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Davies Otwell

Think lifetime lifestyle and insurance to guide your decision

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By Julie Cazzin with Allan Norman

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Q: I’m retiring next year at age 59 and have a defined-benefit (DB) pension plan with my employer, so I will need to make some choices before starting it. What is a pension bridge benefit in a DB plan? Should I take or forego this option? I also need to decide on the percentage of the survivor benefit of my pension that will be payable to my spouse, Richard, upon death. There are several options. Richard doesn’t have an employer pension, but has roughly $250,000 in his registered retirement savings plan (RRSP) and plans to retire later than me — in four years when he reaches age 65. He has worked part time for the past 10 years and earns roughly $40,000 annually. What other options should I pay attention to? I don’t want to make a mistake. — Rinalda

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FP Answers: Rinalda, I can understand your confusion and concerns around decisions about pension bridging and survivor benefits. These are decisions that will have lasting impacts on you and your husband’s lifestyles, taxes and possible government benefits. With a quick review of the basics, you’ll be able to decide which options are best for you.

All DB pension plans have a lifetime pension that may or may not be indexed to inflation. In addition, some plans offer bridging benefits, which is additional pension income paid from the time you retire until you turn age 65, at which time the bridge benefit stops.

Other plans, such as yours, allow a blending of the bridge benefit into the lifetime pension, so a smaller total pension is received before age 65 and a slightly larger pension after age 65.

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The bridging benefit is intended as a Canada Pension Plan (CPP) substitute until taken at the normal retirement age of 65. Although, this doesn’t mean you can’t start your CPP at age 60 and collect both if starting CPP early makes sense in your situation.

Even though the bridge benefit is designed as a CPP substitution, it’s normally less than what your CPP would be, so your total income at age 65 will likely increase when the bridging drops off and you start CPP and Old Age Security (OAS).

In deciding if you should take the larger bridging benefit before age 65 or blend it into your lifetime pension, think about your desired lifestyle and financial requirements throughout retirement. Will you spend a steady income or are you more likely to spend more when you are young, healthy and able?

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If you’re thinking of blending your bridge benefit into your lifetime pension, will you be able to afford your desired lifestyle between now and 65 without having to heavily draw on your investments or starting CPP early? If not, consider taking the larger bridge benefit to 65.

When it comes to survivor benefits, think insurance. If you predecease your husband, what income will he need? Keep in mind that when you die, your OAS will stop and some of your CPP will transfer to your husband if he is not already getting the maximum CPP for an individual, but he will no longer be able to split pension income and he may find that his expenses don’t drop.

Most pension plans provide a survivor benefit worth two-thirds of your lifetime pension, not including the bridge benefit. In your case, you have additional options such as a 50-per-cent survivor benefit or no reduction in your pension.

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Your lifetime pension will be reduced when a survivor benefit is selected. The greater the survivor benefit, the greater the reduction in your pension.

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Your husband can sign off and agree not to receive survivor benefits, and if he did, you would receive a larger lifetime pension. For most people, it is best to maintain survivor benefits. The reasons why you may consider waiving them include if your husband has a shortened life expectancy, a good pension or more than enough money.

What makes this a tough decision is not knowing our life expectancies. If you knew your husband was going to predecease you, then you would waive survivor benefits. If you were going to live a shorter life than what the actuaries predict, then you wouldn’t blend your bridge benefit into your lifetime pension.

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We don’t know when we are going to die, so base your bridging benefit decision on your lifetime lifestyle needs and think insurance when deciding on survivor benefits.

Allan Norman provides fee only certified financial planning services through Atlantis Financial Inc. Allan is also registered as an investment advisor with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca

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Start the process as soon as your youngsters begin asking you to buy them things

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It has become crucial in the current climate of rising costs to learn savvy money skills to balance our budgets and not rely on credit to cover any shortfall. But it’s not just a good idea for us to learn how to better manage our money, it’s just as important to teach our kids.

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You can start this process as soon as your kids start asking you to buy them things. This means they’re ready to start learning about money, but before they can spend, they must have a way of earning it. An allowance is often the first way kids receive money. Decide if you want to link it to age-appropriate chores or give it strictly as a learning tool. I found that linking my kids’ allowance to chores took a lot of tracking before I could pay them.

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Depending on what you can afford and what your child is expected to do with their allowance, a weekly 50 cents to $1 per year of age is a good rule of thumb. This means your four-year-old would get $4/week and your 10-year-old $10/week.

Then choose how you want to administer the allowance.

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It will be more of a visual lesson to start out by giving them cash to put in their piggy banks. As they get older and can grasp the concept of electronic banking, you may want to switch to weekly automatic transfers to their own account, or one that is joint with you.

Next, encourage your child to come up with a goal for something they would like to buy. This is a good way to teach them about savings and delayed gratification, which is worth mastering before they’re old enough to have access to credit.

For example, let’s say the toy they want is $29.99 plus tax. In Manitoba, this comes to $33.59. Help them calculate how many weeks it will take for them to meet that goal given the amount they receive from their weekly paydays. Consider creating a savings goal poster to help them visualize their progress.

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As kids get older and more interested in spending, teach them the time value of money. This aligns how long someone must work in order to earn the money to buy an item.

We used this tactic with our own kids whenever they wanted a new item that was not a necessity. It helped them understand the value of our time and that there are limitations on what we can afford. If your child thinks they should be able to buy a desired item more quickly, this process will provide a good opportunity to teach them about working extra to get a more immediate payoff.

You can facilitate this by allowing them to do extra chores to earn additional spending money. However, avoid encouraging them to think they are getting paid to do their share of helping around the house. Instead, make sure they understand the work they are doing is beyond what is regularly expected and will, therefore, result in extra cash.

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Another option to help your impatient child reach their goal faster, and at the same time teach them about credit, is to lend them the money. Prior to doing so, be sure to set out the terms of the loan: how much the payments will be, when they must be made and how long your child has to repay the debt. Don’t set the payment so high that they don’t have any allowance left over for spending/saving each week.

For an older child, factor in a little interest to teach them about the cost of borrowing. Show your child their progress by tracking their payments until the loan is repaid. Let them know they can pay the debt off sooner if they wish, and if you are charging interest, this can teach them how doing so will reduce the total amount they have to repay.

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Regularly taking your kids shopping can help them learn how to be a savvy shopper. It provides a good opportunity for them to understand how much things cost, how comparison shopping works, how to budget within a limit and the role marketing plays on their spending choices.

Share your best tips and tricks with them while they’re still happy to come shopping with you, or have fun learning together how best to save up or wait for what you want to go on sale.

Above all, remember that your kids watch everything you do and learn their attitudes about money from you. Model good financial habits for them, but don’t worry if you don’t have it all figured out and find yourself relying on credit to supplement your income. Reach out to a not-for-profit credit counsellor for free money management advice. It’s never too late to learn.

Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 25 years.

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Golombek was gearing up for a day in court over a dispute over work-from-home expenses, but it never came

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I never did get my day in court, but I came awfully close.

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I’ve been battling the taxman for more than a year in an attempt to get the Canada Revenue Agency to allow my work-from-home expenses for the 2020 tax year. That fight came to an end last week, when I received a reassessment allowing nearly all my home-office expenses, refunding my overpaid tax, reversing the arrears interest previously charged, and even paying me some refund interest (albeit, taxable).

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I’m sharing my full story so you know what’s in store if you, too, decide to take on the CRA.

The origin of my tax dispute can be traced back to March 12, 2020. I had Toronto Maple Leafs tickets for that night’s game against the Nashville Predators, and my son was to meet me downtown after work for the game. But things would dramatically change: that afternoon, the NHL suspended all games due to COVID-19 and our offices shut down that evening for what would turn out to be many months.

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As of March 13, I began working from home full time, using a spare bedroom as my new office. I deducted some home-office expenses for the first time in my career when I filed my 2020 tax return.

Employees who are working from home due to the pandemic have two methods to claim work-from-home expenses: the temporary flat rate method ($2 per day, up to $500 in 2022) and the detailed method, where employees tally up the actual expenses incurred and allocate them on a “reasonable basis” to determine the portion related to employment use. This is typically done by dividing the workspace area by the home’s total finished square metres (including hallways, bathrooms, kitchens, etc.).

Expenses include utilities, home internet, rent, maintenance and minor repair costs, and office supplies. You can’t deduct mortgage payments, capital expenses or depreciation (capital cost allowance), and only commissioned-based employees can deduct their property taxes and home insurance.

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In my case, the detailed method proved to be the better option, but it meant having to substantiate each and every expense in case the CRA wanted to “review” my return, which is exactly what happened.

In August 2021, I received a “review letter” from the CRA asking for more information about various items on my return, including my claim for the digital news subscription tax credit, proof that I made a small political contribution and, most significantly, support for my work-from-home employment expense claim.

The CRA wanted a copy of my signed T2200, Declaration of Conditions of Employment, and a “detailed breakdown of the amount claimed and the supporting documents.” It also asked for a copy of my T777, Statement of Employment Expenses, and a breakdown of how I calculated the percentage of the expenses I could deduct, and “a copy of the floor plan of the residence with the home office.”

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I didn’t have a copy of my home floor plan, but I was pretty conservative with my estimate, claiming less than 10 per cent of my total home expenses for the use of my home office. I prepared a detailed schedule of my monthly hydro, gas and internet expenses, complete with dates and amounts using downloaded information from my online banking.

Unfortunately, this wasn’t enough to justify my claim. My $75 digital news credit and political donation were allowed, but my home-office expenses were denied in their entirety as I apparently did not send sufficiently detailed information to substantiate my claim. This was confirmed in a January 2022 formal reassessment.

I paid the reassessed tax for 2020 to stop the daily compounding of non-deductible, arrears interest from being charged and, in February 2022, filed a formal Notice of Objection. I sent the CRA PDF copies of all my monthly 2020 statements from each utility provider, totalling 89 pages of documentation, to justify my claim. And then I waited. And waited.

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Periodically, I would go online to the CRA’s My Account page and check under the Progress Tracker to see if any action had been taken. Finally, after several months, the status was updated online: a preliminary review of my objection was conducted, and it was determined to be of “medium complexity.”

Medium complexity income tax objections resolved in August 2022 were completed in an average of 283 days from the date the objection was submitted. That was too long for me to wait, so I exercised my right to appeal directly to the Tax Court, which can be done 90 days after filing a notice of objection if the CRA hasn’t responded by then.

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In late May 2022, I filed my appeal and was told my case would be heard in Toronto “at the first available opportunity.” I was excited and confident. But other than a couple of parking tickets in the 1990s, I’d never been to court before so I had to prepare. I rewatched 12 Angry Men and My Cousin Vinny. I was now ready for court.

But my day in court was not to be. Shortly after filing my appeal, I got a call from a friendly CRA litigation officer who said he had reviewed my file and was prepared to allow all my work-from-home expenses, save for $99. I quickly agreed.

A week later, he had me sign a consent to judgment, which was later certified by a Tax Court judge. On Sept. 14, I received my new Notice of Reassessment, along with a direct deposit of my tax refund and interest.

I really was looking forward to my day in court. Perhaps another time.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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Jamie Golombek: Here’s a brief look at the measures Ottawa is implementing to help with rising costs

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The federal government this week announced details of three measures to “make life more affordable for Canadians who need it most” in light of the rising cost of living, primarily due to higher food prices and rent.

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Specifically, it’s doubling the Goods and Services Tax Credit (GSTC) for six months, introducing the new Canada Dental Benefit for children under 12 who do not have access to dental insurance, and giving a one-time top-up to the Canada Housing Benefit for low-income renters. Let’s take a brief look at each of these measures.

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Doubling the GSTC

The GSTC is meant to offset the cost of paying GST on purchases of goods and services for low- and modest-income Canadians. The credit is paid quarterly in January, April, July and October, and is indexed to inflation each benefit year, which runs from July through June.

The amount of GSTC you receive depends on your income and family size. For the current benefit year, which began July 2022 and runs through June 2023, single Canadians without kids receive a total of $467. Married or common-law couples receive $612 while single parents receive $612. Recipients with kids get $161 for each child under age 19.

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That said, only those with lower incomes get the full GSTC. To receive the full amount, your family income must be less than $39,826 in 2021. Above this income level, the GSTC is gradually reduced as income rises and the full phase-out depends on family type. For example, a single person without children would not get any GSTC once their income reaches $49,200, while a couple with two kids could have 2021 income up to $58,500 before being fully phased out.

The GSTC is indexed to inflation, but it’s done on a lagging basis. For the current benefit year, the value of the GSTC grew by 2.4 per cent based on the average consumer price index during October 2020 to September 2021. As a result, the sharp rise in inflation in 2022 is not yet reflected in the GSTC payments currently being distributed.

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To help support Canadians in the interim, the government announced it’s doubling the GSTC for six months. The extra GSTC amounts will be paid to all current recipients through the existing system as a one-time, lump-sum payment before year-end, meaning recipients do not need to apply for the additional payment, but must have filed a 2021 tax return to be eligible.

The GSTC will also help postsecondary students who typically have little or no income. For example, let’s say Sarah, who’s currently in university, earned $5,000 in 2021 through part-time and summer employment. She’s currently receiving $233.50 in GSTC for the July through December 2022 period, and will receive another $233.50 for the January through June 2023 period. With the temporary doubling of the GSTC amounts for six months, Sarah will receive an additional $233.50. In total, she will receive $700.50 in GSTC payments.

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It’s estimated 11 million individuals and families will benefit from this additional support, costing approximately $2.5 billion.

The Canada Dental Benefit

The government also announced it is proceeding with its commitment to launch a national dental program for uninsured Canadians with an annual family income of less than $90,000. The program will start by covering children under 12 years of age in 2022.

The Canada Dental Benefit (CDB) will provide eligible parents (or guardians) with direct, upfront tax-free payments to cover dental expenses for kids under 12. The target implementation date is set for Dec. 1, 2022, but the program will cover expenses retroactive to Oct. 1, 2022.

The CDB will provide payments of up to $650 per child, per year for families with adjusted net income of less than $90,000 per year and without dental coverage. Families with income under $70,000 would get the full $650 per child. If family income is between $70,000 and $80,000, the benefit is reduced to $390 per child, and for family income between $80,000 and $90,000, the benefit will be $260 per child.

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To access the CDB, parents of eligible children will need to apply through the Canada Revenue Agency and attest their child does not have access to private dental care coverage and they have out-of-pocket dental care expenses for which they will use the CDB. They may also need to show receipts to verify the kids’ dental expenses.

The government estimates 500,000 Canadian children could benefit from the CDB, at a cost of $938 million. Details on how and when to apply have not yet been released.

Canada Housing Benefit

The Canada Housing Benefit (CHB) is administered through the provinces and helps lower-income Canadians pay their rent. Each province has its own system for accessing the funding, but to qualify, family income must be less than $35,000 annually ($20,000 for single Canadians), and the renter must spend 30 per cent or more of their income on rent.

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This week, the government announced a one-time top-up to the CHB that will consist of a tax-free payment of $500 to provide direct support to low-income renters. The payment will be launched by year-end and delivered by the CRA through an attestation-based application process.

To determine eligibility, the CRA will do an upfront verification of the applicant’s income, age and residency for tax purposes. Applicants will need to attest they are spending at least 30 per cent of their income on shelter and that they’re paying rent for their own primary residence in Canada, as well as specify the rental property’s address, the amount of rent paid in 2022 and the landlord’s contact information. They’ll also need to provide consent for the CRA to verify their information to confirm eligibility.

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Students who pay rent and meet the income test above will also qualify. The government estimates 1.8 million low-income renters will qualify for support, at a total cost of $1.2 billion.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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Listen to Down to Business for in-depth discussions and insights into the latest in Canadian business, available wherever you get your podcasts. Check out the latest episode below:

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The value of Canadian residential real estate fell for the first time since 2018 in the second quarter of 2022, helping to drag down the overall value of Canadian household wealth by a record $990 billion.

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According to Statistics Canada‘s national balance sheet and financial flow accounts figures released on Monday, the total value of all residential real estate in the country fell by $446.3 billion to $8,655.6 billion during the quarter, a marked reversal from the $344 billion rise recorded in the prior quarter.

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“The streak of gains in real estate that began in late 2018 was halted by a housing market grappling with rapidly rising interest rates,” the federal agency said in the report.

In terms of household wealth, non-financial assets including real estate declined by $389.8 billion while financial assets fell by a record $530.6 billion in the quarter. Despite the decline, the value of household residential real estate remains 41 per cent above the level recorded at the end of 2019.  An increase in financial liabilities of $69.8 billion as outstanding mortgage debt continued to expand, helped drive the overall drop in household wealth to nearly $1 trillion, or 6.1 per cent, the steepest quarterly drop since data tracking began in 1990.

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“Today’s release revealed that households faced rising financial headwinds in the second quarter,” Ksenia Bushmeneva of TD Economics said.

Bushmeneva attributed the drop in household wealth to the selloffs in financial markets earlier this year combined with a decline in house prices.

Average resale prices dropped to roughly $710,000, while home resale inventory levels remained lower than average. By July, the average resale price dropped further to $635,000.

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Debt growth also outpaced income gains, as households added a near record $56.3 billion of debt in the second quarter. They now have $1.82 in credit market debt for every dollar of household disposable income.

Statistics Canada’s figures also showed the savings rate fell to 6.2 per cent in the second quarter from 9.5 per cent in the previous quarter, as rising expenditures outpaced tepid income growth.

A key measure of housing affordability also reversed course. Real estate as a percentage of disposable income fell to 546.7 per cent from 581.3 per cent in the second quarter of 2020.

• Email: dpaglinawan@postmedia.com | Twitter:

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The most important thing to do if your finances are keeping you up at night is to not delay

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It’s not surprising that many Canadians are feeling the pinch in their budgets in this age of inflation-induced prices and rising interest rates. The question is not just what to do about that, but knowing when it’s time to seek professional advice.

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No one ever really wants to ask for help to get back on track with their money or debt, so let’s start with a few steps you can take on your own first.

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If you don’t already have a budget in place, it’s time to make one, starting with tracking where your money goes. You can accomplish this by going through your old bank and credit-card statements to add up what you spent on food, transportation, shelter, etc. The first step to managing your money better is knowing where it is actually going.

Next, build your budget using those tracked numbers. There are some great online tools and budgeting courses you can access for free if you just need a bit of direction to get started. But if just the idea of trying to make a budget has you hyperventilating, then it’s time to seek the professional help of a not-for-profit credit counsellor. 

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Once your budget is complete, you’ll have a good indication of your financial health. If it shows you are managing all your necessities, debt payments and bills, and have money left over for savings, then your budget is in good shape. If you find you are running short each month and relying on credit to make ends meet, then it’s time to revisit your spending in areas where you could cut back.

For example, you may find there are a few niceties that can be reduced in order to balance your budget. Just being aware of your spending habits can often help prevent unnecessary expenses such as eating out or ordering in because you didn’t plan meals or do some prep in advance. Did you realize that a $2-$5 coffee each day on your way to work can add up to $100 per month? That $100 could go a long way towards debt payments or creating some emergency savings.

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If your budget shows you can barely cover necessities such as housing, food or transportation, let alone any luxury items like eating out, vacations and entertainment, you will have to review those necessities to see if you can do anything to reduce them. If your budget leaves you short each month, balancing it won’t be easy or comfortable, but whatever you can do — even temporarily — will help you manage better in the long run.

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If you’ve already cut back every possible expense, you may need to consider ways to increase your income. A good question to ask yourself is: How can I monetize my interests, skills and talents? Do you have a vehicle that can be used to create income by delivering goods, driving seniors to appointments or even carpooling to work? If you own a home, taking in a renter or international student can help offset some housing expenses. A garage or parking space in a desirable area can also be rented out. If you love animals and work from home, consider pet sitting or boarding as an easy and enjoyable moneymaker. Just make sure your side hustle doesn’t impact your primary source of income. 

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Perhaps your overall debt load is the main cause of your financial anxiety. In that case, consolidating your debt into a lower-interest borrowing product can increase the amount going toward the principal each month, resulting in your debt being paid down faster. But verify the new debt payment amount fits in your budget before you commit to it. Otherwise, adding a payment that is higher than you can manage is only going to make your situation worse, and likely cause you to use those credit cards you just paid off to cover the shortfall in your budget.

The most important thing to do if your finances are keeping you up at night is to not delay. No amount of wishing can make those financial woes go away. If you need help navigating the possible choices, seek the advice of a non-profit credit counsellor. They can help you build a budget and teach you how to better manage your money, as well as provide a free no-obligation review of your finances and explain all the choices you may have. There are a lot more than most people realize. As an added bonus, you’ll be able to sleep better knowing your financial house is in order.  

Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 25 years.

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Jamie Golombek: The restaurant didn’t include electronic tips in its CPP and and EI liabilities

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If you’re an employee who gets a regular paycheque, you’ll be very familiar with the concept of source withholdings, which reduces your take-home pay.

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Put simply, your employer is legally required to withhold and remit federal and provincial income tax to the Canada Revenue Agency, as well as Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums.

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Failure to withhold any of these can land an employer in hot water with the CRA, as one Nova Scotia restaurant recently found out. But before delving into details of the case, let’s review the basic rules governing CPP and EI deductions.

Under the CPP, the employer’s contribution is determined by applying a contribution rate to the “contributory salary and wages of the employee … paid by the employer,” less certain deductions. For 2022, employee CPP/QPP contributions are 5.7 per cent of earnings between $3,500 and $64,900, so the maximum amount of contributions for this year is $3,500. Employers are required to match employee contributions.

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For 2022, an employee’s EI premiums are 1.58 per cent of “insurable earnings” up to $60,300, so the maximum EI premium you may pay is $953. Insurable earnings are defined as “the total of all amounts, received or enjoyed by the insured person (i.e., employee) that are paid to the (employee) by the … employer in respect of that (insurable) employment.”

Under the EI Act, employers must contribute 1.4 times the employee premiums, or 2.21 per cent of insurable earnings, with a 2022 maximum premium of $1,334 per employee.

The recent case involved a popular, seaside restaurant in downtown Halifax that didn’t remit CPP and EI on part of its servers’ tips. Customers sometimes leave a tip in cash, which the servers are free to keep without advising their employer. Most customers, however, choose to pay their restaurant bills using a debit, credit or gift card, and include a tip in their electronic payment. The restaurant, in turn, shares these tips with its servers in a formalized, daily procedure.

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At the end of each shift, each server prints a “summary of sales” from the restaurant’s point-of-sale system. That summary shows each server’s food sales, beverage sales, cash received from patrons who paid in cash, electronic payments received and electronic tips. This info is used to prepare a “cash out sheet.”

On that sheet, the server records their electronic tips, the cash received, a kitchen staff “tip-out” (equal to one per cent of food sales), and an amount equal to two per cent of the electronic tips (the processing charge). The restaurant retains the tip-out to pass along to its kitchen staff and the processing charge to cover its credit-card fees. The net amount is the server’s “net electronic tip.”

If none of the server’s customers happened to pay their restaurant bills in cash that day, the restaurant simply transfers an amount equal to the server’s net electronic tip to the server, typically the next business day, via direct bank deposit. This is known as the “due-back.”

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In some circumstances, a server’s due-back is less than the server’s net electronic tip. This happens when a restaurant customer pays in cash, which the server retains and is taken into account in calculating the due-back. In these cases, the server’s net electronic tip is partially received in cash (from customers’ payment of their restaurant bills), and partly from the due-back received from the restaurant itself.

At the end of each shift, each server also prepares two envelopes in which they place cash to “tip out” the onsite restaurant manager and assistant manager — two per cent — and the support staff (bussers, hosts/hostesses and bartenders) at one per cent per support staff person (to a maximum of three per cent).

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Each server delivers their summary of sales, their cash out sheet, and the two envelopes to the onsite manager at the end of their shift who later distributes the cash tip-outs to the restaurant managers and support staff. The sales summary and cash out sheet were set aside and picked up the next morning by someone from accounting to facilitate payment of the servers’ due-backs.

The restaurant took the general position that due-backs received by servers were not considered to be “pensionable salary and wages” for purposes of CPP rules, nor “insurable earnings” for purposes of the EI Act. As a result, when it calculated its CPP and EI liabilities for 2015, 2016 and 2017, it did not consider any portion of the electronic tips.

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Needless to say, the CRA took a different view and assessed the restaurant on the basis that a portion of the servers’ electronic tips for 2015, 2016 and 2017 should have been considered. The taxpayer took the matter to Tax Court in 2020 and lost. It then appealed the decision to the Federal Court of Appeal (FCA), which heard the case earlier this year.

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The key question the court had to decide was whether the due-backs were properly considered to be amounts paid by an employer to employees “in respect of” their employment. The restaurant argued the due-backs are not paid in respect of a server’s employment and are not insurable earnings because a server’s due-back bears “little or no relation to the server’s net tip. It is simply the difference between cash payments for meals and electronic tips owing.”

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The three-judge appellate panel disagreed, citing a seminal 1983 decision of the Supreme Court of Canada, which stated that the words “in respect of” have “wide scope and import such meanings as ‘in relation to,’ ‘with reference to’ and ‘in connection with.’ In other words, “but for” their employment as servers by the restaurant, the servers would not receive any tips paid to them in the form of due-backs.

The FCA, in a written decision released last month, concurred with the lower court’s decision, and concluded the due-backs were “contributory salary and wages of the employee paid by the employer” for purposes of the CPP and “insurable earnings” for purposes of the EI Act.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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Jason Heath: There are ways to pay less tax during your working years and in retirement

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Canadians file individual tax returns and pay tax at progressively higher rates as income increases. Some countries, such as the United States, allow couples who are married and who file jointly to save tax if one spouse earns significantly more than the other and their incomes are combined. While Canada’s laws on income splitting are not as generous, there are a few strategies that taxpayers here who are single, married or have children can pursue to split income and lower their tax bills.

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Self-employment strategies

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Taxpayers who work for themselves have unique opportunities to split income that are not available to employees. For one, they can employ family members and pay them a tax-deductible salary. This can be advantageous when they have family members whose incomes and tax rates are lower. A taxpayer can deduct the salary from taxable income just like other business expenses.

A salary paid to a spouse or child is deductible if it meets three conditions. First, the salary is actually paid to them. The work they do must also be necessary for earning the business income. Lastly, it must be reasonable given their age, and in line with what you might pay someone else. The salary should be reported on a T4 slip just as you would for another employee.

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Business owners can split income with a corporation by incorporating their business. When a corporation earns income, you only pay personal tax on the income that is paid out personally as either a salary (as an employee) or as a dividend (as a shareholder). Business income that is left in a corporation and not withdrawn from personal use is only subject to corporate tax.

Small business income tax rates for a corporation range from 10 per cent to 12.2 per cent depending on the province or territory. By comparison, the top personal tax rate in Canada is as high as 54.3 per cent. This means when you split income with a corporation, you can defer up to about 40 per cent tax on that income. This higher after-tax income can be used to reinvest in the business or to invest in stocks, bonds, mutual funds, exchange traded funds, real estate, or other investments in a corporate investment account.

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Until 2018, it was possible for business owners to split income with adult family members by paying them dividends on shares they owned of a corporation. Beginning that year, tax on split income (TOSI) rules came into effect and made it more difficult to pay dividends to family members. Split income paid from a corporation is taxed at the highest tax rate unless certain criteria are met. One of the most common exceptions is when a family member who owns shares of the corporation works at least 20 hours per week on average for the company. In this case, dividends can be paid to them and taxed to them without the punitive TOSI rules applying.

Pension planning

Workers with pensions can split their eligible pension income with their spouse or common-law partner in retirement. However, there is a difference between defined-benefit (DB) and defined-contribution (DC) pension plans.

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Workers with DB pensions that receive a calculated monthly benefit in retirement can split up to 50 per cent of their pension with their spouse or common-law partner on their tax return. The amount can change from year to year and the ability to split income can help a couple to pay the least amount of combined tax.

Workers with DC pensions that invest in mutual funds to provide a future retirement income have restrictions on their ability to income split. If the DC pension is used to buy an annuity or provide another lifetime retirement benefit, the income may be eligible to split with a spouse or common-law partner without restriction. Otherwise, a DC pension must be converted to a life income fund (LIF) or locked-in retirement income fund (LRIF) depending on the federal or provincial pension legislation for the plan. Although withdrawals can generally be taken from a LIF/LRIF at 55, the income cannot be split with a spouse or common-law partner until the accountholder’s age 65.

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Workers who contribute to the Canada Pension Plan (CPP) can apply for a retirement pension as early as age 60. CPP allows a recipient and their spouse or common-law partner to apply to split their pensions by completing a CPP pension sharing form. The CPP earned by the couple based on contributions made during the years they lived together will be divided equally between them. This may result in tax savings if there is an income differential.

RRSPs and RRIFs

Like DC pensions that are converted to LIF/LRIF accounts, registered retirement savings plans (RRSPs) that are converted to registered retirement income funds (RRIFs) do not qualify for pension income splitting until the year the accountholder turns 65. RRSP withdrawals do not qualify for pension income splitting unless the account is converted to a RRIF either.

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RRSP contributions provide a method to split income today and in the future. If spouses have a significant difference in incomes, RRSP contributions should be made by the higher income spouse. RRSP deductions will reduce the higher income spouse’s income and leave the other spouse’s income to be taxed at a lower tax rate. One exception to this rule could be if the lower income spouse has a matching contribution for a group retirement plan with their employer. The benefit of the match may exceed the tax differential between the spouses.

If a couple is concerned about having all the RRSP assets in one spouse’s name, the higher-income spouse can contribute to a spousal RRSP for the other. A spousal RRSP is an RRSP that one spouse contributes to but is owned by the other spouse. The spousal RRSP owner can take withdrawals in the future that are taxable to them, subject to a three-year time limit that may cause withdrawals to be taxable to the contributor.

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Non-registered investments

If someone has maxed out their RRSP and tax-free savings account (TFSA), there may still be income-splitting options to consider. If married, the higher-income spouse’s income can be used to fund living expenses while the lower-income spouse saves some or all of their income. By having the lower-income spouse build non-registered assets, the investment income will be taxable to them at their lower tax rate.

A higher-income spouse cannot just give money to a lower-income spouse to invest to save tax. The income and capital gains would be subject to attribution and taxable back to the gifting spouse.

Money can be loaned to the lower-income spouse to invest as long as the loan is made at the Canada Revenue Agency (CRA) prescribed rate in place at the time of the loan. That rate is currently two per cent, but is set to rise to three per cent in the fourth quarter of 2022.

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Money can be gifted to a minor child to invest and only the income (interest and dividends) is taxable back to the parent. The capital gains, however, are not taxable to the parent and can be realized in the child’s name. If a child has no other income, capital gains between $16,962 and $28,796 can be triggered tax free each year.

Taxpayers with significant non-registered assets into the hundreds of thousands of dollars could consider establishing a discretionary family trust. By loaning money at the CRA prescribed rate to a family trust with children, grandchildren or other family members as beneficiaries, income can be shifted to those with lower incomes, some of whom may have little to no income or tax to pay.

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Summary

There are ways to pay less tax during your working years and in retirement. It may be easier to split income for those with a spouse or children, but even single people with no kids of their own may have options to consider.

You can only spend or save what you keep after tax, so by considering ways to legitimately lower your tax payable, you can become more financially independent or have more money to provide for your family.

Jason Heath is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. He can be reached at jheath@objectivecfp.com.

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Clearly articulating your gifting and estate-planning goals may improve your retirement journey

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Retirement is complex because it represents a big change. In contrast to working years, a common goal is to make the most of time — a resource we don’t know how to use when we retire, because we are not used to having it in abundance — versus maximizing wealth. To further complicate matters, retirement isn’t just a single phase. It’s often thought of as three self-explanatory stages: the go-go years, the slow-go years and the no-go years.

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In the go-go years, you will be active, healthy and your engagement with hobbies, friends and family will be paramount. The slow-go years start as your health begins declining and you find growing comfort in predictability and routines. This is where estate planning is typically cemented. In the no-go years, we rely on support, either from the community, the health-care system, family or all three.

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Fortunate baby boomers will find themselves navigating these stages with more wealth than they will consume in their lifetimes. This means supporting family and charities enters the goal set in a meaningful way.

A common decision retired parents may face at this time is finding a balance between supporting children while keeping peace in the family. Many of my retired clients want to help their children get established in our unaffordable housing market and they find it surprising how carefully we have to navigate such discussions because children will view whatever you do subjectively. In my experience, what is equal isn’t always fair and what is fair isn’t always equal.

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By the very nature of children being different — in age, interests, career choice — you have to consider treating them differently to provide bespoke support. However, that’s also the reason why they may feel they weren’t given the same advantages as their siblings.

A classic hypothetical example is a household with two children: the eldest child is a lawyer and the youngest child is an aspiring artist. Supporting the lawyer might entail contributing to expensive post-secondary schooling followed by down-payment gifting. For the aspiring artist, support might be allowing them time to get professional traction before they are ready to take on the commitment of a mortgage (the more time they take, the less affordable the housing market may get).

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It could be argued that it can be balanced out in the will, but they likely won’t see it that way. The subjective view of being treated unfairly can brew resentment. Even though it might even out in the end, the fact that one child received their support many years later is enough for the other to see it as unfair.

How do you diffuse this? Dialogue. Retired parents can be well served by explaining to their children that their intention is to support them equally and fairly. Simply acknowledging this is your goal and intention can go a long way in preserving family unity.

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Another good approach is to consider including children in charitable-giving decisions. By empowering children with a voice and a vote in decisions that relate to family wealth, the playing field can be levelled in their otherwise subjective minds.

It can also help you get a better sense of the power dynamic between children and how they will arrive at decisions — by consensus, majority or divide and conquer. It may also give you a glimpse into how the debate might go over your estate.

The role of your wealth adviser is to guide you through this process and help navigate these uncharted stages of retirement so that you may benefit from the experience of approaches that work well. By clearly articulating your gifting and estate-planning goals, you may improve your journey and, hopefully, increase your odds of a legacy of family unity.

Ethan Astaneh is a wealth adviser and client relationship manager at Nicola Wealth Management Ltd. Nicola Wealth is registered as a portfolio manager, exempt market dealer, and investment fund manager with the required securities commissions.

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Adding a child’s name to your assets won’t accomplish your goal of reducing capital gains tax

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By Julie Cazzin with Andrew Dobson

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Q: My wife Ava and I are in the process of gifting some money to our only child, Marlena. I know that in Canada I can do this tax free. But what are the consequences of adding Marlena’s name to the title on our principal residence, small rental property and cottage, as well as all our bank accounts? All three properties were purchased in the 1970s so there’s a hefty capital gains tax to be paid when we sell or die. We’d like to avoid this if possible. Marlena is 60, single and has one child, our grandson Henry. Is this a good way to save on paying capital gains tax? If not, what are some other ways we can avoid a big capital gains tax bill when we die? — Henry

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FP Answers: There are several factors to consider when determining potential strategies to minimize tax. First, the principal residence exemption may allow you and Ava to avoid paying capital gains tax on some of the real-estate appreciation. The principal residence exemption allows a tax-free capital gain on a property you ordinarily inhabit. It does not need to be your primary home. It can be claimed for your cottage. But since most people’s homes are more expensive than their cottage, it is uncommon to claim it on a secondary property.

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A couple can only have one principal residence between them, and one principal residence exemption claim in a given year. Since all three properties were purchased in the 1970s, claiming the exemption on your home will likely cause your cottage to be fully taxable.

The capital gains tax was not introduced in Canada until 1972, so only appreciation from 1972 onwards would be taxable. There used to be a $100,000 lifetime capital gains election, and, in 1994, many cottage and rental property owners bumped up the adjusted cost base of their properties to use some or all of that exemption. If you did, that may reduce some of the capital gain on your other properties.

The principal residence exemption is claimed when a property is sold. If you transfer a property to a family member, that is considered a deemed disposition, as if you sold the property. The same disposition occurs at death when you are deemed to have sold all your assets. Transferring an asset to a family member takes place at fair market value, so you cannot gift it or use an artificially low value to avoid taxes.

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You may be able to get creative and transfer partial ownership each year for a number of years to your daughter to have small capital gains and keep your income in a lower tax bracket. But if you add Marlena to the title on your properties, there could be other issues related to the principal residence exemption.

For example, if you add Marlena to the title on your principal residence today and the value increases from now until you die, there may be tax to pay on the accrual of her share of the value from when she was registered on the title to when the property is sold.

If you live in a province where probate fees are high, joint ownership with your daughter may help avoid some probate costs by virtue of your share of the asset passing on to Marlena by rights of survivorship.

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With real estate, there may not be much logistical advantage to owning them jointly. If Marlena is the executor for your estates, she may still be able to enter the home, gather an inventory of items, and even list the property for sale without owning the property. Though it could take several months for the probate process to be finalized, she may not necessarily have that much more flexibility by inheriting the home through rights of survivorship than being the beneficiary of the will.

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With bank accounts, you may be susceptible to several risks if you add Marlena to these accounts. She would have full access to these funds as a joint account holder. Also, just like other assets such as your real estate, if Marlena is subject to a lawsuit or gets into a relationship and has a family law dispute, these joint assets could be subject to claims. If you have non-registered investment accounts and add your daughter’s name to them, it could result in a deemed disposition and capital gain on a portion of the investments.

Before adding Marlena’s name to any of your assets, please consider that the risks may outweigh the benefits. Talk to your accountant and estate lawyer to get their input. Given your primary motivation seems to be avoiding capital gains tax, adding your daughter’s name to your assets will unfortunately not accomplish that goal.

Andrew Dobson is a fee-only/advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc.

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