Market Uncertainty Continues. What should you do?

The investment markets have finally gone down. Is this a surprise?

Understanding recent market volatility. Is it time to be afraid or opportunistic?

The markets have been going on a bit of a ride in recent days. The reason for the decline seems to be based on disappointing earnings reports of key corporations in the US, implications of tariffs and rising interest rates. For today we’ll focus on the effect of changing interest rates.

  • Rising interest rates are a signal that the economy is strong and the government wants to control the rate of economic growth. By increasing rates corporations and people tend to borrow less and thus slows economic growth which in turn controls inflationary pressures. Controlling inflation is a focus of the Bank of Canada.
  • These same rising interest rates also give investors a viable alternative for generating income. So some investors will choose to get out of the stock market and move their money to bonds or GICs where rates have improved and tend to be less volatile. Think Retirees!
  • Increasing rates also increases the cost of borrowing. If your mortgage is coming up for renewal, you are most likely looking at the higher rates and considering the impact on your finances.

We have talked to clients over the last few years about being prepared for this normal market cycle that occurs. Thus the importance of having the proper asset allocation to ride through the market ups and downs and still be able to sleep at night. This type of market can also create opportunities. Your money manager will be looking for oversold investments and look to take advantage of mispricing. If you have cash on the sidelines that have been waiting for opportunities this may be the time to consider options.

When will the volatility stop, no one knows. The Canadian market is priced similar to back in March 2014. In some ways this could be thought of as Boxing Day for investments.

If you have any questions on how these changes may affect your financial future, do not hesitate to contact us!

Real Estate Uncertainty

For almost 20 years (in the Lower Mainland especially) real estate has been a pretty sure thing. Many people we’ve talked to over the years have said that real estate is a guaranteed money maker. In most areas of BC this may have been true; ask the people of Detroit and they may think otherwise. Recently, we have seen a softening of the real estate market. So what seems to be driving this softer market?

1. Increase in Interest Rates – The Bank of Canada has increased interest rates over the last year and they are expected to continue this upward trend.

2. Restrictions in Lending Rules – The Federal Government introduced legislation on the lending rules for Canadian banks and credit unions. This reduced borrowing power in some instances by 18%. (Read more about Financial Stress Test: New Mortgages Rules here!)

3. Foreign Buyers Tax – There had been some speculation that foreign buyers were distorting the BC real estate market. As result, BC Government introduced a 15% tax on foreign buyers.

4. Speculation Tax – In strong real estate areas (such as the GVRD, Kelowna, West Kelowna, Victoria and the Fraser Valley) BC introduced a tax on empty properties or properties that are rented for less than 30 days at a time. This tax is 0.5% if you live in BC, 1% if you live in the rest of Canada and 2% if you are a foreign buyer.* 

5. Rent Controls – The BC government recently made it more difficult for landlords to increase rent in BC.

The result: the market has softened in BC and in other parts of Canada as well. Depending on the area, prices have dropped more than 5%.

USEFUL LINKS:

  1. Check out My Realty Check and see real estate price changes in your area.
  2. *You can view the map of areas effected by the Speculation Tax by downloading the Tax Information Sheet from the Ministry of Financehttps://www2.gov.bc.ca/assets/gov/taxes/property-taxes/publications/is-2018-001-speculation-tax.pdf


According to the government’s calculations is that less than one per cent of British Columbians who pay income tax in the province will be hit by the tax.

Over 99% of British Columbians will not pay the tax…only those who own multiple properties and leave them vacant in major cities will be asked to contribute… The tax is intended to improve housing affordability in areas where the need is most acute, while exempting rural cabins and vacation homes.” –  Carole James, B.C. Finance Minister

Follow the chart to see if the new BC Speculation Tax applies to you. This tax is applicable to all Canadian’s and Permanent Residents who live in BC.

If you have any questions on how these changes may affect your financial future, do not hesitate to contact us!

The Noise of Budget 2018 – Or Rather The Collective Sigh Of Relief That Was Echoed Across Canada’s Business World

The income sprinkling rules outlined in July 2017 held strong and the rules pertaining to passive investment income weren’t as harsh as predicted. Specifically, Budget 2018 has implemented two simple measures as it pertains to passive investment income:

  1. Limiting Access to Small Business Tax Rate

Budget 2018 proposed to provide for an alternative reduction to the small business tax rate where a Canadian Controlled Private Corporation (CCPC) and its associated corporations have investment income in the year exceeding $50,000. The amount of the reduction is $5 for every $1 of investment income exceeding $50,000. In effect, the small business tax rate reduction disappears if passive income in a related business exceeds $150,000 in a fiscal year.

  1. Refundable Taxes on Investment Income

Currently, private corporations are entitled to claim a tax refund equal to $38.33 for every $100 of taxable dividend Where the corporation has a combination of regular business income (taxed at the regular business rate which does not include a refundable tax element) and investment income (taxed at the corporate investment rate which includes a refundable tax component), planning was commonly implemented to have the business income distributed by way of eligible dividend (taxed at a lower rate) while still being able to claim the tax refund.Budget 2018 proposes to modify the refundable tax regime to eliminate this planning and ensure that, in general, the private corporation is entitled to a dividend refund only when non-eligible dividends are paid.

There are ways to reduce the impact the business tax changes outlined within Budget 2018 through other financial strategies. These strategies may include Individual Pension Plans, Cash Value Insurance, as well as the strategic use of prescribed loans. We highly recommend contacting your financial advisor to determine which of these strategies will best suit your financial situation.

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If you have any questions on this taxes, or the different kind of impact it could have on you, please, do not hesitate to contact us!

Mortgage Insurance vs. Life Insurance – What am I Actually Covered For?

If you have ever purchased a home or applied for a loan, you may be familiar with Mortgage Insurance. This is the insurance the bank is obligated to encourage you to take in the event you die or become disabled. It is intended to protect your loved ones from being stuck with the mortgage in the event life takes a wrong turn ie. death.   Sounds like a no brainer right? Wrong! There are MANY pitfalls with Mortgage Insurance that put the bank’s best interest ahead of yours for a price that’s not worth it.

Before you say yes to Mortgage Insurance, consider a solution designed to PROTECT YOU, YOUR HOME, & YOUR LOVED ONES – not your lender.  This solution is Life Insurance.

Here are the FACTS that outline Mortgage Insurance vs. Life Insurance:

  1. With Mortgage Insurance, as you pay down your mortgage your coverage is reduced BUT the Mortgage Insurance Cost remains the same. With personally owned Life Insurance your coverage and cost are level throughout the term of the contract.
  2. With Mortgage Insurance the beneficiary is the bank ie. If you die, the bank uses the proceeds to pay off the mortgage. With Life Insurance YOUdetermine the beneficiary. This allows someone you determine to hold the cards and determine how best to pay-off the mortgage. For example they could choose to pay-off the outstanding mortgage with the Life Insurance proceeds and “pocket” the excess or to invest the proceeds and pay-off the mortgage with the interest generated.  The long and short of it is, your loved ones are the beneficiary and NOT the bank.
  3. With Mortgage Insurance, underwriting is often done at time of claim. This means you really don’t know if you are covered until you make a claim. Life Insurance underwrites your policy before you are approved. This ensures an iron clad contract between you and Life Insurance carrier, removing uncertainty at the time of death.
  4. The term of mortgage insurance is the length of the mortgage. With personal insurance you determine the length of the term.
  5. With Mortgage Insurance you do not own the policy, the lender does. That means they can make changes to the overall coverage without your consent.

The bottom-line is that for comparable rates (often less expensive rates) Life Insurance offers you and your beneficiary(s) more options and flexibility.

Beware of Pitfalls When Selling Homes

A recent article in the Investment Executive, Beware of pitfalls when selling homes, draws attention to implications that can arise as a result of the changes that occurred to the Principal Residence Capital Gains Exemption.  The articles mention some important things to be aware of when selling a home that that could interfere with your tax free status of your principal residence and Estate Planning strategies.

These points are:

  • The sale of a principal residence must now be reported on your tax return in the year of sale. The failure to do so could result in exposure to capital gains taxes on your principal residence.  You must designate which years the house was the principal residence and you can only have one principal residence at a time.
  • Be aware of complications that can also arise when you rent your principal residence or when you own multiple homes at the time of divorce.
  • The sale of a residence does not only occur when a simple sale takes place, it can also arise from other scenarios such as dispersement of assets upon death or divorce.
  • For a property that is not your principal residence. The cost of upgrades or renovations can be added to a home’s adjusted cost base, which lowers potential future capital gains.
  • Residency Status can affect the amount one is able to claim under the exemption.
  • There are different rules for eligibility requirements involving trusts commonly used for estate planning (spousal and alter ego trusts).

It is important to understand the rules of the principal residence capital gains exemption as it applies to your situation, as there are multiple variables that can impact your eligibility. Feel free to give us a call to discuss your unique situation.  Remember, if you fail to report your Principal Residence Exemption correctly the CRA has the ability to reject the claim and tax the gains.  To read the article in full, please click here.

Are RRSPs Overrated?

For many years RRSPs (Registered Retirement Savings Plans) were viewed as the best option available for retirement savings. However, the truth is that there are several variables to consider for your best investment options.

Here is a short list of questions to ask yourself:

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  1. Is my income below $38,898?
  2. Are my investable assets (not including home, cars, etc) significant- e.g. over $4 million (Depending on the type of assets and ownership structure and current income)?
  3. Am I a business owner?
  4. Am I within 1-3 years of retirement and without much in the way of retirement savings?

If you answered yes to any of the above questions, there may be more tax efficient ways for you to invest for retirement. If however, you answered no to all of the above questions, then RRSPs may be the best option for you.

Here are some additional rules of thumb for RRSP contributions:

  1. How long I am able to defer tax to a future date: RRSPs defer the tax owing until the money is pulled out of the plan. Until then, the money grows tax deferred. Obviously, the younger you are the greater the tax deferral benefit you have. If you are close to retirement then rule of thumb number two (2.) below becomes much more important.
  2. Will my tax rate be lower when I pull money out of my RRSP/RRIF (Registered Retirement Income Fund) Another key potential benefit of RRSP contributions is if you expect to be in a lower tax bracket when you draw on your RRSPs than when you put the money into your RRSPs. For example, if you are in the 45% income tax bracket right now and in retirement will be in the 30% income tax bracket, you are 45% better off to put your money in RRSPs now and 15% better off long-term NOT including the growth on the deferred tax bill. The reverse is also true, if you are in the 30% tax bracket and expect to remain there in   retirement, the less beneficial it will be for you and then rule number one (1.) is more important…how long can you defer the tax on RRSP money and it’s net benefit to you after tax.
  3. Do I have other tax efficient vehicles available to me? Something to consider is whether you have other investment options that are tax efficient enough so that contributing to RRSPs doesn’t make as much sense. A good example of this could be a Holding Company. I suggest you talk to a financial professional about how this works prior to foregoing RRSPs for another investment option.

Some additional things to consider:

  • Always put RRSP contributions to the spouse who earns the highest income. This will give you the biggest bang for your buck. It can be beneficial to split the contributions between spouses through the use of Regular RRSPs and Spousal RRSPs (SRSPs) to keep the amounts the same; but the higher income earning spouse gets the tax deduction. Remember, UP TO 50% of your pension income (LIF – Locked In Funds, RRIF and work pensions) can be split with your spouse if you are 65 years of age or older.

Do any of these scenarios reflect your situation? If one spouse:

  1. Has a significantly higher income than the other, or
  2. Has brought more assets into the relationship than the other.
  3. Has significant deferred compensation incentives through work, or

All of these examples can create an imbalance of income now and at retirement. With the 50% restriction of pension splitting, this could lead to an increase in taxes owing in retirement if not offset earlier through planning.

  • Always maximize employer contributions. If you work for a company that will match RRSP contributions…do it! If they match your contribution dollar for dollar this in effect doubles your money instantly! Never say no to free money!
  • Home Buyers Plan repayment. If you still have Home Buyers plan repayments, make sure you contribute each year to pay that back and secondly, make sure you choose the option in the tax software/accountant to allocate the appropriate amount to pay the HBP back. Tax software does not always automatically do this for you.
  • Don’t withdraw RRSPs to go on a spending spree. One of the biggest mistakes we see some people make is where they don’t live below their means and use their RRSP account as a savings/spending account. Years later, this creates challenges in generating retirement income.
  • What did you do with the tax rebate? Remember, your RRSPs are tax deferred NOT tax free. So when you get your tax refund it isn’t “free” money. It is future tax money that the government is allowing you to invest until a future point in time. Our recommendation is that you invest it or pay down any debt you may have. This money should not be used for vacations or frivolous spending but to sling-shot your retirement income forward.

If you would like to discuss your unique financial situation, give us a call and we will ask specific questions with the goal of determining the best investment structure for you – Now and in the Future.

Our Biggest Partner in Life

In life and finances, the government is our biggest business partner, usually in the form of taxes.

If you are a business owner:
1.  You are a tax collector (payroll taxes, GST, PST).
2.  The government is your business partner (corporate taxes).

As a family, taxes are often your largest expense:
1.  Income tax (as high as 45.7% of every dollar you earn).
2.  Sales taxes (GST, PST).
3.  Property taxes, and so on.

Fortunately, the government has provided different vehicles to help us plan when we pay our taxes (RRSP, TFSA, pensions, IPPs). These can all be great vehicles to help us defer, smooth out and/or lower our tax bills.

They also provide some incentives when investing in higher risk investments (dividend tax credit, capital gains tax, venture capital, private equity).

The key in all of this is planning how best to generate income in retirement; and prior to that, how do we defer tax and possibly even reduce it. For business owners this becomes all the more challenging with the added challenge of how best to get money out of their company. There are several additional tools available to help business owners with this added layer of complexity.

If you or someone you know would benefit from a review of how best to allocate your investments to be tax efficient, give us a call.

To Split or Not to Split

To Split or not to Split…That is the question.

Income Splitting Strategies

So what is Income Splitting, and who is eligible to quality for the benefit?

Income Splitting is a way for families to split up their income so that if one spouse earns more than the other, the higher-earning spouse can allocate some of their income to their lower-earning spouse’s tax return. Since our tax system has graduated tax brackets, Income splitting is a great strategy to pay less household tax, and keep more money in your pocket! 

To benefit, you must have a child who:

  • is under 18 at the end of the year, and
  • ordinarily resides with you or your spouse or common-law partner throughout the year

The combined federal tax reduction is equal to what you would save if you were to transfer to your lower-income spouse the lesser of:

  • $50,000, and
  • ½ x (your taxable income – your spouse’s taxable income)

The resulting savings can be claimed by either spouse in the form of a federal non-refundable tax credit, to a maximum of $2,000. As a result, this measure can reduce your federal taxes only – not your provincial or territorial income tax. *

Pension Splitting

Another more traditional form of income splitting is the ability to split up to half of your pension income with your spouse. Any pension income that qualifies for the $2,000 federal pension income credit also qualifies to be split. Specifically, this would include annuity-type payments from a Registered Pension Plan (RPP), regardless of age, and also includes Registered Retirement Income Fund (RRIF) or Life Income Fund (LIF) withdrawals upon reaching age 65.*

Spousal RRSPs (RRIFs)

If you think that, upon retirement, you will have a higher income or have accumulated more retirement assets than your spouse, it may be beneficial for you to contribute to a spousal RRSP. A spousal RRSP is an RRSP to which you make the contributions, but of which your spouse is the annuitant (owner) of the plan. It is often used to accomplish post-retirement income splitting since withdrawn funds are taxed in your spouse’s (the annuitant’s) hands instead of yours (the contributor’s). A spousal RRIF is the continuation of a spousal RRSP. *

* http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns409-485/423-eng.html

Get PAID while you wait. The Power of Dividends.

The way we look at it, if you’re going to own something you might as well get paid for owning it. The more things in life that can produce cash flow, the closer you will be to subsidizing your income as we prepare for retirement. Take real estate for example – you own a piece of land, you have the option to rent it out, and not only does your property have the potential to appreciate; you get paid while you own it through rental income. Any viable investment should produce some sort of income. That income values you, the investor, for putting your hard earned money into it. In fact, many of you are getting paid on your investments right now, without even realizing it. The way you get paid to invest is through earning dividends.

What Is A Dividend?

A dividend is simply a payment that a company makes to its shareholders from the net income it makes in a given year.

Dividends are a way to keep investors happy, keep consumer confidence high, and share the profits of a company.

It’s important to understand that not all companies pay a dividend. Also of note, is that each company decides how much to pay out each year in total and they can increase or even decrease that amount when they see fit.

That being said, dividends are a KEY tool in reinvesting into your investment portfolio to see your dollar work for you. Here is why:

The Power of Dividend Income

At the end of the day, you have two choices when it comes to your dividend income. You can either keep the cash or reinvest the money.

When you are able to reinvest back your dividends, this is the power of dividend income,. Reinvesting your dividends will allow you to buy more shares without putting any money from your pocket into your investment allowing you to keep collecting larger dividends, furthermore, growing your mutual fund portfolio.

In conclusion, dividends are a way to see your investment grow at a more rapid rate. At the end of the day we want our investments to work for us and dividend income is just one of many ways for that to happen. So until we retire, let’s get paid while we wait.