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Maximize your returns through asset location

March 26, 2015 in Tax Strategies

pie-chart Do you know the real rate of return on your investments? Generally, Canadians measure the success of their investments based only on the rate of return. While this provides a good snapshot of whether an investment is doing well or not, it is not the only criterion for a true picture of success. A good portfolio is based not only on the return, but also by the tax implications of the investments.

Investors can optimize their real rate of return by utilizing effective asset location strategies to reduce tax exposure. Carefully dividing your investments between registered and non-registered portfolios will help to maximize your overall return. Keep in mind, investment income inside your Retirement Savings Plans (RSP) is tax postponed and is not taxable at all in a Tax Free Savings (TFSA). Everything outside of these investments will have an income tax implication you need to be aware of.

Understanding how your investment income is taxed goes a long way in determining where to invest your money. Investment income falls into three main types. Each has different tax treatment when held outside your registered investments:

Interest income has the highest tax rate of the three regardless of your income. Whether you receive the interest or let it compound, it is fully taxable.

Dividend income is taxed more favourably than interest income. It is important to remember that there are exclusions like income from rent, royalties and foreign dividends.

Capital gains income is also taxed favourably as only 50 percent of the gain is included in income for tax purposes.

An Ontario resident, for example, whose income falls into the highest marginal income tax bracket would pay over 46 percent tax on interest income, over 26 percent on eligible dividends , and over 23 percent on capital gains if these investments are in a non-registered account. Tax rates vary by province.

If these three incomes are within a registered portfolio such as a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF), the taxes are postponed until you begin to make withdrawals and are then fully taxed at your marginal tax rate.

It would be great to have your entire portfolio in an RSP or TFSA, but each has certain contribution limits. If your portfolio includes fixed income securities, you could take maximum advantage of keeping these within an RSP or TFSA for tax shelter purposes. If you have reached the limits of your tax sheltered investments, any equity investments that produce tax-preferred income (capital gains and dividends) would be suitable to include in a non-registered account.

Tax implications should not be your sole motivating factor when choosing your investments. Try to gear your investments so they are suitable for your specific situation and risk tolerance, then focus on the best tax efficiency. – M Dumond

9 things you need to know about RRSPs

January 22, 2015 in RESP

Registered Retirement Savings Plans (RRSPs) have evolved into the most popular savings vehicles in Canada since being introduced in 1957. It is important to be aware of the key features of RRSPs in order to maximize the benefits:

Income Tax Savings – First and foremost, it may go without saying that any contribution to RRSPs can result in an immediate tax savings. These deposits are deducted from the contributor’s income at the highest tax rate they must pay first.

RRSP2 Tax-Postponed Growth – Any growth than an RRSP earns does not attract income tax until it is actually withdrawn from the plan. This maximizes the benefit of compound interest.

Income Splitting – When income is taken from an RRSP after age 65, an election can be made on the tax returns of a married or common-law couple to split qualified income between them. This generally means a lower overall income tax bill, in many cases significantly lower.

Deferred Deduction – A contributor can choose to make a deposit to an RRSP but delay deducting all or part of it until a later tax year. This makes sense if income in a future year would put them into a higher tax bracket. In the case of someone who receives a financial windfall and has unused contribution room, a large deposit can be made initially and deductions from income only used to reduce their highest taxed income in several future years.

New Home Purchase – If certain conditions are met, funds can be withdrawn from an RRSP tax-free and used towards the purchase of a new home. The funds need to be paid back into an RRSP within fifteen years or they may become taxable.

LLL plan Education Funding – The Lifelong Learning Plan (LLP) allows you to withdraw amounts from RRSPs to finance full-time training or education for you or your spouse or common-law partner. You cannot participate in the LLP to finance your children’s training or education, or the training or education of your spouse’s or common-law partner’s children.

Instant Tax Break – If you are making regular contributions (say, monthly) to an RRSP, you can apply to the Canadian Revenue Agency (CRA) to get permission for your employer to deduct the RRSP contributions from your income before calculating the amounts that need to be withheld and remitted.

RRSP Loans – Many contributors borrow to invest in their RRSP close to the annual deadline. They then use their tax refund to reduce or pay-off the loan.

Name a Beneficiary – You can name a beneficiary and, in some cases, a secondary beneficiary for an RRSP on death. This means funds can be paid directly to that person or persons and avoid the delays and cost of being processed in your estate.

adress man2 It is wise to work with someone experienced in the area of RRSPs and retirement planning to help set up and monitor your program. Avoid making RRSP decisions at the last minute because of the deadline. A well planned strategy can mean retirement comfort. -M Dumond

Telephone: 705-798-2105
Toll free: 888-722-3604

10-10-10-10-60

December 10, 2014 in Estate Planning, GIC, Insurance, RESP, RRSP, Tax Strategies

No, this is not a John Lithgow long-distance plan commercial. Remember these numbers, however, when allocating your paycheque.

All too often, people experience financial stress when something happens and they haven’t done a proper job of allocating their income. Ideally, an allocation plan will become a habit that leaves you prepared for just about any eventuality. Here’s how:

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10% for Lifestyle Protection – Disasters happen and most rarely make the news. You have likely experienced at least one already. Very few people are in the financial position where they can cover the cost of an event without the help of insurance. Use life insurance to cover debts, last expenses and income replacement on death; vehicle insurance to cover the costs of damages or injuries; property insurance to replace lost or damaged property; critical illness insurance to help recover from a serious illness; disability insurance to replace a portion of your income if you can’t work because of illness or injury; travel insurance if you become ill while travelling outside your province or country.

10% for Savings – There will come a time when you will need funds for a certain event in your future. Put aside these funds regularly for things like education, home down-payments and, perhaps most importantly, an emergency fund. Eventually your savings should be at a level that will allow you to allocate some of these funds to other things.

10% for Investing – An investment is something that will generate an income, either right away or sometime in the future. This includes retirement savings, a business, income generating real estate, or funds that generate a regular income.

10% for Giving – There are financial benefits to you for giving to charity. The first $200 generates a non-refundable tax credit or 15%. Everything above that, within limits, gets a credit at the top tax rate no matter what tax bracket you are in. In Alberta, for example, the maximum credit is actually 50% which is 11% higher than the maximum tax bracket of 39%.

60% for Lifestyle – This is where everything else comes from – your home, your vehicle(s), your food and clothing, your vacations, your entertainment and hobbies. All too often, this portion gets too much income allocated to it and is the first to suffer when something goes wrong.

Your income is what makes your lifestyle possible. However, if your income stops due to illness, injury or death, will there be adequate funds for you and your family to maintain your lifestyle? Will your resources be adequate if you experience a short period of unemployment, when a child is ready for post-secondary education, or if you need legal help with an unforeseen problem? Will you have enough independent income in the future or will you have to keep working at a time when you would have preferred retiring?

If you don’t have a problem tipping a server 15% to 20%, why not pay yourself a little better than that? – M Dumond

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Susan McArter
Certified Financial Planner

How to benefit from using a financial advisor

December 4, 2014 in Estate Planning, Insurance, RRSP, Tax Strategies

In This Issue

Lifestyle Protection
Estate Planning
Retirement Planning
Tax Efficiency
Team Leader

The results of a recent poll reported by Fidelity Investments stated that 71% of retirees who worked with a financial advisor have the retirement they were hoping for. Of those retirees who did not use did not use an advisor, only 53% have the retirement they had hoped for. Additionally, 52% of pre-retirees expect to continue working in retirement, and 48% of working retirees do so for financial reasons.

If you are serious about achieving your financial objectives, chances are you need a financial advisor. He/she will help you identify your unique problems and define your goals in specific, measurable terms. Then your advisor will provide detailed recommendations that can help you reach your goals.

Some advisors work for fees only. Since fees can run into thousands of percent dollars, fee only advisors are usually employed by the more affluent. Some advisors are compensated entirely by commissions earned on the financial products acquired through them. Others use a combination of fees and commissions to provide a more affordable service.

No advisor, no matter how much they are paid or how good they are, will magically solve all your financial problems. The aim is to help you define your goals, establish their order of importance, and show you how to achieve them.

What can a financial advisor do for you? Here are some key benefits:

Lifestyle Protection – We all face the same risks in life that can disrupt our lifestyles,

namely death, disability, old age, and employment interruption. Your advisor can help you measure these needs and put in place appropriate plans to minimize their effect on you and your loved ones.

estate-planning2 Estate Planning – Just as you wouldn’t expect your home to be built by someone who didn’t use blue prints, don’t expect your family to take care of your affairs without clear written plans for the event of your death or illness. Your advisor can also work with other professionals who will help you with important estate documents and strategies.

Retirement Planning – After determining your risk tolerance and calculating your retirement income needs, your financial advisor can recommend appropriate savings plans to help you reach your goals. He will also regularly review your plans to make sure you are still on track.

Tax Efficiency – Every Canadian has the right, perhaps even the duty, to pay as little income tax as legally possible. Your advisor can help you arrange your finances in as tax efficient manner as possible, and make recommendations of various alternative methods to pay any income taxes that do become payable as inexpensively as possible.

Team Leader – A proper financial plan can often require the services of several professionals, including lawyers accountants and bankers. Your financial advisor can act as the leader of this team to make sure all the different parts of your overall financial plan get implemented in a timely, cost efficient manner. – M Dumond

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Tax Credits. Are you getting yours

December 2, 2014 in Tax Strategies

Every Canadian tax payer has the right to pay as little income tax as legally possible, known as tax avoidance.

The Canada Revenue Agency (CRA) has a very long and detailed list of rules, known as the Income Tax Act, which specifies what you can do to accomplish this. Straying outside these rules is called tax evasion and has severe consequences.

It is up to each individual tax payer to claim all their tax deductions and credits. If you miss any, CRA may not advise you. However, if you miss claiming any of your income, they will certainly let you know and then collect the taxes. Remember, you have the right to arrange your financial affairs in the most tax-efficient manner possible.

Pension Income Tax Credit tax credit (2)
Daphne has continued working after age 65 and postponed her pension and RRSP income until she retires. To take advantage of the Pension Credit, she converted just enough of her RSP into a RRIF to generate $2,000 per year of income.

This federal tax credit makes the income tax-free, so she deposits the money to her Tax Free Savings account(TFSA). This helps Daphne reduce her taxable income a little more when she does retire.

Make Monthly RRSP Deposits Many Canadians find it difficult to come up with a lump-sum to deposit to their RRSP each year. Ben decided to make regular monthly deposits directly from his bank account. He also submitted a Form T1213 to CRA for approval to have his employer deduct his RRSP contributions from his income before calculating his taxes. This gives Ben an instant, ongoing tax break.

Children’s Fitness Amount

You may be able to claim up to $500 per child for fees paid that relate to the cost of registering a child in a prescribed program of physical activity. The child must have been under 16 years of age (under 18 if eligible for the disability amount) at the beginning of the year in which an eligible fitness expense was paid.

Public Transit Amount

You can claim the total amount paid for public transit passes, or for the cost of the passes for multiple transit systems. This includes the cost of monthly passes or longer duration such as an annual pass for travel on public transit. There is specific criteria required to support your claim.

Canada Employment Amount

If you reported employment income, you can claim the lesser of $1,051 and the total of the employment income you reported. The Canada employment amount provides recognition for work-related expenses such as home computers, uniforms and supplies. Sorry, self-employed individuals are not eligible for this amount.

Home Buyers’ Amount

You can claim $5,000 for the Home Buyers’ Tax Credit (HBTC) if: rrsp-home-buyers-plan

•you or your spouse or common-law partner acquired a qualifying home; and

•you did not live in another home owned by you or your spouse or common-law partner in the year of acquisition, or in any of the four preceding years (first-time home buyer).

Tradesperson’s Tools Deduction

You may be able to deduct the cost of eligible tools you bought to earn employment income as a tradesperson (including apprentice mechanics). This cost includes any GST and provincial sales tax, or HST, you paid. You may be able to get a rebate of the GST/HST you paid. Certain conditions apply.

Individual Tax return filing and tax due

Returns and tax payments for individuals are due by April 30 of the year following the tax year. Self-employed ( and their spouses) may file their returns by June 15th, but any tax due must be paid by April 30.

Not intended as specific income tax advise. Rules may change please consult with your tax advisor. – M Dumond

How is your group life insurance?

November 17, 2014 in Insurance

Owen is married and has two children. He has been working at the same company for over five years and relies heavily on his employee group plan for his life insurance needs. A new single co-worker got the same benefits after only 90 days and Owen wonders if his group insurance can let him down.

O group wen learned that group benefit plans treat all employees the same, regardless of individual needs. Coverage amounts may be determined by income, but a single worker with the same earnings will get the same benefit as a married worker with children.

Many plans offer the option of additional coverage for extra premium. However, the total amount of coverage available is limited and may not fully meet Owen’s needs.

A group employee insurance plan is a contract between an employer, union or association and an insurance company to provide protection for the employees or members. Because he is not a party to the contract, Owen has no rights under the plan other than to name a beneficiary.

The group plan can be changed at any time without Owen’s approval. His employer may decide to switch insurance companies, reduce coverage or cancel it completely. Even though he is the insured individual, Owen has no voice in these decisions.

Group insurance is year-to-year coverage. The insurance company can change the policy on the renewal date. It can increase the premiums, reduce the coverage or refuse to renew altogether.

lowcost The group insurance Owen has is low cost for two reasons. First, it covers him while he is least likely to die, while he is still able to work. Second, his employer pays a good portion of the premium. Some premiums paid for by his boss may be a taxable benefit to Owen.

When Owen quits, gets fired or retires, he will lose his coverage. Some companies, associations or unions may continue a portion of the benefits for a short time after retirement. He will get an opportunity to convert his life insurance coverage to a personal plan, but his options will be limited and can be very expensive. However, it is unlikely that Owen will feel he can afford it if he has just left his job.

Whether he is employed or not, Owen’s family will need money to pay off bills and provide income when he dies. He realizes that his group plan is a nice perk while he is working, but it does not fully meet all of his needs.

insurance3 The answer for Owen is to obtain personal life insurance now and coordinate his total coverage needs with his group plan. He will have the option of increasing or decreasing coverage as he sees fit. Owen can use it as collateral for a loan, perhaps to start a business of his own. With the purchase of a permanent life insurance policy, he can use the cash build-up as an emergency fund in the future. In short, Owen will have a policy that he controls and will be in effect whether he is working or not. – M Dumond analysis

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Why Life Insurance?

November 10, 2014 in Insurance

Life insurance is initially purchased for any of a number of reasons. As time goes by, however, many people question why they are still carrying their policies, since the original purpose may no longer apply. Only by having regular Insurance check ups will they know what their current needs are and whether their current policies meet those needs. Here are the three basic uses of life insurance:

Estate Creation – When Ralph and Alice bought their first life insurance policies, they arrived at the amount of coverage with the help of their insurance advisor. The advisor used what is knows as a Capital Needs Analysis (CNA) to arrive at the proper amount of insurance. A CNA measures how much of an estate needs to be created in the event of the death of either Ralph or Alice so the survivor can maintain their standard of living.

The CNA has three parts:

1. Cash needs at death – This includes final expenses (funeral & burial,
legal & probate, taxes); mortgages and other debts; child or home care costs; education funding; emergency fund; and, special bequests and charitable funding.
2. Income needs at death – A calculation is made to determine how much income the survivor needs to maintain or improve their standard of living. Existing sources of income are deducted from this amount to arrive at capital needed to replace any income shortfall.

3. Cash available at death – There are some plans in place already that can contribute to Ralph and Alice’s estate to offset their needs such as investments, group life insurance. They used life insurance to create the rest of their estate needs.

Estate Conversion – Ralph is a part owner in a business. He has built up substantial value in his shares and wants them to contribute to his estate value on death. However, Alice does not want to be a part owner of the business nor does Ralph’s partner, Ed, want her as a partner.

Ralph and Ed each bought life insurance to allow them to convert the value of their shares to cash for a surviving widow(commonly known as buy sell agreement). Let’s say Ralph died. There would be enough life insurance proceeds available for Ed to buy Ralph’s shares from Alice.

Estate Protection -Ralph and Alice want all of their estate to go to their children on death. As they grow their assets while they are alive they also increase the expected tax liability owing to their silent partner – the taxman.

In their case, they have postponed tax liabilities growing in their registered retirement plans, Ralph’s business and their lake front cottage. Most estate assets can pass to a surviving spouse without a tax bill, there by delaying the final tax until the second person dies. If there isn’t enough liquid money left in the final spouse’s estate to pay this tax bill, assets will have to be liquidated to pay the tax bill, there by not allowing the kids to receive all of the estate. (especially the lake front cottage). They can’t forget the funeral and legal bills.

insurance3 Ralph and Alice can use the life insurance policies they originally bought to create tax free liquidity to conserve their estate (life insurance death benefits are tax free). The tax bill will still have to be paid, but their children can use the proceeds from the life insurance, which was paid with pennies on the dollar of coverage.

This article is for information purposes only and is not intended to provide specific insurance or income tax advice. – M Dumond

Avoid these financial diseases

November 7, 2014 in Tax Strategies

There have been a number of articles that speculate on the number of advertising messages we are exposed to daily (excluding this one of course). While there doesn’t seem to be any actual scientific study, the numbers quoted are between about 250 and 3,000. Consider:

Television – The average “1-hour” TV program is only about 45 minutes of actual content. This means that about 15 minutes is dedicated to advertising. At an average of 30 seconds per commercial, you are exposed to about 30 ads per hour.

Internet – A typical web page can contain dozens of advertising links. Even with pop-up blocking active, some ads can still jump out at you.

Product Placement – One of the most lucrative ways for TV shows and movies to make money is by having recognizable products strategically placed or blatantly used as part of the story. Ask yourself, can the character, not the actor, in real life afford that $6,000 watch or $100,000 vehicle?

Branding – Everywhere you look, you see this. The badging on a vehicle, bumper stickers, company signage as you drive to and from work, even logos on our clothes. advertisement

Billboards – Technology now provides a medium to display multiple ads in 5-second intervals to grab our attention. And they can even display a video message. Sporting events are saturated with product ads as part of the venue and on the participants.

This is just a part of the reason why so many Canadians suffer from materialism and consumption today. Recent reports have shown that total debt per capita in Canada is at an all-time high and average savings rates are at an all-time low. There are steps you can take to reduce the symptoms of these diseases. They include asking the questions:

What else can I do with the money? Today you have the young you and the old you money in your pocket. If you spend all the old you money today, you likely will not have enough to retire when you want. Perhaps you have a travel dream you would prefer to make a reality.

How much did we have to earn to make the purchase? For an employee earning $100,000 annually, about one-third is eaten up by government deductions (taxes, CPP and EI). This means that to take home $1,000, you had to actually earn $1,500.

Would I really miss it in a month if I didn’t buy it today? Most of us have experienced “buyers’ remorse” at one time or another. This also gives us a chance to figure out why we really want it. want need

Will this purchase today contribute to where I want to be tomorrow? A consumer purchase almost never contributes to long-term wealth and financial independence. This includes an over-sized house. Consider that the more “stuff” we have, the more time and money it will take just to manage it. It’s way too easy to fall into the trap of buying things we don’t really need with money we don’t really have to impress people we don’t really like. – M Dumond

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Why should we insure our kids?

October 30, 2014 in Insurance

The purpose of any type of insurance is to offset possible financial losses in the future. We can learn from the following examples:

Tom and Sara had three children, two boys and a girl. One of their sons died at the age of five. Nobody wants to imagine a child dying, but unfortunately it sometimes happens. They had to borrow money to pay for the funeral and other last expenses that arose. Now, whenever they make a loan payment, they are reminded of their loss. death

Sara took some time off work to deal with her grief and to help the other two children adjust. This further strained their finances and threatened their relationship.

Grace and Kevin have two daughters and their youngest developed juvenile onset diabetes when she was 11. Fast forward twelve years and she is about to get married. Today it is virtually impossible for her to get affordable life insurance, yet she and her new husband have certain obligations they would like to cover, like a mortgage, car loans income replacement.

Ted and Lynda are excited about their son’s upcoming trip to the Middle East, but they are also concerned. Their son’s hobby is skydiving and with an extended stay overseas, he is unable to get life insurance. He also runs the risk of contracting a serious illness in the areas he will be visiting.

Sam and Debbie have two young children. Their son was struck by cancer and needed extensive treatment. As Debbie earned the higher income, Sam stayed home to help their son battle his disease.

They also needed to pay a caregiver to look after their daughter while Sam took their son for treatments and doctors’ appointments. This added further strain to their already fragile financial situation.

Life insurance can generally be purchased on a child’s life anytime after 14 days of age. A permanent type policy usually has level premiums for the child’s life and they may qualify for a non-smoker premium reduction at age 18. Some plans are designed so that premiums last only for a set number of years and coverage will remain in force for the child’s life.

Additional benefits can be added to a child’s life insurance policy. A guaranteed purchase rider allows the child to purchase additional insurance, regardless of their health, occupation or hobbies, at certain ages or on certain events, like marriage or birth of a child. A rider can be added to cover the premiums if the owner of the policy becomes disabled or dies.

Some parents and grandparents build up cash values in a permanent policy as a way to accumulate and transfer wealth to a child or grandchild. Current tax laws allow this on a tax preferred basis. child hospital

A critical illness insurance policy for a child can provide the funds needed to cover the additional costs that arise if a child gets seriously sick. – M Dumond

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Be prepared for emergencies and opportunities

October 28, 2014 in GIC, Insurance, Tax Strategies

Randy worked for a small business. When the owner died suddenly, the business accounts were frozen and it took several weeks before they could be accessed to meet payroll. Randy had trouble meeting his financial obligations and had to find a new job.

Jane worked at a small company for many years. When the owner decided to retire, she offered to sell the business to Jane. As she didn’t have the funds available, the business was sold to someone else. The new owner let Jane go shortly after taking over.

Joe and Gayle had been renting a house for several years. When the owners decided to sell, they offered it to Joe and Gayle first. Because they didn’t have enough for a down payment, they couldn’t afford to buy the house and also had to move.

emergency fund It seems that many people today are so busy living a lifestyle, they forget that emergencies and opportunities need to be dealt with. Randy, Jane, and Joe and Gayle would have been able to deal with their situations more favorably if they had established emergency and opportunity funds.

It’s all too easy to start taking one’s cash flow for granted and get lulled into the belief that it will go on uninterrupted. Many fall into the trap of trying to save money after all other payments are made. People make their wants their needs and usually, there is little to nothing left over to save. Those who are best able to handle emergencies and opportunities that arise are in the habit of paying themselves first. How do you pay yourself first? Take a little off the top and set it aside. There are many vehicles one can use, and they include:

High Interest Bank Accounts – This may sound like an oxymoron, but there are actually a few banks that offer high interest savings accounts; some with chequing privileges, too. Bear in mind that any interest earned on money in these accounts is fully taxable. However, most bank accounts are readily accessible, so it can be too easy to withdraw funds for things that aren’t really emergencies or opportunities. This may not be the best choice.

gic Guaranteed Interest Certificates (GICs) – Funds can be deposited for a certain period at a fixed interest rate. The interest if fully taxable, even if left on deposit, in the GIC. Because GICs are for a fixed period, funds may not be available at the precise time they are needed, so liquidity can be an issue.

tfsa Tax Free Savings Accounts (TFSA) – Introduced a few years ago and inappropriately named savings account, when they should have been called investment accounts due to the variety of investment that can be held. These plans allow you to earn growth on your deposits without paying taxes on it. Withdrawals can be replenished in the future and your investment choices mimic RRSP options.

Universal Life Insurance – These policies can combine protection and savings in one plan. The minimum premium is set at a level to cover the cost of the death benefit. The policy holder can choose to pay more(over fund), within certain limits, and these extra premiums accumulate on a tax deferred basis. Generally paid out as part of the death benefit, the extra deposits can also be accessed, depending on the company, by withdrawal or policy loan. – M Dumond

“When prosperity comes, do not use all of it.” -Confucius

“Save a little for a rainy day” – Mike Dumond

Monarch Wealth Corporation, Mutual fund dealer