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.

Millennial financial plans include emergency funds but not insurance  

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By Alyssa Furtado, Ratehub.ca

Special to the Financial Independence Hub

Millennials face financial insecurity through precarious work, soft wage growth, and student debt, but they do seem to be planning ahead for financial emergencies; they’re just not turning to insurance as a safety net, according to a new survey.

A poll of 1,000 Canadians by Ratehub.ca found millennials are saving an average of 35% of their pre-tax income, with 36% of respondents stating their emergency fund is a priority. By comparison, 33% of Generation Xers and 27% of Baby Boomers said an emergency fund is one of their key savings goals.

However, Canadian millennials aren’t as likely to turn to insurance as a source of emergency relief as their generational counterparts. Just 22% of millennial renters have tenant insurance (also known as contents or renter insurance), the survey found, compared to 31% of Generation Xers and 44% of Baby Boomers. Renters aren’t legally required to have tenant insurance, but many landlords will ask for proof of coverage before the lease is signed.

Tenant insurance not only helps renters protect the value of their possessions, but it can also cover the costs of repairing damage to their rental unit and the building. For example, if a renter’s toaster catches fire and causes damage to their unit and neighbouring units, tenant insurance could help cover the cost of the damages.

Millennials less likely to have health or dental coverage

Due to the fact that many millennials work part-time, are self-employed, or have contract positions, they’re also the least likely of the three generations to have extended health or dental insurance: 23% of those surveyed said they have this coverage, compared to 28% of Generation Xers and 32% of Baby Boomers. 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…

Longevity, marital breakdown are 2 big reasons women need to take charge of their finances

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By Kathleen Peace, CFA, CFP

Special to the Financial Independence Hub 

A recent poll by IPC Private Wealth among 400 affluent Canadians with at least $500,000 in investable assets revealed that 74% of men say they are the lead financial and investment decision-makers in their household. Among women, only 46% say they are the lead decision-makers.

Ladies, listen up! You are probably going to live longer than your male partner. On top of this, there is a 50% possibility that you will divorce your partner (with financial conflict being one of the reasons why). In either case, you will experience a large inflow or outflow of both investment assets and income. This eventuality means that being 100% cognizant of your family’s current financial situation is a must. Waiting to figure this out until after a spouse’s passing or marriage breakdown is at best reckless, and at worst, an enormous imposition on what will already be an emotionally taxing situation.

Let’s get on top of this. A Masters degree in Finance is not required. Gather information and open up a regular dialogue with your spouse. Both will go a long way to getting on top of your family’s pecuniary situation. Here’s how to get started.

Communicate, Communicate, Communicate

Enlist your partner’s help in becoming more aware of your financial situation. Given that money issues are among the top friction-areas for couples, keeping an open dialogue about how money is run in your family will benefit your marriage both fiscally and emotionally. Opening up this discussion is not always easy.

For many families, money is a taboo subject; in fact, many feel that the most difficult topic to discuss with loved ones is their personal financial situation (apparently they would rather discuss death, politics or religion!) An incredibly helpful resource for starting the money conversation with your partner: Breaking Money Silence: How to Shatter Money Taboos, Talk More Openly about Finances and Live a Richer Life, by Kathleen B. Kingsbury.

Know your Advisor

If you don’t know your family’s financial planner/advisor, change this! 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…

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…