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).

Unfair or not, get ready for these 3 big corporate tax changes

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“We see these approaches to managing people’s affairs through a private corporation as creating an unfair playing field … We’re trying to tighten these loopholes to make sure that it’s fair.”

Doesn’t sound like taxes for small business owners are going down, does it?  The above is from federal finance minister Bill Morneau’s July 18 announcement outlining some of the measures the government is proposing to help level what they perceive to be an unfair playing field.

Since the announcement we’ve been thinking about the potential implications of these changes and digesting comments from a variety of different tax experts.  We agree with one expert who opined that “fairness is subject to personal interpretation.”

Unfortunately adhering to these proposed changes won’t be subject to personal interpretation so the bottom line is that we encourage all small business owners, especially those using private corporations in conjunction with saving for retirement or for the benefit of their families as a whole, to seek expert tax advice ahead of these changes coming into effect.

How did this come about?

Taking a step back, the reason that small businesses were given preferential tax treatment in the first place was to encourage them to reinvest in growth opportunities, employ more people, contribute to the Canadian economy in a more meaningful way and that would be good for Canada – hard to argue with that.

Of course all rules, especially tax rules, end up with unintended consequences.   The current government feels many small business owners and their families have been taking advantage of opportunities (loopholes) in the legislation that allow for further savings when it comes to their personal taxes. Furthermore, they seem to be particularly concerned about the increased “corporatization” of certain professions that has taken place over the last 10 to 15 years in order to reduce tax bills. As not everyone is a small business owner, the tax advantages are deemed to be unfair to those who aren’t.

What are the specific areas that are deemed to be unfair?

1.) Income sprinkling

Income sprinkling is a strategy where a business owner looks to save tax by distributing income, dividends and capital gains to other members of his or her family in order to take advantage of multiple sets of graduated tax rates (i.e. pay other family members who are in a lower tax bracket) or exemptions, in order to lower the overall family tax bill.   Continue Reading…

The “nice” problem of million-dollar RRSPs

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Are million-dollar RRSPs a looming tax problem for soon-to-retire baby boomers or simply a nice problem to have?

My latest Globe & Mail Wealth column has just been published on page B9 of the Tuesday paper and online, which you can access by clicking on the highlighted headline here: The secret to paying less tax in retirement.

As one expert cited — Doug Dahmer, who often guest blogs here at the Hub — tax is perhaps the single biggest expense in Retirement. This often becomes apparent when those growing RRSPs the Boomers and others have been accumulating are forced to become RRIFs or Registered Retirement Income Funds at the end of age 71, at which point they become taxable at your highest marginal rate, just like  interest or employment income. Million-dollar RRSPs are not that uncommon, according to the sources consulted for the column, whether individually or shared by couples.

(I say”forced” but of course there are two alternative options: annuitize or cash out. Very few people choose the latter option, while annuitization or partial annuitiization is certainly a valid option as you progress through your 70s, although ideally when interest rates are higher.)

The initial RRIF withdrawal percentage is 5.28% at 71 but minimum withdrawal rates rise steadily over time, hitting 6.82% at age 80, 10.21% by 88 and reach 20% by age 95 and beyond.

Draw down RRSPs/RRIFs early, delay CPP/OAS to 70

As the article notes, this has two implications: one, since it’s unlikely most investors with balanced portfolios will generate returns as high as the withdrawal percentages, most RRIF recipients will start breaking into capital. Continue Reading…

How to boost your home’s resale value

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By Sia Hasan

Special to the Financial Independence Hub

While your house is your home, it is also a substantial investment that can increase tremendously in value over the years. Property value may increase through changes in market conditions in your hometown; it can also increase when you make strategic upgrades and improvements to the property and even through proper home maintenance steps over the years. Some improvement projects can pay off substantially, and these are the areas you may want to focus on initially for the best results.

Focus on Curb Appeal

If your goal of increasing property value is based on a desire to sell the property soon, curb appeal is a prime area on which to focus. Curb appeal is immediately visible to buyers who are browsing through online listings, and great curb appeal can entice them to continue to flip through your property’s online photos and request a tour. Curb appeal may be improved by fertilizing the lawn, mulching the flower beds, trimming the trees, adding new flowers to your space and more. If you have extra time and money, repainting or replacing your front door and decorating the patio are wonderful ideas to consider as well.

Upgrade the Kitchen

When a kitchen renovation project improves the style and function of the space, it can result in a considerable increase in property value. In fact, you may be able to recoup as much as 80 per cent or more of your costs to upgrade the kitchen through an increase in property value. Choose upgrades and a design that appeal to the masses for the best results, such as a neutral hue for counter tops rather than a bold colour. In addition, only make upgrades that are in line with your market. For example, avoid investing in high-end luxury appliances for a kitchen in a starter home. Continue Reading…

Which investments are best inside and outside RRSPs

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As we stated in an earlier article on RRSPs (What you need to know to build a productive RRSP) your investments gain doubly in your RRSP. Instead of paying up to 50% of your profit to the government in taxes, you keep 100% of your money working for you.

When you lose, however, you take a double loss. You lose the money you’ve invested as well as the opportunity to have the money grow for years, or even decades, sheltered from taxes.

So don’t use it as a place to find out if you have a talent for stock trading.

Successful investors put only their safest investments in RRSPs. These investments have the greatest potential to increase in value over time and therefore benefit from the RRSP’s continuing protection from taxes.

If these investors indulge in penny stocks, stock options or short-term trading, they do so outside their RRSPs.

If you hold speculative investments like this in an RRSP and they drop, you lose more than the money you invested in them. You also lose the tax-deduction value of a loss outside your RRSP. Outside your RRSP, you can use capital losses to offset taxable capital gains in the current year, the three previous years, or any future year.

If you invest in mutual funds, you have another set of tax concerns. At the end of the year, mutual funds distribute any capital gains they have made during the year, after deducting any capital losses, to their unitholders. So, you may have to pay capital gains taxes on your mutual-fund holdings, even though you haven’t sold.

Continue Reading…

What to expect when applying for CPP

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What should you expect when applying for CPP (Canada Pension Plan) benefits? As my latest Retired Money column for MoneySense explains, age 64 is not just the age the Beatles ask the question “Will you still need me, will you still feed me?”

It’s also the age when Service Canada can be expected to reach out to you with a letter to your home address, giving you details of how the Government of Canada will feed you with CPP benefits once you turn 65 (or as early as 60 should you choose reduced early benefits).

But fear not, Ottawa will also  still need you, in the form of taxable revenue: like Old Age Security, CPP benefits are fully taxable.

The full piece can be accessed by clicking on the highlighted headline: CPP application: Here’s what to expect during the process.

The piece’s focus is on the actual application process but does touch on the age-old topic of the optimal age to start receiving benefits: which can be anywhere between age 60 and 70. The Hub has tackled this several times in its almost three years of existence. Use the search engine to the right and enter CPP, or click here.

Try the Canadian Retirement Income Calculator

The piece also links to a useful web tool provided by Service Canada: the Canadian Retirement Income Calculator, which you can access by clicking on the highlighted text.

Continue Reading…