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.

Spousal Loans: Loan money to your spouse, save on your tax bill

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By John Natale

Special to the Financial Independence Hub

Canadians often consider tax-saving strategies on an individual basis but don’t consider how their families can also contribute to lowering the tax bill. While often overlooked, family tax-saving strategies are effective and legitimate ways for households to save big on tax dollars each year.

The Canadian government recently announced the reduction of its prescribed interest rate from 2% to 1% starting on July 1, 2020 – the first time the prescribed interest rate has been this low since April 2018. For Canadian families, this represents a significant opportunity to make a loan directly to family members or where minors are involved, to a family trust, and use this income-splitting strategy to their advantage.

How does it work?

If you loan your spouse money for the purpose of income-splitting, the prescribed rate (the rate of interest you charge your spouse) remains fixed for the term of the loan. Through this tax-saving strategy, that many may not be aware of, transferring income from a high-income earner to a family member in a lower tax bracket allows Canadian families to pay less taxes overall, potentially saving hundreds or even thousands of dollars per year.

Although the Canada Revenue Agency (CRA) restricts most forms of income-splitting, there are legitimate ways to split taxable income with a spouse or minor child such as this strategy. Provided the loan is properly structured, the loan proceeds can be invested by the spouse receiving the loan, with the income taxed at their lower marginal rate.

Of course, one of the keys to a successful income-splitting strategy is to ensure that investment returns are higher than the interest rate charged on the loan: so keep that in mind when choosing your investment.

A real-life example

Let’s suppose spouses Jack and Jill are looking for ways to lower their family tax bill. They are in different tax brackets, Jack at 48% and Jill at 20%. Jack loans Jill $100,000 at a prescribed rate of 1%. Jill invests the money and earns 4% – or a total of $4,000. She then pays Jack the $1,000 loan interest and deducts the same amount as “loan interest expense.”  Jill pays $600 in tax on the remaining $3,000, and Jack pays $480 on his interest income. Continue Reading…

The Pros and Cons of Mortgage Forbearance during the Pandemic

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By Holly Welles

Special to the Financial Independence Hub

Millions of Americans have lost their jobs, experienced furlough and applied for unemployment during the COVID-19 pandemic. As a result, many are struggling financially, and some must even choose between buying food to feed their families and paying the bills. If you find yourself in the same predicament, you may wonder how you’ll be able to afford your mortgage payments in the coming months.

While rethinking your budget may help you scrounge up a few extra dollars here and there, it likely won’t be enough to pay your mortgage without a steady stream of money coming in. If you’re unable to make payments any longer, mortgage forbearance may be the route you need to take. Here’s what you need to know as you pursue this option.

Pros of Mortgage Forbearance

While mortgage forbearance shouldn’t be your first option when seeking financial assistance, it can be helpful, especially as you cope with short-term financial emergencies. Here are a few advantages of pursuing mortgage forbearance.

1.) Suspends mortgage Payments

If and when you agree to mortgage forbearance with your servicer, they will likely temporarily defer your payments for a specified period or allow you to skip some. This setup will help you avoid foreclosure or damaging your credit score.

Most importantly, a temporary suspension of payments gives you time to find a job, recover from the pandemic and begin saving money and eventually making payments again.

2.) Protection under the CARES Act

Under the CARES Act [in the United States], homeowners can receive certain protection benefits if they have a federally backed mortgage. One such benefit is that your lender or servicer may not foreclose on you until June 30. Another advantage includes having the right to request mortgage forbearance for up to 180 days, plus an additional 180-day extension.

Moreover, lenders don’t require documentation proving you qualify for forbearance. Speak with your servicer and answer a few questions about your financial hardship to qualify.

3.) Better Alternative to Foreclosure

The alternative option to forbearance is foreclosure: which often goes hand in hand with bankruptcy. This combination can easily sink your credit score for years and result in months, and even years, of legalities and paperwork. It’s also incredibly expensive for lenders to foreclose on a home, so allowing borrowers forbearance is a more affordable option.

Cons of Mortgage Forbearance

All of those benefits may make mortgage forbearance sound like a great deal. However, there are consequences to pursuing this option, even if it does solve your financial problems in the short-term.

1.) Possible Credit penalties

Pursuing forbearance during the coronavirus pandemic should not affect your credit score. In fact, the CARES Act states that no negative credit reporting or late charges will occur during your forbearance agreement. However, credit penalties and dips may still happen as your lender reports your account information to credit bureaus. Continue Reading…

How to save on auto insurance during COVID-19

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By Matt Hands, RateHub.ca

Special to the Financial Independence Hub

You might only review your car insurance once a year, but in times of financial hardship, exploring all opportunities to cut back is a smart idea. Whether your car is sitting parked, or you’re only driving for essentials like groceries and medicine, you should know two things.

First, the industry is adapting to the current climate in COVID-19 by offering some payment deferrals and flexible payment options. Second, there are things you can do, be it in a pandemic or not, to save money.

Auto insurance industry response to driving less

The industry’s initial response, almost unanimous in nature, was to offer payment deferral options allowing individuals to delay their monthly premium payments for a defined period of time: ideally once your income returns to expected levels. In addition to this, some providers are waiving non-sufficient funds charges (NSF fees), but be mindful that your bank could still charge you the fee, so it’s best to check with them.

In a more surprising move, many insurers have relaxed their rules about using your vehicle in the shared economy:  e.g. uber, lyft, etc. Depending on your provider, you may also be able to get a coverage extension at no additional charge allowing you to drive your car for commercial reasons to make ends meet. Typically, you’d need a special coverage addition or endorsement on your policy to drive and make money from services like Uber Eats.

More recently, the provincial government announced they will allow the Ontario auto insurance industry to provide premium rebates in the otherwise regulated environment. Now, we’re seeing some more tangible reductions being offered to Ontario drivers. The various relief options can be unique to each provider, so make sure you contact your insurer to find out what potential discounts and flexible payment options are available to you.

Automatic discounts

A number of insurers are applying automatic discounts, which don’t require the policy holder to do anything. Allstate, Pembridge, Pafco, and Travelers are issuing a one-time payment equal to about 25% of your monthly premium. Gore Mutual decided to give a payment worth 20% of 3 months of premium payments. iA insurance is offering the same 20% premium discount, but over 2 months, and used as a credit on your account. L’unique, SSQ, and LaCapitale are both offering a 20% rebate applied as a credit for one month. Unica is offering a 15% break on premiums for April, May, and June.

Passive discounts

Other insurers are taking a more passive approach, which requires the policy holder to initiate the conversation about discounts. Aviva, Economical, Sonnet, and Family will reduce your car insurance premium by 75% if you aren’t driving anymore, or 15% if you’re driving less. They still don’t want you driving for commercial purposes, though. CAA is offering a 10% base rate reduction, Unica is doing the same by 15%. Desjardins and The Personal are calculating their discounts by looking at 3 months of premiums and reduced driving to figure out your unique discount.

Actions you can take to save on car insurance

Deferral should be a last resort, as you will still have to pay the premiums owing eventually on top of future payments. But don’t fret, there are some other ways to save on car insurance.

Reducing the kilometres on your policy

You may not remember, but when you first get car insurance quotes, you’re asked how many kilometres you drive in a year and your daily commute to work. Continue Reading…

Want to save money on Energy Bills? Go Solar

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By Gary Bordeaux

Special to the Financial Independence Hub

Most people are well aware that solar power is better for the environment, but did you know it can have a positive impact on your wallet, too? Start saving today by converting your home to solar.

Affordability

Year after year the cost of installing a solar panel system has been decreasing dramatically. In the last decade alone costs have dropped nearly 70 per cent, putting solar energy well within the financial reach of most homeowners. More options for ownership have also become available, and you can now finance or lease a system. That means you can see immediate savings on your energy bill with lower upfront costs. Contact the most trusted Colorado solar provider to learn how you can affordably convert to solar today.

Reduced utility bills

It’s almost a given that when you rely on a traditional energy source your bill will increase each year. What if instead of paying more and more you could watch that payment decrease instead? With a well-designed solar installation, your utility bills will shrink: potentially even down to zero if your system generates all of the energy your home requires.

No dynamic pricing

What is dynamic pricing? It’s when a service provider raises rates at peak times, and it’s becoming the norm in the energy industry. Instead of one flat rate for energy usage throughout the day, utility companies increase pricing when the demand is highest. Most home energy consumption occurs from 4 p.m. to 9 p.m. on weekdays, so utility companies raise the cost of electricity during that time period. It’s meant to discourage use during high-demand hours, but what it really does is drive up the total you see on your bill.

When you’re off the grid, you aren’t subject to paying more during peak periods. You’ve generated your own abundant supply of solar energy that is 100 per cent free to use, regardless of when you choose to use it.

Usage rebates

Savings are provided to solar owners through a process called net metering, which makes it possible for you to profit from the energy made by your panels. Continue Reading…

Cross-border death: an administrative nightmare for survivors

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By Elena Hanson

Special to the Financial Independence Hub

How can the estate of your American aunt, who lived in the United States and visited Canada only three times, be considered a resident of Canada? And how can the Canada Revenue Agency tax her estate income while the IRS may or may not be able to collect tax on anything? It gets even more interesting if she held her assets in a living trust or held majority ownership in a private corporation.

I came across this exact scenario and it shows what can happen when moving a trust across the border.

In 2003, Tom and his wife Rose settled their trust. They were both U.S. citizens and residents as well as the beneficiaries and trustees of their trust. Both passed away within months of each other in 2017. Tom died first.

When Rose died, their trust was the beneficiary of annuities and an Individual Retirement Account (IRA), and also consisted of

  • investments in marketable securities,
  • a corporation owning 50% of a condo,
  • the other 50% of the same condo,
  • and some personal property.

Prior to their deaths, Tom and Rose resigned as Trustee, and their niece Anne became the sole Trustee of the U.S. Trust. She also became one of four beneficiaries of the estate upon their passing. Nothing too complex, so far. Right? Except that Anne and the three other beneficiaries happen to be Canadian citizens and residents who never lived in the U.S. or filed U.S. taxes.

What exactly does this mean? Are there tax implications of the trust moving to Canada? The short answer is, yes. Let’s have a quick look at what those implications might be.

First, from the perspective of the Internal Revenue Code (IRC), when Anne became Trustee of the trust in February 2017, the trust moved to Canada but retained something known as “grantor trust status in the U.S.” When Rose died in May 2017, the trust then became a non-resident and no longer held grantor trust status for U.S. tax purposes.

What’s so great about grantor trust status? Typically, moving a trust from the U.S. to Canada would result in U.S. tax on the appreciation of trust assets. Because the trust maintained its grantor status after it was moved to Canada, the trust assets were not treated as sold.

That’s the good news, but here’s the straight goods on how the U.S. tax regime treats the disposed assets held within the trust:
Continue Reading…