Monthly Archives: August 2017

Unfair or not, get ready for these 3 big corporate tax changes

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“We see these approaches to managing people’s affairs through a private corporation as creating an unfair playing field … We’re trying to tighten these loopholes to make sure that it’s fair.”

Doesn’t sound like taxes for small business owners are going down, does it?  The above is from federal finance minister Bill Morneau’s July 18 announcement outlining some of the measures the government is proposing to help level what they perceive to be an unfair playing field.

Since the announcement we’ve been thinking about the potential implications of these changes and digesting comments from a variety of different tax experts.  We agree with one expert who opined that “fairness is subject to personal interpretation.”

Unfortunately adhering to these proposed changes won’t be subject to personal interpretation so the bottom line is that we encourage all small business owners, especially those using private corporations in conjunction with saving for retirement or for the benefit of their families as a whole, to seek expert tax advice ahead of these changes coming into effect.

How did this come about?

Taking a step back, the reason that small businesses were given preferential tax treatment in the first place was to encourage them to reinvest in growth opportunities, employ more people, contribute to the Canadian economy in a more meaningful way and that would be good for Canada – hard to argue with that.

Of course all rules, especially tax rules, end up with unintended consequences.   The current government feels many small business owners and their families have been taking advantage of opportunities (loopholes) in the legislation that allow for further savings when it comes to their personal taxes. Furthermore, they seem to be particularly concerned about the increased “corporatization” of certain professions that has taken place over the last 10 to 15 years in order to reduce tax bills. As not everyone is a small business owner, the tax advantages are deemed to be unfair to those who aren’t.

What are the specific areas that are deemed to be unfair?

1.) Income sprinkling

Income sprinkling is a strategy where a business owner looks to save tax by distributing income, dividends and capital gains to other members of his or her family in order to take advantage of multiple sets of graduated tax rates (i.e. pay other family members who are in a lower tax bracket) or exemptions, in order to lower the overall family tax bill.   Continue Reading…

Retired Money: A third of OAS recipients can also expect Guaranteed Income Supplement

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My latest MoneySense Retired Money column was published today and looks at the Guaranteed Income Supplement (GIS) to Old Age Security. You can find the full column by clicking on the highlighted headline adjacent: What to expect when applying for GIS.

Service Canada says as of June 2017, 1.94 million seniors were receiving the GIS, roughly a third of the country’s 5.93 million OAS pensioners.

You can get an overview of the GIS program at the Service Canada web site. It says the first requirement to receive GIS is that you also qualify for and are receiving OAS. So that means you have to be age 65: unlike CPP (which can pay reduced benefits as early as age 60), there’s no such thing as early OAS or early GIS, except in certain special circumstances. If you were automatically enrolled in OAS, you should apply for GIS three months before your 65th birthday.

Maximum monthly GIS payments for a single is $871.86: tax-free!

How much can you receive if you qualify? Service Canada’s media relations department says that as of the July to September 2017 quarter, maximum GIS amounts for those receiving the full OAS pension of $583.74 a month are $871.86 a month for a single, widowed or divorced OAS pensioner (so adding the two, $1,455.60 a month); $524.85 if your spouse/partner receives full OAS, $871.86 if your spouse does not receive an OAS pension or the Allowance, and $524.85 if the spouse receives the Allowance.

Thresholds to qualify are very low

Of course, the fact that two thirds of OAS recipients do NOT qualify for GIS suggests that most people are unlikely to qualify: after all, GIS has been referred to in some circles as “Senior’s Welfare.”

In the case of a couple with a combined income of no more than $23,376 and where the spouse gets full OAS, the maximum monthly GIS for the other spouse is $524.85. If the partner is not receiving OAS and the combined income is no more than $42,384, the individual will get some GIS; they will get the full $871.86 monthly GIS benefit if they have no other income. In the case of a couple making no more than $42,384 and where the spouse is receiving the Allowance, the maximum monthly GIS for the other partner is $524.85. For updated numbers, click here.

Still, if you’re close to these thresholds there’s little to lose by seeing if you may qualify. It used to be that Service Canada didn’t always go out of its way to notify low-income seniors that they may qualify for GIS. This has since been rectified: free money that’s also tax free is certainly something worth investigating!

Avoid the Credit Card minimum payment trap

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Somewhere on your credit card statement there is a note saying if you only make the minimum monthly payment each month, it will take you a certain number of years and months to pay off the balance – BUT ONLY IF YOU NEVER ADD ANY MORE CHARGES TO THAT CARD AGAIN!

Your credit card agreement will specify the minimum payment that is due every month. This amount is generally a certain percentage of the balance owed. This percentage can often be based on factors such as your credit score and the limit on your card.

Basing it on a percentage instead of a fixed amount (like a consumer loan, for example) works in the credit-card company’s favour because the minimum monthly payment reduces as your balance reduces. It will take decades to get out of debt and cost you hundreds, if not thousands, of dollars in interest.

At one time, minimum payments were 5% of your balance, but they have gradually reduced to an average of 2%. My personal Capital One MasterCard requires only 1.45%.

According to a recent TransUnion survey of Canadian credit-card holders, 44% of respondents pay their credit card balance in full each month, and 9% just pay the minimum. Interestingly, it varies by province, with consumers from Ontario (27%) and British Columbia (20%) most likely to pay the minimum.

Avoid this financial trap

Jacob moved into his first apartment. His first stop was the local furniture store to buy some living room furniture. He put $5,000 on his new credit card (18.9% interest). The first minimum payment was $200 (4%). If he maintains this payment, it will take him 11 years and 5 months to pay the entire balance and, by the time he has made his final payment he will have paid $8,109 for his furniture. That’s a lot of money for something that will drop in value year by year, assuming he will still own it in 11 years. Continue Reading…

The “nice” problem of million-dollar RRSPs

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Are million-dollar RRSPs a looming tax problem for soon-to-retire baby boomers or simply a nice problem to have?

My latest Globe & Mail Wealth column has just been published on page B9 of the Tuesday paper and online, which you can access by clicking on the highlighted headline here: The secret to paying less tax in retirement.

As one expert cited — Doug Dahmer, who often guest blogs here at the Hub — tax is perhaps the single biggest expense in Retirement. This often becomes apparent when those growing RRSPs the Boomers and others have been accumulating are forced to become RRIFs or Registered Retirement Income Funds at the end of age 71, at which point they become taxable at your highest marginal rate, just like  interest or employment income. Million-dollar RRSPs are not that uncommon, according to the sources consulted for the column, whether individually or shared by couples.

(I say”forced” but of course there are two alternative options: annuitize or cash out. Very few people choose the latter option, while annuitization or partial annuitiization is certainly a valid option as you progress through your 70s, although ideally when interest rates are higher.)

The initial RRIF withdrawal percentage is 5.28% at 71 but minimum withdrawal rates rise steadily over time, hitting 6.82% at age 80, 10.21% by 88 and reach 20% by age 95 and beyond.

Draw down RRSPs/RRIFs early, delay CPP/OAS to 70

As the article notes, this has two implications: one, since it’s unlikely most investors with balanced portfolios will generate returns as high as the withdrawal percentages, most RRIF recipients will start breaking into capital. Continue Reading…

How to boost your home’s resale value

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By Sia Hasan

Special to the Financial Independence Hub

While your house is your home, it is also a substantial investment that can increase tremendously in value over the years. Property value may increase through changes in market conditions in your hometown; it can also increase when you make strategic upgrades and improvements to the property and even through proper home maintenance steps over the years. Some improvement projects can pay off substantially, and these are the areas you may want to focus on initially for the best results.

Focus on Curb Appeal

If your goal of increasing property value is based on a desire to sell the property soon, curb appeal is a prime area on which to focus. Curb appeal is immediately visible to buyers who are browsing through online listings, and great curb appeal can entice them to continue to flip through your property’s online photos and request a tour. Curb appeal may be improved by fertilizing the lawn, mulching the flower beds, trimming the trees, adding new flowers to your space and more. If you have extra time and money, repainting or replacing your front door and decorating the patio are wonderful ideas to consider as well.

Upgrade the Kitchen

When a kitchen renovation project improves the style and function of the space, it can result in a considerable increase in property value. In fact, you may be able to recoup as much as 80 per cent or more of your costs to upgrade the kitchen through an increase in property value. Choose upgrades and a design that appeal to the masses for the best results, such as a neutral hue for counter tops rather than a bold colour. In addition, only make upgrades that are in line with your market. For example, avoid investing in high-end luxury appliances for a kitchen in a starter home. Continue Reading…