Family Formation & Housing

For young couples starting families, buying their first home and/or other real estate. Covers mortgages, credit cards, interest rates, children’s education savings plans, joint accounts for couples and the like.

Master your Mortgage for Financial Freedom

Posted By |

 

“</p

By Michael J. Wiener

Special to the Financial Independence Hub

Many people have heard of the Smith Manoeuvre, which is a way to borrow against the equity in your home to invest and take a tax deduction for the interest on the borrowed money.

It was originally popularized by the late Fraser Smith, who passed away in September 2011.  Now his son, Robinson Smith, has written the book Master Your Mortgage for Financial Freedom, which covers the Smith Manoeuvre in detail for more modern times.  Smith Jr. explains the Manoeuvre and its subtleties well, but his characterization of its benefits is misleading in places.

The Smith Manoeuvre

In Canada, you can only deduct interest payments on your taxes if you invest the borrowed money in a way that has a reasonable expectation of earning income.  Buying a house does not have the expectation of earning income, so you can’t deduct the interest portion of your mortgage payments.

However, if you have enough equity in your home that a lender is willing to let you borrow more money, you could invest this borrowed money in a non-registered account and deduct the interest on this new loan on your income taxes (as long as you follow CRA’s rules carefully).  A common mistake would be to spend some of the invested money or spend some of the borrowed money.  If you do this, then some of the money you borrowed is no longer borrowed for the purpose of investing to earn income.  So, you would lose some of your tax deduction.

With each mortgage payment, you pay down some of the principal of your mortgage, and assuming the lender was happy with your original mortgage size, you can re-borrow the equity you just paid down for the purpose of investing and deducting any interest on this new loan.  Some lenders offer mortgage products with two parts: the first is a standard mortgage, and the second is a line of credit (LOC) whose limit automatically adjusts so that the amount you still owe on your standard mortgage plus the LOC limit stays constant.  So, after each standard mortgage payment, your LOC limit goes up by the amount of mortgage principal you just paid, and you can re-borrow this amount to invest and deduct LOC interest on your taxes.  This is the Smith Manoeuvre.

Smith describes a number of ways of paying off your mortgage principal faster (that he calls “accelerators”) so that you can borrow against the new principal sooner and boost your tax deductions.

Compared to a Standard Mortgage Plan

Ordinarily, mortgagors pay off their mortgages slowly over many years.  Their risk of losing their home because of financial problems is highest initially when they owe the most.  This risk declines as the mortgage balance declines, and inflation reduces the effective debt size even further.

With the Smith Manoeuvre, the total amount you owe remains constant (declining mortgage balance plus LOC balance) or may even increase as your house value increases and your lender is willing to lend you more money against your house.  So, your risk level as a function of how much you owe doesn’t decline in the same way as it does with the standard mortgage plan.  You could argue that your financial risk does decline somewhat because you’ve got your invested savings to fall back on in hard times, but your risk certainly doesn’t decline as fast as it does with the standard plan.

Leveraged Investing

Smith likes to say that the Smith Manoeuvre isn’t a leveraged investment plan.  He justifies this assertion by saying that you’ve already borrowed to buy your home, and you’re now slowly converting this mortgage that isn’t tax deductible to an LOC debt that is tax deductible. Continue Reading…

7 steps to downsizing your Home: a checklist

Posted By |

 

Achieving financial independence often comes with dreams of a big house on a quiet cul-de-sac with plentiful space and bedrooms for the family. But during a worldwide pandemic, many homeowners have sought to simplify their life and downsize their primary residence.

To help demonstrate what downsizing may look like, we asked homebuilders and homeowners about the steps they would recommend taking if they were to downsize a home.

Here are seven steps to downsizing your home:

  • Right-Sizing
  • Accessibility
  • What Items Do You Use to Support Your Habits?
  • Do The Hard Things
  • Have a Financial Plan
  • Don’t Get Sentimental
  • Keep Things Only if They Bring You Joy

“Right-Sizing”

At Cullum Homes, instead of downsizing, we call it “right-sizing”! We have been designing and building lock-and-leave luxury homes in this specialized niche market for many years. Steps we would recommend include (1) free yourself from a large lot, pool, landscaping, etc. and the endless expense, upkeep, and maintenance they require, (2) consider a private, gated community with resort access and/or amenities that are maintained by someone else, and (3) before making the move or having a new home built, give careful consideration to the rooms and spaces you want now and might need or want in the future. Don’t become so focused on cutting space that rooms become unworkable. We have actually had clients that cut out too much space, only to return and have us add on later, or build them another larger home! — Rod Cullum, Cullum Homes

Accessibility

As a company that specializes in accessibility lifts, many of our customers are either looking to downsize or reduce the impact of mobility challenges in their homes. Many of our customers find that adding accessibility to their existing home allows them to remain comfortable and surrounded by the things that are important to them. This is often the easiest way to simplify your life. If you do need to downsize, a stair lift can make an in-law suite readily accessible. — JJ Hepp, Arrow Lift Stair Lifts

What items do you use to support your habits?

Having recently downsized our home, we took stock of how we spend our time and what we use in support of our habits. This made donating and discarding unwanted items a lot easier. We also looked ahead at the space we were moving into and how our current furniture and other items would help make this smaller space as efficient as possible. In hindsight, we spend less time maintaining our space and have more free time and a better quality of life. — Steven Brown, DP Electric Inc

Do the hard things

The reality of downsizing a home is that homeowners have less storage space and less living space. Getting rid of things is hard. Doing Goodwill drop-offs or posting items on OfferUp means saying goodbye to lots of memories. But, making the hard decision to part ways with items opens up an opportunity to say hello to a new lifestyle with reduced upkeep and increased savings. Do the hard things that come with downsizing, and your lifestyle will benefit as a result. — Brett Farmiloe, Real Estate SEO Company

Have a Financial Plan

Whenever downsizing is brought to the table, it can be a phenomenal experience. It is quite surprising to learn how you can function on a lean basis, void of clutter and unnecessary items. Continue Reading…

Ways to re-plan your Finances during Covid-19

Posted By |

By Donna Johnson

Special to the Financial Independence Hub

COVID-19 certainly has made 2020 a year to forget for some, and as it wraps up with the holidays and new year, many people are assessing their financial situations and determining the next steps. The good news is it does appear a vaccine and more medicines are on the way. But still, getting these treatments out to everyone and getting the virus under control will still take time, so reopening the economy completely may not happen for several months yet. In the meantime, Americans are trying to manage holiday expenses and future budgets until the tide turns.

Covid-19 savings reallocation opportunity

While it may be no fun to miss out on going to your favorite movie theater on Friday nights, or visiting your favorite theme park during vacation, consider the upside of this. The money you may have spent on all those activities is money you can tuck away for better use. Money you don’t spend as disposable income is money you can turn into either savings or investments. There are ways to use it that can be a return on investment if you do your planning right.

Building a emergency savings fund

The worst thing that could happen to you during a pandemic is getting laid off; in which case you will need savings to get by. Unemployment during the pandemic hit a high of about 14.4% back in April. But even if you’re still employed, sudden expenses like HVAC repairs, car repairs, and doctors’ visits still happen. When they do, you’re better off not putting all of those expenses on your credit card, or borrowing money from high-interest loans to pay for them. Instead, consider setting aside about $20-50 per week or per paycheck, let that money sit in a savings account untouched, and over time you’ll see it grow to potentially hundreds if not thousands of dollars in savings. And these savings should not be used for regular expenses like gas or rent, unless you’ve lost your job. But instead, prioritize sudden emergencies like car accident expenses or pipe burst repairs for these savings.

Use the time to refinance and tackle debt

Another thing you can do with extra savings is apply them to any outstanding debt accounts you have. Now one thing to note is that some debts such as federal student loans had payments suspended and interest rates set to zero. Continue Reading…

Covid pandemic impacting Canadians’ mental health with worries about rising Debt and Housing

Posted By |

 

A third of Canadians were financially unprepared for the pandemic, and more than 75% think Covid-19 has impacted their mental health, according to a Manulife Debt Survey released late Tuesday. Young people are particularly concerned that their hopes for home ownership are slipping out of reach: two thirds of Canadians served who do not own a home worry about saving for one. 

A whopping 36% said they worry significantly about saving for a home, while 28% are concerned about supporting their children through post-secondary education (28%) and 28% about saving for retirement.

On average, Canadians have been allocating nearly half their income to essentials like food and housing since COVID-19 began, with 58% of homeowners and 54% of renters worry about making payments.

Manulife Bank CEO Rick Lunny

“Debt can negatively impact mental health and leave Canadians feeling like their financial goals are unachievable. The pandemic has made that even more pronounced,” said Rick Lunny, President and CEO, Manulife Bank. “It’s so important to have financial flexibility, especially when one looks at purchasing a home – it’s easy to feel stressed. Financial conversations are essential to identify opportunities, what matters most and help you stay on track, no matter the financial environment.”

A financially unprepared population

The survey found 35% admit they were financially unprepared for the pandemic. 74% believe their financial situation has been impacted as a result of the pandemic and 69% of them  say the impact has been overall negative: 42% worry that it may take them over a year to recover to pre-COVID-19 levels.

One in four are struggling to keep up with their bills, with one in six laid off due to COVID-19: an equal number say they would have been laid off had it not been for the wage subsidy provided by Ottawa.

Some have flourished

The survey reveals a sharp disparity in how the pandemic has impacted us, with some flourishing as others have been devastated. Manulife views this as evidence of  a K-shaped recovery narrative. On the one hand, while Canadian on average, appear to be saving more compared to a year ago (16%  of after-tax income, on avg. vs. 14%  in Fall 2019), 24% have been saving absolutely no after-tax income compared to the same period last year. Within the indebted population there has been a significant increase in the proportion of those who say everyday living is the cause of their debt: 24%. This suggests more Canadians who are in debt are struggling to make ends meet, even if fewer Canadians (27% debt-free vs. 21% on Fall 2019) are now in debt overall compared to a year ago.

Continue Reading…

Biden Presidency may be more taxing for Canadians with cross-border affairs

Posted By |

By Elena Hanson     

Special to the Financial Independence Hub

Finally, the U.S. election season is behind us. But a new presidential administration typically means changes in the taxation landscape, and President-Elect Joe Biden is sure to follow suit. In fact, a Biden presidency may have certain implications for a number of people on this side of the border.

One of the proposals in his election campaign may prove especially punitive to Canadian taxpayers, especially those who hold U.S. real property or any U.S. publicly traded securities in Canadian- or U.S.-based investment portfolios, RRSPs, RRIFs or TFSAs. (Think of your shares of Apple or Microsoft, which have seen a great deal of growth in recent years with quarterly dividends literally dripping into your accounts!)

Tax implications at death diverge in the 2 countries

Hopefully, most Canadians are aware that the tax implications at death tend to diverge when it comes to Canada and the United States. In Canada, capital assets of the person who dies are subject to deemed disposition on the person’s terminal tax return, unless those assets are jointly held with a surviving spouse or they go to a trust designated to the surviving spouse. If the latter two conditions apply, there will be a tax deferral and the tax to be paid only happens when the surviving spouse dies.

In the U.S. non-American citizens are taxed on the market value of their U.S. assets held at the time of death if the total value of such assets exceeds USD $60,000. Interestingly, that $60,000 threshold was set up back in the 1980s and is not subject to any adjustment for inflation. This clearly demonstrates that foreign taxpayers are quite low on the priority list for policy makers in that country.

In addition to this incredibly low filing threshold, there is no deferral permitted upon the death of the first spouse. There is also a presumption that the person who died, the decedent, owns 100 per cent of the couple’s property and must be taxed on the entirety of the couple’s U.S. assets in excess of the $60,000 exclusion.

Now this is where salt gets rubbed into the wound. The executor of the will may be required to look back over the preceding three years – prior to the passing of the person – to determine if they had gifted in any of those years. If so, the value of the gifted property would have to be brought back for tax purposes.

Canada-US Income Tax Treaty provides some relief for Canadians

Luckily for Canadians, the Canada-U.S. Income Tax Treaty overrides harsh provisions of American domestic law. For example, Article 29-B of the Treaty allows taxpayers to avoid U.S. taxation (but they still must file tax returns if the value of the estate exceeds the $60,000 exclusion) if the worldwide market value of the property of the deceased is less than USD $11.58 million (2020 rates). That exclusion is doubled if the assets are jointly held with a surviving spouse. But this generous escape hatch is not automatic; the person in question, a U.S. non-resident, must file their non-resident estate tax return within nine months of the date of death.

Now, let’s get back to the recent U.S. election outcome and why it matters to Canadians. With Joe Biden as President of the United States, that exemption of USD $11.58 million is expected to be lowered quite significantly, and may happen as soon as January 1, 2022. In fact, it may even happen in 2021 following Biden’s inauguration, although it is unlikely that exclusion would be the first tax reform the administration will choose to focus on.

At this point, we do not know how much the exemption will be lowered. Based on changes to the U.S. estate tax over the past two decades, it has already been adjusted at least three times. In 2003, it went from $600,000 to $1 million, then in 2009 to $3.5 million and one year later in 2010 to $5 million. It is likely that the exemption will revert to either the 2009 or 2010 level, subject to adjustment for inflation. Continue Reading…