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.

Navigating the RESP

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Image via Pexels: Ketut Subiyanto

By Megan Sutherland, BMO Private Wealth

Special to Financial Independence Hub

The days are getting shorter, nights a bit cooler and with September now upon us, back to school is on the minds of parents nation-wide.  Since 2007, the average cost of undergraduate tuition fees in Canada has increased 55% and, according to a 2023 poll, 81% of parents believe it’s their responsibility to help pay for post-secondary costs.  Conversations I’m having with clients, friends and family certainly corroborate these numbers, making it timely to talk about the Registered Education Savings Plan (“RESP”).

For decades Canadians have been able to utilize the RESP, a program developed to incentivize savings with grant money (Canada Education Savings Grant, “CESG”), and preferential tax treatment.  Who doesn’t love free money!

Okay, so what’s the deal?

  • What is the maximum amount I can contribute per beneficiary?
    • A lifetime contribution limit of $50,000 per beneficiary.
  • How can I receive the maximum CESG?
    • Contribute up to $2,500 per year to receive 20% in CESG.
  • What if I’ve missed years of contributing?
    • You can catch up one additional year of CESG per year.
  • How much is the CESG grant?
    • Maximum of $7,200.
  • Is there an age limit on receiving CESG?
    • The CESG is available until the calendar year in which the beneficiary turns 17. However, there are specific contribution requirements for beneficiaries aged 16 or 17.
  • What is the tax treatment?
    • Contributions are not deductible but can be withdrawn tax-free.
    • Investment growth and CESG are taxed to the beneficiary when withdrawn for qualifying educational purposes.
  • Do you have to be the beneficiary’s parent to open one?
    • Any adult can open an RESP on behalf of a beneficiary – parents, guardians, grandparents, other relatives or friends – however, contribution across all plans must not exceed the maximum per beneficiary.

If you hope to have an aspiring doctor on your hands, consider harnessing the power of compounding to amp up your savings and open a plan as soon as possible!

Compare:

  1. Contribute a total of $36,000 over 14.4 years and receive the maximum CESG
    • Annualized return: 5%
    • Value at age 18: ~$80,000
  1. Contribute a $14,000 lump-sum in year one, then $36,000 over 14.4 years, for a total of $50,000, and receive the maximum CESG
    • Annualized return: 5%
    • Value at age 18: ~$115,000

 

Net benefit from additional $14,000 contribution in year one: approximately $20,000.

Saving to Attract CESG Only vs. Saving to Maximize Growth and Attract CESG 

Just like everything in life, make sure to read the fine print.  Keep in mind the following tips and traps:

  1. Open a Family Plan. Growth can be shared by all beneficiaries and the CESG money may be used by any beneficiary to a maximum of $7,200.
  2. Be prepared if the funds aren’t depleted by school costs. Contributions can be withdrawn by the subscriber without penalty. However, remaining CESG is clawed back. Growth in the RESP can be contributed to your RRSP (up to $50,000 if you have available contribution room), otherwise it is taxed at your marginal tax rate upon withdrawal by the subscriber, and there is an additional penalty tax of 20%.
  3. Choose investments wisely. Taking too much risk could result in losses that may create hard feelings or regret. Make sure to plan for withdrawals, potentially transitioning assets to cash, laddered bonds or GICs to ensure funds are available to pay for education costs.
  4. Put it in your estate plan. If you are married, consider opening the RESP in joint name. If you aren’t married or open the RESP in your name only, name a successor subscriber in your Will.
  5. U.S. citizens beware! The U.S. does not recognize the RESP as an exempt account type. Therefore, any earned income in the account is reportable on your U.S. tax return and can result in double taxation. Continue Reading…

Retired Money: Should retirees consider a Reverse Mortgage?

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My latest MoneySense Retired Money column looks at the question of whether seniors or those near Retirement should consider  taking out a reverse mortgage. Click on the highlighted headline for the full column: Why a reverse mortgage should be a last resort for most Canadian retirees.

At first glance, reverse mortgages sound appealing, especially for those whose wealth mostly resides in their home equity. If you have little other sources of future retirement income, and especially if you have no heirs who will be annoyed at having a reduced inheritance, then the prospect of living in your home in old age and generating tax-optimized retirement income to boot does sound appealing.

Have your Home and your Money too?

As P.J. Wade wrote in her 1999 book, Have Your Home and Money Too,  reverse mortgages can be “your best friend or your worst enemy … your choice!”

However,  there’s not a lot of Reverse Mortgages available in Canada. The two main ones of which I’m aware are Equitable Bank and HomeEquity Bank (aka CHIP). According to Rates.ca “Reverse mortgages always cost more than conventional mortgages because the lender’s funding costs are higher.”

The full column includes input from occasional MoneySense contributor Allan Small, who is a senior investment advisor with IA Private Wealth Inc. as well as a podcaster. He says reverse mortgages “have not played a part in any of the retirement plans and retirement planning that I have done so far in my career. I think the reverse mortgage idea or concept for whatever reason has not caught on.” Also, “those individual investors I see usually have money to invest, or they have already invested. Most downsize their residence and take the equity out that way versus pulling money out of the property while still living in it.”

Milevsky: It all depends on to what a financial strategy is compared

For me, the definitive word on Reverse Mortgages or any other financial instrument goes to noted Finance professor and author Moshe Milevsky. He told me in an email that when it comes to reverse mortgages – or any other financial strategy or product in the realm of decumulation – “I always ask this question before giving an opinion: Compared to what?” He worries about the associated interest rate risk, which is “difficult to control, manage or even comprehend at advanced ages with cognitive decline.”

What are the alternatives to a reverse mortgage? Is it selling the house and moving? Or, Milevsky asks, “Is the alternative reducing your standard of living? Is the alternative taking a loan from a local bookie? It’s the alternative that determines whether the reverse mortgage is a good idea or not … Generally I will not rule them out and I think they will continue to grow in popularity among retiring boomers, but I wouldn’t place them at the very top of the to-do list when you get to your golden years.”

Darren Coleman interviews Tax expert Kim Moody about Liberals floating tax on Home Equity

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Darren Coleman (left) and Kim Moody (right, with glasses).

The following is an edited transcript of an interview conducted by financial advisor Darren Coleman’s of the Two Way Traffic podcast with tax expert Kim Moody, of Moody Private Client. It appeared on August 8th: click here for full link.

Moody recently wrote an article in the Financial Post about the government flirting with the idea of a home equity tax, even on principal residences. Such a tax could result in an annual levy of about $10,000 for a home worth $1 million. He described that, along with the increase in the capital gains inclusion rate that has already passed into law, “really bad tax planning” based on ideology, not economics.

In the podcast Moody and Coleman also discussed …

  • The disparity between U.S. and Canadian tax rates, beginning with how the state of Florida compares with Ontario, a difference of 17%.
  • The tax model established in Estonia lets you reinvest in your company without paying corporate tax while personal income is taxed at a flat rate of 20%. They say such a system would work in Canada, and celebrate success and entrepreneurship.
  • What organizations like the Fraser Institute and mainstream economists think about Canada’s economic performance.

Below we publish an edited transcript of the start of the interview, focusing on the capital gains inclusion rate and trial balloon about taxing home equity.

Darren Coleman, Raymond James

Darren Coleman:  I’m Darren Coleman, Senior Portfolio Manager with Raymond James in Toronto.  I’m delighted to be joined by Kim Moody of Moody’s tax and Moody’s private client. You’re also a law firm based in Calgary, Alberta, and probably one of Canada’s best known tax and estate planning advisors. You may have heard our last conversation with Trevor Perry  about some of the issues we might be seeing in terms of taxation of the principal residence in Canada.

I think because governments have spent so much money that we’re going to see tremendous innovation in taxation.  Do you want to set the table for the article you wrote in the Financial Post, where you talked about where this is coming from, and why Canadians might be on alert for what might be coming to tax the equity in their homes.

Kim Moody: The point of the piece was mainly just to put Canadians on notice that you had the Prime Minister and the finance minister sitting down with what I call a pretty radical
think tank.  I consider them an ideological bastion of radical thought but that issue aside,
they call them call themselves a think tank, and this particular one, led by Paul Kershaw of
Generation Squeeze, has stuff on their website that pretty much attacks older Canadians:
basically saying they’ve gotten rich by going to sleep and watching TV. Unbelievable. Whoever approved that, it’s just so offensive. But that issue aside,  the whole connotation of the messaging is that, hey, these people are rich. We’ve got these poor young Canadians who are not rich and they can’t afford houses because you’re rich and …

Darren Coleman Someone should do something about it, right? That’s the trick.

Kim Moody

Kim Moody: Someone should do something about it. And their solution is to introduce a so-called Home Equity tax on any equity of a million dollars or more. And they call it a modest surtax of 1% per year. So it’s like another, effectively property tax … It’s just so nonsensical and so offensive on a whole bunch of different levels. Like you think about grandma and grandpa, yeah, they’ve got equity in their homes, but they don’t have a lot of cash. They’ve been working hard their entire lives to pay off their houses. And yes, they want to transfer down to their kids at some point, but right now, they’re living again, and they’re making ends meet by living off their pensions that they worked hard, and you’re expecting them to shell out more money for that, and I find that offensive.

…. Back to the original premise of why I wrote the article:  to let Canadians know that our leaders are entertaining stuff like this. It doesn’t mean they’re going to implement it, but they’re actually entertaining radical organizations like this and secondly, just to put Canadians on
notice that this is just the beginning. If this regime continues with out-of-control spending and no
adherence to basic economics, then we could expect a whole bevy of new taxes.

Darren Coleman  

Indeed, they’ve already done some of this, right? So you know that this idea about we’re going to tax home equity, either through some kind of annual surtax on equity over a certain amount, or we’re going to put a capital gain on principal residences. And I would argue that for years now, Canadians have had to report the sale of the principal residence on their tax returns, which is a non-taxable event, yet you now have to tell them, and if you don’t, there’s a penalty. Continue Reading…

Common traits of an excellent Rental Tenant

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Finding a good tenant can be a bit like dating. You work your way through interested applicants until you come across someone with decent qualities that you can trust. Only, instead of drinks at the bar and long walks on the beach, you’re searching for someone who likes walk-in closets and a spacious backyard, someone who isn’t going to break your heart or your sink. Don’t let your real estate investments go to waste by renting to bad tenants. Here are a few of the common traits of excellent tenants and what to look for.

By Dan Coconate

Special to Financial Independence Hub

Do you own a rental property that needs the perfect renter? Excellent rental tenants often display the same common traits. And having a superb tenant is one of the most important aspects of property management. It helps ensure a steady income, reduces vacancy rates, and minimizes property damage.

This post will provide valuable insights on how to attract the right type of tenant for your property, highlighting what to look for and how to align yourself with the ideal renter. You’ll learn what characteristics to seek, how to market your property effectively, and the steps needed to build a positive landlord-tenant relationship.

Understand your Ideal Tenant

Identifying the ideal tenant involves recognizing key traits like responsibility and reliability. Responsible tenants pay rent on time, maintain the property, and follow lease agreements. Reliability means they have a stable income and a good rental history. During the screening process, you can identify these traits by asking the right questions and verifying references.

An ideal tenant will also have a good credit score, as this often indicates financial responsibility. You should look for consistent employment history and positive feedback from previous landlords. Personal references can also provide additional insights into their character.

Effective Property Marketing

To attract the right type of tenant, effective property marketing is important. Start by creating targeted property listings that highlight your rental’s unique features and benefits. High-quality photos and detailed descriptions will make your property more appealing. Using social media and professional networks will help you reach a larger audience. Continue Reading…

Is a Tax Credit a better way to support Social Housing?

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image courtesy CMI Financial Group

By Kevin Fettig

Special to Financial Independence Hub

One of the biggest challenges in Canada’s rental housing crisis is the lack of new affordable housing units being built.

Despite efforts through the National Housing Strategy’s five programs, only 17,000 units were delivered after four years. This disappointing outcome is only a modest improvement over Ottawa’s track record in the past 30 years. For example, between 1996 and 2013, fewer than 7,000 new units were provided by federal and provincial governments.

In contrast, the United States built 3.5 million subsidized rental units from 1987 to 2021. Adjusted for population, this is equivalent to building 11,000 units per year in Canada. Both countries have tightened the tax benefits of rental real estate, but the U.S. offset this policy shift by introducing the Low-Income Housing Tax Credit (LIHTC) to mitigate the impact of these changes on low- and middle-income renters.

A Canadian LIHTC would offer an alternative method of federal funding by leveraging private-sector expertise in owning, building, and managing low-income rental housing. The LIHTC would provide tax credits to both for-profit and nonprofit owners of rental housing, with nonprofits having the option to sell these tax credits. A key aspect of the program would be its efficient resource allocation, achieved by creating competition among developers for tax credits and using a market-based test for the viability and need for low-income housing.

Complements existing Renter Support Initiatives

The program could be designed to complement existing renter support initiatives, such as local government programs, housing allowances, and rent supplements. It would work by providing tax credits to developers, who would then pass them on to investors to offset their income tax.

Unlike earlier tax credit programs like the Multiple Unit Residential Buildings (MURB) provision, this program would have a cap, with credits allocated annually to each region based on population. The credits would be federally funded and awarded according to provincial objectives. Continue Reading…