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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…

How to protect against the rising threat of Ransomware

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ransomware
Ransomware can attack Windows or Mac PCs

By Michael Benadiba

Special to the Financial Independence Hub

[Editor’s note: this blog originally appeared on the Hub in 2017 and is being republished in the wake of the Colonial Pipeline ransomware attack of 2021 and, just this week, JBS meat plants.]

In 2016  the University of Calgary got hacked. The university was hosting a conference with thousands of professors and on the first day problems started to appear with the databases.

The school’s IT department said this was due to a type of malware called ransomware. Before long, people on the campus had to communicate with one another via walkie-talkies, since the email system was suspended. Then it came back up again. How? The university paid the hackers a $20,000 ransom.

Both Windows and Mac PCs targeted

Although ransomware has been around for some time, it just now is becoming well known. It targets computer operating systems like Windows 7, 8 or 10 and Mac OS X, which means any organization using such operating systems is potentially vulnerable. And that’s a lot of organizations. Continue Reading…

Purpose Longevity Pension Fund game changer for Canadian retirees?

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It’s possible that the game has been changed for the better, for Canadian retirees. Purpose Investments has launched a retirement funding mutual fund that is designed to deliver an annual payout at 6.15% annual. That is, the fund would pay out a minimum of 6.15% of your initial total fund value. For every $100,000 that you have invested, you would receive an annual payment $6,150. Introducing the Purpose Longevity® Pension Fund.

The Purpose Longevity Pension Fund offers the pension model, now available to the typical investor. Advisors will also be able to use the fund and will collect a modest trailing commission. For many Canadian retirees it will certainly be a game changer.

Income for life.

One of the greatest fears for retirees is running out of money. And most retirees don’t want to manage their own investments. They want to enjoy life, without financial worry. The Purpose Longevity Pension Fund will allow Canadians to top up their Canada Pension Plan and Old Age Security payments. Retirees may have other private pensions and other assets within the mix. The fund will allow a retiree to pensionize a large percentage of their liquid assets. They approach would remove much of the stock and bond market (volatility) risk.

And more importantly perhaps, it would remove the risk of investors messing up their retirement portfolio (and retirement funding) by way of bad behaviour.

Related post: Pensionize your nest egg with annuities: your super bonds.

The Purpose fund sits between the Vanguard VRIF ETF retirement funding solution and the traditional annuities. The Vanguard ETF is designed to pay out at a 4% rate of the portfolio value, adjusted each year.

An annual 6.15% payment (at age 65) is a big step up the retirement funding ladder.

When a retiree manages their own investment portfolio they will often use the 4% rule as a benchmark for the level that the portfolio can safely deliver retirement income, including an annual inflation adjustment. On Boomer and Echo I had offered …

The 4% rule. Is there a new normal for Canadian Retirees?

Everything changes in the decumulation stage.

Life changes and priorities change when we switch to the retirement or decumulation stage. Retirees just want to get paid.

Purpose Investments Presentation

Canadian retirees are not necessarily well served by the financial institutions in the retirement stage.

Purpose Investments Presentation

The pension model for the masses.

How does a fund pay out at a 6.15% rate (and potentially to increase) while studies show that a balanced or conservative investment mix can only ‘safely’ pay out at a 4%-4.5% level? Once again it follows the model used by pension funds (public and private) around the world.

I asked Som Seif, CEO of Purpose Investments to deliver an explanation.

It is based on what they call Longevity Risk Pooling. The difference between the required return on the fund (net 3.5%) and the income paid to investors (6.15%+) is because when people buy, they get their income, but as some people redeem/pass away earlier, they leave behind in the pool their returns on their invested capital (ie they get their unpaid capital out upon death or redemption).  These returns left behind reduce the total return required to provide the income stream for all investors.

Som Seif

It is the pooling of funds by the collective group of investors that will hold the fund, that delivers the secret sauce. There is retirement funding strength in numbers.

This is called Longevity Risk Pooling (or Sharing).

And as per the above quote, the underlying fund holdings only have to deliver at an annual 3.5% rate of return for the Purpose Longevity Pension Fund to deliver on the 6.15% funding level. Here’s ‘the how’ …

If you put in $500,000. After a number of years you receive distributions of $200,000, but then you pass away.  Your estate would receive the unpaid capital of $300,000 ($500k-$200k). The return on the invested capital would stay in the pool for the benefit of all of the investors remaining.  This return would reduce the overall required return for everyone.

Som Seif

The approach as been back tested.

Morneau Shepell conducted extreme stress testing on the model, which included the use of their economic scenario generator (ESG) that produced over 2,000 different simulations of future paths of economies and financial markets.

Probability of success (i.e. not having to decrease the income payout):

  • Over a 25 year period: 91%
  • Over a 35 year period: 86%

Purpose Investments can reduce income levels to ensure that the assets are never depleted and that income payments can continue to unitholders for their lifetime.

Net, net, the payments could move higher or lower. The risk will be managed, while any benefits offered by the markets will be passed along to investors.

The fund series.

There will also be a D-series available for self-directed investors.

The game changers combo offering.

On MoneySense and when we put together the Best ETFs in Canada, we often refer to the one ticket asset allocation ETFs as game changers. For use in the accumulation stage (wealth building) Canadian investors can hold comprehensive all-in-one portfolio ETFs with fees in the range of 0.20%.

And now enter the Purpose Longevity Pension Fund that might turn out to be the next piece in the game changing investment landscape.

  • Accumulation: one ticket
  • Decumulation: personal pension mutual fund

I’ll continue to do more research and I’ll add to this post. And I would invite reader questions. What do you want to know about this new offering?

I’ll get you the answers and I’ll add the responses to this post.

Thanks for reading. We’ll see you in the comment section.

Support your portfolio and Cut The Crap Investing.

While I do not accept monies for feature blog posts please click here on the mission and ‘how I might get paid’ disclosures. Affiliate partnerships help me pay the bills for this site. That will allow me to keep this site free of ads and easy to read.

You will also earn a break on fees by way of many of those partnership links.

I also have partnerships with several of the leading Canadian Robo Advisors such as Justwealth, BMO Smartfolio ,Wealthsimple, Nest Wealth and Questwealth from Questrade.

Consider Justwealth for RESP accounts. That is THE option in Canada.

At Questrade, Canadians can buy ETFs for free.

I use and I’m a big fan of the no fee Tangerine Cash Back Credit Card. We make about $55 per month in cash back on everyday spending.

Make your cash work a lot harder at EQ Bank. RRSP and TFSA account savings rates are at 1.3%.

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Dale

Dale Roberts is the Chief Disruptor at cutthecrapinvesting.com. A former ad guy and investment advisor, Dale now helps Canadians say goodbye to paying some of the highest investment fees in the world. This blog originally appeared on Dale’s site June 1, 2021 and is republished on the Hub with his permission.

8 Small Business investing options

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What is one investment option that a small business should consider? Why?

To help your small business take on different investment options, we asked financial experts and small business leaders this question for their best investment ideas. From consulting a tax expert to getting into stocks and shares, there are several smart investment tips that may help your small business.

Here are eight investment options that small businesses should consider:

  • Learn About Objectives & Preferences
  • Consult an International Tax Expert
  • Invest in Your People
  • Help Fund Your Home Base
  • Find Companies That Improve Lives
  • Build Wealth with Index Funds
  • Think About Retirement Early
  • Get into Stocks and Shares

Learn About Objectives & Preferences

As any sound advisor will say, the best investment options for a small business truly are based on a personal situation. Some small businesses want more flexibility and control with their savings. Others are looking for less risk and fees. Before looking at investment options, small business owners should learn about their objectives and preferences. Then, they can see how investment options like life insurance or annuities can improve their financial position by safely growing their money while protecting it from tax and market risks. —Chris Abrams, Marcan Insurance

Consult an International Tax Expert

Investment options depend on a small business owner’s situation. Small business owners located overseas must understand that tax laws can differ considerably from country to country and impact their assets, financial accounts, and investments. That’s why consulting with an international tax attorney on issues like cross-border tax structuring, and compliance needs to be a part of the process. Investments aren’t just about the return; they’re also about the tax ramifications and savings by making the right choices. — Jason Kovan, International Tax Attorney

Invest in your People

Some of the most successful businesses tend to have a people-first mentality. An investment in people, whether that is putting in the time to make your customers happy or providing the resources necessary for happier employees, is an investment in your business’ success. If your customers are happy, they will recommend your business to their family and friends. If your employees are happy, they will be more willing to invest their time and efforts into the company’s goals and vision for the long term. — Brianna Vaughan, LendThrive

Help fund your Home Base

Invest in municipal bonds to help fund and develop your home base where most of your customers are located. These types of bonds offer a way to build interest while preserving your capital. They also have some tax benefits. Many municipal bonds are exempt from federal income tax as well as state and local taxes. — Rronniba Pemberton, Markitors

Find companies that Improve Lives

Investing in tech companies and products like ours helps to advance the industry and improve our daily lives. Predictive text and real-time spelling correction capabilities help to open doors for more opportunities not only for your business, but also your customers and employees who struggle with text. It also helps to improve overall productivity to maximize daily efforts. Continue Reading…

Wake up excited about your Future with these Financial Planning strategies

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LowrieFinancial.com

By Steve Lowrie, CFA

Special to the Financial Independence Hub

When people ask me what I do for a living, I sometimes say financial planning. Or investment advice. Or, “I’m a personal financial advisor.”
But none of these descriptors is spot on. As my website says, what I really do is help people wake up excited about life, not worried about money. A key element to this higher calling is to deploy the secrets of simple investing.

Simple investing sounds like a good idea, right? It’s important whether you’re mid-career and all-business, or you’re approaching retirement, with leisure time on your mind. It applies whether you live in bustling Toronto, my hometown of Barrie, or anywhere else in the world. It’s also a familiar theme on my blog, from “Why simplicity beats complexity,” to “Simple investing isn’t easy,” to “Simple Investing Strategies to Take Away from 2018.”

Still, the secrets of simple investing never grow old and always bear repeating, lest we forget: Your long-term financial goals should drive your financial planning strategies, which should guide your investment portfolio … not the other way around. Or, even more succinctly:

Investment Success = Goals + Planning + Building & Maintaining

This basic equation explains why trend-hungry traders chasing after the latest SPACs, NFTs, etc. are going about it all wrong.

Today, let’s unpack this wise, but simple investing advice.

Simple Investing Step 1: Setting Goals

For most of us, the ability to wake up excited about life, not worried about money means having satisfying goals ahead, and realistic plans for achieving them. No wonder a significant part of what I do as a personal financial advisor is to walk people through the emotional and financial elements of goal-setting.

To achieve your personal short- and long-term financial goals, first, you must have them. And yet, I often see busy families rushing right past this critical first step.

I see it when I ask a 50-something couple about their retirement goals. As each partner shares their ideas, differences often emerge. One may be imagining action-packed days, filled with family gatherings and community service. The other might be dreaming of downsizing to a peaceful country cottage and enjoying more quiet time. Who knew?

I see it in younger families too, as they wrestle with life’s tradeoffs: kids, careers, friends, personal interests, neighborhood organizations, soccer league … How do you do it all without going crazy, broke, or both?

I’ve also seen how the pandemic has put many families’ once-solid long term financial goals into a tailspin, creating a challenge and opportunity to revisit their assumptions. Now what?

Fortunately, the steps to setting long term financial goals successfully are simple enough:

Define and Describe: First, take the time to record your current goals. Go beyond “I want to be rich and famous,” to large and small, near- and long-term specifics. Chances are, you’ll have more goals than time and money to achieve them all. So, estimate the costs involved, assign priorities, and establish approximate timelines for each:

When we retire in 2028, we would like to buy a family cottage near Georgian Bay. But most of all, we’d like to spend more time with the grandkids.

I would like to finish my master’s degree next year. Either way, I really want to be self-employed with my own business by 2025.

Communicate: Talk about your goals as a couple, to discover common ground as well as where you may differ. Identify where and how you might need to find good compromises.

Maintain: Life changes. You change. Periodically revisit your goals and adjust them as needed.

Simple Investing Step 2: Making Plans

With your short- and long- term financial goals in sight, you’re better positioned to wake up enthused about life’s possibilities. The next step is to reduce the worrying. That’s where planning comes in. Clearly, life doesn’t always go as expected! But we must plan anyway, because …

Your plans become your most dependable touchstones against which to adjust your course as needed.

Robust financial planning should embody your personal goals and financial realities. As a personal financial advisor, my aim is to tend to both, so my clients can:

  • Live comfortably, but within their means, by spending less than they make today
  • Invest what they don’t spend today wisely, to fund tomorrow’s dreams
  • Protect what they’ve achieved so far, by insuring against the great unknowns

Admittedly financial planning can be gnarly. Unless you’re a personal financial advisor too, you probably don’t wake up feeling excited about the chance to balance your budget, invest your reserves, select sensible insurance coverage, and figure out how to draw on your reserves once you retire.

In the spirit of simplicity, let’s revisit the point of these tasks:

Financial planning helps you make the most of your money today AND tomorrow.

In other words, by having personalized, practical plans in place, it becomes much easier to know where you stand today, whether you’re on track for tomorrow, and whether you’re as ready as you can be for whatever might happen along the way.

Which brings me to my final simple investing step:

You don’t just need a financial plan. You need ongoing financial planning.

Simple Investing Step 3: Building and Maintaining

Here’s a simple truth: Whether you manage your own money, or you have a personal financial advisor to assist you, a lot can happen between “now” and “then.”

In Your Life: Relationships, careers, interests, and ambitions evolve. Financial windfalls may propel you forward; emergency spending might set you back. Even if you’ve carefully prepared for a big event like retirement, it may not be quite what you imagined once it arrives.

In the Market: Over time, you can expect to build significant wealth by participating in a market’s long-term growth. But in ever-volatile financial markets, you never know what’s going to happen next, or whether the next few months or years will delight or disappoint.

In the World: You don’t need me to inform you that the world never stops spinning. From Toronto to Beijing, for better and worse, breaking news from near and far can wreak havoc on even the most ironclad plans you’ve made for you and your family. Continue Reading…