All posts by Financial Independence Hub

Retirement shouldn’t be a Taxing transition for couples

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By Matthew Ardrey, Tridelta Financial

Special to the Financial Independence Hub

When people think of retirement, they make think of relaxing at the cottage, travelling the world, or maybe with the recent blasts of winter we have been receiving, spending some time in warmer climates. What most people don’t think about is how their taxes are going to change. Yes, with April just around the corner, it’s time to think about taxes and how they will impact you in retirement could be the difference between lying on a beach in February and shovelling your driveway for the fifth time this week.

Pension Splitting

If like many Canadians, you are a couple where both spouses work, the opportunities to split income are few and far between. In retirement that changes for the better. A number of years ago the government introduced legislation that allows pension income to be split between spouses. If you are already the lucky recipient of income from a defined benefit (DB) pension plan, you can further benefit by splitting up to 50% of this income with your spouse. The obvious benefit to this is the lower income spouse would pay less tax on the pension income than the higher income spouse.  Also, he/she would now receive the pension credit, which is a non-refundable federal tax credit that maxes out at $2,000. So depending on the disparity of the tax rates between spouses and size of the pension, this could be a material benefit to their tax returns saving thousands of dollars a year in taxes.

Ok, that is great for those Canadians who have a pension, but what about the rest of us?

What if you don’t have a splittable pension?

Once a taxpayer is over the age of 65, they can split life annuity, RRIF and LIF income in the same manner as DB pension income. This can lead to some interesting tax planning for someone who is doing a RRSP meltdown strategy. If one spouse has a much larger RRSP/RRIF than the other, they can double the meltdown amount by taking it from a RRIF instead of a RRSP after the age of 65. In doing this, the RRSP (or RRIF in this case) meltdown strategy could be extended to age 70, with CPP and OAS deferrals.

Other benefits to income splitting include being able to claim the age amount tax credit and possibly reducing or eliminating OAS clawback.

The mechanism for doing this in your taxes is relatively straightforward and does not have to be implemented until you file your taxes the following April. There is a form T1032 in your tax return where you make the pension election. Most tax software these days will do the calculation for you. Once all of your other information is entered for you and your spouse, the software will optimize the pension splitting between spouses. Even if you both have a pension, it can do this for you.

The topic of income splitting continues with your government pensions. Though OAS is not eligible to be shared, the CPP is. You and your spouse can apply to share your CPPs. You both have to be contributors at some point in your lives and both be receiving the pension. The amount eligible to share is based on your joint contributory period, which is just a fancy way of saying the time you were married or cohabitating. The benefit increases with the difference between CPP payment amounts.

While we are on the topic of CPP, I thought it was important to mention the child-rearing drop out provision. Unlike the general drop out provision, which is calculated automatically, the child rearing must be applied for.

How does the CPP drop-out provision work?

Let’s take you back to grade school where we learned about fractions. The CPP you receive is a fraction of the maximum payable, ignoring any early penalties or deferring benefits. The total number of years is 47 (age 18-65). The general drop out provision eliminates the lowest eight, making the denominator 39. Any year you make the maximum contribution you get a 1 in the numerator and if not, then a number between 0 to less than 1.

The child rearing drop out provision allows a spouse who may have stopped or reduced their work due to child care, to eliminate up to seven years per child (no double counting years if you have children close in age). The benefit is any year that has less than a 1 in the numerator that is eliminated, will increase the overall CPP payable to you.

Another tax surprise for many retirees is tax installments. If you were self-employed, you will be familiar with these, but many salaried employees are not. Tax installments are requested by CRA once your taxes payable less your taxes deducted at source exceed $3,000. While working, your employer took taxes at source. In addition, you probably had RRSP deductions and other things that reduced your taxes or generated you a refund. Now with RRIF payments, CPP, OAS and other incomes, you may end up owing taxes. Continue Reading…

Prairies and Eastern Canada most affordable for single home buyers, study says

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

Despite recent reports that home prices in Canada’s tightest markets are starting to cool, skyrocketing values over the last five years mean purchasing real estate is still financially unfeasible for many prospective buyers – especially those trying to do so on their own.

However, while this certainly is the case in the Vancouver and Toronto markets – where average home prices rose 35 and 58% between 2014 – 2019, respectively – a new study from Zoocasa reveals homeownership isn’t out of the cards for buyers willing to expand their search.

Where can single purchasers afford a home?

To find which markets can be considered affordable on a solo budget, the study sourced average home prices for 20 cities across the nation. It then calculated, assuming a 20% down payment, mortgage rate of 3.29%, and a 30-year amortization, the minimum income required to purchase the average home in each market. That amount was then compared to actual median income data of “persons living alone who earned employment income” as reported by Statistics Canada.

The numbers reveal that for single purchasers earning the median income, 10 markets can still be considered affordable: and all are located within the Prairie and Eastern Canadian provinces.

Regina takes the top spot for single buyer affordability; there, an earner bringing in$58,823 would qualify to purchase a home at the average price of $284,424, and have an “income surplus” of $20,025. This surplus indicates the buyer is not purchasing at the top of their affordability, an important consideration when interest rates are on the rise.

The other most affordable cities include Saint John, where the average home priced at $181,576 could be purchased on an income of $42,888 with $18,038 left over, and homes on the Edmonton MLS, where earning $64,036 would net a $17,826 surplus on the average home price of $338,760. Calgary, Lethbridge, Winnipeg, and Halifax can also be considered to be affordable markets based on the study’s criteria.

Vancouver, Toronto, still well out of financial range for solo buyers

On the least affordable end of the scale is Vancouver, where the average home costs $1,109,600: out of the range of the local median single income of $50,721 to the tune of $88,361.

Affordability also remains steep for single buyers in the Toronto market, despite overall higher earnings and lower average home price: there, an income of $55,221 would fall $46,858 on the average home price of $748,328. Victoria rounds out the top three with an average home price of $633,386, $39,359 below what the median income of $86,400 can afford. Continue Reading…

Are current beliefs about RRSPs costing Canadians money in the long term?

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By Edward Kholodenko

Special to the Financial Independence Hub

A recent study we conducted with Leger (www.leger360.com) asking what Canadians wanted in relation to their RRSP investments unearthed some compelling findings demonstrating that many Canadians have misconceptions that could be costing them money, especially in the long term.

Our research confirmed 78 per cent would be willing to switch to a lower-fee RRSP investment, if the lower fees could ensure a superior rate of return.  When we asked if they were able to move their RRSP easily, which factors would be most important, 66 per cent once again said they would move accounts for lower fees and better returns.

In addition to lower fees and higher returns, 31 per cent of people we talked to identified the ability to easily manage their RRSPs and make contributions online as a factor to consider in a switch (highest in those between the ages of 25 – 44 years), speaking perhaps to the rising appeal of newer fintech companies who offer the ability to do everything online.

When asked for other reasons they might consider switching their RRSPs, respondents cited frustrations including feeling like they’re being upsold (28 per cent), having to book an appointment and visit their financial institution in person (27 per cent) and not knowing what their RRSP is invested in (26 per cent).

This strongly suggests Canadians are far from content with their current RRSP contribution process and provider and would be willing to switch; however, there are misconceptions that are holding people back.  Most interesting — only 50 per cent believe their RRSPs can easily be transferred between financial institutions.

Common misconceptions

Why? Common misconceptions included high transfer fees (32 per cent), incurring a tax penalty (24 per cent) and even the fear of an uncomfortable conversation with their current advisor or financial institution (16 per cent).  While only 50 per cent of Canadians told us that they believe their RRSP can be easily moved between financial institutions, the reality is that RRSPs are easy to transfer.  There are no tax penalties incurred when an account is transferred and furthermore, most institutions would cover the cost of any transfer fee that may be charged and by consolidating your RRSPs at an institution with lower fees, you may reach your retirement goals faster. Continue Reading…

5 common financial mistakes Millennials are making

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By Noel Gonzales

Millennials have many opportunities in their hands today. With their skills and talent, they can earn more and do more with their lives. However exciting this is, it also becomes quite a challenging task for millennials to use wisely what they have.

Today’s trends on consumerism entice people to buy and spend more when they earn more, and this is where the trap of debt begins. Aside from this, here are five other common financial mistakes that millennials are making:

1.) Millennials don’t invest in the stock market or other financial markets

Millennials are tech-savvy, and most own a smartphone. Hence, investing in the stock market is not difficult to do nowadays. However, a lot of people, including millennials, still consider traditional savings as the way to go; they’re unaware that stocks grow more income than savings.

If you’re confused with how to start, you can take advantage of online resources and tools that can do the following:

  • Teach the basics of financial markets and investing.
  • Maximize your income, like a great position size calculator, that decides the estimated amount of currency units to buy or sell.

In investing, the younger you start, the better. If you start early, you’d surely thank your young and smart self 10 years from now.

2.) Millennials don’t invest in health insurance

Health insurance is a good investment for your future, as you have a shield that covers all your costs in the event of any health issues. Remember, health is your greatest asset. Illness can be very expensive, but when you have health insurance, your expenses are covered and you can focus on recovering.

There are now easy payment plans on health insurance, depending on your salary. You’ll be surprised to know that paying your insurance premiums can cost you less than the money you spend on your daily coffee run.

3.) Millennials don’t have an emergency fund  

As a millennial, you’re at the top of your health and age. Hence, you forego saving for an emergency fund. An emergency fund refers to money set aside to cover:

  • Emergency travel, such as when you need to go home because a family member died
  • Home repairs after a natural disaster
  • Sudden job loss

You should have at least three to six months’ worth of your monthly expenses as savings for emergencies. For example, if you spend a total of 500 USD every month to cover living expenses, home loan, etc., 3000 USD should be your emergency fund.

4.) Millennials don’t write a monthly budget

Not writing down a monthly budget is a mistake that can lead you to overspend. When you write your budget down, you can visualize it better and stick to it; hence, you know where and how to allocate your money efficiently. Continue Reading…

Which All-in-one, One-ticket Portfolio Is right for you?

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By Dale Roberts, CuttheCrapInvesting

Special to the Financial Independence Hub

In February 2018 Vanguard Canada changed the investment game in Canada with the launch of complete Balanced Portfolios that you can purchase by entering one ticker symbol. For example, once logged into your discount brokerage account you would enter the symbol VBAL, and press buy to get a complete globally diversified Balanced Portfolio. The Portfolio is 60% Canadian, US and International stocks with 40% of those shock absorbers known as bonds.

Vanguard offers One-ticket Portfolios at five different risk levels.  With an MER of .22% these portfolios are a game changer. (In the pie charts below, Orange shows equities and blue fixed income percentages). 

 

iShares has also had One-ticket solutions available for several years. The asset allocation was ‘weird’ and the fees were not that low. considering the low fees on the underlying ETF assets. In response to Vanguard, iShares recently took the scrub brush to the funds, cleaned up the asset allocations and then cut the fees. In fact they undercut Vanguard just slightly with an MER of .20%. Here’s the link to the iShares product page; this will take you to XBAL, their Balanced Portfolio.

And then last week along comes one of the big banks with their own One-ticket offering. Here’s my review at the Hub: BMO keeps it simple with its One-ticket Portfolio Solutions.

 

 

The one-ticket solutions are the most cost-effective managed portfolios available in Canada. This should be the final dagger in the heart of the high fee mutual fund industry.

Which One-ticket provider is best?

Let’s call it a draw. The portfolios are equally great. They include the basic and sensible asset allocation building blocks of Canadian, US and International stocks supported by a bond component. All the One-ticket providers use Canadian and foreign bonds to manage the risks.

How to select the right portfolio

Nothing is more important than investing within our risk tolerance level. We could argue it is the most important ‘part of it all.’ The Portfolios do not come with an owner’s manual for when and how to use them. Matching the appropriate portfolio to your risk tolerance level, time horizon and objective is key.

We have to invest within our risk tolerance level; bad things happen when we invest outside of our comfort level – usually permanent losses. We must be comfortable with the percentage and dollar value that the portfolio could decline.

Are you comfortable with a portfolio that could decline by 5% in a major correction, 10%, 20%, 30%, 40% or 50%?

Remember those bonds work like shock absorbers to soften the blow and smooth out the ride during periods when the stock markets tank.  And tank they can; Canadian and US and International markets have declined by some 50% or more twice in the last 20 years. Continue Reading…