Category Archives for "Investments"

Financial Literacy Lessons Should Begin Early in Life

By Randall Orser | Budget , Investments , Personal Finances , Personal Income Tax

For most of us money management was not a subject taught in our schools.  Today it is recognized that financial literacy should start at an early age and should be taught in schools.  The Ontario government recently announced that this would be a subject that would be included in the 2020 curriculum which would be a win-win situation for both children and their parents enabling children to achieve a more stable financial future.  Other provinces across the country are now also making financial literacy a priority in schools. 

According to Doretta Thompson CPA Canada's financial literacy leader, "financial wellness is a continuum from knowledge, to competency to confidence in making sound financial decisions". "Kids who learn the basics of budgeting, saving, credit and wants versus needs are better prepared to make good financial decisions through post secondary education and beyond." In BC a new provincial curriculum was introduced in 2019 after it was shown that a number of students were graduating with a lack of financial skills.

Experts believe that talking about money and financial management goes beyond dollars and cents, it is also about making choices and being aware of the trade-offs those choices require.  The classroom setting gives children the opportunity to ask questions about money such as creating a budget to allow them to save up for a toy.  It is important that teachers are comfortable teaching financial literacy especially if they are struggling in their own financial situation.

Teaching money management in school is a good foundation for kids to learn but it is important that parents engage with their children about what they are learning.  Other strategies for parents including giving kids an allowance and teach kids about spending and saving, involving them in family financial decisions where appropriate for their age and reviewing the kid's first pay stub to make sure that they understand about deductions and taxes.

Although it can be difficult for parents to discuss money with their kids it is a good idea to use every day examples to teach about money in a way that make it relevant to them.  Examples can pop up all the time such as when grocery shopping or getting gas. 

From an article by Ethan Rotberg

Over-contributed to your TFSA or RRSP? Here’s what you should do.

By Randall Orser | Investments , Personal Finances , Personal Income Tax , Retirement

It can be an easy mistake to over contribute to your TFSA or RRSP especially if you have an amount automatically contributed each month. If you find that has happened to you there are some basics that you should know to remedy this situation.

RRSP Contributions

The penalty for RRSP over contributions is 1% per month for each month that you are over the limit.  The CRA  does allow you a $2000 grace amount for over contributions but that amount is not tax deductible.  The best way for you to correct an overpayment is to withdraw the amount, though it will be subject to taxes.  You will be able to claim an offsetting deduction if you meet certain conditions (link to CRA Website).  The main condition is that you make sure the the over contribution is withdrawn in the year that it was made, the year in which you receive an assessment for the year of contribution, or in the year following each of these years.

If you meet the conditions for offsetting deduction you can have withholding tax waived on the withdrawal by filing form T3012A.  If you don't do this then the tax withheld at source can be claimed as tax paid on your tax return.  It is very important to keep track of your RRSP contributions and make sure that you withdraw any over contribution so as to penalties that may arise.

TFSA Contributions

Over contributions to TFSA's happens often especially when people have multiple accounts in different banks and they lose track of those accounts over time.  As the limits allowable have varied depending on the year it can become really confusing to contributors.  Two common mistakes are:

  • Replacing a TFSA withdrawal in the same year - if your contribution limit has already been reached you have to wait to replace a withdrawal until January in the next calendar year.  This often happens when the TFSA account is used in the same way as a savings account with repeated withdrawals and contributions which can create an over-contribution as withdrawals do not lower the contribution limit.
  • When a TFSA balance is transferred to another institution, if this is not done as a direct transfer it will be counted as a second contribution and the withdrawal amount will not be added to your  TFSA room until the following year.

TFSA over contributions are 1% per month over the term of the over-contribution until the year end based on the highest excess amount for the month.  There is no $2000 grace amount as with a RRSP and penalties for over contribution must be paid by June 30th.

For more information on TFSA contributions see the CRA's TFSA Guide (RC4466) which also provides you with a RC343 worksheet  for you to keep track of your contributions and withdrawals.  It is also important to review your notice of assessment that you receive from the CRA which states how much contribution room that you have in your TFSA and RRSP for the current year.  It is a good idea to compare the CRA amounts with your own records.   In addition you can get a copy of your contribution history from the CRA's My Account service.

From an article by Denise Deveau

Financial Considerations for First Time Home Buyers

By Randall Orser | Investments , Personal Finances , Personal Income Tax

The Covid-19 pandemic has not stopped people from wanting to buy a home for the first time.  However it is necessary to do some long term planning including preparation for the unknown before taking the plunge into the housing market.

Canadian house sales rebounded by 63% month over month in June showing that the real estate market seems to be holding steady despite the financial problems that the pandemic has caused.  However the Canada Mortgage and Housing Corporation (CMHC) predicts that home prices will fall up to 18% due to job losses, declining income, stalling construction and it has now tightened lending restrictions.  Despite this, Canadians are still feeling optimistic about the real estate market mostly due to the all time historic low interest rates.

If you are thinking about purchasing your first home you should consider the following:

1.  Adjusting your expectations - even if you are relatively unscathed by the pandemic and still have stable employment it is a good idea to weigh your needs against what you want to own and adjusting your expectations.  For example do you really need a single detached home?  If you are working remotely would living outside of the city where property is usually cheaper to buy be an option?  Do you really need a backyard? if not would a condo work for you?  Making adjustments to your expectations will help you to better assess what you can comfortably afford while maybe retaining some of your savings.

2.  What you can afford should be based on your lifestyle not low interest rates. You should not be stretching yourself beyond the limits of what you can really afford while still retaining your lifestyle.  Though low interest rates are a plus for many the CMHC says it is important to consider the losses that you may suffer should house prices decline. Making a bigger downpayment will help to protect you against these possible future losses. 

3.  Align your budget - make sure your budget is realistic and something that you can stick to. Use it to determine the down payment that you can make while accounting for your expenses and leaving some money for savings.  You should consider your cash flow and liquidity and make contingency plans preparing for a worst case scenario such as job loss or unexpected costs.   It is important to maintain your savings rather than relying on credit to help you pull through difficult times.  

4.  Plan for hidden costs - purchasing a home involves a lot more than just your down payment, mortgage payments and the interest rate and you need to be prepared for these extra costs.  These include:

  • Closing costs - legal and administration fees which can account for 1.5 to 4% of the purchase price, land transfer tax, and title insurance.
  • Upfront costs - such as property inspections, condominium fees and mortgage default insurance if required.
  • Less obvious expenses that may vary depending on where you live but for new developments can include infrastructure, planning approval and zoning fees.  It is advisable to seek legal advice to review this type of purchase agreements as the fees can mount up and it is important to set some preset limits on what they are going to be.
  • Additional expenses - besides property taxes, utilities and insurance homeowners should also have a fund to cover repairs and other unexpected costs that pop up.

From an article by Sophie Nicholls Jones

4 Tricks Wealthy People use to Reduce Taxes – you can try them too!

By Randall Orser | Investments , Personal Finances , Personal Income Tax

The more money you have the more tax planning you can do with it, but you don’t have to be in the top 1% of income earners to incorporate these tried and true tax strategies into your own planning.  

You might think that the wealthy have all the answers to making more money while reducing their tax bill.  From using offshore tax shelters to trust funds it seems the opportunities for them dodge the tax man are endless.  Tax lawyer Dale Barrett says  "There are numerous legal ways for the average tax payer to reduce their taxes depending upon the amount of money that they have to work with and their present and future employment status.  If you are a wealthy person or corporation you can take advantage of different tax structures and levels, but even if you are not part of the 1% you can still incorporate some of the tried and true tax strategies in to your own planning."

Sheltering Investment Income

For any Canadian with the ability to save money, the government makes available two main ways to shelter income - Registered Retirement Savings Plans (RRSP's) and Tax Free Savings Plans (TFSA's).

Contributions to a RRSP are tax free so that you don't have to pay any tax on them in the year that you contributed so it is a good idea to put away the maximum that you can into your RRSP.  There is no tax on your gains until the age of 71, at which point the taxpayer must start to withdraw their funds, which is treated as taxable income, but for many people their income will be much lower than when they were working meaning that they will pay less tax.

The money that you contribute to your TFSA is post-tax income and any interest, dividends or capital gains in it are tax free for life so you do not have to pay tax not your withdrawals.  Wealthy Canadians also use these ways to shelter money but they usually max out the amounts that they contribute every year.  However they go further by using TFSA's to fund for their children once they reach the age of 18 for them to put into their own TFSA's thereby transferring wealth intergenerational and keeping all the investment income tax free.

Incorporating

Many wealthy Canadians run a business to take advantage of lower tax rates, business write-offs and tax deductible individual pension plans.  If you are self employed or doing freelance or contract work it is worth considering incorporation depending upon your income.  If you are using all the money that you are bringing in then incorporation is not ideal for you.   However if that income even from a small side business is extra for you then incorporation is worth thinking about for the benefits.  In 2019 the small business tax deduction rate was 9% after the federal tax abatement meaning that you would have been taxed at the lower corporate  rate on your income.  The downside to incorporation is the amount of money that it costs to incorporate, and the accounting costs to do financial statements and tax returns which can run into the thousands of dollars.  So you have to decide if spending that is worth it for the tax benefits you will receive.

Income Splitting 

This is a an effective strategy for wealthier Canadians in the highest tax bracket, but there are benefits for the average Canadian.  If one spouse is in a higher tax bracket they can transfer some of that taxable income to another family member including children in a lower tax bracket.  

Permanent Life Insurance

Most people are familiar with term life insurance which covers you for a set time.  Permanent life insurance, on the other hand, lasts for life. This life insurance comes with an investment component that grows free of annual taxation.  Unfortunately most people are not able to afford this as it is sometimes 6 to 10 times the cost of term life insurance.  It is however an additional investment option for those who have already maxed out their RRSP's and TFSA's.  

Whatever your income if you have done a good job of your tax planning you will acquire some savings that will be beneficial to you even if it is not the thousands and millions that the wealthy have earned from their investments.

From an article by Julia Mastroianni Financial Post

What Your Tax Accountant Needs to Prepare Your Income Tax

By Randall Orser | Business Income Taxes , Freelancing , Home Based Business , Investments , Personal Income Tax , Small Business

When it comes to income tax preparation, there are do-it-yourselfers and there are those who have their income tax prepared by professionals.

For many businesses, having a professional such as a tax accountant prepare their income tax returns is the most sensible option. We don’t all have time to become income tax experts and income tax mistakes can be costly. So why not hire an expert to get the job done right and cut down on tax time anxiety?

To do the job right, though, your tax accountant or other income tax preparer will need to have all the right tax records at hand – preferably organized. Use this checklist to get your records together for your tax accountant.

Business Records Your Accountant Needs

· Revenue and business expenses for the year

· Business use of auto

· Auto operating expenses

· Vehicle driving log with business kilometres driven

· Asset additions

· Business use-of-home details

Your tax accountant will also need any tax records such as:

· Last year’s Notice of Assessment

· Amounts paid by installments

· A copy of your income tax return filed last year (if you’re a new client)

Other records your tax accountant will need will depend on whether you’re asking him or her to prepare a T2 (corporate) or T1 (personal) income tax return.

If the latter, your tax accountant will need all the relevant information slips and tax-related documents. Here are some of the most common:

· T4 slips (if you have employment/business income)

· T4A commissions & self-employed

· T5013 Partnership Income

· T3 Income from Trusts

· T5 Investment Income

· RRSP contribution slips

· Charitable donations

· Medical and dental receipts

· Child care information

Save Money on Your Tax Accountant’s Fee

Accountants generally charge by the hour, so the harder you make their job, the more it will cost you.

Summarize and tally records wherever possible. Cheques, invoices, business expenses - all should be categorized and totalled. Sort all your information slips by type. Having your tax accountant do the organizing and tallying is the expensive way to go.

If you have several businesses, remember that you will have to have separate revenue and business expenses figures for each business, as business income should be listed by individual business on the T1 form.

Be as organized as you possibly can. For example, clip groups of receipts together by type and put a post-it-note stating what the category is on the top. The less your accountant needs to figure out, the less time she’ll be spending on your file.

And remember, having a tax professional prepare your income tax return(s) isn’t costing you as much as you think when you see the bill – it’s a legitimate business expense.

Personal Finance New Year’s Resolutions

By Randall Orser | Budget , Investments , Personal Finances , Personal Income Tax , Retirement

The start of a new year is the perfect time to take stock of your financial situation and see how you can make changes to improve it.   You need to make firm resolutions to help you get closer to your financial goals whether it be saving for retirement, a down payment for a house or starting a business.  Here are some considerations that you might want to add to your resolutions list. 

RESOLVE TO DO BETTER IN 2020 – Identify the financial mistakes that you made in 2019 and how you could have avoided them so that you are armed with that knowledge to help you avoid making the same mistakes in 2020.

Prioritize Your Debts – Make a list of all your debts and organize them according to the annual interest rate.  Plan to pay off those with the highest interest rate first, these will probably be your credit cards.  It makes no sense to save money in an account with a low interest rate when you are paying high rates of interest on your credit cards. You might want to also think about selling any assets that you might have such as matured savings bonds and using the money to pay off high interest debts. 

Open a Registered Retirement Savings Plan – It’s never too late to start saving for retirement.  Meet with a financial planner and let them advise you about the right plan for you.  Even if you only contribute $50 a month it soon starts to add up and any contributions will help to lower to your income tax bill. 

Rebalance Your Investment Portfolio -  Meet with your financial advisor to ensure that your investments are still working for you, and that once attractive investments are still that way or no longer appropriate.  If your financial goals have changed then you may need to rebalance your investment portfolio.  

Set up an Automated Savings Plan – If your willpower to save money is not too great then consider setting up an automated savings plan with your bank.  “Paying Yourself First” is one of the most effective ways to save money.  With an ASP a specific amount of money will automatically be transferred to your savings account at regular intervals before you have the chance to get your hands on it.  With regular deposits like this earning compound interest your savings will grow faster.

Collect Your Change – You may think that this is not a great way to save money, but you could be surprised!  Whenever you pay with cash save the change or take the money that you get back from recycling bottles and cans at the store and put it into a jar. At the end of the year take the change you have accumulated and use it to pay down debt.  

Commit to No Spend Days – Plan on taking regular no spend days or weekends, eat at home, find free entertainment and skip shopping.  This is probably best done during cold and rainy weather that makes you want to stay indoors.  Maintain the habit throughout the year to get the best financial benefit.

Get Healthy Without Joining a Gym – Save money on expensive gym memberships by doing free exercise videos on-line, working out at the park or taking winter hikes.  There are a number of free apps such as Fitbit Coach and Nike Training Club that you can use to do workouts at home.

Cut Back on Your Bad Money Habits – these usually include eating out too much and buying too many clothes. Identify what makes you want to indulge in your bad habits and try a different activity to replace it.  If you eat out too much try prepping your meals for the week on Sunday and ask friends and family to help you. 

Start Using Personal Finance Software -  This will enable you to keep track of where your money goes.  If you don’t know how much you spend on coffee, haircuts, movie tickets or eating out how can you start to cut your spending?

Read a Financial Book Regularly -  Some books recommended for Canadians are:

Personal Finance for Canadians for Dummies (2018) Eric Tyson

Millionaire Teacher (2nd ed 2017) by Andrew Hallam

Wealthing Like Rabbits by Robert R Brown

Worry Free Money (2017) by Shannon Lee Simmons

Happy Go Money (2019) by Melissa Leong

The Value of Simple (2018) – John A Robertson

The Latte Factor (2019) David Bach

Retirement Income for Life (2018) Frederick Vettes

The Worst Financial Mistakes that you can Make

By Randall Orser | Budget , Investments , Personal Finances , Retirement

When people are working on their budget or long-term financial plan, they are making changes to their spending. There are some common mistakes that people make when handling their finances that can come back to bite them in the future, but there are steps that can be taken to fix these mistakes.

  1. Thinking that things will work out ok in the end – putting your head in the sand and thinking that things will magically work out means that nothing is going to change.  You have to create a solid plan to save and to follow a budget which will determine how and when you will spend your money.  It is important to know that budget and financial plan are not bad words! 
  2. Relying on your credit cards to get by -  if you do this a few times it might not be too difficult to get out of debt, but if you make it a habit then you are liable to rack up a lot of debt in a short period of time.  Emergencies can and do come up unexpectedly, so you need to be prepared by starting an emergency savings fund.   If you have that you will not need to use your credit card for emergencies.   You need to make a goal to pay off your credit card and to not use it for the next year.  If you do use it make sure to pay it off each month.  
  3. Failing to plan for retirement – you should be making regular contributions to your retirement plan even if you are in your twenties.  The earlier you start the longer you will have for your fund to grow and benefit you in the long run.  Contributing to  a Registered Retirement Savings Plan is also a good way to save on your tax bill.
  4. Giving in to pressure to take the next big step – milestones in your life will affect your financial situation, such as getting married, a career change, buying a house or starting a family.  Only you can decide when you are ready to take these big steps so do not let friends and family rush you into something that you are not ready for otherwise you might resent the step that you took.  

From an article by Miriam Caldwell

Reasons Why Start-ups are Riskier Than Franchise Businesses

By Randall Orser | Investments , Small Business

Thinking about starting your own business?  It is always a risky thing to do and most budding entrepreneurs will do a risk assessment to determine how much financial risk they are willing and able to take. One big consideration is whether to launch a startup business or buy into a franchise.  They both have their pros and cons which mostly involve the potential business person.  Start-ups appeal to people who want to make their own decisions about how the company operates and those who want to turn their big idea into a million-dollar business. 

However, risk assessments have shown that undeniably start-ups are much riskier than investing in a franchise.  Here are some reasons why:

  1. In a start-up you have to build your own brand from scratch.  This is difficult, time consuming and costly and most new business owners lack the resources to do the work so consequently they are only able to grow their business within their own circle of family, friends, and acquaintances or their business fails.  Franchises come with an already built brand which is familiar to a wider audience, this includes slogans, logos, signage, buildouts, team apparel and more.  This means that prospective customers are already familiar with the product or service making it much easier to make sales right from the start.
  2. When you start your own business, you may get lots of advice, but if this is your first time in business you may make mistakes that can be costly.  If you have a franchise, you can draw on the advice and experience of other owners who have experienced the same problems or had the same questions.  The franchise business will teach you how to do things the best and most profitable way.
  3. If you start your own business you have to write your own business plan, sell your idea to prospective investors and banks and try to estimate how much money you will need to establish your business as well as to survive while it is getting off the ground.  If you buy into a franchise, they will help you to draw up your business plan and can often assist with finding financing.   They will also be able to let you know exactly how much money you will need to become a franchise owner.
  4. You will need supplies as well as legal and accounting support to operate your business.  If you buy a franchise can often offer this kind of support in-house or recommend third-party vendors.  In addition, they can often secure products and services for franchisees at a discount due to the volume that they purchase.
  5.  Franchise owners have a support system from corporate teams, regional directors and from fellow owners that can be critical to the success of their business.  Other owners have been there and can offer detailed help to work through problems.  When you start your own business, you are pretty much on your own.
  6.  Starting your own business requires learning how to choose the best location, hire and train staff, market your business and do bookkeeping.  As most new owners are busy doing the work and are not experienced in doing these tasks the new business can easily fail.  Franchise businesses have operational systems already in place and are able to clearly explain to prospective franchisees the types of skills they will need to be a successful owner.

Franchise businesses do come with their own risks and there are no guarantees of success. However, for a prospective new owner who lacks business knowledge and experience a franchise business is a good idea to mitigate risks.

Need Help With Your Return? Where to Get Answers to Your Income Tax Questions

By Randall Orser | Investments , Personal Finances , Personal Income Tax

The April 30th deadline is rapidly approaching.  If you are in a panic about your tax return and need answers to some questions, here are some places you can go for help.

1.  If your tax return is complicated it is always best to get a tax professional such as Number Crunchers® to complete it for you. We know all the ins and outs of tax returns and we can answer your questions and make sense of the chaos.

2. If you still want to go it alone, get a Canadian Income Tax Package.  This used to be mailed out but can now be downloaded and printed from the CRA Website.  The package includes line by line instructions to help you to fill out your return.

3. Head to the CRA website at http://www.cra-arc.gc.ca/formspubs/tpcs/menu-eng.html to find forms and publications by topic.

4. The CRA has an automated Tax Information Phone Service (TIPS) for personal and general tax information.  To find out more go to http://www.cra-arc.gc.ca/esrvc-srvce/tps/menu-eng.html.  Before calling you need to make sure that you have the following information on hand: your social insurance number, your month and year of birth and the total income that you recorded on line 150 of your 2017 return.

5. Tax information for individuals, businesses, charities and trusts can be found at http://www.cra-arc.gc.ca/ndvdls-fmls/menu-eng.html

6. Phone Inquiries – you can reach a CRA representative by calling 1-800-959-8281 but expect to wait a while to talk to someone, they are extremely busy at this time of year.  They do have extended evening and weekend hours up to April 30th, (9am to 9pm local time during the week and 9am to 5pm Saturdays local time) and they do suggest calling Thursday or Friday when the phones are usually less busy.

7. For help with CRA online services you can go to their E-Service Help Desk at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/menu-eng.html.

8. If you need help with a very basic return that does not include bankruptcy, deceased individuals, capital gains or losses, employment expenses or business or rental income and expenses there are Volunteer Income Tax Preparation Clinics offered by the CRA.  These are only to help people who meet their basic eligibility requirements such as maximum income levels.  For more information about locations go to http://www.cra-arc.gc.ca/tx/ndvdls/vlntr/menu-eng.html

Do you Know the Difference Between Tax Havens and Tax Shelters?

By Randall Orser | Investments , Personal Finances , Personal Income Tax

Though both tax havens and tax shelters are used by wealthy people to reduce their income tax payments there is a big difference between the two.

Tax Haven is a locale anywhere in the world that has lax tax laws.  This country will often charge very low or very reduced tax rates.  Many multinational corporations take advantage of the benefits of tax havens creating subsidiaries to shield their incomes from taxation. Tax havens can also provide offshore banking services to non-resident companies and individuals.  Foreigners can easily form an international business corporation or offshore corporation which will often be given tax exemption for a set period of time.  

Because of the strict privacy laws enforced by most tax havens owners of these “shell” companies often remain unknown.  Although tax havens are technically legal the CRA frowns upon them and the public has a poor view of companies carrying out offshore banking activity.  Switzerland is the most well-known tax haven, but others include the British Virgin Islands and Luxembourg.

Tax Shelters are commonly used by all taxpayers as a method of legally reducing their tax burden through the use of specific investment types or strategies.  These are often temporary and require a future income tax payment, but they are useful for those wanting to reduce their tax payments during the years when their earnings are highest.  The two most popular tax shelters in Canada are Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSPs). 

The TFSA was started by the government in 2009 and it allows anyone over 18 to earn investment income tax free up to a set maximum per year.  In 2009 you could contribute up to $5000 which increased to $5,500 per year in 2013 with and $10,000 for one year in 2015.   This allowance is cumulative so that if you had not contributed by 2017 you could invest up to $52,000 and in 2019 your total investment allowance Including an increase to $6000 per year will be $63,500. You can withdraw from your account anytime during the year, but you cannot replace it until the following year unless you have sufficient contribution room for it to be considered an additional contribution.

RRSPs - You can contribute to your RRSP each year up to a limit based upon your income and deduct it from your taxable income.  You will only pay income tax on your investment and the interest it earns when you make withdrawals from your RRSP.  If you have a properly structured investment portfolio you will be able to take advantage of the low tax rate on capital gains and dividend income outside of your RRSP while it shelters your higher taxed investment income.

RRIFs - A Registered Retirement Income Fund is a tax-deferred retirement plan for your RRSP. RRIFs are used by those who do not plan to withdraw their RRSP as a lump sum when they retire but take smaller withdrawals.  RRIFs offer more flexibility and tax savings than lump sum withdrawals, but you must withdraw a minimum each year and report it for tax purposes.  You may withdraw more if you wish at any time.  The CRA will set your minimum withdrawal for each year according to a schedule which will start at 5.28% at age 71 in 2019.

For more information about TSFA’s, RRSP’s or RRIF’s consult your investment advisor or the CRA website 

 

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