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Personal Finance

Ottawa couple aiming for simple retirement worry inflation will derail their plans

by Davies Otwell March 31, 2023

John is afraid inflation will eat away so much of his pension the couple will only have enough for groceries

A couple getting ready to retire fear inflation will only leave enough in their pensions to buy groceries. Photo by Stefani Reynolds/AFP via Getty Images

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John* is ready to retire and not look back. The programming analyst has built his career with the federal government over the past 33 years and plans to retire at the end of this year.

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“I’m 62 years old and I’m done with work, but I worry that inflation will eat away at my pension until it’s only enough for groceries.”

John currently earns about $90,000 a year before tax (about $60,000 after tax). His government defined-benefit pension plan is indexed to inflation and will pay $62,000 a year before tax if he retires as planned this year. Part of the pension is a bridged benefit to approximate Canada Pension Plan (CPP) payments until age 65.

His wife Cathy is 55 and works in the private sector. Her annual income is about $60,000 before tax. She plans to work another five to eight years before retiring. Her employer converted their once defined-benefit pension plan to a defined-contribution plan, so she used part of that money ($68,000) to purchase a car and put the rest in a locked-in retirement plan.

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“It could take a while to pay back the pension money used to buy the car,” John said.

Each of them has about $60,000 in a registered retirement savings plan (RRSP) invested in moderate-risk mutual funds. They own a single-family home in Ottawa worth about $500,000, but don’t have a mortgage or any other big debts. John estimates their current monthly expenses run about $3,500 with the surplus income going into the bank and to “pay off” the pension money used to purchase the car.

My basic vision for retirement is that I stop working. I have very simple needs

John

The couple live modestly and have no big plans for retirement other than to pursue personal interests, as long as there’s enough money to do so.

“My basic vision for retirement is that I stop working. I have very simple needs,” John said. “I want to learn to play guitar. We don’t have any big travel plans in mind. It would be nice to be able to afford to travel, whether we do or not, is a different thing. Our last trip was to Disney World back in 2000.”

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The couple don’t have children, but they would like to leave money to their nieces and nephews.

If they were to splurge, they’d like to purchase a swim spa, which would require some home renovations so it could be used year-round. John estimates it would cost between $80,000 and $100,000 and they would take out a mortgage on their house to do it. That said, their biggest priority is to ensure they’re comfortable in retirement.

“Is this going to work?” he asked.

What the experts say

Based on the numbers provided and their desired lifestyle, John and Cathy can both retire today, Ed Rempel, a fee-for-service financial planner, tax accountant and blogger, said.

“Their current lifestyle expenses are about $3,500 a month, or $42,000 a year, which would require an income of $46,000 a year before tax,” he said. John’s pension alone is more than this.”

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Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management, agrees.

“I see this a lot in my own practice. People are looking for clarity on what’s possible,” he said. “They are debt free and John’s pension plus CPP and OAS (Old Age Security) when he claims them will likely come close to his current net income. They are fine.”

But Rempel is concerned they haven’t considered all their potential spending needs, such as entertainment, medical expenses, gifts, etc.

“I added an additional $2,500 a year for medical expenses assuming any health benefits stop when he retires, $5,000 for vacations and a $68,000 car every 10 years, assuming they want to keep a similar car to what they have and drive it for a long time,” he said. “This amounts to $56,000 a year — $64,000 before tax — or $4,700 a month to spend to achieve their desired retirement lifestyle.”

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He recommends they take a closer look at the extra money (about $2,200) they have coming in each month. Right now, it’s not clear where it’s going. If they do nothing with it, they will slowly start to spend more and it will become part of their lifestyle spending.

Rempel recommends John split $18,000 of his pension with Cathy so they can both be in the lowest tax bracket. This will save $1,500 a year and ensure their OAS payments will not be clawed back.

“Both should convert their RRSPs to a registered retirement income fund and a life income fund, and start taking the minimum withdrawal when Cathy retires at 63 and John is 70,” he said.

As for when to claim CPP benefits, Rempel said the top two considerations are investment returns and tax.

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“Since they invest in balanced mutual funds, their rate of return should be similar to CPP, about five per cent a year,” he said. “They will probably pay less tax if they start John’s CPP and OAS at age 70 when Cathy retires, and Cathy’s CPP at 63 when she retires and OAS at the earliest age of 65.”

Depending on its value, Einarson said it may make sense to not take the pension bridge John has access to and instead use his RRSP to overcome any gaps until he claims CPP, but the swim spa is well within their reach.

“Retirement is about cash flow. If expenses are only about $3,500, they could take out a line of credit or a mortgage and comfortably work that cost into their cash-flow needs,” he said. “It’s very doable, particularly if Cathy is going to continue working for the next seven to eight years. They could make sure the swim spa reno is paid off by the time she retires to feel an additional bit of safety.”

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Einarson added that if they psychologically don’t mind having debt, they could take out a longer-term mortgage to pay off the spa upfront.

He also recommends investing their surplus income inside tax-free savings accounts.

“They are a great savings tool for the couple if they do need additional funds and also to build up money for the estate, which they could leave to their nieces and nephews,” he said.

*Names have been changed to protect privacy.

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March 31, 2023 0 comment

Personal Finance

FP Answers: What are the next steps for saving and investing after paying off student debt?

by Davies Otwell March 24, 2023

written by Davies Otwell

To start, clarify your goals so you can determine what to do with your money, financial planner suggests

Savings are important for short-term goals, but for longer-term goals and future use, you want to make your money work for you. Photo by Getty Images/iStockphoto

By Julie Cazzin with Janet Gray

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Q: I’m a 29-year-old graphic artist earning $6,000 a month after tax. This year, I paid off my $30,000 student loan debt. I have $20,000 in my tax-free savings account (TFSA), but I’m not sure what to do with it. I’m doing some long-term planning, and 10 years from now I would like to work only two days a week so I can pursue my hobbies. I recently started reading about investing, but don’t know where to start. Can you give me some good savings and investing advice? — Merlita

FP Answers: Merlita, having no or little debt and some savings certainly gives you more options. Let’s start by clarifying the difference between saving and investing.

Saving is protecting your money and keeping it secure so it doesn’t decrease in value. This is usually best for short-term use and/or emergency funds, and done with products such as high-interest savings accounts or guaranteed investment certificates (GICs). For longer-term goals and future use, you want to make your money work for you. You do this by investing it.

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Start by clarifying your goals, which are the jobs you need your money to do. This is easier if you look at your goals by time chunks: short term (less than 12 months), medium term (one to five years) and long term (six years or more). Try to attach a cost estimate and date to each goal. It will make it easier to plan for.

Some examples of goals could be a holiday within the next year that will cost $1,200 (short term), a new car purchase in the next three years costing $35,000 (medium term) and a goal to retire at age 55 with an annual retirement income of $60,000 (long term).

With the future cost known, you can calculate how much to save while remembering to factor in the investment growth for longer-term goals. For instance, if you need $1,200 in 12 months, the math is simple: you need to save $100 each month. If you are saving for a retirement in 20 or 30 years, the calculations get trickier as there are many factors to consider, so speaking to a financial planner is helpful.

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You might have many goals with potentially different start dates. Once you know the amount needed and the timeline, you are then able to narrow down the asset class (cash, bonds or stocks/equities) needed to match each goal. Choose an investment that is the right tool for the job.

A long-term goal suits longer-term investments, which usually indicates equity or stock investments. A short-term or more immediate goal suits cash. Medium-term goals are better suited to income assets, such as GICs.

Note, the overriding decider is your own risk tolerance. Some call this their “stomach” factor. What does your stomach tell you about the risk you are considering? How much risk can you tolerate? This is another way of asking how much loss you can afford before your goal’s timeline is up.

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With a short-term goal, you would not be able to quickly recover if your money decreased in value before you needed to use it, but if it was a longer-term goal, you would have time to recover and wait for the value to gradually increase again.

Any financial account you open — whether it be a registered retirement savings plan (RRSP) or TFSA — asks you to analyze your risk tolerance on the initial application, and usually annually after that to allow for changes in goals and timelines.

Merlita, you are looking at a longer-term, 10-year goal. Longer-term investments such as equities — mainly in the form of mutual funds and exchange-traded funds (ETFs) for most small investors — are more suited for those goals so that growth can compound over time and increase the amount you started with.

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It’s also wise to regularly review and revise your goals since factors such as interest rates, the economy, employment income and lifestyle can all influence them.

Try to consistently add to your base amount. Set up automatic contributions that match your pay schedule. These contributions encourage investors to deposit to their account whether the value of their investments is up or down. This is known as dollar-cost averaging. You will get a better average price for your investments because you are buying more frequently and at different price points due to different purchase dates rather than buying them all at one time at one singular price.

Look for the service level you require from your investment company. This is usually indicated by how involved you want to be. Some investors want to manage their investments themselves using a DIY brokerage account. The fees are low and you do all the transactions, research and monitoring yourself.

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Other investors use a digital online adviser (also called a robo-adviser). They allow you to input your information and required data, and choose a product their algorithms suggest. The fees are a little higher, but you can speak to their call centre if needed.

Investors can also work with an investment adviser. There is a fee for this, either a percentage of your portfolio’s value or a fee built into the investment product you purchase. Many of them offer services such as insurance, banking and mortgage products.

The takeaway here is to determine how much advice and involvement you want regarding your investments, then make sure you do your research to find the best fit.

Janet Gray is an advice-only certified financial planner with Money Coaches Canada in Ottawa.

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March 24, 2023 0 comment

Personal Finance

FP Answers: I’m 73 and newly widowed so how should I best organize my finances and investments?

by Davies Otwell March 17, 2023

written by Davies Otwell

Keep in mind the three wealth destroyers as your analyze your new financial situation

There are costs that will reduce your overall wealth when you invest or borrow money. Photo by Getty Images/iStockphoto

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By Julie Cazzin and Allan Norman

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Q: I am 73, newly widowed and struggling with how to set up my investments as well as with how to minimize taxes on a fixed income. I’d love some tips on how to get things organized as well as who to look to for help. Any suggestions? — Shelly

FP Answers: Shelly, I’m sorry to hear about your loss. I am assuming you have done the immediate necessary financial things such as contacting the Canada Revenue Agency (CRA), reorganizing your banking, reviewing the title on your home, organizing your bill payments, and reviewing as well as updating your will and powers of attorney, which is why you’re now asking about investments, staying organized and keeping a check on taxes.

Probably the best place to start is with the big picture and then work toward the details. You can do this by preparing and analyzing your current and projected net-worth and cash-flow statements. The time to set up your investments is after you have done this analysis for your new financial situation.

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As you do your analysis, keep in mind the three wealth destroyers: tax, inflation and the cost of using money — namely, fees and interest. I’ll explore the three wealth destroyers so you can look for areas of improvement while analyzing your net worth and cash flow.

Taxes

Personal income taxes will likely be your largest lifetime expense. However, you are permitted to arrange your affairs to minimize the amount of tax you pay. Think about how you can apply these next three ideas to improve your situation:

Don’t overpay your taxes to receive a refund at the end of the year.

Keep as much of the first dollar earned for as long as you can. This often means using tax-free savings accounts (TFSAs), registered retirement savings plans (RRSPs) or registered retirement income funds (RRIFs), and sometimes permanent life insurance as well.

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Use the power of the economic family unit to reduce taxes on income and assets over time. For instance, does it make sense to gift money to children now?

As well, consider if there are ways to improve your situation by minimizing your taxes and their impact on government pensions, credits and benefits, and your total wealth.

Inflation

Probably the best description of inflation I have heard of is to think of it as a rising tide. While you are working, you’re in a life raft that rises with the tide and you are not affected. That’s because pay raises hopefully keep pace with inflation, even though there may be some adjustment periods. Once you retire, you are standing on a buoy anchored to the ocean floor. As the tide rises, you slowly notice the water at your feet, then your knees, and you start to wonder if you will survive.

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Do you have a balanced investment program that protects your capital while making income withdrawals and provides enough growth to protect you from the impacts of inflation?

Costs of using money

There are costs that will reduce your overall wealth when you invest or borrow money. Costs cannot be avoided, but they may be either minimized or considered acceptable based on the product and services provided.

Now, let’s bring in your current and projected net worth and cash flow. As you look at your statements, consider which assets are liquid (cashable) and which aren’t. Also, think of the tax characteristics of each asset while you hold it as well as when it’s sold. How will that tax affect your taxable income? What assets do you have that will protect you against inflation and are the fees for those assets reasonable?

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Even if you don’t know the answers to those questions now, they will naturally start coming just by preparing the documents and thinking about your assets, liabilities and cash flows.

Your current and projected net-worth statement is an indication of your wealth and your financial stability. The statements include an itemized list of all your assets and liabilities (debts). Assets may include properties, vehicles, investments (TFSAs, RRSPs, etc.) and art work, while liabilities may include mortgages, lines of credit, credit cards and vehicle loans.

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The cash-flow statement works in conjunction with your net-worth statement and highlights your income sources and expenses, including taxes and how they may change over time.

You may have noticed that as a single person now, you can no longer pension split. As a result, your personal taxes may have increased, and you may be subject to clawbacks on the age credit as well as on Old Age Security payments.

Shelly, what are your net-worth and cash-flow statements telling you? Do you have enough wealth to maintain your lifestyle? Is it just enough, more than enough, or not enough? Each scenario has its own issues to be solved, but, again, if you lay it all out to see the big picture you can start to work on the solution.

Allan Norman provides fee-only certified financial planning services through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc. (ACPI). ACPI is regulated by the Investment Industry Regulatory Organization of Canada (IIROC.ca). Allan can be reached at alnorman@atlantisfinancial.ca

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March 17, 2023 0 comment

Personal Finance

Capital gains tax and more changes that could target higher-income Canadians in the next federal budget

by Davies Otwell March 16, 2023

written by Davies Otwell

Jamie Golombek: Ottawa says it’s looking to close tax loopholes that benefit the wealthy and corporations

Finance Minister Chrystia Freeland holds a news conference before delivering the 2022-23 budget, in Ottawa, on April 7, 2022. Photo by Blair Gable/Reuters

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We have a date. Finance Minister Chrystia Freeland will deliver Canada’s federal budget plan on March 28, giving us less than two weeks to speculate about what may — or may not — be included therein, which also means time is running out to do any significant planning before any potential tax changes.

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No one knows with any certainty what will be in the upcoming budget, but we can glean some insight on its potential themes from the 226-page pre-budget Report of the Standing Committee on Finance issued last week, which contained 230 separate recommendations for tax changes and spending.

Among the proposals, the following recommendation may set the tone: “Undertake a public review to identify federal tax expenditures, tax loopholes and other tax avoidance mechanisms that particularly benefit high-income individuals, wealthy individuals and large corporations and make recommendations to eliminate or limit them.”

With that ominous theme in mind, here are some potential tax changes that could target higher-income Canadians, along with some potential planning tips.

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Top tax bracket

The top federal tax rate of 33 per cent currently kicks in at an income of more than $235,675 for 2023, which is a 6.3 per cent bump in the threshold over 2022 as a result of the high inflation we’ve been experiencing over the past year. The NDP’s pre-election platform hoped to increase the top rate by two percentage points to 35 per cent. If enacted, this could bring the top combined marginal tax rate, once provincial tax is factored in, to approximately 56 per cent in British Columbia, Ontario, Quebec and Nova Scotia, and to 57 per cent in Newfoundland and Labrador.

A similar proposal to bump up the top rate for the highest income earners was recently included in United States President Joe Biden’s budget announcement earlier this month. He called for a top federal income tax rate of 39.6 per cent, up from 37 per cent, for taxpayers earning more than US$400,000.

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Surplus strips

The government may decide to shut down a popular private corporation tax-planning arrangement that some sophisticated taxpayers have been employing to distribute corporate surplus (essentially, retained earnings for tax purposes) from their corporation at capital gains rates, rather than at the higher rates for Canadian dividends, or via the payment of a salary or bonus.

The Canada Revenue Agency has previously attempted to challenge surplus strip transactions, but the courts have generally held that this type of planning is acceptable, and doesn’t violate the general anti-avoidance rule, since the Income Tax Act doesn’t contain a general policy requiring shareholders to remove their surplus via a dividend rather than a capital gain.

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The government tried to shut down this type of planning as part of its private corporation tax reforms in 2017, but those proposals were ultimately abandoned after significant public criticism.

Alternative minimum tax

Last year’s federal budget noted that “some high-income Canadians still pay relatively little in personal income tax as a share of their income.” To address this, the government announced a formal review of the alternative minimum tax (AMT), the results of which were originally supposed to come out in last fall’s economic update. Instead, the government stated that a “detailed proposal and path for implementation” would be released in the upcoming budget.

Of course, we already have a federal AMT at a 15-per-cent rate. The primary reasons why some high-income Canadians pay low effective rates of tax has nothing to do with nefarious tax planning. For the most part, high-income earners are doing nothing more than claiming registered retirement savings plan deductions, charitable donations and dividend tax credits, and earning half-taxable capital gains.

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South of the border, Biden’s recent budget included a proposal to introduce a new 25-per-cent minimum tax on individuals whose net worth is more than US$100 million. This new tax would be different, in that it would be imposed on both income and unrealized capital gains for the wealthiest 0.01 per cent.

Capital gains inclusion rate

Finally, no discussion of potential budget changes would be complete without at least touching on the capital gains inclusion rate. Currently set at 50 per cent, you may recall that the NDP’s platform proposed a hike to 75 per cent.

In preparation for the budget discussions, Jonathan Rhys Kesselman, emeritus professor at Simon Fraser University’s School of Public Policy, just released a paper entitled Pathways to Reform of Capital Gains Taxation in Canada that considers the case for increasing taxes on capital gains in Canada, and the implications for the upcoming reform of the AMT.

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Kesselman shows there is a high concentration of capital gains among relatively few taxpayers and at very high incomes, and suggests that targeting an increased capital gains inclusion rate, either on large gains above a certain dollar amount or by filers with very high incomes, would sharply reduce the number of affected taxpayers, “easing both administration and compliance as well as public acceptance.”

Biden’s budget proposed a similar measure. The U.S. currently taxes long‐term capital gains and dividends at a top rate of 20 per cent federally, plus net investment income tax (NIIT) of 3.8 per cent. The U.S. budget proposed taxing capital gains at a new top marginal income tax rate of 39.6 per cent (plus raising the NIIT to five per cent) for taxpayers with more than US$1 million of annual income.

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If a change were announced to Canada’s capital gains inclusion rate, it would likely be effective as of budget day (March 28). This means investors who fear a bump in the inclusion rate could consider accelerating any planning, including a potential rebalancing of their portfolios by taking gains now, thereby locking in a 50-per-cent inclusion rate. There are also more sophisticated tax strategies that could buy you some time if you’re unsure what could happen to the inclusion rate on budget day.

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

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March 16, 2023 0 comment

Personal Finance

How the magic of a three-paycheque month can give you a financial head start

by Davies Otwell March 10, 2023

written by Davies Otwell

There are lots of ways to play that extra payment

Extra money from a third pay period in March can go a long way to sorting out some financial tight spots, such as a late payment on a bill. Photo by Getty Images/iStockphoto

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By Sandra Fry

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Do you live paycheque to paycheque? For those who get paid biweekly, March might be a month when you get an “extra” paycheque. For many, the extra pay this month simply helps end the month in the black, and the cash is soon spent. But as a credit counsellor, I like to point out what a difference this bonus cheque can make in a client’s quest to get on top of their budget.

Here’s why March 2023 could be your month to make the changes you’ve always wanted to make to your spending, budgeting and overall money management system.

Most of us have an idea about which bills need to get paid every time we get a paycheque. Even without a formal budget or paycheque plan, we tend to divvy up our expenses throughout the month. If we have two big payments, such as a car loan and rent, we use the first paycheque to pay our car loan and the second goes to rent so that it’s not late. Utility bills, credit cards and other expenses get paid when there’s enough money left over to do that.

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But what happens when there’s extra money? That’s when a budget is even more important than normal. Without a budget, we don’t know where we stand. Do we spend the extra cash on a splurge, pay a bill off entirely, save for an expense that comes up once a year, or just leave it in our bank account in case we need it? There’s no right or wrong answer, but depending on your goals and financial situation, some ideas for the extra cash will work out better for you in the long run than others.

If you’re managing all your bills and expenses well, consider using the extra paycheque to pay one bill off completely. If you don’t have a bill that you can pay off entirely, pay your smallest bill down as much as possible. Psychologically, it can be extremely motivating to knock one bill off your list and redirect the payment money to another bill. This is called the snowball method and it’s one of the fastest ways to get debt paid down fast.

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Credit card fees

If you’re struggling and having trouble managing your obligations, an extra paycheque could get you out of a difficult spot with one of your bills. You could ask your credit-card company to reduce your interest rate or waive a fee if you make a significant payment by a specific time. If you’re behind on your electricity bill and face disconnection, an extra payment might save you that added trouble and expense. If you’re behind on your rent or fees for child care, the extra money might be just what you need.

However, before you decide where to use it, outline all your obligations to determine where an extra bit of cash can help you the most.

An extra paycheque is also a great way to jumpstart a savings account. Whether it’s for gifts, an annual vacation, new glasses or your emergency fund, it gets easier to add to a savings account when there’s already a solid start on deposit.

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If you pay your mortgage semi-monthly, that comes to 24 payments each year. However, if you receive your paycheques biweekly and make your mortgage payments biweekly as well, that comes to 26 payments each year. While you won’t have as much “extra” money available in a three-paycheque month, you will save time and interest on your mortgage. It’s one way of accelerating your payments to pay your home off faster. Speak with your mortgage lender if you’d like to learn more about how to accelerate your payments.

You can also accelerate your payments on credit cards, lines of credit, overdrafts and some loans. An extra payment a few times a year, or dropping half of your tax refund down on a debt, means you pay less interest in the long run. With interest rates as high as they are right now, any savings you can find just makes it that much easier to pay off what you owe.

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Finally, look for ways to achieve your goals. Maybe you need to catch up on some home maintenance or car repairs. If you’ve never had the money to open a tax-free savings account, now you might. Topping up your registered retirement savings plan (RRSP) could help get you an income tax refund next year, which you could reinvest into your RRSP again. Many Canadians use this strategy to ensure they aren’t hit with a surprise income tax bill, but also to keep investing in their RRSP when their budget is tight.

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If March isn’t your month to break the cycle of living paycheque to paycheque, June might be. If you file your taxes on time, you’ll hopefully have your refund by then, too. Combine any refund you get with the extra paycheque, and you could have a sizable sum to get back on track and give yourself a clean financial slate.

Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 26 years.

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March 10, 2023 0 comment

Personal Finance

High interest rates mean you don’t want to be late if you pay income tax by instalments

by Davies Otwell March 10, 2023

written by Davies Otwell

Jamie Golombek: You could be hit with arrears interest at the highest rate we’ve seen in more than 15 years

Published Mar 09, 2023 • 5 minute read

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Ignoring the upcoming March 15 income tax instalment deadline will cost you a lot more thanks to higher interest rates. Photo by Getty Images/iStockphoto

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Beware the ides of March.

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This is especially true this March 15 if you’re one of the estimated two million Canadians required to pay tax by instalments. The upcoming instalment date is when the first of four payments for the 2023 tax year is due. And because of the recent dramatic rise in interest rates, you don’t want to be late, or you could be hit with arrears interest at the highest rate we’ve seen in more than 15 years.

But before looking at how the latest rate hike could impact late or missing tax payments, let’s briefly review our tax instalment system, including each of the three methods for calculating your required quarterly instalments.

Under the Income Tax Act, quarterly tax instalments are required for this tax year if your balance due for 2023 will be more than $3,000 ($1,800 for Quebec tax filers) and was greater than $3,000 ($1,800 for Quebec) in either 2022 or 2021.

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The three options that can be used to determine how much you need to pay each quarter are: the no-calculation option, the prior-year option and the current-year option. Taxpayers are free to choose the option that results in the lowest payments. But if you choose to pay less than the no-calculation option, you could face instalment interest, and possibly even a penalty, if your payments are too low or late.

Under the no-calculation option, the Canada Revenue Agency calculates your March 2023 and June 2023 instalments based on 25 per cent of the balance due from your 2021 assessed return. The Sept. 15 and Dec. 15, 2023, instalments are then calculated as 50 per cent of the balance due from your 2022 return minus the March and June instalments already paid.

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The prior-year option bases the calculation solely on last year’s balance due, and your four 2023 instalments are each one quarter of the 2022 balance due. This option is best if your 2023 income, deductions and credits will be similar to 2022, but significantly lower than in 2021, perhaps because you sold some securities in 2021 and reported large capital gains in that year.

Finally, under the current-year method, you can choose to base this year’s instalments on the amount of estimated tax you think you will owe for this year (2023), and pay a quarter of the estimated amount on each instalment date. This option is useful if your 2023 income will be significantly less than in 2022. But it’s also the riskiest method because if you’re wrong, you can end up being charged instalment interest, compounded daily at the prescribed interest rate, and an instalment penalty if the instalment interest is more than $1,000.

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The reason to be more concerned this year than in recent memory about missing or making a deficient March 15 instalment is because the prescribed rate is set to rise yet again on April 1. The prescribed rate is set quarterly and is tied directly to the yield on Government of Canada three-month Treasury bills, but with a lag.

The calculation is based on a formula in the Income Tax Regulations, and it takes the simple average of three-month Treasury bills for the first month of the preceding quarter rounded up to the next highest whole percentage point (if not already a whole number).

The prescribed rate is set to rise yet again on April 1. Photo by Brent Lewin/Bloomberg

To calculate the rate for the upcoming quarter (April 1 through June 30, 2023), you look at the first month of the current quarter (January 2023) and take the average of the three-month T-bill yields, which were 4.3563 per cent (Jan. 5) and 4.4456 per cent (Jan. 19). That average is 4.401 per cent, but when rounded up to the nearest whole percentage point, we get five per cent for the new prescribed rate for the second quarter of 2023. Contrast this with the historically low rate of one per cent we had between July 1, 2020, and June 30, 2022.

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There are, however, three prescribed rates: the base rate, the rate paid for tax refunds and the rate charged for late-paid taxes. The base rate, which is the prescribed rate, and which will be increasing to five per cent (from four per cent) on April 1, applies to taxable benefits for employees and shareholders, low-interest loans and other related-party transactions.

The rate for tax refunds is two percentage points higher than the base rate, meaning that if the Canada Revenue Agency owes you money, the rate of interest will be seven per cent as of April 1. Note, however, that filing your 2022 tax return early won’t necessarily get you that rate on your refund, because the CRA only pays refund interest on amounts it owes you after May 30, assuming you filed by the deadline.

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Finally, if you owe the CRA money, which could happen if you haven’t fully paid your balance due on your 2022 tax return by the May 1, 2023, deadline, or if you’re late or deficient in one of your quarterly instalments, then the rate the CRA charges is actually a full four percentage points higher than the base rate. This puts the interest rate on tax debts, penalties, insufficient instalments, unpaid income tax, Canada Pension Plan contributions and Employment Insurance premiums at a whopping nine per cent as of April 1.

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Keep in mind that this interest is compounded daily, and is not tax deductible. For example, if you’re a resident of Newfoundland and Labrador and in the highest 2023 tax bracket of 55 per cent, that means you’d have to find an investment that earns a guaranteed, pre-tax rate of return of 20 per cent to be better off than paying down your tax debt.

So before thinking twice about ignoring the upcoming March 15 instalment deadline, keep in mind there’s likely no better use of those funds.

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

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March 10, 2023 0 comment

Personal Finance

Half of Ontario insolvencies filed by millennials

by Davies Otwell February 13, 2023

written by Davies Otwell

Insolvencies are up 15% from last year and a younger generation is leading the way

Published Feb 13, 2023 • 3 minute read

23 Comments

Total Ontario insolvencies rose by 15 per cent in 2022 year over year while Canadian filings rose by 11 per cent. Photo by Getty Images/iStockphoto

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After the pace of insolvency filings fell during the pandemic, it is now back on the upswing, with millennials leading the pack in 2022.

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Millennials accounted for 49 per cent of total insolvency filings in Ontario even though they only make up about a quarter of the 18-and-over population, according to the latest Joe Debtor report from Ontario-based insolvency firm Hoyes, Michalos & Associates Inc. Total Ontario insolvencies rose by 15 per cent year over year while Canadian filings rose by 11 per cent and were notably higher than pre-pandemic levels.

“The average insolvent millennial is just 33 years old, yet they are 1.7 times more likely than baby boomers and 1.4 times as likely as generation X to file (for) insolvency, relative to the population,” licensed insolvency trustee Ted Michalos said in a press release. “We’ve noticed an overall trend since 2016 that the average insolvent borrower continues to get younger, with student loan debt and extremely high-cost loans being the main drivers of their insolvency.”

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Millennials weighed down by heavier student debt loads

Millennials owed an average of $47,283 in unsecured debt last year, largely driven by student debt loads. More than one in three millennials were carrying student debt worth an average of $16,725, representing about 30 per cent of their total unsecured debt load. Post-secondary education debt has become a greater strain on younger generations as the cost of college and university has grown.

This generation was also the only age group to have a rise in unsecured debt, which grew by about nine per cent in 2022. They also heavily leaned on credit cards to cover rising expenses with 87 per cent of millennials holding credit-card debt with an average value of $13,948. The taxman also hit millennials harder, with nearly half of them grappling with tax debt, up from 37 per cent in 2021. Some of the tax debt was owed to repay pandemic support measures such as the Canadian Emergency Relief Benefit.

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The problem with rapid high-cost loans

Millennials have also flocked to loans with outsized rates, with more than half of them carrying at least one extremely high-cost loan — such as a payday loan or high-interest line of credit — with average balances totalling $11,940. Over half of insolvent debtors had at least one rapid loan, as subprime credit players such as payday lenders expanded their services into longer-term credit options and high-cost instalment loans became one of the limited options for desperate low-credit borrowers.

Hoyes, Michalos & Associates pointed out that these kinds of loans typically carry a minimum interest rate of around 29.99 per cent and that can rise as much as 59.99 per cent when fees are added.

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The buy now, pay later trend is also coming home to roost for many of these borrowers. The fintech option for retailers that allows consumers to buy a product and pay in instalments has become an easy-to-access source of debt with a simple application process, no need for collateral and easy approval standards. While convenient, borrowers are often left with punitively high rates and extra charges should they fall behind on payments.

The biggest concern for insolvency trustees such as Doug Hoyes, co-founder of Hoyes, Michalos & Associates, is the rapid pace at which the demand for these loans have grown.

“Despite subprime lending being a small component of overall lending in Canada, its fast growth is creating a crisis among heavily indebted borrowers and these rapid loans are a significant driver of consumer insolvencies,” he said.

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Back with a vengeance

Even though household debt climbed during the pandemic, Hoyes, Michalos & Associates noted that insolvency filings fell as Canadians working from home managed to bulk up on savings and government supports. They also benefited from delayed wage garnishment (which legally forces a portion of your wages to be turned over to creditors through a court order) and collection activity, which was halted when courts were closed. Now, the economic reopening and the challenge of making ends meet in a high-inflation, high-interest rate environment are bringing those debt loads back to the fore.

• Email: shughes@postmedia.com | Twitter: StephHughes95

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February 13, 2023 0 comment

Personal Finance

5 steps to stop feuding financially with your partner

by Davies Otwell February 10, 2023

written by Davies Otwell

Being on the same page and having a way to talk about money is crucial for a stable financial future

Setting joint financial goals, like saving for something you can enjoy together within the next six months, is a good way to get on the same page financially. Photo by Getty Images

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The statistics aren’t great for couples who argue about money. Being on the same page and having a way to talk — rather than fight — about money with your partner is crucial for a stable financial future. Whether you and your partner stay together or go your separate ways, what you do now will impact each of you for years to come.

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Talking about money with your partner can seem a bit strange at first, because most of us didn’t grow up doing that. We may have watched the adults in our life manage on a shoestring from one crisis to the next, but they didn’t talk to us about the choices they were having to make. Alternatively, we may have grown up in a home where money was plentiful without knowing how it’s being managed in the background to afford the lifestyle we were living.

For many of us, our home life fell somewhere in between and we learned how it felt to try to balance priorities. Even then, nowhere along the way did anyone explain to us the ins and outs of managing money, let alone with a significant other.

We bring all our financial experiences with us when we enter romantic relationships. The values we developed over our formative years influence our spending choices. I often see someone trying to save a lot when they’ve grown up in a family that struggled because they saw how hard living paycheque to paycheque was.

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That can cause conflict with a partner who spends on “extras” because they value some recognition for their success or status, or don’t feel that debt is a big deal. It may cause arguments about excessive spending and incurring debt versus saving for emergencies.

This may lead partners to keep secrets from each other or question each other’s choices in a way that starts to break down the relationship. Even positive secrets about saving can be perceived negatively in such situations.

It can be hard to remember that each person is making choices based on their own values and beliefs around money when we’re in the midst of not agreeing with our partner. No choice is better or worse than the next, but finding a happy middle ground that works for both people takes compromise and communication.

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It takes a two-pronged approach to get onto the same page when arguments about money are based on a communication gap: develop a way to talk about money without arguing and implement a financial fix. We have talked about strategies to manage money as a couple in the past, so let’s tackle some tips on how to talk to your spouse about money.

Set aside time to talk about money

Schedule it in your calendars and ensure you have a predetermined end time for your appointment. By limiting the time and topic, it’s easier to listen and focus on solutions.

Progress, not perfection

Leave your judgment behind and know that you don’t have to agree on everything. Money management isn’t about being perfect; it’s about working together, drawing on each other’s strengths and agreeing to disagree (for now).

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Avoid the blame game

The debt is there. The money has been spent. The bills are past due. Now what? Draw a line in the sand and start from there. Decide how best to organize your finances to end the financial feud.

Start by working on what you can agree on

At some point, you’ll need to outline a budget that accounts for all sources of income, bills and debts, household expenses, savings and costs that crop up seasonally or once a year. You’ll likely have different ideas about how to balance your budget to ensure you don’t spend more than you bring in. Rather than argue or come to a frustrating stalemate, leave it for a day or even a week. Regroup and see if you can try talking about it again later. In the meantime, work on what you can agree on so that you’re still moving forward.

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Set joint financial goals

Working on something together, even a jigsaw puzzle or paddling a canoe around a lake, can bring you and your partner closer. Set a goal to save for something you can enjoy together within the next six months. A special date night, weekend getaway, some paint and trim to fix up the spare room or even bi-weekly payments to completely pay one bill off. Success with one goal will show you that you really can do it, so the next ones won’t seem like such a challenge.

If it gets to a point where you and your spouse can’t figure things out, don’t wait too long before asking for professional help. A non-profit credit counsellor in your area can help you work on your finances. A clinical counsellor can help with communication strategies. Your medical doctor can help with mental health and addictions that one or both of you might be facing. Go easy on yourselves as you work towards your combined financial future.

Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 26 years.

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February 10, 2023 0 comment

Personal Finance

Canadians now expect to need $1.7 million to retire, up 20% from 2020, BMO survey finds

by Davies Otwell February 7, 2023

written by Davies Otwell

Reviews and recommendations are unbiased and products are independently selected. Postmedia may earn an affiliate commission from purchases made through links on this page.

Canadians believe they will need to save up $1.7 million to retire, up 20 per cent from 2020, according to a study published by BMO Financial Group on Tuesday.

“While the anticipated headwinds in 2023 will understandably prompt concerns about how inflation and interest rates will affect our finances, Canadians remain resilient and are taking proactive measures to protect and invest in their retirement nest egg,” said Nicole Ow, the head of retail investments at BMO.

The report said Canadians are prioritizing retirement savings as both contributions and account holdings have increased from the previous year. The national average amount held in Registered Retirement Savings Plan (RRSP) increased two per cent to $144,613 in 2022, while almost half of Canadians said they’ve contributed to their RRSPs for the tax year.

However, despite believing they need to save more money, only 44 per cent of Canadians are confident they will have enough to retire as planned, the study said. This figure represents a 10 per cent decrease from 2020.

As for retirement planning, the survey said Canadians take different approaches, including 22 per cent planning to retire at between the ages of 60 and 69 with an average age of 62.

Meanwhile, among those who had experienced a major life event, such as starting a family, moving homes or starting a new business, since the beginning of the pandemic, 20 per cent had experienced a loss of income and nine per cent had to make a large payment.

The study added that 69 per cent of Canadians believe the state of the economy has affected the amount they are saving, and 60 per cent say it has affected the money they are investing.

Canadians can look to financial advisers to help them remain focused on their financial goals during disruptions, major life events and uncertainty, Ow said.

The BMO survey, conducted by Pollara Strategic Insights, surveyed 1,500 adult Canadians online between Nov. 4 and 7, 2022. The margin of error for a probability sample of this size is ± 2.5 per cent, 19 times out of 20.

• Email: dpaglinawan@postmedia.com | Twitter: denisepglnwn

February 7, 2023 0 comment

Personal Finance

‘Nonsensical’: CRA denies taxpayer’s headhunter fees, but judge sees things differently

by Davies Otwell February 2, 2023

written by Davies Otwell

Jamie Golombek: CRA’s reasoning for denying headhunter expenses full of contradictions, judge says

Published Feb 02, 2023 • Last updated 3 days ago • 5 minute read

12 Comments

A taxpayer asked to search for a candidate to join her team by her employer had her headhunter fees denied by the CRA. Photo by Getty Images/iStockphoto

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Much of the discussion concerning the tax deductibility of employment expenses over the past three years has focused on what employees who have been working from home due to COVID-19 can write off on their tax returns. But it’s also important to remember that other non-reimbursed employment expenses, beyond those related to your home office, may also be tax deductible.

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To be entitled to deduct employment expenses, you’ll need to get a copy of a properly completed and signed Canada Revenue Agency Form T2200, Declaration of Conditions of Employment, on which your employer has certified you were required to pay various types of expenses for which you will not be reimbursed.

You’ll also need to complete and file a copy of Form T777, Statement of Employment Expenses, with your tax return. This form lists examples of potentially deductible employment expenses, which can include: accounting, legal, advertising and promotion fees; allowable motor vehicle expenses; certain food, beverage and entertainment expenses; out-of-town lodging expenses; parking; and postage, stationery and other office supplies. But this list is not exhaustive, and, occasionally, the CRA may challenge your claim if a particular expense is unusual, large or not on its list of traditional employment expenses.

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That’s exactly what happened in a recent tax case involving a Quebec wealth-management adviser who was employed at a major bank-owned brokerage firm from 1997 until her retirement in 2019. The taxpayer during her testimony described the nature of her work, which included assessing clients’ needs, investing their money and estate planning. Although the taxpayer resided in a small town about an hour’s drive outside Montreal, she had clients throughout Quebec, as well as in Ontario and Nova Scotia. As a result, she incurred travel expenses that were not paid for by her employer, and which the CRA fully allowed.

In 2015 and 2016, the adviser reported commission income on her tax returns of $538,388 and $527,077, respectively, and deducted employment expenses of $31,051 in 2015, and $39,435 in 2016.

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Canada Revenue Agency's headquarters in Ottawa. — Canada Revenue Agency’s headquarters in Ottawa. Photo by Justin Tang/The Canadian Press

The CRA allowed the majority of her employment expenses, including promotional, motor vehicle and travel expenses, but it denied costs she paid to a headhunter to help find an appropriate associate adviser to join her practice. Specifically, the CRA denied $11,112 in 2015 and $10,606 in 2016.

By way of background to justify the headhunting fees, the adviser explained her performance evaluation was based on several things, the most important of which is the amount of commissions she earned, which was primarily based on bringing in “net new assets.” She stated her net new assets during 2014 and 2015 were “clearly insufficient.”

At that time, she concluded that if she wanted to achieve the performance expected by her firm, she needed to hire an associate adviser who could share her duties and canvass for new clients. This was confirmed by her brokerage branch manager, who testified that when an adviser’s clientele becomes larger, it can be difficult to ensure the quality of services, and that in these cases the firm suggests senior advisers hire associates.

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To this end, the brokerage firm posted the associate adviser position internally, but the posting produced few candidates, so the taxpayer was asked to search on her own. It was at this juncture that she decided to hire a search firm to find a suitable associate to join her team. That new associate adviser joined in October 2017. Documents produced in court showed that the hiring allowed the adviser’s commissions to grow by increasing net new assets to the firm.

The CRA denied the adviser’s cost to hire the search firm, arguing the taxpayer wasn’t explicitly required under her employment contract to pay the headhunter expense. The CRA said the taxpayer should have gone through the internal recruitment process and selected someone from that list rather than using her own headhunter.

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The judge found this to be nonsensical: “This seems illogical to me since (the brokerage manager) confirmed that the internal process … had not been productive.”

The judge also said the CRA was somewhat contradictory in its approach toward the taxpayer’s employment expenses. The CRA clearly acknowledged the taxpayer “had to incur most of the expenses,” and allowed all of them except for the executive search firm fees on the basis that the taxpayer was not required to incur “this” expense. Furthermore, the CRA admitted during questioning that its argument was essentially that the employer’s requirement to pay “other expenses” was not specific enough to include headhunter expenses.

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The judge disagreed. She turned to Question 1 of Form T2200, which indicated the adviser was required to pay the expenses incurred to perform the duties related to her work. “In my view, this is sufficient to conclude that the (taxpayer) meets the condition set out in (the Income Tax Act)” to deduct employment expenses, the judge wrote.

Finally, the CRA attempted to argue that the fees paid to the headhunter were capital in nature and, therefore, not deductible. It argued this on the basis that it was a one-time expense. Again, the judge disagreed and concluded the costs incurred in finding an associate adviser were current expenses and not capital expenses.

Having met the conditions in the Tax Act to deduct employment expenses, the judge ordered the matter be sent back to the CRA for reconsideration and reassessments on the basis that the adviser is entitled to deduct the amounts paid in 2015 for 2016 for headhunting fees since they clearly fell within the expenses described as “business development,” and thus were expenses which the adviser had to pay and for which her firm provided no reimbursement.

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

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February 2, 2023 0 comment

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