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...........
Wednesday, March 24, 2010
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...
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