The past few months have seen a barrage of financial events and changes. Like a 100 item buffet, information and choices presented by the local, national and world economies are information overload and show no sign of abating. Therefore I am introducing a new feature the Very Important Trivia Hall of Fame.
I am valuable to you when I find that gold nugget or diamond that is relevant to your financial situation.
For example: An acquaintance asked me to do his father’s tax return. After checking his T slips it became clear that the father qualified for the Guaranteed Income Supplement, a government benefit available to low income seniors. Both he and his son were unaware of this program.
And the Inductees Are…
Avoid the Auditors:
- Word has it that Canada Revenue Agency will be assessing Albertan’s tax returns more often than other provinces, especially if one is self employed or has a corporation.
Check Your Credit Card:
- We are very busy and the last thing we want to do is check our bank or credit card statements to verify transactions. However, this is the first line of defense against fraud: A Calgarian’s credit card was used in Ontario. The amount charged was between $500 and $1000. The signed slip was not even the name of the cardholder! The credit card company did not notice the discrepancy until it was pointed out by the cardholder.
New Fraud Trick:
- Unscrupulous servers in restaurants give the customer back an expired card that is similar to theirs, keeping the valid card when the patron pays the bill. Bottom line: Keep your card in sight at all times and check that you get your own card back. Or pay cash!!
What the Bank Doesn’t Want You to Know:
- Thinking you would like to get out of the roller coaster market into something safer? For the last 10 years the after tax after inflation rate of return (called the real return) of a GIC has been mostly negative. If you had invested $10,000 in 1982 in the Canadian stock market your real return would be $41,022. If you bravely bought into the world stock market your return would be $45,000. If your friend had bought a GIC he or she would have a real return of $10,687. (1)
Graph here
The Dollar Destroyer:
- A client of mine who as a single parent raised three boys now spends as much on expenses as when the family was still at home. Inflation must be the new math where 4 =1.
Current Highlights of the ongoing Financial Cinema
Her are changes brought about by the two recent federal budgets. The most notable: Parents finally get a break.
Tradespeople and employees get tax relief as well.
If a taxpayer DOES NOT use software or a professional to get their taxes done they must take extra care to include these credits on the tax return. Most of the credits are under the nonrefundable tax credits Schedule 1 of the tax return. Ask me if you need help!
The best new news:
The Tax Free Savings Plan is most important change in the latest federal budget.
Starting in 2009 Canadians will be able to open investment accounts and contribute up to $5000 per year. The unused contribution room can be carried forward.
Interest, dividends, and capital gains will NOT be taxed(no T3s or T5s). When the money is withdrawn there will be NO tax paid. Withdrawals will also add to contribution room.
Client’s Q&A
When a product be it financial or not becomes well known or popular that does not mean it is good for every person’s situation. In the financial realm Canadians must do their homework to avoid making decisions that will have consequences for years to come. Thank you to 2 of my clients who gave me these ideas.
Alberta’s thriving economy has seen an increase of investment products. Here are two that bear discussing because of their aggressive promotion.
Q. What is Universal Life Insurance?
Universal life insurance combines an investment component within a life insurance policy. They are often advertised as a tax shelter or as the best way to save on taxes.
Policyholders are able to choose investments in the policy. Premiums are flexible within the minimums and maximums stated in the contract. The Income Tax Act mandates a maximum investment return. Any gains above that are taxable. If only the minimum premium is paid it is difficult for the investment portion to make any gains.
There are many fees that policyholders must pay. Also within the first ten years of the policy access to invested funds is severely restricted. In all cases a person will pay more than they invested to cancel the policy or get back their investment.
Universal life insurance may be suited to taxpayers who have already maxed out their RRSP or who will have challenges paying tax on the sale of a second property or business. However, objective financial experts agree that investments and life insurance should be kept separate.
Also with the arrival of the Tax Free Savings Plan universal life’s usefulness as a way to beat the taxman will be greatly diminished.
Q. What is the tax deductible mortgage plan?
Again the promoters want to take advantage of people’s dislike of taxes.
The premise behind the plan is the make the interest on a mortgage tax deductible, by putting one’s mortgage into a self directed RRSP. Mortgage payments then become RRSP ‘contributions’.
However there are 2 catches. The most important one is that the interest rate one can charge oneself is limited by the prime lending rate. In today’s low interest environment a person would be cheating themselves out of a better return by locking into a low interest rate. They would be better off using alternate investments that would potentially have a higher rate of return. Also the mortgage must be administered by an approved lender who is going to want their share of fees.
There is another process that can possibly make mortgage payments tax deductible. I will discuss that in the next newsletter.
Both universal life and the mortgage plan pay high commissions to the people who sell them. This could be one reason why their profile has been raised in Alberta. Remember that planning and discipline enable someone to achieve their financial goals, not the purchase of a financial product.
Until the next time questions and comments are always welcome.