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.

Tax rates likely to rise: what to do about it

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By Eva Khabas

Special to the Financial Independence Hub 

The Covid pandemic has led to unprecedented government spending with a deficit that has reached record heights.

Sooner or later someone has to pay for this and that usually means the taxpayer. Don’t look now but when you start your tax planning it’s probably best to assume that tax rates are going up in Canada.

However, even before Covid the federal government was talking about increasing the capital gains tax.

Capital gains inclusion rate could go back up to 75%

Currently, only 50% of capital gains are, in fact, taxable but this was not always the case. In fact, from 1990 to 1999 75% of capital gains were subject to tax! It’s logical to assume that tax revenues will be increased through a higher capital gains portion that is taxable, since capital gains are perceived as ‘passive’ income from investments. In theory, this means taxes should be generated by wealthier taxpayers.

Loss of Principal Residence exemption?

Also, the big fear of every Canadian is that government will remove the principal-residency exemption. Currently, taxpayers can sell their primary residence at a gain and not pay any taxes.  Many taxpayers rely on the appreciation in value of their homes as their main source of retirement income. The impact of making gains on principal residency taxable would be devastating to many, if not most, Canadians.

Before discussing what to do about all this, let’s make sure we understand what capital gains are, how they are different from your other income, and when these gains become taxable.

So, what exactly is capital gain? In a nutshell it’s the growth in the value of an asset being held for investment purposes, so that asset is not for resale. A long-term holding period would indicate that the gain is capital. Currently, only half of the capital gain is taxable, while most other income is fully taxed.

In most cases the capital gain is subject to tax when the asset is sold, but there are also times when you may have to report capital gains without an actual sale occurring. For example, at the time of death there is the deemed or assumed sale of all assets, with any capital gains included in the tax return of the deceased. This would, of course, affect beneficiaries.

It’s important to note that increases in personal tax rates will also result in you paying more tax on capital gains. This is because the tax rate on capital gains is applied at the same tax rates in Canada as on employment and other income. In addition, reporting a higher overall total income would also result in more tax because a higher income puts you in the top tax bracket.

Defence # 1: Timing

So, now we see that many tax-reducing strategies primarily revolve around two things – 1) timing, and 2) reducing your taxable income. First, let’s look at timing.

If you have higher overall income from various sources in 2021, and expect lower taxable income for 2022, consider disposing of the asset(s) in 2022 wherever possible so the gain attracts a lower marginal tax rate for you.

You can also use time to advantage by deferring the cash outflow – the tax you pay to the government – and disposing the assets early in the year. Your tax bill is due April 30th of the following year, so if you sell the capital asset in January of 2022 you still have 15 months until tax must be paid on that.

Staggering gains over multiple years

Now, let’s assume you have a large capital gain. How can you stagger that gain over several years? One strategy is to defer cash receipts from the sale over multiple years. The Canadian Income Tax Act allows you to spread that gain over five years (and in some cases over ten years), provided you receive proceeds from the sale over a number of years. For example, if you receive 20% of the proceeds in 2021, you only need to include 20% of the gain in your taxable income as it can be spread over five years.

RRSPs and TFSAs

All these strategies are of a short-term nature. If the assets are disposed of in the long term, consider holding them inside your RRSP. You don’t have to declare those assets as income until you make a withdrawal. Likewise, you can use your TFSA so some of the gains are not subject to tax at all. Either way, your tax advisor can help determine if assets can be transferred to your RRSP or TFSA. Continue Reading…

Why choose Joint Life Insurance?

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Dundas Life

By Greg Rozdeba

Special to the Financial Independence Hub

When considering life insurance, the first thing that comes to mind is coverage for a single person. While that is the most commonly used option, there are many variants of the policy that you can use.

One of these variants is the joint life insurance policy. It is an option that covers two people instead of the one offered by a standard policy. These policies are usually targeted towards couples.

While having two separate policies is better overall, joint life insurance can come in handy in certain circumstances.

There are some important reasons for choosing joint life insurance. One of these is if your spouse does not qualify for an individual policy. It can also come in handy if you have people who depend on you or if you want to leave an inheritance for your heirs.

Most joint insurance policies are permanent and last your entire life. They contain an investment component that earns interest.

There are also a few joint policies that can be set up to last a certain amount of time but are rare.

Differences between Single and Joint Insurance policies

A single-life insurance policy provides coverage for a single soul, which is usually you or your significant other. The policy pays out if that soul passes away.

Conversely, a joint insurance policy provides coverage for 2 souls. It pays out if one of the policyholders passes away.

Joint insurance policies pay out only once when one of the covered individuals passes. This leaves the other person without coverage. Joint insurance policies cost more but provide more protection.

How do Joint Life Insurance policies work?

Joint life Insurance policies provide coverage for 2 people within the same policy. This is a cheaper alternative to buying two different policies. It also has its own unique set of bonuses.

Since it is cheaper, a joint policy will pay out only once, usually when the first person dies. In some cases, the policy can also pay out if one person is diagnosed with a terminal illness. The doctor must specify that person has less than a year to live.

The policy ends instantly when it pays out once. This leaves the other partner uncovered. This can be a problem if the surviving person is old and cannot afford a new policy.

Both the partners in a joint insurance policy are usually insured for the same amount. This ensures the payout is also similar when either person passes. Continue Reading…

Setting them up for success: Financial Advice for new parents

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By Veronica Baxter

Special to the Financial Independence Hub

Are there some things that you wish you knew before you became a parent? Parenting comes with lots of financial responsibilities, and it’s a life-changing experience for many. Suddenly, life is about taking care of yourself, but another person solely depends on you for everything.

Preparation is critical to get ready for this exciting and, perhaps, scary new adventure. It is more helpful to be prepared for the many financial alterations to come. It is estimated that a middle-income American parent spends at least $284,570 (US$)  till the child turns 18 years old.

Most people tend to focus more on their finances after a significant life event. Making the necessary financial plans will save you the stress as you embark on this journey.

Here are vital planners to get you started:

1. )  Make a Household Budget

Having a baby can be expensive. A household budget prevents you from being a spendthrift and also saving for the future. Please write down your steady monthly sources of income and compare them to your monthly expenses.

Adjust your expenses to cover the baby’s needs like diapers, furniture, formula, and other unexpected costs that come up. Also, set some spending limits and do your best to stick to them.

2.)   Get a Life and Disability Insurance Policy

Many new parents question the worthiness of buying life insurance. After all, most don’t think of death. Life insurance comes in handy during such situations to protect you during such worst-case scenarios financially. Life insurance has three different choices:

1.   Whole Life Insurance

This one is lifetime guaranteed. It offers a specified benefit given to your spouse or other beneficiaries upon your death. It accumulates cash value over time and provides the opportunity to earn dividends.

2.   Term Life Insurance

This policy provides coverage for a certain number of years, mostly 15, 20, or 30. If you live longer than the plan, no benefits are paid out since the coverage automatically expires. However, most term policies allow for a continuation after the initial term though at higher charges.

3.   Universal Life Insurance

This policy is a hybrid of the two. It also allows you to set your premiums and death benefits.

Disability insurance becomes a significant refuge when one or both parents cannot work during a disabling injury or illness. No specified amount can never be enough for anyone. That’s why it’s essential to consult a financial expert to help you explore the best option that will fit your financial capability and excellent financial standing.

3.) Write A Will

Thinking about writing a will can be pretty uncomfortable. In a case of untimely death, the state decides how and with whom your assets are shared. The state’s decisions may probably go against your preferences. This is why a will comes in handy to name the guardian to your kids and who will manage your asset distribution when they become adults.

Have the hard conversations of when they are allowed to chip in, to make healthcare and financial decisions. An attorney will give a good outlook that will help you set up a financial trust that aligns with your situation and goals.

4.) Adjust your Emergency Fund

An emergency fund is essential to ensure your household runs smoothly in the event of unforeseen financial circumstances. The amount set aside varies from family to family but should start with three to six months of living expenses. Your emergency fund should now reflect the cost of having a child versus what you initially saved for.

5.)   Include your child in your Medical Insurance Cover

Having a baby is a qualifying life event that allows you to adjust your health plan to enroll your child.  Most of these plans require you to add your child within 30-60 days post-delivery. Try and add up your child as fast as possible to prevent those recurring cash expenses during pediatrician visits.

6.)   Don’t rush to make a Home Upgrade

Some couples equate good parenting to owning a home. However, financial planners advise couples to wait until 3-4 years to make a move. It would be best to have a better outlook of what you want the future to be like within that time.

7.)   Tax Breaks

Childcare can be expensive for many parents. The [US] government offers tax breaks to reduce the tax burden on individuals, allowing them to keep more of the money that they have worked for. Tax breaks are awarded either from claiming deductions or excluding income from your tax returns. Continue Reading…

How to raise money-smart kids

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By Gaurav Kapoor, Founder, Mydoh

(Sponsor content)

Financial literacy isn’t an innate skill. Like most skills in life, financial literacy must be learned – the problem is who teaches it? Parents know they play a part, but they may lack the confidence, or the knowledge.

Helping your children develop good money habits as they enter their teen years is a great place to start their financial literacy journey. Teenagers are eagerly seeking out financial independence and may be earning money through an allowance or an after-school job.

As they look to spend their hard-earned money, it’s crucial to set them up for success. After all, money isn’t just about dollars and cents, it’s about the choices we make with it. Parents want to teach their children to be money-smart – to have skills to earn, budget and spend, but they also want to share the value, emotions and experiences that come with money.

This notion of early financial literacy is what motivated me to create Mydoh, the Smart Card for kids.

Check out my best tips below for raising money-smart kids with the help of Mydoh:

Leverage technology that helps your kids learn how to save, and spend, their money

Kids today are more tuned in to technology than ever before – so why not use tech to teach them financial literacy?

Mydoh is a Smart Card for kids that comes with a money management mobile app, available on iOS and coming soon to Android. Kids gain financial skills by earning money through tasks and an allowance (set up by their parents) and by making their own purchases (wherever Visa is accepted) using their Smart Card issued by RBC through the app, with a physical card coming soon. This gives kids the autonomy, competency, and confidence to make their own earning and spending decisions – learning values that help build a strong foundation for the future.

Through the app, kids can manage their own money in the real world, making decisions to spend and earn, while parents get visibility to their spending and can have better money conversations. Continue Reading…

MoneySense Retired Money: How safe are REITs and REIT ETFs during the Covid recovery period?

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MoneySense.ca: Photo by energepic.com from Pexels

My latest MoneySense Retired Money column has just been published: it looks at how much real estate should make up of an investment portfolio, either through direct ownership in physical real estate, or through more diversified REITs or REIT ETFs. Click on the highlighted headline for the full column: How much real estate should you have in a balanced portfolio? 

How much should real estate comprise in a balanced portfolio? While a principal residence certainly will be a big part of most people’s net worth, personally I don’t “count” it as part of my investment portfolio, even though it can ultimately serve as a retirement asset of last resort, via Home Equity Line of Credits (HELOCs), reverse mortgages or simply an outright sale when it’s time to enter a retirement or nursing home.

If you take that approach, and many of my advisor sources do, then the question becomes how much real estate should you have in your investment portfolio, above and beyond the roof over your head?

Certainly, if you are happy being a landlord and handy about home maintenance, direct ownership of rental apartments, duplexes or triplexes and the like is a time-honored route to building wealth. That’s the focus of organizations like the Real Estate Investment Network (REIN).

However, if you don’t want the hassle of being a landlord, you may want to try Real Estate Investment Trusts (REITs), which are far more diversified both geographically and by housing type. Some REITs focus on baskets in particular real estate sectors, such as residential apartments or retirement homes.

A still more diversified approach is to buy ETFs providing exposure to multiple major REIT categories, whether Canadian, US or international.

Adrian Mastracci, portfolio manager with Vancouver-based Lycos Wealth Management, says the REIT idea “makes sense” but suggests they should not make up more than 5 or 10% of an investor’s total wealth or not more than 7% of an equity portfolio. “I consider it part of the equity bucket. Publicly traded REITS trade more like equities than real estate.” He advises buying top-quality REITs (or ETFs holding them), diversified across Canada but avoids foreign ETFs because “you want the dividends taxed as Canadian dividends.”

Most of the major ETF suppliers with a Canadian presence have broad-based passively managed REITs although there is at least one actively managed one.

Major passive and active Canadian REIT ETFs

The Vanguard FTSE Canadian Capped REIT Index ETF (ticker VRE/TSX) was launched in 2012 and has a modest MER of 0.39%.  As the name implies, any one holding is capped at 25% of the total portfolio [typically this is RioCan.] Its mix is 22% retail REITs, 19.8% office REITs, 18.5% real estate services, 18.5% residential REITs, 8.5% industrial REITs, 8.1% diversified REITs and 4.6% real estate holding and development.

An alternative is XRE, the iShares S&P/TSX Capped REIT Index ETF, trading on the launched in 2020, which holds roughly 16 Canadian REITs, with weightings almost identical to VRE. The iShares product (from BlackRock Canada) has a slightly higher MER of 0.61%. Continue Reading…