Monday, May 18, 2015

Estate Planning - it's never too early

In a recent article in The Toronto Star, Gordon Pape talked about tax efficient investments. Depending on whether your investments generate interest, dividends or capital gains, their tax rates vary. For example, if your income is from Canadian dividends, you could save $157.10 of tax for every $1,000 received, compared to interest income.

As per Wikipedia,

Estate planning is the process of anticipating and arranging for the disposal of an estate during a person's life. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximize the value of the estate by reducing taxes and other expenses.

In reality, we should start estate planning early in life, as building your estate is step one of estate planning.

I often get asked by people where they should invest their money - paying off debts, paying off their mortgage, in an RRSP, in a TFSA, in real estate, etc. There is no correct answer, as many factors contribute to estate planning.

From a retirement perspective, your sources of income vary by how flexible they are. That is true based on when you can take the money, the flexibility of taking the money and how tax efficient during both the accumulation and withdrawal phases they are. In order of least to most flexible at retirement, most advisors would itemize them as follows:
  1. OAS - money may be claw-backed starting at incomes of $71,492
  2. CPP - can be started between age 60 and 70; can be shared by spouses; is considered taxable income
  3. Annuity - once started, it continues for life; there may be guarantees; tax rates vary depending on the source of the original funds (e.g. registered or not)
  4. Employment Income - is always taxed, but you may be able to decide how much you work and earn; if you are under 65, you may need to pay CPP on this earned income
  5. Work Place Pensions - both Defined Benefit and Defined Contribution; can be shared by spouses
  6. RRSP - at 71 must be converted to a RRIF or Annuity or cashed in (not recommended); watch the attribution rule for Spousal RRSPs
  7. Non-registered investments - you paid tax through the accumulation phase, but they are normally not taxed when you spend the money
  8. TFSA - growth is tax free. Current limit if you have not opened an account yet is $36,500; they are normally not taxed when you spend the money
At any stage of life, you want to minimize the amount of tax you pay. You really need to contact a Tax Accountant for complete advice.

Sunday, May 3, 2015

April 21, 2015 Federal Budget Highlights

As you know, Finance Minister Joe Oliver delivered his Federal budget on April 21 in Ottawa.
While you've probably seen plenty of media coverage, I thought you would appreciate an overview of how some of the budget items that relate to investments and taxes.
This year, the government reported balanced books and wants that to continue. So it's introduced balanced budget legislation requiring Ottawa to stay in the black unless there's a recession, war, or natural disaster. One way the government will do that is by closing certain tax loopholes.
Still, this year's budget contains some generous changes
Foremost is an increase in the TFSA contribution limit from the current $5,500 to $10,000. The proposed change is retroactive to January 1, 2015, and clients over age 18 who have not contributed since the TFSA's creation in 2009 now have $41,000 in contribution room.
For some clients, especially those in lower tax brackets, this change means TFSAs can become more advantageous than RRSPs. Many clients nearing retirement also will benefit from the limit increase, because they can take advantage of early RRIF withdrawal benefits and then move the money into a TFSA and keep it sheltered.
Or, if you've already contributed the old $36,500 maximum, you could now move some non-registered investments into TFSAs. In cases where large capital gains might apply, this might not be a strategy worth pursuing. But we can talk about whether this strategy is a good idea when next we meet.
TFSA limit increases also have been decoupled from the inflation rate, meaning future increases aren't automatic and instead will have to be legislated by the government.
Meanwhile, proposed changes to RRIF rules will mean seniors won't have to withdraw as much money from their retirement savings. The budget cuts the required withdrawal amount at age 71 to 5.28% from the current 7.38%. Required withdrawal rates still increase every year, but instead of topping out at 20% at age 94, the cap isn't reached until age 95.
Another budget item aimed at seniors and others who qualify for the Disability Tax Credit is a new Home Accessibility Tax Credit. This 15% non-refundable tax credit applies to up to $10,000 of renovations, such as wheelchair ramps, walk-in bathtubs and wheel-in showers.
And, small businesses will get to keep more of their earnings. This year's budget proposes to reduce the small business tax rate to 9% by 2019 - or 2% over the next four years. The reduction generally applies to the first $500,000 of business income.
Small business owners also will get a tax break if they sell their companies and donate the private company shares to charity. To be eligible, a sale must take place in 2017 or later.
Lastly, rules for reporting specified foreign income will be changing, again. Ottawa's announced a revamp of Form T1135 to streamline the process for people with assets between $100,000 and $250,000 in time for the 2015 tax year. But those reporting $250,000 or more will need to follow the existing requirements.
I hope you find these highlights useful. If you'd like to discuss these and other Federal budget initiatives and how they affect your financial plan, please don't hesitate to contact me.