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There are many reasons an entrepreneur would want to create multiple passive income streams. Some people do this because they enjoy the work and how it makes them feel, while others might try to increase their savings account balance. The following blog post will cover 6 reasons why every entrepreneur should create multiple passive income streams!

Financial Independence & Freedom

It’s difficult to pinpoint how many reasons there are for every entrepreneur should create multiple passive income streams, because this will differ depending on the person.

However, it is easy to see how beneficial having passive income streams really is! People who have these types of investments seem happier and more fulfilled in life. They also sleep well at night knowing their bills will get paid no matter what happens regarding how much work they do or don’t receive.

Not only does it help them become financially free, but mentally as well! There’s something that just feels good about being able to say you’re not dependent upon if your primary business succeeds (and I hope it does!). With this, you can earn money that doesn’t even require your presence anymore.

Many Ways to Create Multiple Passive Income Streams

It’s not easy, but it can be done! You don’t need a lot of money either – you just need the drive and knowledge of how to make this happen for yourself. Once you set your mind on something, there isn’t much that will stop you from making it come true!

There are many different ways that entrepreneurs can go about creating multiple passive income sources. Some of them include:

  • writing an ebook,
  • getting paid by companies to try out their products & services for reviews
  • starting up an online store selling things like clothing or food items
  • blogging about certain topics which get readers clicking on ads;
  • and building an online membership site where people buy access to your information.

More traditional ways of how to create a passive income include:

  • buying real estate,
  • starting an e-commerce store with your own products or services,
  • and investing in stocks or index funds.

If you learn, practice and adapt how to make this work for you, the possibilities are endless!

Creating Passive Income Streams is a Brilliant Method to Invest Money

If you’re interested in how some entrepreneurs could retire before they turned 40, then this next fact might interest you. Many of them had multiple passive income streams!

It’s not always about how much money you make, even though that certainly helps – it’s how well the money is used and invested. If using the extra cash for traveling or buying more things isn’t what someone wants out of life, there are better ways to handle it than just letting it sit around doing nothing.

Building up multiple sources of passive income ensures that no matter what happens with any source (i.e., a sudden loss of income), you still have the others to keep going and fund the lifestyle you want!

Creating Passive Income Streams is Easier Than You Think

If someone has been making money from their job, then they likely know how easy it can be for things like taxes or having bills automatically deducted out of one’s paycheck to make life easier for them

Instead of doing everything yourself manually (i.e., paying multiple bills each month with checks written by hand), there are some extra steps that can be taken to simplify the process even more – such as automating payments so everyone gets paid correctly and promptly.

This example is like when people first learn how passive income works – many people think it’s going to be difficult and complicated, but in reality, that couldn’t be further from how things really are!

Take the time to learn how to create each income stream before diving right into it. Here, video tutorials, mentors, and industry thought leaders will play a crucial role so that you can minimize mistakes.

Improved Mental and Physical Wellbeing

Money isn’t the only thing that’s affected when someone has multiple sources of income. For example, having passive income reduces stress levels while helping entrepreneurs feel more fulfilled with what they’re doing – which can lead to better physical and mental health.

Every bit counts, so even if you don’t have hundreds or thousands of dollars each month coming in already (unlike others), there still might be enough room to add one extra stream here and there until your life changes too!

Remember to keep a positive outlook on life and stay humble and optimistic. And never neglect your personal needs, such as exercising, eating well, and resting. Because you can’t enjoy your money if you’re dead.

Improved Quality of Life

If there’s one thing that people can agree on about multiple streams of passive income, then this would probably be it: everyone benefits from having more money!

If you think about how much energy and effort goes into earning a certain amount of cash in order to pay bills or buy things like food items at stores – wouldn’t you rather have some help along the way too?

Whether working as an employee or running your own business, if your job involves getting paid every month, why not set up ways to automate how that happens instead?

If someone isn’t even trying to add multiple sources of passive income, then they’re leaving a lot on the table in terms of how their life could change – and so much more!

The Best Time to Learn How Multiple Sources of Passive Income Works is Now!

In conclusion, there are many benefits to creating multiple passive income streams. For example, a person can have more money and a better quality of life with less stress. Not only is it easier than you think, but the help available will make it worth your while! Get started today by clicking this link to learn how to make online passive income streams.

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When you are running a business, you should closely monitor your cash flow because this is the lifeblood of your enterprise. As much as possible, you should ensure that the income you are generating exceeds the expenses that you have to cover. Otherwise, your business may not thrive in a market that is stringent with competitors. This entails the need for you to be prepared for certain emergency expenses such as those listed below.

Natural Disasters

One of the primary things that you need to prepare for is the event of natural disasters. No matter how detailed your business plan is, if you don’t encompass the expenses that you can incur in the event of typhoons or storms that can be damaging to your business, then you may encounter a significant setback later on. This is where financial modeling and analysis prove to be beneficial because, through this, you will be able to factor in the costs that you need to prepare, and where you should get it, for insurance payments depending on your location. For instance, if you are located in an area where forest fires are imminent, then the insurance costs you have to pay may be more compared to a low-risk area.

Equipment Breakdown

Another emergency expense that your business needs to prepare for is equipment breakdown. No matter how well you maintain the machinery and equipment you use for your business operations, there are instances wherein these just suddenly break down. Make sure that you have built sufficient emergency funds to cover the costs of their repair or replacement to ensure that your business operations won’t be interrupted. Otherwise, make sure that you have the proper insurance coverage for this scenario as well.

Employee Turnover

You should also prepare for employee turnovers which can be quite unpredictable. For instance, you may have a long-term employee who suddenly needs to resign because of various personal reasons. While there may be a certain notice period that will give you ample time to look for a replacement, you have to keep in mind that you can incur a significant cost in the hiring process. For this reason, you should also factor this in when you analyse the finances of your business.

Economic Downturn

Finally, your business should also be prepared in the event of an economic downturn that can be triggered by various factors. For instance, a global pandemic may plague various countries for a number of years and this can have a negative impact on your business. Apart from proper planning and financial forecasts, you should also come up with innovative ways on how your business will be able to adapt to these kinds of unfortunate circumstances.

Final Word

Some of the emergency expenses that your business needs to prepare for include natural disasters, as well as equipment breakdown, and employee turnover. You should also prepare for an economic downturn by building ample emergency funds for your business. In this way, you will be able to preserve and continuously run your business even with the occurrence of these unforeseen circumstances.

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The Dia de Sorte is a different lottery that guarantees a lot of fun for the players, because in addition to getting the numbers drawn, it is possible to win through the “Lucky Month”. A field in which the bettor can choose based on the month of birth of a loved one, his own or random.

This game is part of the set of “Loterias Caixa”, which are administered by the bank Caixa Econômica Federal, in Brazil. In addition to the Dia de Sorte, Caixa promotes nine other lotteries, which are: Mega-Sena, Quina, Lotofácil, Timemania, Lotomania, Lucky Day, Federal Lottery, Loteca and Super Sete. All of them are regulated.

The Dia de Sorte draw takes place three times a week, always on Tuesdays, Thursdays and Saturdays, from 8pm onwards. The balls are drawn at the Caixa Lotteries Center, located in São Paulo, the largest metropolis in Latin America. They are broadcast on television and on Caixa’s official YouTube channel.

The nights when the lottery draws take place are always very fun, as they are the three days of the week in which a greater number of games are drawn, so the Brazilians who like to bet take advantage of the game.

In Dia de Sorte four prizes are available, the highest collection is given to those who match the seven numbers drawn. But those who score lower can also be considered. Hitting 6, 5 and 4 numbers. As we already mentioned here, whoever gets the Lucky Month can also win, but the prize is symbolic, usually with only one digit. Many Brazilians redeem these small prizes to place another bet using the value and guarantee the emotion in the next contest.

To play the Caixa lotteries you need to purchase a ticket. In the case of Dia de Sorte he has 31 numbers in which the player can choose a minimum of 7 and a maximum of 15 numbers to bet. It is also possible to allow Caixa’s electronic system to choose numbers at random, it is called “Surprise”.

To buy a lottery ticket you need to go to a Lottery House, usually there are one or more of these agencies in the city center, in shopping malls or in larger neighborhoods, it is quite easy to find one in Brazil.

Those who do not wish to leave the house to play have the option of using a virtual platform created by the bank. It is an official website dedicated exclusively to games. On the Lotteries Boxes website, the player can buy tickets, choose the numbers, find out what the previous results were, how many bets they won in the last competitions and the chances of winning.

For those who follow the Dia de Sorte understand that the game is more interesting when no one hits the seven numbers and the prize accumulates, because over the weeks the prize is very robust, increasing the expectations of the players.

It is worth mentioning that when a bet is contemplated, its owner has up to 90 days to redeem the prize, when it does not appear the amount is transferred to the Student Financing Fund (FIE), which is part of the Federal Government. In this situation there is no appeal for the player.

For those who wish to withdraw the prize, if it is an interior value of R $ 1,903.98 the withdrawal can be carried out at Casa Lotérica. Now, if it is higher than this amount, then it is necessary for the player to go to a branch of Caixa bank to request the prize.

Gamblers from any part of the world can make a “faith” using the official Loterias Caixa website. However, the foreigner who is contemplated must go to Brazil to personally withdraw the award. Do you think it’s worth the risk?

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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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