Debt & Frugality

As Didi says in the novel (Findependence Day), “There’s no point climbing the Tower of Wealth when you’re still mired in the basement of debt.” If you owe credit-card debt still charging an usurous 20% per annum, forget about building wealth: focus on eliminating that debt. And once done, focus on paying off your mortgage. As Theo says in the novel, “The foundation of financial independence is a paid-for house.”

My journey to Passive Index Investing – Part 1

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By Dr. Networth
Special to the Financial Independence Hub

“If I were you, I would check out ETFs.”

And that’s how it started.   An idea was planted in my head.   A little nudge from a friend of mine.   This was back in 2009, when Exchange-traded Funds (ETFs) were not widely known.   I had never heard of the term before, and I did not know much about investing apart from hearing whispers  that I should just go to MD Management, hand over my money and let them “handle it.”

I was just finishing up with residency/fellowship, and was about to embark on my first staff physician job.  Since my pay cheque was about to dwarf my resident’s salary, I figured I should probably know the basics about investing, so I asked my friend for his advice.   At the time, he was working as a financial advisor at Bank of Montreal (BMO) with “high-net worth clients” (portfolios over $1 million); thus he seemed like a good resource to start with.  Looking back, I am extremely grateful for his honesty and transparency, as he could’ve easily recommended that I hand over my money and let him “handle it.”

I asked him what he recommended to his “high-net worth clients” to invest in.   His answer: BMO mutual funds.  Made sense, since he was at BMO.

Not all advisors invest alongside their clients

Then I asked him what he invested his own money in.  To my surprise, he invested his own money in ETFs, and did not hold a single BMO mutual fund.  I had always thought “wealthy” clients had access to the “best” investment products, so naturally, he would have done the same.

What???   I was confused!

Paraphrasing his answer:   “At the beginning of each month, financial advisors are told to recommend specific mutual funds to their clients in order to meet quotas, which in turn results in bonuses/commission fees.   The funds usually have a high MER (2% and above).   It lines my pockets and the bank’s pockets.  If I were you, I would check out ETFs.”

Looking back, I realize my friend was not your typical financial advisor.  He enjoyed reading books on personal finance/investing topics, and was quite knowledgable about investing.  Needless to say, he become disillusioned with the banking industry with all the sales tactics and the commissions and quotas driven nature of it all.   Not long after our conversation, he left the banking industry to pursue a career in a different industry that made him much happier.

Continue Reading…

Lending to Spouse at Prescribed 1% rate ‘Best Before’ April 1

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“Never spend your money before you have it.”
—Thomas Jefferson

I can’t emphasize enough that time is truly of the essence if you benefit from implementing this simple family lending practice. Interest rates are expected to inch up again and will alter the value of this tactic. Hence, I revisit the benefits of one of the few remaining family income splitting strategies.

It is commonly known as the “prescribed rate” loan. The procedure needs these components:

  • One spouse is in a lower tax bracket than the other, or earns little income.
  • The higher tax bracket spouse has cash to lend to the other spouse.

“The benefit of the prescribed loan strategy is a bigger family nest egg.”

Examine your family benefits from this income splitting opportunity. All loan arrangements and documentation must be in place by March 31, 2018 to derive maximum benefit. The key is to charge interest at least at the prescribed rate on cash loaned to a spouse/partner. That prescribed rate is now set at 1% for loan arrangements made by March 31, 2018.

The lower income spouse aims to accumulate a larger nest egg while the family pays less tax. The good news is that loans don’t have to be repaid for a long time, say 10 to 20 years or more.

My sample case highlights the income splitting strategy (figures annualized):

  • The higher tax bracket spouse lends $200,000 to the other at the 1% prescribed rate.
  • The recipient spouse invests the cash, say at 4% ($8,000) and reports the investment income.
  • The recipient must pay 1% annual interest ($2,000) to the lender spouse.
  • The lender spouse is taxed on the 1% interest, while the recipient deducts it.
  • The recipient is taxed on the net income generated ($8,000-$2,000).
  • This results in annual income of $6,000 shifted to the lower income spouse.
  • A promissory note is evidence for the loan.
  • A separate investment account is preferred for the recipient.
  • These loans are best made for investment reasons, such as buying dividend stocks.
  • A new 1% loan can also deal with an existing higher rate prescribed loan.
  • Multiple prescribed loans can be made at 1% while the rate does not change.
  • Business owners can investigate the viability of prescribed loans to shareholders.

Prescribed Rate Loan – Sampler

Here is a simplified method to think of such loans:

Cash Borrowed at 1% rate:  $200,000
Assumed Investment Income (4%): $8,000
Less: Prescribed Loan Interest (1%): $2,000
Taxable Income for Borrower Spouse: $6,000
Taxable Interest for Lender Spouse: $2,000

The benefit of the prescribed loan strategy is a bigger family nest egg. Your mission is to shift investment income into the hands of the lowest taxed spouse.

Need for speed

Today’s prescribed rate, which is set quarterly, is as low as it can be. However, it is most likely to rise at the next setting later this month. The prevailing expectation is a jump to 2% from the current 1% rate on April 01, 2018. Such an increase reduces the net value of the loan arrangement. Further, we may not enjoy a 1% rate for a long time, perhaps never again. Continue Reading…

Does downsizing to a secondary housing market really save money?

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By Penelope Graham, Zoocasa.com

Special to the Financial Independence Hub

Despite the efforts of new rules and regulations, real estate prices continue their upward trajectory across the nation; according to the Canadian Real Estate Association, the HPI Index rose in nine of 13 markets in January by an average of 7.7 per cent, while the average home price increased 2.3 per cent, to $481,500.

However, CREA noted that excluding Canada’s largest housing markets – Toronto and Vancouver – would strip a whopping $107,500 out of the national sale price, with the remaining markets contributing to an average of $374,000.

While it has always been more expensive to live in a main city centre than in a rural market, excessively hot price growth over the last few years has increasingly prompted buyers to explore their options in secondary real estate markets, fuelling the migration to further-flung communities with comparatively affordable housing. And, as new stress-testing mortgage rules designed to squeeze affordability are now in place, this big-city exodus won’t slow any time soon.

Savings offered by secondary Real Estate markets

This trend is perhaps most evident in Ontario’s Greater Golden Horseshoe region, home to the City of Toronto and surrounding markets that stretch as far as Niagara, Peterborough and Windsor. Prices have ballooned in Toronto over the last two years and – while slightly softer following the implementation of the Fair Housing Plan last year – remain firmly out of reach for many prospective home buyers. For perspective, the average sale price in the Greater Toronto Area fell 4.1 per cent to $736,783 in January, yet a buyer earning the city’s median household income of $78,280 would qualify only for a maximum mortgage of about $545,692.

One of the most popular real estate destinations for these displaced buyers is the City of Hamilton, located to the west along the shores of Lake Ontario. At a roughly one-hour’s drive from Toronto’s downtown core, and boasting beautiful natural features in addition to a rapidly-gentrifying downtown, home seekers have been drawn to the Hammer in droves.

However, affordability is clearly their main motivation, as freehold Hamilton real estate can be had for a relative bargain compared to its Toronto counterparts, with the average home costing $549,546 in January. That’s a whopping $734,435 less than the average Toronto detached price of $1,283,981.

Is It worth moving to another city?

Such savings are tempting – but there are considerations all buyers should mull over before booking a long-haul moving truck. Continue Reading…

Canadians miss out on $1,000 a year from Credit Card rewards, RateHub says

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By Alyssa Furtado, RateHub.ca

Special to the Financial Independence Hub

A whopping 86 per cent of Canadians say one of their top reasons when choosing a new credit card is earning rewards points or cash back, this according to a recent survey done by Ratehub.ca. 42% of those surveyed said they’ve never searched or compared credit cards to ensure they’re getting the maximum return.

Based on spending averages from Statistics Canada, that means Canadians could be giving up almost $1,000 rewards by not using one of the best credit cards available.

How is that possible? Well, when you look at some of the best credit cards in Canada, they offer up to 5% in cash back or rewards for certain categories. In addition, many cards offer a big sign-up bonus that could be worth anywhere from $250 to $500, so it’s not hard to see how some people are missing out.

Choosing a new credit card

With 29 per cent of those surveyed saying that the card they use most has been in their wallet for more than 10 years and another 50 per cent saying they would never pay an annual fee, perhaps it’s psychology that’s holding them back from making a change?

Continue Reading…

Federal budget 2018: Just what you’d expect from a Liberal government well into its mandate

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The Liberals’ 2018 federal budget that descended on us on Tuesday afternoon is pretty much what you’d expect from the Justin Trudeau administration at this slightly-past-the-midway point of its mandate: lots of spending on things like gender pay equity, parental leave, native rights. Another stab at sin taxes, with a carton of 200 cigarettes going up by $1 and a proposal for excise duties on cannabis if and when marijuana becomes legal in July. A bit of business tax reform scaled down from the measures that so incensed small business last fall. As for balancing Ottawa’s books? Not so much.

The CBC’s web site provides this overview: Liberals spend billions to close gaps for working women, indigenous families. If you want to do straight to the source, click on the Finance Canada site here.

Here’s the Globe & Mail’s overview that went up soon after 4 pm:  Federal budget highlights: 12 things you need to know. In case you’ve met the paywall limit on free views, it reports that the budget is in line with previous estimates from Finance Canada, which means deficits for the “foreseeable future.”  Pay equity legislation is proposed for federal government employees and federal regulated sectors. And $447 million will be spent over 5 years to create a new indigenous Skills and Employment Training Program (replacing the Aboriginal Skills and Employment Training Strategy).  And another $1.4 billion or more over 6 years is proposed for First Nations child and family services.

A National Pharmacare program is being “consulted” on. More detail on passive income and private corporations: companies with more than $150,000 in passive income will no longer be eligible for the small business tax rate, while those with under $50,000 oil passive income will not be affected. In between is a formula. Also more than half a billion will go to Cybersecurity, and $3.8 billion over 5 years will go to “support science.”  And journalism has not been forgotten: the budget proposes $50 million over 5 years to support journalism in “underserved communities.”

At the National Post, this piece looks at 5 ways average Canadians could be impacted by the federal budget. MoneySense‘s Julie Cazzin totes up 15 ways Budget 2015 will impact your wallet. There’s something for everyone, Cazzin writes, but no real showstoppers. Julie also looks at 5 measures that directly impact Canadian families. Another MoneySense writer looks at the implications for small business owners.

Carrick sees 7 changes affecting personal finances

Here’s Rob Carrick’s piece on 7 changes that could affect your finances. Carrick writes in the Globe that Ottawa will be modernizing deposit insurance, replace the Canada Working Income Tax Benefit with the introduction of a Canada Workers Benefit, which raises benefits by up to  $170 a year in 2019 for single parents and couples, while raising the level at which the benefit is phase out from $32,339 to $36,483. The Sears bankruptcy appears to have stimulated consultation on pension security, while as of June 2018 an extra five weeks of parental benefits will be available when parents share parental leave. (Yes, Justin Trudeau’s government wishes to encourage more men to take pat leave!) There is also an expansion of the medical expense tax credit and a move to strengthen the oversight of bank sales practices by the federal Financial Consumer Agency of Canada.

Coyne: Budget has nothing to do with budgeting; Ivison: Liberals show their cunning

Back at the National Post, you can get useful video insights from columnists Andrew Coyne, John Ivison and William Watson here. Coyne’s column is titled Liberals deliver a federal budget that has nothing to do with budgeting, or the economy.  In it, he wryly observes that the Liberals are pandering “to every conceivable Liberal client group and policy cult: environmentalists, seasonal EI recipients, multiculturalism, official language groups, regional development, all the way to the media … And, of course, feminists.”

John Ivison’s column is headlined “In their third federal budget, Trudeau’s Liberals show their cunning.”

Finally, for a sober look from the tax and accounting pros at KPMG, read this overview.

My take? How about addressing pension inequity between public and private sectors?, not just gender pay inequity?

Continue Reading…