Monthly Archives: September 2017

Half of us fear rising interest rates will be negative for our finances

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Now that interest rates have finally appeared to bottom, consumers are starting to worry about the prospect of rising rates and their impact on their personal finances.

This is explored in my latest article, which is in Monday’s Financial Post (e-paper and online). You can access it by clicking on this self-explanatory highlighted headline: Only a quarter of Canadians have a  rainy day fund, but more than half worry about rising rates.

It describes a new Forum Research Inc. poll that shows more than half of Canadians (51%) fear rising rates will negatively impact their personal finances. The national poll of 1,350 voting-age adults was conducted after the Bank of Canada raised the prime interest rate from 0.75 to 1% on September 6th, which in turn followed an initial 0.25% hike in July.

After an amazing run of nine years of ultra-low interest rates, it’s clear consumers are starting to fret the party is over. Anyone with variable-rate mortgages might well be petrified that interest rates could again reach the high teens, as they did in the early 1980s. Little wonder that many homeowners are starting to “lock in” to fixed mortgages while rates are still relatively low.

Of course, as Credit Canada’s Laurie Campbell notes, for the longest time it’s paid to stay variable and flexible, whether with a variable-rate mortgage or a line of credit. It does cost a bit more to “lock in” to fixed mortgages, as Campbell notes, but the ability to sleep well at night in my opinion more than makes up for the difference.

While the poll asked specifically how consumers felt about the second hike, “they are worried more are coming,” Forum Research president Lorne Bozinoff told me. 12% say the negative effect will be extreme. However, 17% believe rate hikes will have some positive aspects:  you’d expect debt-free seniors to welcome higher returns on GICs and fixed-income investments. Another 38% don’t think it will have an effect either way.

Lorne Bozinoff

A quarter have no emergency savings at all

Bozinoff is more concerned that 26% of respondents have no emergency savings, and 40% have a cushion of a month or less: 9% have less than a month and 11% just a one-month cushion.

Financial planners generally recommend three to six months as a hedge against job loss or other setbacks. A minority do: 14% have two to three months, 9% four to five months, and 13% six months to a year. Only 15% have a year or more and predictably, 56% of the latter group are 55 or older. Continue Reading…

Liberal tax changes would spark exodus of Canadian entrepreneurs

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By David J Rotfleisch, CA, CPA, JD

Special to the Financial Independence Hub

The proposed changes to the Income Tax Act that the Minister of Finance, the Honourable Bill Morneau, has released have real-world implications. The consultation period ends October 2, 2017, so now is the time to make your voice heard. Call or email your member of Parliament, or Minister Morneau directly.

I recently had a meeting with a high-tech entrepreneur in an internet-based business. He is very conservative and has not carried out any tax planning. His wife helps him but he does not do any income splitting with her. He has about $1 million in his corporate bank account for possible business use, but has not invested it and just earns minimal bank interest. The hype about the proposals has caused him to take notice of his tax affairs and meet with me.

I told him that under the new proposals income splitting with his wife, other than a fair salary for services performed, will be prohibited. His wife will probably not be able to participate in the lifetime capital gains exemption. If he decides to invest his retained earnings, there may be an additional tax on his income. He is now thinking about lifestyle and whether he wants to leave the country. I fully expect to prepare a memo for him about becoming non-resident.

Minister Morneau’s proposed tax changes will have the effect of causing an exodus of Canadian entrepreneurs for more business-friendly jurisdictions.

I had lunch with accountants a few days ago and they reported the same types of conversations with high-tech clients. They are considering leaving the country. Now, some won’t because of the education of their children, to be close to aging parents, adult children,or because they like their Canadian lifestyle. Others will decide it’s more important to maximize after-tax income and that it makes sense to move offshore.

70% of Canadians work for firms with 100 or fewer employees

Remember,  statistics show that the vast majority of Canadians — 70 per cent — who are the economic engine of this country, work for companies with between 1 and 100 employees: the very targets of these new measures, and who are able in many cases to pack up and leave.

This is not just the view of tax professionals. Ryan Holmes, the CEO of social media internet company Hootsuite, was reported as saying on Sept 14, 2017 that the proposals are causing a lot of concern to business owners and that “I think you need to be very favourable at the small end of the market.”

I was recently contacted by a Liberal MP who is very opposed to what his government is doing. He has an entrepreneurial background and he realizes the impact of these proposals.

Continue Reading…

Women have distinct financial planning needs

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Marie Philips

By Marie Philips

Special to the Financial Independence Hub

The financial assets controlled by Canadian women as well the income earned by women is projected to grow significantly over the next decade.

This increase in wealth will result from a greater overall participation in the work force, higher level professions, an increase in female entrepreneurship and being the beneficiaries of a large share of the $1 trillion wealth transfer that is underway in Canada.

By 2026, women in Canada will control close to half of all accumulated financial wealth, roughly $900 billion in financial and real estate assets. That’s a significant increase compared to a decade earlier, when the share was closer to one third.

Yet according to a recent white paper published by IPC Private Wealth in collaboration with Strategic Insight, almost two  thirds of financial advisors (85% of whom are men) do not believe a female client should be viewed in any different light than a male client.

If we look at some of the concerns women have, we can see that there are distinct financial planning needs for women compared to men. Life expectancy at birth now means mortality in 2015 is 84 (80 for men).  Women live longer and are likely to have interrupted careers as a result of family responsibilities (children and caring for elderly parents) which all lead to potential lower available savings for retirement income.

Caregiver women more likely to end up in poverty

Research shows that women caregivers are likely to spend an average of 12 years out of the workforce raising children and caring for an older relative or friend.  Continue Reading…

Right side of the tracks: most affordable commuter Neighbourhoods

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

It’s a given that home buyers will pay a premium to live within big city limits: close proximity to work, lifestyle benefits and a comparatively healthy job market mean homes within a municipality’s core are in high demand.

While the concept of moving to further-away communities with lower real estate prices isn’t new, the suburbs near Canada’s largest cities are becoming a buying destination for home seekers at a faster pace. For example, homes within the Greater Toronto Area’s 905 region have appreciated 56.96 per cent over the past years, fueled by demand from spillover buyers from the 416.

This trend is mirrored on the west coast, where popular commuter cities Maple Ridge, Pitt Meadows and New Westminster have appreciated 6.5, 72.8 and 73.4 per cent, respectively.

Car commute costs add up

However, a long-standing argument against “driving until you qualify” is the opportunity cost of longer commutes. Those who choose to drive to an office in the downtown core need to factor in the cost of purchasing and maintaining one or more vehicles, as well as insurance, gas and parking. For this reason, neighbourhoods closest to well-serviced transit lines, such as rail, light rail or bus lines, tend to appreciate in value faster than their car-accessible-only counterparts.

“The cost of owning and operating one or more personal vehicles greatly outweighs the cost of taking transit,” states the Metro Vancouver-commissioned “Housing and Transportation Cost Burden Study”. It found the average auto-related commuter costs range from $13,500 to $17,700 annually, a “significantly higher amount than the average annual transit costs.”

That makes a pretty strong argument for suburban buyers to stick close to local transit stations when buying. But what regions provide the greatest value vs commute cost? To find out, Zoocasa crunched average home prices and transit pass prices in Canada’s two largest housing markets: Toronto and Vancouver. (Please refer to the infographic at the top of this blog.)

Toronto commuters could save $395,667

That’s the difference between purchasing the average home in the 416 compared to one in Malton, the most affordable neighbourhood located along the GO Transit Line, which services the majority of the Greater Toronto Area with commuter trips to downtown Union Station. Continue Reading…

5 common senior financial traps and how to avoid them

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Scott Terrio’s Twitter feed (@CooperTrustee) reads like a financial horror story. Terrio, an insolvency expert at Cooper & Co. in Toronto, uses the 140-character medium to share the multitude of ways seemingly well-off Canadians end up buried in debt and turning to debt consolidation, consumer proposals, and even bankruptcy.

Canada’s record household debt levels have been a cause for concern for years, but Terrio sees a new problem on the horizon. Canadian seniors are the demographic increasing debt at the fastest rate.

Take Dorothy, an 81-year-old widow who owns a home with a 1st mortgage from a secondary lender. She refinanced a couple of years ago to do house repairs ($18,000), assist her son with divorce legal fees ($37,000), and to help her grandson with tuition ($8,500).

When her partner died she was no longer able to make the mortgage payments. A friend from church referred her to a mortgage broker.

The broker suggested a reverse mortgage,  which would let her stay in her house without the monthly mortgage payment. But the money from the reverse mortgage wasn’t enough to pay out the 1st mortgage after fees and penalties. She needed a private 2nd mortgage at 12 per cent to pay the balance.

Dorothy co-signed a $26,000 car loan for her nephew and co-signed with her son for funeral expenses ($12,000) for her partner. Her son stopped paying, so Dorothy was pursued (100 per cent).

She then ran into tax trouble by not having tax on her OAS & CPP deducted for the first few years. She owes $21,000 in tax, much of it penalties and interest.

This scenario is becoming more common among seniors today.

“Many are in a unique quandary. They’re asset-rich, but cash-poor. Cash flow is tight. Pensions are fixed, and many have underestimated retirement costs,” said Terrio.

So what do they do? Many seniors cash out assets to make ends meet. Others raid their home equity and take out lines of credit. All have financial consequences.

We asked Terrio to share the top financial traps seniors fall into and how to avoid them:

1.) Tax problems

Most seniors were used to being paid by their employers in after-tax dollars. At pension time, many don’t have taxes deducted to offset their Old Age Security and Canada Pension Plan income and therefore end up spending taxable pension income.

Continue Reading…