it. Not that I see this issue that often but ....what if you are saving too much? It's important to enjoy your life while you are young enough to do so while not compromising your retirement years. Think of it this way....you work 40 years....if you work from 25 to 65 and if you live to be 90 then you have to save for 25 years of income replacement. That's a lot of savings and if you love golf and travelling then those expensive hobbies mean that you have to save even more to enjoy the lifestyle that you want in retirment.
Retirement assessments are only part of what a financial planner does....or, at least a good one. There are tax considerations, estate planning needs (especially in most of today's two family scenarios), divorce calculations, remarriage considerations not to mention insurance needs such as long term care, critical illness and life insurance issues.
Whether you have a small fortune or a rather large one it's important to consider all of your financial options...before it's too late...........
Retirement assessments are only part of what a financial planner does....or, at least a good one. There are tax considerations, estate planning needs (especially in most of today's two family scenarios), divorce calculations, remarriage considerations not to mention insurance needs such as long term care, critical illness and life insurance issues.
Whether you have a small fortune or a rather large one it's important to consider all of your financial options...before it's too late...........
Wednesday, March 17, 2010
Estate Tax in Canada????
Well, not formally.......but one could argue that Canada Revenue Agency (CRA) hasn't exactly given up the gauntlet.
There are two things that are guaranteed in life, right? Death and taxes. When you get hit with the double whammy then some really interesting things start to happen. On your final tax return all your income is pro-rated up until the day of your death and all that income is accounted for on your final tax return. What some people miss is not the typical annual things like salary income, Canada Pension Plan, Old Age Security, capital gains, dividend income and interest income....or whatever applies... but what about those registered plans that you have spent most of your life accumulating? Registered plans like your Registered Retirement Savings Plans and Registered Pension Plans (not including a defined benefit pension plan as that would work in a different way)? Well, if you have a spouse ~ and assuming your spouse is your beneficiary ~ it would roll over to them, tax-free but on second death (or your own if you are single) all those registered assets become de-registered and included as income on your final tax return.
The interesting piece here is that your marginal tax rate may be 31.15% while you are alive but once you de-register those registered funds it, typically, will put you into the highest marginal tax bracket of 46.41%. Yes, almost one half of your registered plans goes to CRA. CRA becomes one of your biggest beneficiaries at death!
There are methods to preserve that wealth for your children or whomever is the beneficiary of your Estate through estate planning methods but many options need to be weighed to consider the cost of doing so and weighing the ultimate benefit.
There are two things that are guaranteed in life, right? Death and taxes. When you get hit with the double whammy then some really interesting things start to happen. On your final tax return all your income is pro-rated up until the day of your death and all that income is accounted for on your final tax return. What some people miss is not the typical annual things like salary income, Canada Pension Plan, Old Age Security, capital gains, dividend income and interest income....or whatever applies... but what about those registered plans that you have spent most of your life accumulating? Registered plans like your Registered Retirement Savings Plans and Registered Pension Plans (not including a defined benefit pension plan as that would work in a different way)? Well, if you have a spouse ~ and assuming your spouse is your beneficiary ~ it would roll over to them, tax-free but on second death (or your own if you are single) all those registered assets become de-registered and included as income on your final tax return.
The interesting piece here is that your marginal tax rate may be 31.15% while you are alive but once you de-register those registered funds it, typically, will put you into the highest marginal tax bracket of 46.41%. Yes, almost one half of your registered plans goes to CRA. CRA becomes one of your biggest beneficiaries at death!
There are methods to preserve that wealth for your children or whomever is the beneficiary of your Estate through estate planning methods but many options need to be weighed to consider the cost of doing so and weighing the ultimate benefit.
Thursday, March 11, 2010
Tax Strategies
Ok, so last week's bad word was debt and this week is 'taxes'!
I thought this may be a timely post considering that April 30th is fast approaching. So let's discuss a tax strategy that may save you money.
This particular strategy works if you have a large disparity of income between spouses because one spouse will have a higher marginal tax rate than the other. CRA rules dictate that if you have investable assets they must be derived from your income. In other words, a wife (assuming she is the higher income earner) cannot gift her husband monies to invest and take advantage of his lower marginal tax bracket. If she did then the interest, dividends and capital gains would be attributable back to her which defeats the purpose of changing ownership of the funds. If he is working she can pay all the bills and have her lower-income spouse do all the investing with the income that is attributable to him. This must be tracked carefully for CRA to legitimize this strategy.
If however, he is not working, she can loan her husband the money at the CRA perscibed rate of interst (currently 1%) and he can invest it and any returns would be taxable to him but she must also include the interest portion of the loan as income on her tax return. This strategy must be evidence by a loan document and the interest portion is payable to the wife by January 31 of any given year. Because the CRA perscribed rate is so low, at the moment, it would be an opportune time to utilize this income splitting strategy, if it was beneficial to do so. The question remains ~ what is the optimum amount to lend to your spouse??? Well, that question could be answered by your accountant or tax preparer by either assessing your 2009 filing or by doing a pro-forma tax calculation after the fact.
If this strategy does not affect you then stay tuned as next week's topic will also be about taxes and strategies to ensure CRA doesn't get more than it should.
I thought this may be a timely post considering that April 30th is fast approaching. So let's discuss a tax strategy that may save you money.
This particular strategy works if you have a large disparity of income between spouses because one spouse will have a higher marginal tax rate than the other. CRA rules dictate that if you have investable assets they must be derived from your income. In other words, a wife (assuming she is the higher income earner) cannot gift her husband monies to invest and take advantage of his lower marginal tax bracket. If she did then the interest, dividends and capital gains would be attributable back to her which defeats the purpose of changing ownership of the funds. If he is working she can pay all the bills and have her lower-income spouse do all the investing with the income that is attributable to him. This must be tracked carefully for CRA to legitimize this strategy.
If however, he is not working, she can loan her husband the money at the CRA perscibed rate of interst (currently 1%) and he can invest it and any returns would be taxable to him but she must also include the interest portion of the loan as income on her tax return. This strategy must be evidence by a loan document and the interest portion is payable to the wife by January 31 of any given year. Because the CRA perscribed rate is so low, at the moment, it would be an opportune time to utilize this income splitting strategy, if it was beneficial to do so. The question remains ~ what is the optimum amount to lend to your spouse??? Well, that question could be answered by your accountant or tax preparer by either assessing your 2009 filing or by doing a pro-forma tax calculation after the fact.
If this strategy does not affect you then stay tuned as next week's topic will also be about taxes and strategies to ensure CRA doesn't get more than it should.
Wednesday, March 3, 2010
Leveraging? Debt?
Bad words, right? Most of us struggle a good portion of our working lives to pay off debt whether it be in the form of car loans or mortgages so the word tends to have an air of negativity surrounding it. Debt, however, is a great enabler of our economy. Without it most of us could not afford the nice homes we live in or the opportunity to own our own vehicle.
What about the financial planning debt consideration "borrowing to invest"? If you borrow to invest Canada Revenue Agency allows you to write-off the interest charges. Sounds great, eh? Like 'free' money almost....but wait! There are risks associated with this strategy that you must know before you put this consideration into practice. Most of the pitfalls and, conversely, the potential gains, are all based on market timing and performance. If you borrowed, let's say, $100,000 back on March 10th of last year and invested it in almost any market then you, most likely, would have seen this strategy work wonderfully for you. With the market at it's all time low (in the most recent of years) and the exact day of the turnaround you may have fared....as an example....10% and the loan was, maybe 5%. Of course, dependant on your marginal tax rate, you still would have done more than OK.
The pitfall, however, is if you borrowed to invest that $100,000 and the market drops. Even with the advantage of being able to write-off the interest on your annual tax return you would still be paying for a loan (less cash flow) to pay for an investment that was devalued considerably. Then, my guess is, you would not be too happy with this strategy.
Borrowing to invest is OK for people who understand the potential pitfalls and how are willing to take on the additional risk associated with this strategy. For those who are good at market timing it can be very rewarding...
What about the financial planning debt consideration "borrowing to invest"? If you borrow to invest Canada Revenue Agency allows you to write-off the interest charges. Sounds great, eh? Like 'free' money almost....but wait! There are risks associated with this strategy that you must know before you put this consideration into practice. Most of the pitfalls and, conversely, the potential gains, are all based on market timing and performance. If you borrowed, let's say, $100,000 back on March 10th of last year and invested it in almost any market then you, most likely, would have seen this strategy work wonderfully for you. With the market at it's all time low (in the most recent of years) and the exact day of the turnaround you may have fared....as an example....10% and the loan was, maybe 5%. Of course, dependant on your marginal tax rate, you still would have done more than OK.
The pitfall, however, is if you borrowed to invest that $100,000 and the market drops. Even with the advantage of being able to write-off the interest on your annual tax return you would still be paying for a loan (less cash flow) to pay for an investment that was devalued considerably. Then, my guess is, you would not be too happy with this strategy.
Borrowing to invest is OK for people who understand the potential pitfalls and how are willing to take on the additional risk associated with this strategy. For those who are good at market timing it can be very rewarding...
Wednesday, February 24, 2010
Timely Considerations
With the new year well upon us we welcome new opportunities. If you haven't contributed to your Tax-Free Savings Account (TFSA) for 2010 it may be a good time to do so. Every year Canadians are allowed to shelter $5,000 in a TFSA. The name, however, is a source of confusion. I think the government should have called it a Tax-Free Investment Account as the words 'savings account' has led to a lot of confusion. The funds you place in your TFSA can be invested just the same as your regular investments. Whether you invest in GIC's, bonds coupons or if you are a stock-affectionato you can hold many of these options in your TFSA potentially earning more than a regular savings account. Much like a RRSP where income is sheltered the TFSA is different becasue you will not receive a tax deduction for your personal income tax filings but you will not receive any T3's or T5's (for dividends and interest income) from income generated while the funds are in the TFSA. The account is also accumulative so if you missed putting the maximum in for 2009 you are able to put in $10,000 in 2010. Conversely, if you take out the $5,000 you put in in 2009 you can replace it and also add another $5,000 for 1010. Also, unlike a RRSP, if you take the money out this year you do not have to include it as income in your 2010 tax year's filings as you never received a deduction for it (a tax advantage) in the first place.
If you are thinking that you cannot make a RRSP contribution and a TFSA contribution at the same time then consider a couple of options. You can make the RRSP contribution and with any refund monies you can place it in your TFSA. Also, if you have any current non-registered investments you can always move existing investments over to your TFSA without adding any new funds.
If you are thinking that you cannot make a RRSP contribution and a TFSA contribution at the same time then consider a couple of options. You can make the RRSP contribution and with any refund monies you can place it in your TFSA. Also, if you have any current non-registered investments you can always move existing investments over to your TFSA without adding any new funds.
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