Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

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…

Online Fraud: 7 simple ways to protect yourself from a #clicktastrophe

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By Rob Fodor

Special to the Financial Independence Hub

If you’re like most people, you have a phobia about phishing. In fact, as we found in a recent Interac survey, almost one quarter of Canadians have clicked on a link that resulted in a phishing scam.

It’s no wonder Canadians are more likely to be worried about payment fraud scams such as phishing and skimming than they are about having their homes broken into or their cars stolen. Fortunately, just as you can take steps to protect your home and car, there are things you can do to protect yourself from online scams, too.

Beware Phishing trips

Phishing is a scam where fraudsters try to get your personal or financial information – such as passwords or card numbers – by masquerading as a trusted person or business, usually through email, text or an instant message, but also sometimes by phone. Continue Reading…

Budget 2018 aftermath: Holding passive investments inside Private Corporations

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By Brad Smith and Tea Pupica-Terzic 

Special to the Financial Independence Hub

The 2018 Federal Budget confirms that the Government will move forward with the implementation of the December 13, 2017 proposals regarding the splitting of income by private company owners and their family members. The Budget, however, proposes two additional key measures regarding the taxation of passive investment income earned by a Private Corporation, a topic that was aggressively targeted by the July 2017 consultation paper on tax planning strategies involving private corporations.

The first measure focuses on limiting the access to the small business tax rate to private corporations earning a significant amount of passive income.[1]  Currently, the small business deduction limit allows for $500,000 of active business income to be taxed at a preferential small business tax rate. This $500,000 limit begins to be ground down once the taxable capital of an associated group of companies reaches $10,000,000; it is completely eliminated once the taxable capital of the group is $15,000,000.

Budget introduced new reduction mechanism on passive investment income

The Budget’s proposal introduces a new reduction mechanism, which will work in tandem with the aforementioned existing business limit reduction, based on the passive investment income earned by a private corporation and its associated group. Specifically, once a corporation and its associated members earn $50,000 of passive investment income in a given year, the small business deduction limit begins to be ground down, on a straight line basis, until the passive investment income reaches $150,000. At this point, the small business deduction limit would be ground down to nil. The new reduction will apply to taxation years that begin after 2018.

The second measure aims at correcting an unintended tax advantage currently enjoyed by some private corporations when paying out eligible dividends to their shareholders in situations where the refundable tax pool (aka refundable dividend tax on hand “RDTOH”) was generated from investment income that would need to be paid out as a non-eligible dividend. The Budget is creating a new account, called the eligible RDTOH account, which will include the tax paid on eligible portfolio dividends.

Otherwise, tax paid on investment income or on non-eligible portfolio investments will be included in the non-eligible RDTOH account. The ordering rule will dictate that a private corporation, in payment of non-eligible dividends, will first have to access the refundable tax in the non-eligible RDTOH pool before it can tap into the eligible RDTOH pool.  A payment of eligible dividends will only entitle the corporation to dividend refund to the extent of its eligible RDTOH pool. These new measures will also come into play after 2018.[2] Continue Reading…

Is fear keeping you out of the stock market?

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The biggest concern for many investors is the fear of losing their money. The stock markets have shown some volatility the last few weeks, and the recent screaming headlines in the financial media do nothing but encourage panic.

Some people think the latest bull market has overvalued stocks and a major market meltdown is imminent. They are sitting on their cash and waiting for the right entry point.

According to a BlackRock survey, 70% of adults aged 25 to 36 are also clinging to cash assets. Apparently, these Millennials don’t have much trust in the stock market and are afraid of another large market crash. This puts them at risk of not having enough saved to enjoy a comfortable retirement.

It’s true. Investing in equities does carry risks. Market corrections (drop of about 10%) are common. Bear markets (drop of 20% or more) will likely occur during an investor’s lifetime.

Even a reasonably diversified portfolio of stocks lost about half of its value during the 2008-2009 market crash. However, avoiding equities completely isn’t the best strategy. The stock market can be good to investors who have the discipline.

What can you do to get over your stock market fears?

1.) Educate yourself

Combat your fears with knowledge. Learn the basics: how the markets work so you can prepare yourself for future market conditions. The more you know, the less afraid you become, but avoid information overload.

Stop reading the gloom and doom reports in the financial media. Your financial education should not come from the news media. They need something to report and tend to sensationalize short-term market events to grab our attention. Just because something appears in print doesn’t guarantee that the information is correct. Look for reliable sources.

Investing magazines and books can provide useful information.

Knowledge is freely available on the Internet. Basic investing information is available at sites like Get Smarter About Money and Canadian Securities Administrators. Some social media sites, forums and financial blogs are worthwhile if written by knowledgeable authors.

Lack of confidence and second guessing yourself can paralyze your decision making. If you’re afraid of picking the wrong investments, turn to a professional for help. You could also try one of the many well-publicized model portfolios that have yielded good returns.

2.) Take a long-term investing approach

The biggest fear of investing is losing a lot of money in a short period of time.

Investing is a long-term process and is most likely your only way to reach your long-term financial goals.

Consider the benefit of investing sooner rather than later. Time is on your side.

Don’t keep monitoring your portfolio. This is psychologically hard, but don’t let short-term losses bother you too much. No one likes losing money, but it will be temporary. You’re not going to need this money to survive tomorrow, or next month, will you?

Acknowledge short-term market risks, but trust in long-term historical gains and commit to long-term investments. Continue Reading…

Budget 2018: Pixie Dust

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By Trevor Parry

Special to the Financial Independence Hub

While Bill Morneau’ s second federal budget can be described as a punt, this third foray can best be described as a “fart in the wind;” however,  given that this is a Justin Trudeau government, the term “pixie dust” seems far more appropriate.

The Budget included two major tax measures, one relatively substantial and the other curative.  The latter was a tweaking of the rules surrounding Refundable Dividend Tax on Hand (RDTOH) , dividing the pools into eligible and ineligible pools, thus corresponding with their according dividend. The more substantive measure was to introduce a measure that reduces the ability of a corporation (or its related entities) to claim the Small Business Deduction where “substantial” income has been earned of invested after tax profits.

The new rule would see a company’s SBD eroded by 5 dollars for each 1 dollar of passive income earned in excess of $50,000 each year.  If the company earns $150,000 per year in passive income it loses the entire SBD and is subject to General Rate taxation, effectively 26%.  The government claims that this will affect about 3% of businesses.  In the cases where the full SBD is lost the company will end up paying about $55,000 in additional corporate tax.  The same company would also be paying out eligible dividends, which will be taxed at lower personal rates by the shareholder.

Finance’s pragmatic policy wonks prevailed with the Small Business Deduction

I actually think that the more pragmatic policy wonks in the Department of Finance prevailed with regard to this measure.  The SBD was introduced to provide a tax incentive for small businesses to save and invest and by this process graduate to a medium sized or growing business.  The problem of course is that tax planners have for decades sought to freeze the status of a small business in place.  This can still be achieved by paying out shareholder bonuses, but given confiscatory personal rates in most of the provinces it is likely that trusted advisors will still the ability of a corporation to defer taxation and recommend that earnings continue to be retained.   The approach the government has taken is a more comprehensive approach to total corporate earnings.  It explicitly says to business owners and incorporated professionals that you can use your corporation as a retirement vehicle, or rainy day fund but you will be taxed as a more mature business.

There are of course planning measures that can be taken to avoid this new measure.  Permanent life insurance remains the last game in town with regard to significant tax deferral possibilities.  Given that the Department of Finance engaged in meaningful consultation in fashioning the substantive update of the “exempt test” rules in 2016 that no wholesale assault on life insurance is in the offing.

Instead, I think the Department will continue to observe the golden rule — “Pigs get fat and hogs get slaughtered” — in deciding what action is necessary.  Like the 10/8 strategy before, there are strategies being implemented today that clearly drift into the aggressive category.   The diversion of loan proceeds to a shareholder in an Immediate Finance Arrangement, or the rebating of commissions without their appropriate declaration of status as taxable income come to mind.

Individual Pension Plans only temporary remedy for new rules

Some might also trumpet the use of Individual Pension Plans.  IPP’s in the right instance are wonderful planning tools.  They are particularly useful for incorporated physicians who cannot plan retirement on the basis of an eventual sale of their professional corporations and who too often suffer from a lack of savings discipline.  Continue Reading…