Lower gas prices can mean really big TFSA savings!

Many Canadians have grown accustomed to low mortgage rates and strong residential pricing, and now the price of gasoline is leaving a few more bucks in our pockets.  Don’t get too comfortable, because history teaches us that none of this is sustainable.  It is circumstances like the present that make seasoned money managers anxious.  While neophytes are happy to carelessly bathe in the sunshine, experts are usually getting ready for the next storm.  What can you do?  With lower gasoline prices providing some extra cash flow why not use the cash to bolster your savings?

One cloud on the horizon has been getting some attention of late.  The massive global financial stimulus that has caused interest rates to remain low for so long has had a predictable impact on our collective behaviour.  Canadians have borrowed money like there’s no tomorrow.

Household Debt vs Disponable IncomeAccording to data from Statistics Canada, our total borrowing has been on a steady incline since 1990, while servicing the debt has been eating away at our disposable income.  Sure, we tightened our belts some during the financial crisis, but the temptation to borrow at low rates has just been too much to overcome.

It is difficult to save money, when so little of one’s income is disposable.  And most financial advisers would recommend that it doesn’t make a whole bunch of sense to save money at all when you owe money.  It makes far more financial sense to pay down your debt.  Based on numbers alone, this is sound advice.  But our behaviour is seldom governed by numbers alone – we are indeed a complex species.

For example, contributing to your RRSP provides a tax savings in the same year your contribute right?  So where does it go?  A strictly numbers analysis espousing the merits of RRSPs would certainly factor in those savings to illustrate how effective they are at growing your wealth, but I am inclined to agree with the Wealthy Barber (David Chilton) who frequently points out (and I am paraphrasing here) that those dollars you supposedly ‘saved’ were most probably squandered, not saved.  If the tax savings were indeed invested, then it is true that one’s net worth might grow.  However the iPhone, piece of furniture or other consumer good bought with that tax refund hardly qualifies as savings now does it?

Does it make any sense at all to save when wallowing in debt?  I would argue most emphatically YES!  According to an IPSOS Reid poll published in October:  “The average working Canadian believes they would need $45,609 in savings to sustain themselves for a year should they be off work due to illness.”  Where would this money come from?  In real life, a portion of it would be required for food and lodging yet some of it will be needed just to pay the mortgage or rent.  I’d bet that the average Canadian polled would no doubt have seriously underestimated the amount needed to live on while not working (for whatever reason).  In the same poll roughly 68% admitted to having some or lots of debt – suggesting that 1/3rd of Canadians have none?  Pardon me if I suspect that a good percentage of those polled might also have been too embarrassed to answer candidly even if their responses remained anonymous – we are Canadians after all and loathe to taint our conservative image.

Now is an ideal time to bump up your savings!

Where will the extra cash come from to begin a more aggressive savings program?  Let’s start at the gas pump.  We all feel a bit of relief simply watching the price of gasoline come down when fueling, but has anyone really considered how much they might now be pocketing because of lower energy prices?  In April of 2014 Canadians were paying a near-record $1.50 per litre.  Just 6 months ago the price of gasoline in Toronto was 139.9 cents a litre and today (I am writing this on December 10) it is 103.9 cents.  That’s a whopping 25% decrease.  Say a motorist was spending $50 in after-tax dollars a week.  If they price of gas simply stays at 103.9 the cost savings are $12.50 a week which is equivalent to $650 of annual savings requiring about $1000 of your pre-tax income.  If there is more than one vehicle in a family? Let’s keep it simple and assume $1000 in annual family savings simply from the lower gasoline price.  Never mind that other energy costs (heating) and transportation costs (flights) will also create savings.  What if you simply invested that amount every year and earned a rate of return on it?  It will grow to a handsome sum.  Unfortunately, you will have to pay taxes on those returns but more about that later.

Growth in $1000 annually

 

Of course it’s unreasonable to expect gas prices to remain at these levels or fall lower.  It is also not wise to anticipate more generous rates of return.  In point of fact, it is foolhardy to expect or anticipate anything at all.  Returns will be what they will be, and gas prices are determined by market forces that the experts have trouble understanding.

Does the uncertainty we must live with mean that savings might just as well be spent on the fly?  As I tell students studying to be financial planners; one must start somewhere and there are two things worth acknowledging up front:

1)  The power of compounding (letting money earn money by investing it) is very real, as evidenced by the table.

2)  It makes sense to have a cushion in the event of a loss of income, the desire to pay down some debt, make a purchase or just retire.

Yes it makes more financial sense to have no debt at all, but the majority of Canadians will borrow for those things they want now rather than later, like a home or car.  If you must borrow, why not save as well?  Fortunately we have been gifted the perfect savings vehicle.  The Tax Free Savings Account introduced in 2009 has advantages that make it an ideal place to park money you are saving at the gas pump.  The returns you earn in the account are tax-free.  With GIC rates as low as they are, you might be inclined to say ‘so big deal?’ But any financial adviser over 45 years of age (I admit, there aren’t many) can tell you that low interest rates are temporary, and besides you can and will earn better returns over the longer term in equity mutual funds just as an example.

TFSA Contribution LimitsOf course there are limits (see table) to what you are allowed to contribute, but best of all they are cumulative.  In other words, if you haven’t contributed your limit since 2009, you can ‘catch up’ at any time.  Including 2014, you have a right to have put up to $31,000 into the account.   Also the contribution limit rises (is indexed) over time with the rate of inflation.  Perhaps most important, you can withdraw money from the account tax-free.  Your contributions were already taxed (there’s no tax deduction when contributing like when you put funds into an RRSP), and the investment returns are all yours to keep.  Using your TFSA means that won’t have to pay those taxes and the effects of compounding aren’t diminished.  To top it off, you are allowed to replace any money you’ve withdrawn in following years.

The seasoned money manager will want some flexibility in the event that he is blindsided.  With your TFSA savings you too will enjoy more flexibility.  If interest rates are higher when you renegotiate your mortgage, taking money out of your TFSA to reduce the principal amount might help reduce your monthly payments to affordable levels.  Should the economy take a turn for the worse over the next several years and you lose your job, then you’ll have some extra cash available to retire debt and help with living expenses.  For younger Canadians saving money at the gas pump? Investing the extra cash flow in your TFSA account will certainly help towards building a healthy deposit for your first home.

  • Don’t squander the cash you are saving thanks to low energy prices.
  • Your TSFA if you have one, allows you to invest those savings and the returns you earn are tax free.
  • If you don’t have a TFSA, then get one.
  • Be sure to use only qualified investments and do not over-contribute. The penalties are severe.
  • Money earned on your investments is tax-free.
  • Take out cash when you need it, and put it back when you can.
  • When you retire, money withdrawn from your TFSA does not count as taxable income.

 

Mal Spooner is a veteran fund manager and currently teaches at the Humber College School of Business.
Mal Spooner is a veteran fund manager and currently teaches at the Humber College School of Business.

 

 

 

 

 

 

 

 

 

 

 

 

 

To Be or Not to Be – (or which is better, pay-off the mortgage or buy an RRSP?)

Lee and Daphne are asking this very question – which is better for them? They are aware of the huge interest cost on their mortgage but also would like to be able to retire in their late 50s or early 60s. Can they do both at the same time or must they choose?

Through diligent saving before they purchased their condo, their mortgage is only $150,000. They are able to afford higher-than-normal payments so decided on a 20 year term at a fixed rate of 5.0%. Over 20 years, they will pay about $87,000 in interest, assuming rates don’t change of course. If they decide to make a principal payment of $6,000 on each mortgage anniversary, they would pay it off in 11 years and reduce their interest cost to about $46,000. In theory, they would then begin contributing that same $6,000 to their RRSPs after the mortgage was paid. But is this the best option?

They are both 30 and by waiting until age 41 to start their RRSP contributions, and assuming they are able to obtain a consistent 7.0% rate of return each and every year up to age 60, they would accumulate about $230,000. Really a very modest amount. At current rates that could pay them a lifetime income of about $1,300 per month. Even including OAS and CPP at current maximum rates, and applying the effects of inflation for 30 years up to retirement and beyond, this is not going to be much of a lifestyle.

So let’s examine this more closely. To pay down their mortgage by $6,000 annually, this young couple has to earn just over $9,100 before taxes (BC rates are used for 2013). If they made $9,100 annual deposits to RRSPs after the mortgage is paid, and using the same 7.0% interest assumption, they could have nearly $350,000 at age 60 – which could mean a monthly income of about $2,000, again based on current rates. Better – but not by very much.

So, by doing some reverse math, if the agree to pay off the mortgage in 15 years and starting with $9,100 of pre-tax earnings, they could deposit $6,800 into their RRSPs every year starting now. The estimated tax savings (in BC at 2013 rates) would be about $2,300. This $2,300 is then used as the annual prepayment on their mortgage. The mortgage would then be paid in full after 15 years with interest paid now being about $64,000. By putting $6,800 per year into RRSPs now and increasing it to $9,100 when the mortgage is done, they would accumulate nearly $710,000 at age 60! At current rates, this would provide a lifetime income of nearly $4,100 per month!

To summarise, their choices come down to 3:

a) Eliminate the mortgage in 11 years by making $6,000 annual principal payments then put the $6,000 into RRSPs each year until age 60. This reduces total mortgage interest to $46,000 and has an estimated total RRSP savings of $230,000 and an income of about $1,300 per month at age 60.

b) Pay off the mortgage in 11 years and then start RRSP deposits of $9,100 each year until age 60. The mortgage interest still totals $46,000 but their RRSP totals $350,000 and a potential lifetime income of $2,000 per month. Better than the first choice, but they can still do better.

c) Finally, they could decide to clear the mortgage in 15 years by contributing $6,800 to RRSPs each year and applying the tax savings of $2,300 to the mortgage principal. When the mortgage is gone, they then increase their RRSP deposits to $9,100 per year. Mortgage interest will total about $64,000, but their RRSPs can grow to $710,000 and generate about $4,100 per month.

Time to think things through – Lee and Daphne decided that choice c) gives them the best of both worlds. While option c) does result in higher interest paid on the mortgage and extends the payment period from 11 to 15 years, there is a very significant difference in both their RRSP savings and potential lifetime income. This does require they pay about $18,000 more in interest but their RRSP total more than TRIPLES – increasing by $480,000 and their retirement income goes from $1,300 per month to $4,000 per month.

Doesn’t it make sense to do this same series of calculations on your mortgage? Happy crunching!

2014 Resolutions – is it too early?

2014 Resolutions – is it too early to plan ahead?

Yes, it is only late October. No, no-one likes to make resolutions as most people fear the self-recriminations if they fail. So let’s call them guiding principles for 2014 instead!

1. Avoid credit to the greatest extent possible. Special offers arrive weekly in our mail box – many from institutions with which we already have a business relationship but also some of the “Dear Occupant” variety. And they all sound so tempting. Loans, lines of credit, new credit cards – the choices seem endless – and sooooo easy. For lifestyle items (toys, vacations, etc.), the wanton use of credit can be a death knell for your financial well-being. It is tough realising you are still paying for that vacation 6 months after you return and that 60 inch flat screen is rapidly losing its attraction a year later and the “interest free” purchase is starting to cause cash-flow problems.

2. When you decide you absolutely MUST borrow, shop around and keep your calculator handy. Of course, it is difficult to completely avoid debt. HOWEVER, when you do have to borrow, generally, the lower the interest rate the better it is for you – but beware of the so-called “interest-free” payment plans. NOTHING in life is free – don’t be fooled. The vendor isn’t making that offer without covering all of their costs in some manner. Maybe it is an “arrangement” or “set-up” fee; maybe the actual price is higher than normal. The seller has costs that have to be covered and they aren’t in business to intentionally lose money.

3. Pay off debts as quickly as possible. Especially credit card balances! In some cases, they can carry a rate as high as 2.4% per month compounded. That is nearly 33% annually –and yes, it is a usury rate as far as I am concerned – but tell that to our Federal politicians! To put that in real terms, a $1,000 purchase carried on a credit card for a year will actually cost nearly $1,300 in total. For a home mortgage, the shorter the amortisation period, the better off you will be. Go to www.mortgagecalculator.org and play with some numbers yourself – this site also produces some nice graphs for picture-lovers.

4. First, pay YOURSELF, not everyone else. Usually, we have too much month left over after our pay-cheque. If we wait to save money until everything else is paid, there’s never anything left. If we don’t see it, we don’t spend it. Talk to HR (yes, I know they are sometimes interesting people) and arrange to have something deducted from each pay cheque to buy Canada Savings Bonds – this is just one alternative. Some businesses will split your cheque and deposit part into one account and another sum into a different account – perhaps a savings account. Make sure you contribute monthly to your RRSP or TFSA. We make loan payments each month so why not make financial future payments the same way?

5. Plan for your future. If good things are to happen to us, we have to plan – the future will not take care of itself. We have to plan for long term goals such as education, retirement and major purchases. And let’s not forget emergencies such as unemployment, a falling economy, disability or death. We can’t rely on our employer and certainly not any level of Government – which leaves only a Fairy God-Mother. We must take action ourselves.

Talk to a financial advisor about your plans today!

Canada’s most flexible and legitimate tax shelter!

In 2004 I wrote a book (with my friend Pamela Clarke and published by Insomniac Press) called Resources Rock: How to Invest and Profit from the Next Global Boom in Natural Resources. Since taxes are fresh in everyone’s mind at this time of year, I thought I’d reproduce a chapter in the book that explains one of Canada’s most flexible and robust tax planning tools. It’s not widely understood but has the advantage of being 100% legitimate – it is written right in our tax code. Here’s the chapter:

“Certainty? In this world, nothing is certain but death and taxes,” said American scientist Benjamin Franklin over two hundred years ago. The only difference these days is that while death is still final, taxes can be deferred or reduced. Canadians didn’t always have to worry about taxes. Income tax was introduced as a temporary measure (sounds like the GST saga) to help cover the country’s military expenses during World War I. By 1948, the wars were over, but the government decided to not surrender. Instead, the Income War Tax Act became the Income Tax Act. Since then, Canadians have had to declare income from all sources, including capital gains on the sale of investments or property. We’re allowed to deduct some expenses and there are a few tax credits, but by and large, there aren’t too many opportunities for us to reduce our taxable income. Taxes are steep and vary greatly depending on where you live.

But that’s not all. You pay tax on everything you earn as well as on everything you buy. Take the price of gas, for example. It was pumped up to over $1.40 a liter in some provinces and more than one-third of the price was taxes: provincial sales tax, GST, and something called the Federal Excise Tax. It hurts even more if you consider that you’re paying for the gas taxes with after-tax dollars. Ouch.

One of the best means of minimizing the pain is to take advantage of all the tax deductions that you can. Standard ones include childcare expenses, family support payments, moving and medical costs, and of course, RRSP contributions. Unfortunately, not too many taxpayers are familiar with the deductions that are available from investing in the “flow-through” shares of junior Canadian resource companies, or ventures that qualify for the Canadian Exploration Expense (CEE). You should consult your tax advisor for precise information on the benefits of these deductions for your portfolio, but in the meantime, here’s a brief introduction to these tax-deductible investments.

Buried deep in the Income Tax Act (Section 66 (1) to be exact) there’s a clause that says:

“A principal-business corporation may deduct, in computing its income for a taxation year, the lesser of (a) the total of such of its Canadian exploration and development expenses as were incurred by it before the end of the taxation year…”

The Section goes on ad nauseam, but only tax accountants need to get into that level of detail. What you do need to know from the clause is that most junior energy and mining companies spend all of their money on exploration programs and usually have little or no revenue. Because they have virtually zero income, they’re not able to use all the tax deductions that they’re entitled to as a resource exploration company. Mining companies are allowed to deduct prospecting, drilling, geological or geophysical expenses, but if they don’t have any revenue, then these deductions remain unclaimed or“wasted”.

In a rare moment of generosity, the government decided to allow exploration companies to give up those tax deductions and pass them on to people who can use them. Companies can bundle the tax deductions with their shares, then sell them to investors and use the proceeds from the sale of these shares to finance their exploration projects. The ventures don’t mind selling off their unused deductions. If they can’t afford to keep digging or drilling, they’ll be out of business anyway. These deductions, sold as shares, are called “flow-through shares” because they transfer the tax deductions from the company to the investor.

In other words, the government allows a tax deduction that would usually only be granted to an exploration venture to be passed on, or “flow-through,” to their investors. It’s a win-win situation as the company gets the money to finance their exploration work while investors can claim up to 100% of their investment as a tax deduction. The government created this program as a means of encouraging people to invest in resource exploration companies. That’s nice of them, but given our incredibly high tax rates, it’s a good idea to understand how investing in exploration—either in flow-through shares, or in shares of a limited partnership that owns a portfolio of flow-through shares—can help you lower your taxable income.

Investors can buy flow-through shares directly from a company, or own them indirectly by purchasing units in a limited partnership specially created to buy shares in a portfolio of several junior exploration companies. Buying units in a limited partnership can be beneficial for individual investors because it gives them the tax deduction from the flow-through shares, in addition to reducing their investment risk. A limited partnership can usually buy a much greater variety of flow-through shares than an individual investor could afford to purchase on their own. Therefore, investors in a limited partnership end up owning shares in a basket of startups, rather than just in one venture. Given that a lot of exploration companies could go bankrupt or walk away from their projects, buying shares in several of them minimizes the risk that you could lose your entire investment. The answer varies from one investor to another, but as long as the exploration company – or companies if they’re in a portfolio owned by a limited partnership – spends all the money they raised from selling flow-through shares on eligible exploration expenses, then almost the entire amount invested in the shares can be deducted.

A word of caution: Don’t let the tax appeal of flow-through shares affect your decision-making skills as an investor. Remember that even though the tax deductions alone are beneficial, you’re still investing in the riskiest side of the resource industry. It is possible for you to lose all your money if the exploration team repeatedly comes up empty-handed. On the other hand, investing in an exploration startup by means of flow-through shares does mitigate the risk of losing your investment to some extent. Depending on your marginal tax rate, the after-tax cost of buying the flow-through shares (or portfolio of flow-through shares) is virtually cut in half, compliments of the government .

In the Economic Statement and Budget Update of October 18, 2000, the Minister of Finance announced a temporary, 15% investment tax credit (applied to eligible exploration expenses) for investors in flow-through shares of mineral exploration companies. Oil and gas exploration companies were excluded. This announcement introduced a credit, known officially as the Investment Tax Credit for Exploration(ITCE), which reduces an investor’s federal income tax for the taxation year during which the investment is made. Although deemed ‘temporary’, after expiring at the end of 2005, the credit was re-introduced effective May 2,2006 and is currently subject to annual review.

The ITCE is a non-refundable tax credit that can be carried back three years or carried forward twenty years. So if you invest in flow-through shares (of mining exploration companies only) this year, you can use the deduction any time up to 20 years in the future, or back three years. It’s a real bonus being able to use this deduction when you need it the most. Keep in mind, however, that the ITCE has to be reported as income in the year after you claimed the tax deductions from the flow-through shares. The only downside is that when you sell your investment, or trigger a “deemed disposition”(which means the government thinks you’ve unloaded the investment even if you haven’t actually sold it), then you’re on the hook for capital gains tax. That’s not so bad, as capital gains tax rates are better than regular income tax rates.

Let’s look at how these tax credit programs can help you reduce your taxes. For example, if you live in Ontario and your annual taxable income is $300,000, and you’re taxed at the highest marginal tax rate of 46.41%, then you’d pay $139,230 in tax. (Of course, to make it simple,we’re unrealistically assuming there are no personal exemptions or other allowable deductions and that all income is taxed at the same rate.) If you invested $50,000 in flow-through shares, and the entire amount qualified as a CEE, then 100% of your investment could be deducted from your taxable income. Your taxable income is reduced to $250,000 and you now owe $116,025 in taxes—a savings of $23,205! That’s a nice chunk of change that stays in your pocket.

It can get even better. If a part of your investment in flow-through shares is with companies that are exploring for metals and minerals that are eligible for the Federal Investment Tax Credit, you’ll get an additional tax credit of $7,500. That extra credit would cut your total tax bill down to $108,525. In a perfect world, you could save yourself $30,705 in taxes. Serious money by any standards.

In addition to these federal government programs, there are several provincial flow-through initiatives that we won’t address here as they vary tremendously from one province to another. Flow-through shares are starting to sound like they’re the best discovery since Chuck Fipke dug up some diamonds in the Northwest Territories. As wonderful as they are, keep in mind that since money is made and taxes are paid in the real world, things aren’t always as rosy as simplified examples in a book on investing. Before buying into the example above, remember that:

  • Taxes Vary: Everyone pays taxes on a sliding scale, so not all of your income is taxed at the top marginal rate.
  • Diversify: Your entire portfolio should never be solely invested in just mineral exploration stocks—diversification is advisable even for investors with an incredibly high tolerance for risk.
  • No Guarantees: An exploration company is obligated to spend 100% of the money it receives from selling flow-through shares on expenditures that qualify for tax deductions, but if for some reason it doesn’t, then you can’t claim 100% of the deductions.

The bottom line is that there are many variables that will influence the impact of flow-through shares on your tax situation. Investment advisors can provide details on the limited partnerships or flow-through shares that are available in the market today. Ask them to help you research and screen limited partnership funds so you end up investing in a portfolio of companies that meets your investment objectives.

That’s the end of the chapter, and before you say this is more complicated than it’s worth let me excessively simplify and round in order to provide an example of how powerful this tool can be.

Imagine you’ve sold an income property for $500,000 and long ago used up your personal capital gains exemption. To keep it simple, you are not subject to minimal tax and are at the highest marginal tax bracket which I will round to 50%. Let’s ignore all the other deductions and stuff too. Your options are:

1. Report the proceeds as income and let the CRA (government) keep half of your money.

2. Invest the entire sum in one (or more) flow-through limited partnerships.

Let’s examine #2. The $500,000 can now be deducted against income, so your taxable income (money going to CRA) is reduced – you keep half at 50% tax rate or (roughly) $250,000. So far you’re no worse off right? Even if your get nothing back (I’ve never seen this happen personally and I’ve managed dozens of these funds myself) you’re no worse off.

Say after two years (the lifespan of most of these funds) you get your whole investment back (it happens). Once the fund is wound up your $500,000 is now subject to capital gains tax (roughly 25% rather than 50%) so you’ll net $375,000. Isn’t keeping the extra $125,000 for yourself worth the effort? Whether you end up with half that amount, or double you are still ahead.

By the way, when a flow-through limited partnership is ‘wound up’ your money is usually rolled into a more liquid mutual fund – you can leave some or all the the money in there and not pay the capital gains taxes until you redeem. If you can afford it, use the tax shelter every year and watch your tax savings grow over time. You will have to pay a tax accountant (since filling out the tax returns correctly is critical and often you have to re-submit them when you receive additional or more precise information from the fund company after-the-fact), and seek advice from a good investment advisor. If either of them tells you not to do it without a really good explanation….it’s because they don’t understand them or want to avoid the added work. Find someone else.

Mal Spooner

 

The Scariest RRSP Story

Will you put money into your RSP before the deadline? Are you going to rush over to the bank or your advisor to do that? Then I’ll ask you to remember Jack the pilot’s story as you contribute to your RSP. It will throw you a new curveball and your financial future may not be the same.

Jack was a pilot and had a sizable RSP account. He and his wife Helen were going through a separation. Jack wanted to keep his portfolio intact. He decided to let Helen have their home, and he would keep the investments. Jack signed a separation agreement, and a divorce proceeded uncontested.

Jack later remarried and had several children with his second wife. Jack’s second wife predeceased him and Jack revised his will. He wanted everything to go to his children. Unfortunately, Jack died without revising his designated beneficiary of his RSP.

Jack had invested over $300,000 in his RSP. The tricky part was that it was still designated to his first wife, Helen. Here is the trouble this caused his estate.

Jack left the RSP to his first wife

Helen received the full $300,000 from Jack’s RSP. Unfortunately, this generated a tax liability to his estate of approximately $150,000 for the RSP.

Well, I know you’re asking: isn’t there a tax-free rollover of a RSP to a qualifying spouse? Does this not give Jack a tax deferral if he leaves a RSP to a qualifying spouse?

Yes, but the problem was that Helen was no longer a qualifying spouse. She was Jack’s first wife. Therefore, there was no tax deferral or rollover possible for Jack’s estate.

The worse news is that Jack’s children paid the taxes of $150,000 from his estate. That tax bill left very little for Jack’s children whom he intended to benefit.

The scary part

All of this could have been avoided. All Jack had to do was check the designated beneficiary of his registered plans. Whenever there is a separation, death or divorce you need to revise your designated beneficiaries.

Could Jack have made a new designation in a will? Possibly. But to be a valid designation it is necessary for Jack to make reference to the institution and the RSP account number.

When banks merge or branches close, these designated particulars are changed or are lost. When a bank branch closes, oftentimes paper or electronic records will not always match Jack’s intended beneficiary.

Who is responsible for this RSP mistake?

Only Jack has the right to obtain this information. He must keep it up to date to reflect his estate plan. It is not enough for Jack to make a will. His will must reflect how he owns or has designated his property.

As a lawyer, I do not include any designations for registered plans in any wills. I do this so my clients can cheaply and easily change their designated beneficiary. They do not have to pay a lawyer to change their will. That is the cost benefit of controlling your designated beneficiaries.

The scary part is if you fail to keep the designated beneficiaries up to date.

Then your loved ones may end up with a horror story.

Estate Planning Steps to Take

1. Remember Jack the pilot as you contribute to your RSP.

2. Ensure your RSP holder confirms the name of your designated beneficiary in writing.

3. Make sure your designated assets match your beneficiaries under your will.

About Edward Olkovich

Edward Olkovich (BA, LLB, TEP, C.S.) is a nationally recognized author and estate expert. He is a Toronto estate lawyer and Certified Specialist in Estates and Trusts. Edward has practiced law since 1978 and is the author of Executor Kung Fu. Visit his website, mrwills.com, for more free valuable information.

© Edward Olkovich 2013

 

 

A ridiculous idea – but profitable!

My mind works in strange ways as my readers know – so here is another slightly off-beat idea on RRSPs – for children!

I took the time recently to confirm a long-held belief – most people selling RRSPs aren’t aware of all of the possibilities – and neither am I for that matter – however, here is an idea that no-one I asked had the slightest understanding of that which I was asking. My question was simple (or at least I thought so anyway): “What is the earliest age at which a person can purchase an RRSP?”

Without exception, I received answers that fell within this brief summary – “the year after they have earned income.”

I found this a bit disconcerting, particularly coming from many professional advisors. The correct answer, of course, is the same day the receive their SIN from the Federal Government. In other words, within 3 to 6 weeks after they are born.

But wait you say – they don’t have any earned income so how can they contribute?? My response – what about the lifetime $2,000 over-contribution limit? I usually receive a puzzled look from the person with whom I am speaking and then they say: “what about it?”

Let’s be a wee-bit creative here – I am NOT a rocket scientist I assure you – my mind just works somewhat differently than most other peoples’!

These days, parents and grandparents spend literally thousands of dollars on toys and other gadgets that have life spans counted in days and weeks and maybe months – but that’s it. What about a gift that will GROW with each passing year?

Rather than all of the toys and related odds and sods, put $2,000 into an RRSP for the baby as soon as the parents receive an SIN. The actual source of the money is irrelevant of course – but the concept is sound.

If a baby has an RRSP with $2,000 in it at age zero and leaves it until age 65, it will grow to $18,713.40 assuming a compound growth rate of 3.50% and as much as $25,597.47 with a compound growth rate of 4.00%. I will leave it to my readers to play with other assumptions – my purpose here is just to get people thinking about the possibilities of acting on this idea.

The $$ amount doesn’t sound like a lot – and it really isn’t – but it is certainly worth a lot more than the toys and gadgets that are generally purchased for a new-born child in their first year of life. What a special Christmas gift (oops – don’t want to be politically incorrect!) – holiday season gift – for the new one in your life!

All the best to everyone for a wonderful and SAFE holiday season and a prosperous 2013! Cheers Ian

2012 Taxes – some quick reminders

With mid-December upon us, I wanted to just do some quick reminders for year-end!

a) Don’t go into debt on credit cards just because it is Christmas!
b) Tax Free Savings Accounts (TFSAs) – to use your 2012 allowable limit, you must contribute BEFORE December 31st, 2012. There is no 60-day grace period as there is with RRSPs and Spousal RRSPs. The TFSA limit increases for 2013 to $5,500.
c) Registered Educations Savings Plans (RESPs) – similar to TFSAs, there is no 60-day grace period to get your contribution into the plan for 2012 purposes and obtain the maximum Canada Education Savings Grant (CESG).
d) If you need to maximise your 2012 Medical Expense Claim, and need prescriptions refilled, glasses or contact lenses ordered or maybe hearing aids purchased – do them now before December 31st, 2012 or you won’t be able to use them for your 2012 tax return claim. Also consider any needed dental work.
e) Charitable donations also run on a calendar-year basis so mail those cheques now or do it on-line. Remember, once you have donated $200. in a tax year, the Federal Tax Credit on all donations in excess of $200. increase from 15% to 29%!
f) For those of us who are self-employed and are considering when to purchase software upgrades, software updates (for programs that are income-tax sensitive) or new hardware, consider purchasing them now – some very good deals are available and thy should count toward 2012 allowance business expense deductions. The same applies to car servicing or repairs that are due – including switching to your snow tires!
g) For students, pay for your 2013 tuition fees before the end of December and the deduction can be applied to your 2012 tax return – particularly if you have income from a part-time job.

Be happy, be safe and look forard to a happy and successful 2013! Cheers

Year-end tax planning – not too early!

Yes, I know it is just October 1st – 3 months to go but now is the right time to begin your year-end tax planning. Why? Avoid the rush and decisions made in haste tend to be either wrong or not sufficient.

I will start with RRSP and Spousal RRSP plans – start adding up any contributions you have already made in 2012 – going right back to January 2012 (yes, I know you probably claimed some or all of the January, February and March 1st contributions on your 2011 tax return), but get the detailed list anyway and then get your copy of your 2011 Tax Return and Notice of Assessment (NOA) and cross off contributions that were deducted and then compare your remaining deposits to your maximum Allowable RRSP Contribution Limit from the bottom of page 2 of your NOA. Plan now to make as many deposits as you can before year-end so your top-up cheque in early 2013 doesn’t put your bank account into over-draft.

Generally, deposits to RRSPs and Spousal RRSPs should be made into accounts for the spouse with the lowest potential post-retirement income (from all sources) so you can take maximum advantage of income-splitting opportunities.

TFSAs – Tax Free Savings Accounts – these operate on a CALENDAR-year basis – there is no 60-day grace period into the next tax year – so decide on what you can comfortably afford, and get it in now and where possible, ensure contributions end up in the hands of the spouse with the lowest potential income at retirement even though withdrawals from TFSAs are tax-free.

Charitable donations may or may not be part of your life, but if you are going to make them, now is the time to get them in so you can check to make sure you get your deductible receipts – sometimes they tend to get lost in the year-end crush – no receipt, no claim. So take the time check. Tax receipts can be claimed by either spouse so it doesn’t matter in whose name the receipt is issued.

Investment income can be planned and controlled within certain limits. Check with your financial advisor or planner to determine if you are going to have reportable losses that can be used to offset some or all of your gains. No-one can estimate year-end results – particularly in the current market conditions, but you can start to get a handle on where you currently sit and then arrange to meet with your advisor no later than the first week of December to make your final decisions about triggering losses or gains!

Medical and dental expenses are another important consideration as these also operate effectively on a calendar-year basis. If you know that you are going to need prescriptions re-filled or dental work completed, make sure you get them done before year-end so that you will have the maximum allowable claim – subject to the usual threshold of 3% of earnings.

We will look at other year-end issues and opportunities over the next few weeks. Cheers!