All posts by Financial Independence Hub

Keeping the Family Cottage in the family

Posted By |

By John Natale

Special to the Financial Independence Hub

Summers in Canada are defined by the great outdoors and one of our favourite summer pastimes is to head up to the cottage (or cabin) to lounge on chairs, enjoy some cold beverages and toast marshmallows on the campfire for a relaxing time with friends and family.

For those who own a cottage, transferring its ownership to children or grandchildren can sometimes get tricky, with many owners failing to realize the potential tax bomb that awaits. Below is one strategy that may help ensure your property remains a space that will continue to generate positive, loving memories instead of a source of worries and sleepless nights for you and your family.

 An in-depth look at the issues

For many individuals, it is important that the cottage stays in the family so the next generations can continue to enjoy it for years to come. The good news is that when you pass away, assets can be transferred to your spouse tax-free.

However, a transfer to your children, on the other hand, may trigger a capital gains tax that must be paid before the children (or their heirs) can enjoy the property. Canadian households can only use the principal residence exemption (PRE) to protect one property from tax on capital gains. If the PRE is used for the home, then the transfer of the cottage to the children will be taxable.

Over the years, many cottages and other vacation properties have increased significantly in value and are now worth much more that their purchase price. It is important to note that 50% of this increase in value is subject to taxation. Many people are not aware that this could trigger a significant capital gains tax liability for your estate and, if it doesn’t have enough assets to pay for it, the estate may be forced to sell the cottage to pay the tax. Ultimately, your family can risk losing the property altogether.

Selling the cottage now vs. later

By selling the cottage to your children today instead of transferring it when you pass away, you can cap your tax liability and pass the responsibility for any future capital gains to your children. Because the cottage is being transferred now – and will not be included as part of your estate – the family can also avoid the time and costs associated with the settling of an estate while avoiding potential claims against your estate from creditors or other interested parties. Continue Reading…

How many credit cards should you have?

Posted By |
Photo by Blake Wisz on Unsplash

By Barry Choi

Special to the Financial Independence Hub

If you’ve recently walked into the mall, your bank or even the grocery store, there’s a good chance you’ve been asked if you want to sign up for a new credit card. Your first thought might be to say no since you’ve already got one, but with so many different credit cards that come with a variety of offers, it can be tempting to apply on the spot.

You may also be wondering “how many credit cards should I have” in the first place or “does it hurt me to have multiple credit cards?” There’s no straightforward answer so let’s take a look at when it does and doesn’t make sense to get another credit card.

When it makes sense: Pros

Getting another credit card can actually improve your credit score since it’ll increase your credit utilization ratio, which is one of the major factors that determines your credit score. Your credit utilization ratio is based on the amount of credit you’re using relative to the amount of credit you have available to you.

Let’s say you have a single credit card with a limit of $1,000 and you typically charge about $600 on it; that would give you a utilization ratio of 60%. If you applied for a new credit card and you were given a limit of $1,000, your overall credit utilization ratio would drop down to 30% since you now have access to a total of $2,000 in credit. As a general rule of thumb, your credit utilization ratio should be no more than 30%.

You may also want to maximize rewards by using a combination of cards for different spending categories or scenarios. For example, it would be to your benefit to use one of the best Mastercards in Canada if it earns you more points on grocery or gas spending compared to a Visa card. Alternatively, if you currently only have an American Express credit card, you could also apply for a credit card with no annual fee (Visa or Mastercard) and use it only where your Amex isn’t accepted. Since the card has no fee, you won’t need to worry about paying an annual fee on two different cards.

Sometimes it also makes sense to apply for a new credit card for a specific reason. Let’s say you like to travel, a card that comes with no foreign exchange fees or has airport lounge access would be pretty handy to have. You could also offset the cost of your trip by applying for one of the best Aeroplan credit cards, since the welcome bonus could be enough points to pay for your flight.

The above are great reasons why you should have more than one credit card, but that only applies if you’re responsible with your spending. In other words, if you’re always paying your bills in full and on time every month, then there’s nothing wrong with getting another credit card.

When it doesn’t make sense: Cons

The tricky thing about getting another credit card is that you could be tempted to overspend since you’ll have access to more credit. Studies show that people spend more when using credit cards instead of cash, so having access to a higher credit limit or multiple credit cards could potentially result in more spending.

More credit cards also means having to stay on top of more bills.
Continue Reading…

40 years after the stock market died

Posted By |

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Legend has it, 19thcentury humorist Mark Twain once had to refute a rash of rumors swirling in the popular press about his alleged death.  “The report of my death was an exaggeration,” he wryly observed.

What about the stock market: how many times have popular pundits pronounced its demise? Clearly, all such predictions have been dead wrong so far.

One noteworthy example is a Business Week cover story that ran exactly 40 years ago, on August 13, 1979.  Advisor and blogger Barry Ritholtz has reprinted this now-infamous article here, for historical reference.  Its authors bemoaned, “this ‘death of equity’ can no longer be seen as something a stock market rally — however strong — will check. It has persisted for more than 10 years …”

My take:  This article, and plenty of others like it, are textbook examples of financial pornography. As Ritholtz observed in a separate piece, “One day, the world will indeed end.  The sun will run out of hydrogen fuel, turn into a red giant star, and expand until it engulfs the earth.  That is about 5 billion years in the future.  In the meantime, you can safely ignore all other forecasts.”

I couldn’t agree more, at least when it comes to market forecasts. There’s always something causing us to wonder whether the end is near.  A few years ago, it was Greece.  Now there’s trade wars.

Return-dampening concerns

These too shall pass, only to be replaced by new sources of return-dampening concern.  In the meantime, quietly, unexcitedly (and thus often without remark), the markets will almost certainly continue to inch upward over time.

Consider that 40 years is probably most peoples’ investment horizon.  As an exercise, I pulled some returns from various indexes, in Canadian dollars.  Since Business Week pronounced the death of equities, here’s what actually happened:

  • Inflation grew by 3.12% per year; so something that cost you a $1 in 1979 would roughly cost you $3.40 today, or more than three times as much.
  • If you kept your money in Canadian 30-day T-bills (a “risk-free” investment), the annual return was 5.53% per year.  In dollar terms, $1 would have grown to $8.58, or more than twice the inflation rate. As an aside, the vast majority of this return came during the high interest rates of the 1980s.  Since 2009, the return of 30-day T-bills has been lower than inflation by about 1% per year.
  • A basket of diversified global equities returned 9.84% per year; so a $1 investment grew to $42.42.  Put another way that is 42 times more than leaving your money in a mattress, which after reading this article might have seemed like a good idea at that time.  Not a bad return for something that was supposed to be “dead.” Continue Reading…

The rising cost of owning pets

Posted By |

By Ted McCarthy

Special to the Financial Independence Hub

People are spending more on their pets than ever. No matter the pet type (hamster, dog, snake, etc.), people are willing to pay a pretty penny on their pets. The APPA reported that US$72 billion was spent on pets in 2018.

People are spending so much on their pets, LendEDU wondered if people were willing to go into debt for their pets, or spend more on their pets’ wellbeing than their own?

Pet insurance is becoming more popular with pet owners, with 2.1 million pets insured in 2017.

LendEDU surveyed 1,000 adult American pet owners to see how much they spend on their pets, with or without pet insurance.

Spending breakdown on pets

The survey showed the breakdown of pets:

  • 24% of expenses go to healthcare/vet costs
  • 55% of expenses go to food
  • 13% of expenses go to toys & accessories
  • 8% of expenses go other

These statistics are about in line with the APPA’s statistics, as over US$30 billion out of the US$72 billion spent on pets in 2018 was food alone.

The pet business is massive in America and will continually grow according to the APPA. As consumers treat their pets better and more as part of the family than before, spending per pet will increase, and people are willing to spend that money.

Pet types

Out of the six pet types surveyed, dog owners spent the most acquiring their pet at an average of US$327.13, and fish owners spent the least at an average of $53.58.

Monthly expenses stack up to about the same. Dog owners spend an average of US$157.39 per month, bird owners, an average of $127.38, and cat owners an average if $95.11. Continue Reading…

I prefer the phrase Financial Independence Work On Own Terms (FIWOOT) over FIRE

Posted By |

By Mark Seed

Special to the Financial Independence Hub

The Financial Independence Retire Early (FIRE) movement certainly has legs, and maybe rightly so.

Like any good movement, it takes courage to do what others don’t care to do.

Financial independence takes know-how, it takes discipline to hone your financial behaviours; it takes time to remain invested when others are jumping in and out of the market.  It also takes saving your brains out thanks to a good salary and let’s not forget lots of luck.  Regarding the latter, you need a strong bull market – a long one – and we’ve had it for a decade or more.

It’s not that I fully disagree with the FIRE movement and what some folks are striving for.  I think many FIRE principles have great merit and kudos to those that live by these rare principles:

  • Save early and often, in great quantities.
  • Live frugally and avoid financial waste.
  • Avoid long-term debt that is not used for wealth generation.
  • Optimize your investing (i.e., keep your costs low and diversified) to realize your financial goals sooner than later.

I’ve written about FIRE before on this site.  A few times.

I even questioned if FIRE was right for me.  I know that answer.

Why I’m tired of retire early in FIRE

In some circles (not all thankfully), the focus of FIRE is on “retire early” part.  Work hard, make good money with the intention of leaving the corporate rat-race sooner than later.  That’s fine and definitely aspirational – if that was the end of it. However I’ve become tired (and maybe a bit cynical) of some members of the retired early crowd.  Why? Continue Reading…