All posts by Financial Independence Hub

Women have distinct financial planning needs

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

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…

Average Canadians stranded in storm of Liberal tax changes

By Dave Faulkner, CLU, CFP

Special to the Financial Independence Hub

On July 18, 2017, the Liberal Government announced a significant set of tax proposals designed to close certain tax loopholes that can result in high-income individuals gaining tax advantages that are not available to most Canadians, these include:

  • The elimination of “income sprinkling” by paying dividends to family members that own shares in a business or holding company.
  • The curbing of “passive investment income,” by imposing additional taxes on money sitting in a corporate investment account.
  • The conversion of a corporation’s regular income into capital gains using legal tax strategies that have been around for decades.

In recent interviews, Finance Minister Bill Morneau said that average Canadian business owners need not worry about his proposals, because if you make less than $150,000 per year you will see no increase in taxes paid. He continues to state that he is going after only the wealthiest Canadians that use corporate tax loopholes to gain advantages over the hard-working middle class. It is important to note however, that what Bill Morneau refers to as tax loopholes are in fact legitimate tax planning strategies that have been available to all Canadians for many years.

To help sell these proposals proponents of the new tax have released simple spreadsheets illustrating the impact to an individual in Ontario earning $1.00 of business income who earns over $200,000 and pays tax at the top marginal rate of 53.53%. In other words, the wealthy 1%.

As a financial planner, I know first hand that most small business owners are not wealthy. They are hard working average Canadians who are struggling to build their business, often at the cost of not being able to make regular contributions to retirement plans. As a software designer, I know first hand that simple spreadsheets do not provide enough analysis to come to any meaningful conclusions, due to the complexity of our tax system. All they do is support the opinions of the author.

So, to help bring some meaningful analysis to the position that these proposed changes will not burden middle class business owners, Razor Logic Systems has deployed a temporary version of our financial planning software RazorPlan that addresses one aspect of these proposals, passive investment income. As the largest provider of financial planning software to independent Canadian financial advisors, upon request we will temporarily make this version available to any financial writers, bloggers, the media, and Minister Morneau.

Passive Investment Income

Currently, to eliminate double taxation, a portion of the income tax a CCPC pays on investment income is refundable. In Ontario, the combined Federal and Provincial tax rate is 50.17% made up of 19.5% non-refundable and 30.67% refundable only once the income is paid to the shareholder in the form of a dividend. This effectively ensures that the tax paid on $1.00 is the same regardless of where it originated. The tax proposal aims to eliminate the 30.67% refundable portion, claiming the low tax rate on active business income in a CCPC creates an advantage for individuals with a corporation compared to individuals who earn income personally. Continue Reading…

What rising interest rates mean for the stock market, and how to cope

By Matthew Wilson

Special to the Financial Independence Hub

We’ve all seen the headlines: “Interest rates are on the rise.” The United States has raised rates three times since December and the Bank of Canada is now on the move after seven years of silence. Here’s what you need to know and how to prepare:

How high will rates go?

Before we start worrying about how this impacts our investments, let’s first look at how high we can expect them to go.

To do this we simply need to open the history books and look at (on average) how many times the Bank of Canada has raised interest rates when entering an increasing rate cycle. They never simply raise rates once and be done with it; they typically raise in a continuous cycle over the course of several years. Here’s what I mean:

  • 1999–2000: 4 rate hikes
  • 2002–2003: 5 rate hikes
  • 2004–2007: 10 rate hikes
  • 2010: 3 rate hikes

So, on average, whenever the Bank of Canada starts a cycle of raising interest rates we can expect to see approximately 5–6 increases.

It’s safe to say we won’t get back to the days of 16% interest rates as seen in the early 90’s, but we can expect to get back to the 3%–6% range that we saw throughout the early 2000’s.

Between 1990 and 2017 Canadian interest rates have averaged 5.92%, so as we currently sit at 0.75% we have quite a way to go. Here’s what I mean. Please refer to the graph that’s at the top of this blog.  As you can see we are just starting to come off the bottom: early days!

When do higher rates start to impact investments?

Just because interest rates are moving higher doesn’t necessarily mean bad news for the stock market, at least not yet.

Take the US for example. In their last four rate increase cycles they raised interest rates 10 times (on average) during each cycle. The US stock market (S&P 500) moved up an average of 23% during each of these cycles.

So, it’s not all doom and gloom, but there is a point at which we need to start getting concerned.

This tipping point typically comes once we get into the 4%–5% range. Why?Because as we near the end of a rising interest rate cycle it can start to slow down the economy in a number of different ways:

Firstly, it means higher borrowing costs for corporations and consumers, (i.e. higher mortgage rates, auto loan rates, lines of credit, etc). For corporations, this means less profit because they are spending more money on interest.

Secondly, it means more competition between bonds and equities. Right now you can get stock dividends paying a nice 4%–5%, but as bonds get up into this same range we start to see an outflow of cash from the equity markets and into the bond markets – seeing as bonds are incredibly less volatile, and if they are paying the same yield, people will naturally go with the less risky investment.

Essentially, bonds start competing with the equity markets, and with so many baby boomers retiring on fixed incomes they can’t afford the volatile swings of the stock market so they switch to bonds.

How long until we need to start worrying?

As mentioned above, markets don’t typically start to feel the impact of rising interest rates until we reach the 4%–5% range.

Continue Reading…

Are Investment Fees for suckers?

By Chris Ambridge, Transcend

Special to the Financial Independence Hub

Providing a service costs money, but paying a fee deemed as an unnecessary amount has come under attack from consumers at all levels. Think banking fees, or the perception of “hidden fees” on phone bills to brokerage and investment fees. Consumers are demanding more value and in some cases winning the battle.

There is more scrutiny on fees than ever before. Studies have shown many investors either believe they do not pay anything or have no idea what they do pay (Hearts & Wallets: Wants & Pricing — What Investors Buy & Competitive Ratings — 2016).

But everyone understands nothing in life is free and clients have a right to know what they pay.

 The long-view of investment fees  

For centuries, if an ordinary person had any liquid wealth the best they could hope for was meagre interest on their cash. Then, as the concept of companies developed, the notion of profiting from an equity investment emerged and stock exchanges were established in seventeenth century Europe to trade equities.

In Canada, much of the early development was raised in the London market, with public shares of large companies such as the Hudson’s Bay Company. The Toronto Stock Exchange (TSX) was created in 1861, and 17 years later the TSX was the second official stock exchange in Canada.

Commission-based Investing

At this time, being a stockbroker was a comfortable, genteel and very lucrative profession. By providing investors with access to markets, brokers earned fixed commissions of about 2% or more per trade. This lasted until May 1975, when negotiated commissions were introduced, leading to increased competition and a decrease in direct share ownership. Currently only 17% of the Canadian financial wallet is invested directly in stocks, down from 30% in 1990 when it was second in importance only to short-term deposits.

 Asset managers on the rise

 For less well-heeled investors, the first modern mutual fund was created in Canada in 1932. They were slow to catch on and grew very little between 1930 and 1970. However this was reversed in the 1970s when investors wanted greater stability following the oil crisis. Continue Reading…