Author

Davies Otwell

What is Melanotan 1?

Melanotan is considered to be a chemical substance created in the lab. It displays similarities to a hormone found in the human organism. It was initially created to take on the role of a drug to aid in the process of treating certain skin conditions. It is also believed to have the ability to take on the role of a supplement.

Melanotan 1 (MT-1) is believed to be a synthetic variant of alpha-melanocyte-stimulating hormone (alpha-MSH).

One of the roles of this peptide is to aid in treating erythropoietic protoporphyria in order to avoid any kind of damage or sun-related injury to the skin, hence the fact it was originally created to act as a sunless tanning agent.

When it comes to clinical studies regarding this peptide, researchers have revealed that trials are in phase II for keratosis (a specific type of sun-induced skin damage). It is also in phase III for curing polymorphous light eruption.

Melanotan is commonly used for skin tanning. It is also used to produce erections in subjects with erectile dysfunction (ED), for rosacea, fibromyalgia, and other conditions, but there is no good scientific evidence to support most of these uses. There is also concern that Melanotan might not be safe when used as a shot under the skin.

How does Melanotan 1 work?

Melanotan I, when injected, takes action by duplicating alpha-melanocyte-stimulating hormone in the human organism. The alpha-melanocyte-stimulating hormone links to melanocortin receptors and promotes the creation of the pigment melanin in the cells of the skin. As a consequence, the more melanin the body’s skin cells create, the darker the skin will appear to be.

Clinical studies conducted on lab subjects, such as rodents, reveal that Melanotan I lives for a longer period of time in the organism, compared to Melanotan II before being broken down by enzymes. Melanotan II connects with a larger variety of receptors compared to Melanotan I and also lives a shorter life in the organism.

Benefits of Melanotan 1

•Melanotan 1 could be combined safely with UV-B light or sunlight and seems to take action synergistically in the tanning response to light.

•Decrease in ultraviolet light exposure, found in sunlight and lights used in indoor tanning beds, which decreases the likelihood of skin cancers or other skin issues.

•If desired, Melanotan I has the ability to darken and tan the complexion of the skin.

Side effects of Melanotan 1

The biggest concern when it comes to tanning injections is that they can be unregulated. In the absence of proper regulation, there is no guarantee that the product being utilized has been adequately and properly labeled. Additionally, the long-term outcomes of Melanotan I use are mostly unknown. If you have a license and are working in the lab, you can Buy Melanotan 1 USA and help in the process of discovering further useful information about this peptide.

The most common adverse reactions of Melanotan I, which are considered to usually be temporary, include:

•           Feelings of nausea

•           Flushing of the skin

•           Loss of appetite

•           Drowsiness or fatigue

•           Lightheadedness

•           Itchiness at the injection site

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Tax incentives may be more effective than disincentives to benefit the housing market

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There was no federal budget in 2020 due to the pandemic, so the upcoming budget will be the first in two years. As home prices continue to rise, there may be tax incentives that could benefit renters, investors and seniors without further contributing to higher prices.

The Teranet-National Bank National Composite House Price Index rose by 9.6 per cent in January over the previous year. Meanwhile, the federal unemployment rate was 9.4 per cent, compared to just 5.6 per cent in January 2020, with an increase of more than 762,000 unemployed Canadians.

I am not a tax policy expert, but as a financial planner, I observe tax implications that influence people’s real estate and financial decisions.

Real estate investors can claim a variety of tax deductions when they own a rental property. They can deduct their rental expenses against rental income including mortgage or line-of-credit interest. They can also claim depreciation — capital cost allowance (CCA) — as a tax deduction as well.

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For a $500,000 rental property with a $400,000 mortgage at 2 per cent, an investor may be able to claim almost $8,000 of annual interest costs. Depreciation could provide up to another $20,000 in tax deductions. A high-income taxpayer may save 50 per cent tax or $14,000 by claiming these deductions, let alone deductions for property tax, insurance and condo fees.

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By comparison, a renter renting the same property may be eligible for a tax credit on the rent paid. In the country’s most populous province, the Ontario energy and property tax credit would provide up to $1,095 of tax benefits for a non-senior and $1,247 for a senior. However, the credit is only available to low- to moderate-income taxpayers. There are plenty of moderate- and even high-income renters, especially younger people.

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As real estate prices rise, the mortgage interest and depreciation deductions rise with them, whereas the modest tax credits available for renters typically are adjusted annually based on inflation.

One of the deterrents for a real estate investor to sell a property is the capital gains tax payable on the appreciation. One half of a capital gain is subject to tax, as well as a recapture and full income inclusion of all previously claimed depreciation. The tax hit can be significant enough to keep an investor from selling to a potential homeowner who may want to live there.

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There could be ways to incentivize a property owner to sell but ideally to the right buyer. One option could be a capital gains exemption or deferral if the property was sold to a tenant who lived in and rented the property for at least two years immediately prior to the sale (ideally an arm’s-length buyer who is not related). This could make a tenant’s offer to purchase a property or a landlord’s offer to sell a property to a tenant more appealing than involving a third party on the open market.

Real estate agents might not be in favour of this idea but maybe they could still help the buyer and seller on a fee-for-service basis to evaluate comparable properties and whether a tenant-landlord private sale made sense for the parties.

A limited capital gains exemption, a reduced capital gains inclusion rate, or the ability to defer the capital gain over up to five years, as examples, could help encourage tenant-landlord transactions.

I work with real estate investors and aspiring real estate investors whose capital could be put to good use by using tax incentives. There are federal and provincial tax deductions and credits to invest in flow-through shares issued by junior mining and energy companies. There are also tax credits to invest in shares of prescribed labour-sponsored venture capital corporations (LSVCCs). Tax deductions and credits could be used to attract investors to fund investment in affordable housing development investment funds. This might also allow smaller investments by those who might otherwise over-extend themselves to buy a rental property directly. If the funds were RRSP and TFSA-eligible, more investors could participate, and more people would contribute to their RRSPs and TFSAs instead of buying rental properties that are not otherwise eligible to be held in a registered account.

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In the U.S., real estate investors can benefit from a like-kind exchange. A rental property can be sold and if a comparable property is purchased, the capital gain, or a portion thereof, may be deferrable until the sale of the replacement property. This would not necessarily increase the housing stock available for buyers but could at least increase the volume of transactions that is sometimes an issue in markets where there is not a lot of inventory or turnover.

In Australia, seniors who are 65 or older can downsize a primary (main) residence they have owned for at least 10 years and make a one-time downsizer contribution to their superannuation. A super is an investment account that has low tax rates during working years and tax-free status in retirement.

A similar incentive in Canada could encourage the sale of larger homes owned by seniors to potential buyers raising families by allowing a one-time downsizer contribution to a TFSA. A Canadian primary residence grows tax free as it is, so the ability to access more TFSA room may not necessarily allow more tax-free earnings for a taxpayer. But it could divert real estate assets to investment assets for retirees and free up housing stock for young people.

The Australian government has a limit of $300,000 for a downsizer contribution. Other restrictions may be needed to help ensure the intended outcome of helping increase the availability of homes and helping seniors, especially low- to moderate-income seniors, fund their retirements.

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Recent tax measures such as foreign buyer taxes, empty homes taxes and the enforcement of business income tax rates instead of capital gains tax rates on real estate flippers may help bring balance to the housing market. However, as a father, I have consciously opted for positive reinforcement techniques rather than negative reinforcement with my kids. In much the same way, tax incentives may be more effective than disincentives for renters, investors and seniors, and for the benefit of the housing market — at least from this financial planner’s perspective.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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In Ontario, a couple we’ll call Leonard, 54, and Bobbi, 51, live with their two children, ages 16 and 18. Leonard used to have a teaching job that paid $90,000 per year, but the pandemic forced many schools to close and his position was eliminated. He received $100,000 severance, $30,000 of which went to pay taxes. He has a new job with a retailer that pays $44,280 per year. Bobbi still has her job with take-home income of $71,856 per year. Leonard and Bobbi would like to retire in eight years, when they are 62 and 59, respectively, but waiting another year or two may be more practical.

email andrew.allentuck@gmail.com for a free Family Finance analysis  

One of the key decisions they are grappling with is whether to take the commuted value of Leonard’s teaching pension or to wait until he is 65 and take the annual payouts of $27,456 per year. The commuted value is $692,525, which would be split between a substantial cash payout that will incur taxes and a portion that would be held in a locked-in retirement account. The analysis is complex, as we’ll see.

Debt is an issue as well. They have a $1.1 million house with a $235,273 mortgage. Their mortgage has a 14-year amortization. To shorten the repayment period to the time Leonard is 62, the monthly mortgage payment, $1,707, would have to rise by $1,025 to $2,732 per month. They pay 2.74 per cent on the existing mortgage, as much as double current rates being offered by some lenders.

Family Finance asked Derek Moran, head of Smarter Financial Planning Inc. in Kelowna, B.C., to work with the couple.

The pension question  

Leonard has the choice to either commute his pension — that is, take an upfront payout of the amount of capital invested in secure assets, mostly bonds, needed to make its annual payments — or leave the pension’s capital with professional investors as is.

Commuting means getting a large sum now — one that can be reinvested or put to other uses — but giving up the security of a guaranteed annual payment upon retirement.

If he takes the commuted value, he will get $412,417 in fully taxable cash immediately while an additional $280,108 will be placed in a locked-in retirement account (LIRA). Using current Ontario tax rates, he would have to pay about $182,343 in taxes on the cash portion of the payout.

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Leonard has $61,404 contribution room in his RRSP. Using up that space by contributing a portion of the cash payout would cut his tax bill by $32,879 to $149,464, Moran explains, a wise move.

If Leonard chooses to keep the pension instead, it will pay him pay $27,456 per year, indexed to 75 per cent of the change in the provincial cost-of-living index.

The LIRA and the additional RRSP contribution will not be able to match that level of return.

If the sum of the $280,108 LIRA and the $61,404 enhanced RRSP — total $341,512 — grows at three per cent per year after inflation, it would become $472,732.48 by Leonard’s age 65, and could produce $23,415.98 per year in income, assuming continued growth at three per cent.  

The investment flow would be less than the pension, but the couple would have options: they could start the payouts sooner to facilitate an early retirement and would have $201,540 of after-tax cash to make up the difference.

That money could reduce their $235,273 mortgage. Once mortgage free, household expenses would drop by $1,707 per month. With the house paid off and $1,707 freed up, money could go to Bobbi’s RRSP.

Estimating retirement income  

Bobbi’s pension will be $45,012 at 65 or 15 per cent less, $38,260, at 60.

If both wait until 65 to begin drawing CPP, Leonard would get $12,720 per year and Bobbi $9,600.

Leonard will get full OAS, currently $7,380 per year, but because Bobbi came to Canada at age 31 her OAS will be a little less, $6,273 per year.

The couple has $27,102 in TFSAs, but we will leave that as an emergency fund, for now.

For ease of calculation, let’s assume they decide to target Bobbi’s age 60 to start drawing down their RRSP accounts, slightly later than they hoped to retire.

Adding the $44,563 they presently have in their RRSPs to the $280,108 commuted value and $61,404 RRSP addition gives a total of $386,075.

While we have assumed Leonard uses most of his space to reduce taxes on the pension payout, Bobbi still has $65,707 of contribution room.

If they were to put an additional $10,000 into her RRSP now, they would get a 29 per cent tax refund.

Assuming they do that and that she contributes $12,000 per year for the next nine years to her age 60 and the funds grow at three per cent per year after inflation the total in all RRSP accounts will grow to $639,871 in nine years. If they spend the RRSPs over 30 years to Bobbi’s age 90, they would support payouts of $31,818 per year, Moran estimates.

Starting when Bobbi is 60, they would have her $38,260 pension and RRSP payouts totalling $31,818 for total income of $70,078 per year. After splits of eligible income and 12 per cent average tax, they would have $5,140 per month to spend. Assuming their mortgage, which costs them $1,707 per month, is paid in full, $50 RRSP and $200 monthly RESP contributions have ended, their expenses will have dropped to $3,873.

When both are 65 and they are receiving CPP and OAS, they would have Bobbi’s $38,260 pension, CPP income of $12,720 for Leonard and $9,600 for Bobbi, OAS sums of $7,380 and $6,273, and the RRSP payouts of $31,818 for total income of $106,051. After splits of eligible income and 15 per cent average tax, they would have about $7,500 monthly to spend, well in excess of their expenses.

While commuting the pension transfers investment risk to the couple, it also gives them flexibility and the potential for greater income in retirement.

Retirement stars: *** out of Five

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Jamie Golombek: The first instalment is due in a couple of weeks on March 15

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Earlier this month, the Canada Revenue Agency sent out instalment reminders to taxpayers who are required to pay quarterly tax instalments, reminding them of the first and second instalment deadlines for 2021. The first instalment is due in a couple of weeks on March 15, 2021, with the second due on June 15, 2021. According to the CRA, approximately 1.8 million individuals are required to pay income tax by instalments annually.

Under the Income Tax Act, quarterly tax instalments are required for this tax year if your “net tax owing” for 2021 will be more than $3,000 ($1,800 for Quebec tax filers) and was also greater than $3,000 ($1,800 for Quebec) in either 2020 or 2019.

The definition of net tax owing is somewhat complex, but essentially refers to your net federal and provincial taxes, less income tax withheld at source, plus any Canada Pension Plan contributions and Employment Insurance premiums on self-employment earnings (if applicable), as well as adjustments for certain other credits and social benefit repayments.

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There are three options that may be used to determine how much you need to pay each quarter: the no-calculation option, prior-year option and current-year option. Individuals can choose the option that results in the lowest payments.

Under the no-calculation option, the CRA calculated your March 2021 and June 2021 instalments based on 25 per cent of the net tax owing on your 2019 assessed return. The Sept. 15 and Dec. 15, 2021 instalments will then be calculated based on the net tax owing from your soon-to-be-filed 2020 return (due April 30, or June 15 for self-employed and their spouse or partner), less the March and June instalments already paid.

By contrast, the prior-year option bases the calculation solely on last year’s (2020) income. The 2021 instalments are based on your 2020 tax owing and you simply need to pay a quarter of the amount on each instalment date. This option is best if your 2021 income, deductions and credits will be similar to 2020, but significantly different than 2019, perhaps because you sold a vacation property back in 2019 and reported a large capital gain (which wasn’t sheltered by the principal residence exemption.)

Finally, under the current-year method, you simply base your 2021 instalments on the amount of estimated tax you think you will owe for this year and you pay one quarter of the estimated amount on each instalment date. This option is useful if your 2021 income will be significantly less than 2020. For example, if you are self-employed and your income has dropped significantly due to COVID, you can make 2021 instalments based on your estimated lower income this year.

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Provided you make the required instalments and they are remitted on time, no interest or penalties will be assessed.

Thinking of ignoring the instalment reminder you just received? The government could charge you instalment interest and, in some cases, an instalment penalty. Instalment interest is compounded daily at the prescribed interest rate, which is currently five per cent for overdue taxes. The instalment interest clock starts ticking from the day your instalment was due until the date it is paid (or, if unpaid, until April 30, 2022.) Fortunately, the government chooses the instalment option that results in the least amount of interest.

An instalment penalty may also apply if the instalment interest is more than $1,000. The penalty is calculated by subtracting from the instalment interest the greater of either $1,000 or 25 per cent of the instalment interest calculated if no instalment payments had been made for the year. Half of this difference is the amount of the penalty.

A tax case decided last month demonstrates what can happen if you ignore the instalment reminder from the CRA. The case came before a three judge panel of the Federal Court of Appeal, which heard the case by online video conference. The taxpayer was appealing a prior judgment of the Tax Court of Canada which had dismissed his appeal concerning $599.24 of arrears interest the taxpayer was charged for the failure to make tax instalment payments for the 2016 tax year.

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The taxpayer worked in Egypt for a non-Canadian petroleum company but was still considered a resident of Canada for tax purposes for the year 2016. He chose not make any Canadian tax instalment payments for the year.

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The taxpayer argued that he should not be required to make Canadian instalment payments because source deductions were taken by his employer on account of his tax liability in Egypt. The taxpayer wanted the court to reimburse him for the arrears interest charged.

The taxpayer attempted to seek relief using an article of the Canada-Egypt tax treaty, which states that, “The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected.”

The taxpayer interpreted this provision to mean that the CRA was required to take into account source deductions taken with respect to tax in Egypt in calculating the instalment payments that were then required to be paid in Canada.

The appellate court disagreed and found that the treaty provision being invoked did not apply to the taxpayer’s case. It ruled that instalments were, indeed required, and, as the lower Tax Court found, any source deductions taken for tax in Egypt do not affect the instalments that were required under the Canadian Income Tax Act. The court therefore upheld the arrears interest charged for failing to make the required tax instalments when due.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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Tracie wants to buy a Montreal duplex and rent it out before they move back to the city, but it’s a risky plan

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A couple we’ll call Tracie and Kevin moved to northern Quebec two years ago in search of a fresh start. Both of them had tried their hand at living in Montreal and failed.

Tracie, 31, had wrapped her Master’s degree but couldn’t find steady work in the city. Between her substitute teacher roles and the work that she’d put in at youth centres, she was barely making enough to live on. “It was paycheque-to-paycheque for me,” she said. Kevin, 40, was running a small business and wasn’t doing much better.

Together, they had accumulated more than $100,000 in debt, $80,000 of which belonged to Tracie. The rest was brought on by Kevin.

“You can’t be good with money if you don’t have it,” Tracie said.

In March 2018, Tracie made the move up north when she heard about the opportunity to not only teach full-time but earn a decent living doing so. Her $3,002 after-tax income, which already had rent payments deducted from it, is higher than anything she could expect to receive in Montreal. Kevin, despite having no experience, got a job as a gym teacher where he earns $2,769 after-tax.

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In two years, the couple has already cut their debt by half. They focused on paying off Kevin’s first and Tracie now only has slightly more than $50,000 in student debt left to cover on her end. Suddenly, they can see daylight.

The added flexibility received from paying off Kevin’s debt allowed them to start cobbling together an emergency fund in a TFSA ($18,077) for the first time in their lives. They’re speaking about their long-term goals — well, at least Tracie is — and looking into what the next steps could look like after Tracie’s student debt is paid off.

The move north may have given Tracie her second chance, but she doesn’t want to live there for the rest of her life. Eventually, she wants to venture south again, back to Montreal perhaps. And if she did make that move, she’d like to already have a property there to come home to.

Over the next two years, Tracie is aiming to save enough to buy a duplex in Montreal for about $500,000. The couple would stay up north for a third year, where they could continue to pay off Tracie’s student debt and would rent out the duplex in the meantime. Rather than just cover the mortgage bill, Tracie hopes she can make some extra income off her tenants too.

If they could manage that kind of setup, it would alleviate some of the pressure of investing their money into the stock market — a move that Tracie dreads. Neither Tracie nor Kevin are very financially literate. I cracked a smile when Tracie referred to ETFs as “EFTs” and RRSPs as “RSSPs” in our interview, remembering a time when I had the same limited knowledge. They’ve never had the money to invest before and so they never did their own homework.

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But there’s a trust issue here for Tracie as well. She’s not knowledgeable enough to do her own investing and she doesn’t have the complete confidence that a financial advisor that she’d be paying would have her best interests at heart. That same skepticism is ingrained in her thoughts about investing in stocks.

“I think it’s the unknown of my money being wrapped up in something I don’t know,” she said. “You hear stories where the CEOs are doing something with the money and everyone has lost their pension and that freaks me out. I feel like there’s more control over my own property versus trusting these people I don’t know with my own money.”

I asked Richardson GMP director of wealth management Serena Cheng how Tracie can approach the next three years as she saves for a duplex and whether she’d have to get over her fear of investing to get there.

The good news for Tracie and Kevin is that they won’t need to change their spending habits in order to fund a downpayment. In a recent month, they earned a combined $5,771 after-tax and managed to put away $1,958 of it. They spent a bit more than they usually do, mostly on two plane tickets to Montreal for a Christmas vacation ($827.29), but they also received a $785 reimbursement from their workplace. The two nearly cancel each other out.

Their food spending only hit $380 because of a number of subsidies they receive for living up north, while their combined shopping bill was only $400. The largest costs came from diverting another $1,500 towards Tracie’s student debt — double the minimum payment — and the “other” category due to a $492 CRA tax bill and Kevin’s child support payments of $400.

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The reason no change is really needed here is because if they save $2,000 per month, Tracie and Kevin will have hit $48,000 in 24 months. In one more month, they would hit $50,000 — a 10 per cent downpayment on a $500,000 home that would still leave them with their TFSA as an emergency fund, Cheng said.

The best way for them to save up for the downpayment would be to do so within their RRSPs, Cheng said. That way, they can take advantage of the Home Buyers’ Plan and each withdraw up to $35,000 tax-free to put toward the downpayment.

Of course, the best thing they could do is invest that money as they’re accumulating it, said Cheng, who suggested a conservative portfolio to match Tracie’s risk profile. With little knowledge to go on herself, Cheng said it would be best for Tracie to offload this work to an advisor.

“It would be strongly advisable for those two to become comfortable with the idea of starting a relationship somewhere with someone in the financial world they can trust,” Cheng said. “It’s like finding a doctor.”

There are a few potential flaws in Tracie’s plan, Cheng said. Student debt isn’t one though. You might ask why Tracie should rush into adding a mortgage before she’s fully paid off her student debt, but at her current pace, within two years, she’ll only have little more than $10,000 left. If they can wait until they’re debt-free, that would always be better, but Cheng wouldn’t be fussed if they didn’t.

“What I’m more worried about is if they can handle the fixed costs of owning that house if something goes wrong,” Cheng said.

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And a lot of it can.

On a 25-year amortized mortgage with a five-year fixed rate at 1.64 per cent, they’d be paying about $1,886 per month, Cheng calculated. Essentially, that would mean that the money they’re putting away for savings in their monthly budget morphs into a mortgage payment.

Cheng can’t say whether the rent Tracie could collect from two tenants would generate any income. At the very least, she suspects that tenants could cover the mortgage and utilities payments while they are up north.

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But for this plan to work, it hinges on the couple finding those tenants, Cheng said. There’s the risk that they won’t be able to do so right away and it may not be sustainable for them to cover mortgage payments and student debt payments for very long.

The even more concerning issue is the possibility Tracie and Kevin can’t find jobs right away when they move back to Montreal or if the jobs they do find pay them far less than what they earn in the north.

So can they do it? Yes, but there’s a lot of risk involved.

Tracie zoned in on those risks when I explained Cheng’s conclusions to her. She’s now less-willing to put her plan into action. That doesn’t mean that she won’t buy in a home in Montreal, but she’ll wait until she and Kevin are back in the city and have found work before pulling the trigger on one.

Financial Post

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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Personal finance expert Rubina Ahmed-Haq speaks about what’s different this tax year

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Personal finance expert Rubina Ahmed-Haq speaks with Financial Post’s Larysa Harapyn about what’s different this tax year.

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Jamie Golombek: Here’s how making an RRSP contribution could save you big bucks for 2020 and beyond

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The March 1 deadline for registered retirement savings plan (RRSP) contributions for the 2020 tax year is less than 10 days away, and, even if you’ve never contributed before, this is the year you may want to consider making one to claim a deduction on your tax return and save some tax on any COVID-19-related benefits.

Let’s review the basic rules and then look at a couple of examples of how making an RRSP contribution could save you big bucks for 2020 and beyond.

To claim a deduction on your 2020 return, you need to contribute by March 1, 2021, and the maximum amount you can contribute can be found at the very bottom of your “RRSP deduction limit statement” on your 2019 Notice of Assessment. It can also be looked up online using the Canada Revenue Agency’s My Account portal.

Your deduction limit for 2020 was based on 18 per cent of your 2019 earned income (up to a dollar limit of $27,230), less any pension adjustment from your employer, plus any unused deduction limit from previous years. Earned income includes employment, self-employment and rental income (as well as a few other things.)

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It’s important to note, however, that an RRSP contribution can be deducted against any source of income, not just earned income. In other words, contributing to an RRSP can help you save tax on your employment income as well as your investment income, taxable capital gains and even government COVID-19 related benefits that are taxable.

If you’re one of the millions of Canadians who received COVID-19-related government benefits in 2020, you need to report most of these amounts on your 2020 return. Reportable amounts include: the Canada Emergency Response Benefit (CERB), Canada Emergency Student Benefit (CESB), Canada Recovery Benefit (CRB), Canada Recovery Sickness Benefit (CRSB) and the Canada Recovery Caregiving Benefit (CRCB), all of which are considered taxable income and should be reported on Line 13000 – Other income.

Depending on your total 2020 income, you may owe some tax on your COVID-19 benefits. This is particularly true if you received CERB or CESB payments, since no tax was withheld when they were issued, so there may be a balance owing when you file. If you received CRB, CRSB or CRCB payments, 10-per-cent tax was withheld at source, but this may not be sufficient, depending on what other income you earned in 2020.

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In addition, if your 2020 net income was more than $38,000, you may have to repay 50 per cent of your CRB payments for every dollar in net income you earned above $38,000, to a maximum of CRB received in the year. Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any CERB, CRSB and CRCB payments received (but not CRB).

By making an RRSP contribution by the deadline, you may be able to reduce or eliminate tax owing on any COVID-19 benefits as well as possibly keep more of the income-tested CRB.

Let’s walk through two examples to illustrate how two taxpayers could benefit from making an RRSP contribution and claiming a deduction on their 2020 returns. (For simplicity, CPP/QPP and EI contributions and credits/deductions have been ignored to focus on the income taxes owing.)

Example 1

Tom, an Ontario resident, earned $60,000 annually prior to COVID-19, but lost his job on March 15, 2020. Prior to this, he earned $12,500 in employment income for the first three months of 2020, for which his employer withheld $2,600 in federal and provincial tax. He applied for CERB, and received the full $14,000 in benefits with no taxes withheld. He subsequently applied for CRB, which replaced CERB, and received a total of $6,000 for the last three months of 2020, on which 10 per cent, or $600, was withheld.

Tom’s total income for 2020 was $32,500. His tax liability, after taking into account the enhanced basic personal amount, Canada employment amount and Climate Action Incentive, is $3,419. Since the taxes withheld at source via his employer and the government were only $3,200, Tom would need to pay additional tax of $219.

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If Tom contributes about $730 to his RRSP, he could reduce his tax bill for 2020 to the $3,200 that was withheld so he wouldn’t need to pay any further tax. Of course, whether it makes sense to do so will depend on the rate of return he can achieve on his tax-deferred savings, his anticipated tax rate on withdrawal, and how many years he can leave it in there before withdrawing it in retirement.

Example 2

Jerry, an Alberta resident, was self-employed for much of 2020, earning $50,000 before shutting down his business in the fall and collecting $6,000 in CRB (less 10-per-cent withholding). If he doesn’t make an RRSP contribution, he will be forced to repay the entire $6,000 in CRB since his net income (excluding CRB) for 2020 was $50,000 and he must repay 50 cents of CRB for each dollar of income above $38,000, for a repayment of $6,000 (i.e., ($50,000 – $38,000) x 50 per cent).

Jerry’s taxable income would be $50,000, since he’s not taxed on amounts he didn’t get to keep, and the net federal and Alberta tax liability (assuming just the basic personal amount and Climate Action Incentive) is $8,170. After taking into account the $600 withheld on CRB, Jerry would need to pay additional tax of $7,570, as well as repay $6,000 in CRB received for a total amount owing of $13,570. (For simplicity, we have ignored any tax instalment payments made in 2020, which affect cash flow and not the tax ultimately owing.)

But if Jerry can reduce his income to $38,000 by making a tax-deductible RRSP contribution of $12,000, perhaps by borrowing the funds via an RRSP loan, he would cut his tax owning and get to keep his full $6,000 in CRB (less the associated tax). His tax liability would drop by $1,581, for an effective marginal effective tax rate savings of 63 per cent ($7,581/$12,000).

Even if Jerry withdraws funds from his RRSP well before retirement, provided his marginal effective tax rate in the year of withdrawal was lower than 63 per cent, contributing to an RRSP will have been a smart tax decision. And, to the extent the funds can be left inside the RRSP, Jerry may also be able to enjoy decades of effectively tax-free investment growth to fund his retirement.

Jamie.Golombek@cibc.com

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

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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Dennis will lose about $7,000 in after-tax income per year if he pursues a PhD

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In Alberta, a man we’ll call Dennis, 35, has several careers — one as a researcher in health care, one as an administrator on contract for a government agency and one as a graduate student heading for a PhD in medical statistics. His present income of $8,500 per month from his contracts leaves him with an average of $5,519 after tax.

Dennis focuses on his future: He does not expect to have kids, wants to earn his PhD and move from his $298,000 condo to a $550,000 condo. While enrolled in the PhD, Dennis will see his income drop to the $35,000 per year he’ll receive from a scholarship.

E-mail andrew.allentuck@gmail.com for a free Family Finance analysis.

Family Finance asked Eliott Einarson, head of the Winnipeg office of Ottawa-based Exponent Investment Management Inc., to work with Dennis on the question of cost and return. It’s one that involves calculating his present assets and their future value, as well as the impact foregone income during four years of study will have on their growth. We assume that all tuition costs will be covered by scholarships.

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In this analysis, we will not assume the PhD generates an income boost, because that will depend on what kind of work Dennis ends up doing. If Dennis works in government, he could earn more than he might as an instructor or assistant professor.  As a result, this analysis will probably be on the conservative side, Einarson explains. We are assuming constant RRSP contributions, though the base for calculation could change, and we are excluding any defined-benefit pension that might go with a future job. That, too, could boost retirement income.

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Pricing the future     

Dennis’s present monthly income, $8,500 from salary, leaves him with $5,378 per month after tax. Out of this cash flow, he adds $800 per month to his RRSP on top of $400 added by his employer and $500 per month to his TFSA while paying his condo mortgage of $960 per month, a $284 monthly car loan and $450 for tuition. He is left with $260 he can save for a move to a larger home on top of tapping his RRSP for a Home Buyer’s Plan loan.

In terms of assets, Dennis has a $298,000 condo, $22,000 in his TFSA, $90,000 in several RRSP accounts, $51,000 in a locked-In retirement account and $28,000 in cash. He also has a $20,000 car, bringing the total assets on his balance sheet to $509,000. His debts are modest — just a $157,000 mortgage and a $13,500 balance on the car loan. His net worth is thus $338,500.

Cost of a PhD

At the time he starts his PhD, his part-time income and money from a renewable scholarship, about $35,000 per year, would cover his mortgage and car loan. If he were to sell his condo for its $298,000 estimated market price less five per cent for fees and fussing, the gain less interest and principal paid on the condo might leave him with $126,000. For a $550,000 condo with a 25 per cent down payment, net $137,500, he could use money from sale of the condo plus $11,500 cash on hand. Remaining cash, $16,500, is for unexpected expenses and emergencies.

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We’ll compare Dennis’s retirement income from work at present without the future PhD with income after he gets a PhD.

Retirement income

His RRSPs, excluding the $51,000 LIRA, total $90,000. With future contributions of $14,400 per year composed of $9,600 from his own funds and $4,800 from his employer, total $14,400, will grow to $924,090 in 30 years at this age 65. That sum could generate $45,773 taxable income for 30 years to his age 95. If Dennis were to take the next four years out of the calculation, the RRSP would grow to a value of $790,280 and provide $39,145 for the following 26 years to his age 95.

His LIRA account, with no further additions, would grow from today’s balance of $51,000 for 30 years to his age 65 at an assumed rate of three per cent after inflation to $123,840 and then pay $6,132 for the following 30 years to his age 95.

The TFSA account with a present value of $22,000 with $6,000 annual contributions for 30 years would grow at three per cent per year to a value of $347,416 and could then provide income of $17,209 per year. If the TFSA were to miss four years of contributions early on, it would grow to a value of $291,668 by his age 65 and then provide $14,447 cash flow per year.

At 65, OAS would provide $7,380 per year and CPP $14,100 per year.

Adding up these sources of income, Dennis would have $73,385 taxable income in retirement at 65 for 30 years. After 21 per cent average tax and addition of TFSA cash flow of $17,209, he would have total income of $75,183 per year.

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If Dennis takes the PhD route, he would have $66,757 taxable income. After 20 per cent average tax and addition of $14,447 TFSA cash flow, he would have $67,853 disposable income for the following 30 years.

The income Dennis foregoes while doing his PhD puts a dent in his savings that compounds over time, creating a tangible difference in his retirement, to the tune of about $7,000 in after-tax income per year.

That, however, assumes the PhD does not boost his income.

To make it financially worthwhile, Dennis would have to expect that the additional savings he could make with a PhD would over time grow to be enough to offset the lost retirement income. We can’t predict exactly much of a boost the PhD will bring, if any.

But we can estimate how much more he would have to save per year after earning the PhD to fill the hole from taking four years off.

To replace $7,000 in after-tax income, he would need to save enough to generate $8,300 pre-tax per year over a 30-year retirement.

Using annuity calculations and assuming a return of three per cent after inflation, the lump sum he would need at age 65 is approximately $167,000.

To accumulate that amount from over the 26 years after completing his PhD would mean setting aside $4,220 per year.

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While there is no guarantee of a pay raise, health care is a lucrative field and a PhD subsidized by scholarships is a financially efficient way to enter it. The financial gains of an advanced degree and the value of career doors it opens are likely to exceed the income and savings given up for four years of graduate study, Einarson concludes.

“Knowledge does not have price tags, but in Dennis’s case, it should enhance income. Financially, the PhD should be a good investment.”

Retirement stars: 5 ***** out of 5

Financial Post

E-mail andrew.allentuck@gmail.com for a free Family Finance analysis.

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If you have already repaid, the government will be sending it back to you

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Sometimes, one word can make all the difference.

This week, the federal government officially backtracked on its previous position when it announced that self-employed individuals who applied for the Canada Emergency Response Benefit (CERB) and would have qualified based on their “gross” income but not their “net” income will not be required to repay the benefit, provided they also met the other eligibility requirements.

No need to repay CERB

Readers will recall that back in December 2020, the Canada Revenue Agency sent out 441,000 “educational letters” warning individuals that they may not be eligible for the CERB. The letters were sent out to individuals for whom the CRA said it was “unable to confirm … employment and/or self-employment income of at least $5,000 in 2019, or in the 12 months prior to the date of their application.”

The issue of whether the $5,000 income threshold for the self-employed means “gross” income (i.e. revenues) or “net” income (i.e. net of expenses) has been discussed extensively. It has always been the CRA’s view that the $5,000 refers to net income and thus if you had gross income of $5,000 in the required time period, but netted under $5,000 after deducting business expenses, then you didn’t qualify for the CERB and, until now, the CRA’s position was that you needed to return it.

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This week, the government reversed that position and said that self-employed individuals whose net self-employment income was less than $5,000 and who applied for the CERB will not be required to repay it, as long as their gross self-employment income was at least $5,000 and they met all other eligibility criteria. The same approach will apply whether the individual applied through the CRA or Service Canada.

What if you already voluntarily repaid the CERB based on the government’s previous instructions to do so? Well, you’re in luck as the government will be sending you back any amounts you repaid, with additional details on how, and when, to be announced in the coming weeks.

But, the question on many other self-employed Canadians’ minds this week is: what about those individuals who didn’t apply for the CERB because their “net” self-employment income was under $5,000? It appears that they’re out of luck.

Interest relief

For some Canadians, the 2020 tax year may be the first time in their lives that they won’t be getting a tax refund and may actually end up owing some tax. That’s because, just like Employment Insurance (EI) benefits, the COVID-19 emergency and recovery benefits, including similar provincial benefits, are taxable. And, although tax was withheld at source at a rate of 10 per cent of the benefit amount for the three Canada Recovery Benefits (the Canada Recovery Benefit, the Canada Recovery Sickness Benefit and the Canada Recovery Caregiving Benefit), no taxes at all were withheld from the CERB or the Canada Emergency Student Benefit. In addition, if your 2020 net income was over $38,000, you may have to repay 50 per cent of the CRB payments for every dollar in net income you earned above $38,000 (to a maximum of the CRB received in the year.) Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any CERB, CRSB and CRCB payments received (but not payments received through the CRB.)

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To illustrate, assume Mike, an Ontario resident, was furloughed from his company in mid-2020. His pre-COVID income was $18,000 from which his employer withheld $2,200 in federal and provincial tax. He applied and received $14,000 of CERB, for which no tax was withheld. The result is that Mike would owe about $850 in taxes when he files his 2020 return, after taking into account non-refundable credits for the basic personal amount (federally $13,229), the Canada employment amount ($1,245) and the Climate Action Incentive ($300). (CPP and EI have been ignored for this example).

Now take Heather, whose 2020 income was $44,000 prior to losing her job due to COVID layoffs. She applied and received six periods of CRB for the final three months of 2020, for a total of $6,000 (with $600 withheld.) But, when she files her return, she will be forced to repay $3,000 of the CRB since her total income for 2020 was over $38,000, and the CRB is reduced by 50 per cent for each dollar of income above this amount (i.e. ($44,000 – $38,000) X 50 per cent).

But, what if Mike and Heather don’t have the funds to repay the government by the April 30, 2021 payment deadline?

To help taxpayers like Heather and Mike, the government also announced this week that it will be providing targeted interest relief to Canadians who received COVID-related income support benefits. Once you’ve filed your 2020 income tax return, if you qualify, you won’t be charged interest on any outstanding income tax debt for the 2020 tax year until April 30, 2022, giving you more time and flexibility to pay if you have an amount owing.

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To qualify for this targeted interest relief, you must have had a total taxable income of $75,000 or less in 2020 and have received income support in 2020 through one or more of the COVID-19 measures: the CERB, CESB, CRB, CRCB, CRSB, Employment Insurance benefits or similar provincial emergency benefits.

If you fall into this category, you don’t need to do a thing other than file your return, as the CRA will automatically apply the interest relief measure for taxpayers who meet these criteria. In addition, the government announced that any CRA-administered credits and benefits normally paid monthly or quarterly, such as the Canada Child Benefit and the goods and services tax/harmonized sales tax credit, will not be applied to reduce any taxes owing for the 2020 tax year.

The government estimated that the interest relief measure will provide relief to approximately 4.5 million low- and middle-income Canadians.

No change to filing deadline

Finally, the government confirmed this week that it has not extended the tax filing deadline, meaning that you should file your 2020 return by the normal April 30, 2021 deadline or risk a five per cent late-filing penalty on any amount owing. Self-employed Canadians (and their spouse or partner) should file by June 15, 2021.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

Comments

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Depending on your total 2020 income, you may owe some tax on your COVID benefits. This is particularly true if you received the CERB or CESB, since no tax was withheld when payments were issued, so there may be a balance owing when you file.

If you received the CRB, CRSB, or CRCB, 10 per cent tax was withheld at source, but this may not be sufficient, depending on what other income you earned in 2020. You can find the income tax deducted at source in Box 022 of your T4A slip, which should be included on line 43700 – Total income tax deducted.

In addition, if your 2020 net income was over $38,000, you may have to repay 50 per cent of CRB payments for every dollar in net income you earned above $38,000, to a maximum of the CRB received in the year. Net income for this purpose is line 23600 of the T1 return (with some minor adjustments), and includes any CERB, CRSB and CRCB payments received (but not payments received through the CRB.)

Jennifer Gorman, Social Care Manager for TurboTax Canada, says that if this is your first year facing a balance owing, you want to make sure you file by the deadline, even if you don’t have the cash to pay. “There are two separate penalties. You have interest that accrues if you don’t pay your balance, but there’s also a late-filing penalty,” explains Gorman. The late-filing penalty is five per cent of your balance owing, plus one per cent of the balance owing for each full month your return is late, to a maximum of 12 months.

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