All posts by Financial Independence Hub

Is it worth it to skip a Mortgage payment?

By Alyssa Furtado, RateHub.ca

Special to the Financial Independence Hub

Skipping a mortgage payment can seem like a good option, especially in an emergency if you don’t have a rainy day fund or savings to dip into. If you lose your job, your car breaks down, or you have any other type of unexpected expense, the option to skip a mortgage payment may look enticing. But is it worth it?

Some mortgage lenders allow you to skip a payment. Here’s what you need to know before deciding whether or not you should choose that option.

What does skipping really mean?

Sounds like a simple fix on a month when everything’s gone south, right? Not so fast. When you skip a payment, you’re not just pushing the expense back a month, you’re still racking up interest.

On a day-to-day basis, it looks like a simple monthly payment. But your mortgage payment actually has two component parts: The principal (the actual payment of the debt itself) and the interest. You don’t pay the principal, but your mortgage lender still charges you interest.

By skipping a month, you lose the chance to pay down the principal and you add on that month’s interest, which gets added to the total amount left on your mortgage.

You wind up with a higher mortgage rather than the number staying the same. The skip doesn’t freeze time. Any scenario where you add more interest should be looked at as borrowing more money.

Looking years down the line, the interest you pay after skipping will be even higher since your loan itself becomes larger. The increase won’t be huge, but if you just took on a mortgage with a 25-year amortization period, the additional interest will add up over time. If you’re close to paying off your mortgage, the interest costs won’t be as high.

Am I allowed to skip?

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Duking it out: The RRSP vs TFSA

By Brandon Hill, CFP

Special to the Financial Independence Hub

I’ll never forget when I was growing up hearing my parents talking about “buying RSPs” (I got excited about saving money. I know… I’m a weirdo).

In my mind, they were this magical investment that people bought so they could multiply their money to one day retire. This term, “buying RSPs” is still used today; however, I think it adds to the confusion of what a RRSP really is.

I’m here to explain in plain English the difference between the RRSP (Registered Retirement Savings Plan) and the TFSA (Tax Free Savings Account).

What are they?

The best way to think of an RRSP or a TFSA is simply as an account that has special tax benefits. Just like your chequing account, you are able to deposit and withdraw money into a RRSP or TFSA; however, the special tax benefits make it slightly more complicated.

RRSP: When you deposit money into an RRSP, you’re allowed to deduct this amount on your tax return, saving you tax and increasing your refund. However, when you withdraw money from your RRSP, you have to pay tax on this amount.

TFSA: When you deposit money into a TFSA you do not get a tax deduction, although when you withdraw from your TFSA, you do not have to pay any tax.

All growth within an RRSP and TFSA is tax free.  

You can invest in many different ways inside the RRSP or TFSA, including: stocks, bonds, GIC’s, Mutual Funds, ETFs, and other more advanced options.

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5 tax tips for the Family Business: Keep more money in your wallet

By Mahyar K. Hansotia

Special to the Financial Independence Hub

 In Canada, as many as 80 per cent of small businesses are family enterprises. Whether it’s a start-up or a third-generation company, there’s often plenty of hard work that’s been invested, not to mention financial risk. So it goes without saying that business owners are keen to utilize any tax-saving strategies available to help them maximize take-home profits.  Here are five ways family business owners can keep more of their hard-earned dollars.

1.) Pay your family a salary

Don’t miss an opportunity to pay your spouse, common-law partner or children for any work done to help the business. This commonly known income splitting technique allows you to shift some of the income to family members who may be in a lower tax bracket. This can significantly reduce the overall tax bill by moving some of your income out of a higher tax bracket. Examples of work can include filing, answering phones, making deliveries and creative or technical assistance with the business website. Canada Revenue Agency (CRA) allows you to pay family members, as long as you meet two key conditions:

  • You must be able to prove that your family members actually did the work
  • The wages must be “reasonable under the circumstances”

In addition, this strategy allows family members to increase their CPP contribution, as well as create RRSP contribution room. Both items can benefit the family member in future years; CPP contributions will result in a higher retirement income, and the increased RRSP contribution room can be used in the future to bring down the family member’s taxable income should they be in a higher tax bracket.

2.) Pay a bonus directly to RRSP

There are some tax benefits for the family members as well. As an employee, they can consider contributing a bonus directly into their RRSPs. You’ll avoid tax withholding and the full amount can be used as a deduction, provided the family member has reached the CPP/EI threshold. Continue Reading…

Top secret tax saving tips for shrewd investors

By David J. Rotfleisch

Special to the Financial Independence Hub

While the most common tax savings tips such as contributing to an RRSP are well publicized, there are tricks that are not well known except by tax professionals.

So, here are obscure ways that we, as long-time Canadian tax lawyers, recommend for you, or people you know, to save on your taxes. After all, you have to make it to spend it.

Reduce Source Deduction Amounts

If you have income tax deductions that result in a large tax refund when you file your 2016 income tax return, then you can submit a form TD-1 form early in 2017 to reduce the amount of source deductions withheld by your employer from each subsequent paycheque.

This will mean money in your pocket every week instead of in 2018 when you file your 2017 tax return.

First Time Donor Tax Credit

2017 is the last year that you can benefit from an additional 25% tax credit for charitable donations made by a Canadian taxpayer who has never claimed a charitable donation in the past. So, if you’ve never made a charitable donation this is your chance to top it off at CRA’s expense.

Medical Expense claims for Spouse or Dependent

You can claim all medical expenses paid not only for yourself but also for your spouse and dependents, even if they have their own income and file their own tax returns.

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How to add value in the Great Migration from mutual funds to ETFs


 

By Luciano Siracusano III, Chief Investment Strategist, WisdomTree

and Christopher Carrano, Investment Analyst

 

Over the past few years, as hundreds of billions of dollars has flowed out of equity mutual funds and into exchange-traded funds (ETFs), a great migration of assets has been under way in the asset management business. This is occurring because of the changing business models of advisors and brokers-dealers and because of the unique benefits that ETFs can bring to investors, including relatively lower fees1, transparency of holdings, intraday liquidity and the potential for greater tax efficiency.

In many cases, “low-cost beta” ETFs, which track broad indexes, have outperformed the vast majority of active managers over time.2 This has made the decision to move assets from actively managed mutual funds into ETFs not just a decision based on cost, but also one based on performance.

But investors making this migration today have a choice that goes beyond just low-cost beta. For the past 10 years, WisdomTree has been showing investors ways to generate “low-cost alpha” in the form of fundamentally weighted ETFs that provide broad market exposure but that rebalance equity markets based on income, not market value. In recent years, other ETF managers have followed similar paths, creating narrower exposures that seek to tap into return premiums such as value, size, qualitymomentum or low volatility—all of which have been associated with generating excess returns versus the market over time.

In the table above, we show how portfolios targeting value, size, quality, momentum and low volatility have performed compared to the S&P 500 Index in each calendar year since 2000. The last column on the right shows the annualized returns of these factor-based baskets over the 16-year period. Note that in each and every case, the annualized returns exceeded those of the broader market over the entire holding period.

Factors’ long-run performance

Yet, it is important to note that, despite all five of these factors outperforming the S&P 500 since 2000, they did not do so in each and every year. Factors are subject to the ebbs and flows of the business cycle, much like the sectors of the S&P. But, unlike factors, it is impossible for every sector of the S&P 500 to individually and collectively outperform the entire S&P 500 Index over time. The appeal of factor-based investing is that these major return premiums, based on decades of data, appear not to be subject to this same constraint.

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