Retirement & Taxes

Most Baby Boomers nearing retirement probably know their lives are about to change. What they may not realize is, their income tax position will change too.

As they begin planning for retirement, they would be well-advised to also pay some attention to how they structure their financial affairs. There can be enormous differences in tax considerations post retirement. People will often be shifting from paying taxes on earnings to taxes on income from investments and different types of investments are taxed at different rates. The focus has to be not on how much money you have but on how much of it you get to keep.

Those entering retirement must also understand that the need for income will change with the years. For example, those entering retirement may feel they will not need to start drawing down from RRSPs in the first few years. However, the earliest retirement years are often the heaviest spending years. Men and women in good health often want to travel, stay actively involved in social and recreational activities and maintain exactly the same lifestyle as they did when working.

If there is an age difference between spouses, the younger one may continue to work and bring in a regular salary for a period of time.

Those contemplating retirement should start tax planning and restructuring of investments at least five years out. Documentation is key and so is an understanding of the rules.

Those thinking about continuing to work during retirement, either from need or choice, should consider that impact on taxable income as part of the picture.

What you want to do is get the most out of retirement and keep as much of the income you bring in as well. Tax planning can certainly help with the latter.


Mark
www.MajecAccounting.com

ps. a tax free savings account (TSFA) should be one of the alternatives.

The Old Investment Model is Broken

Yet there is little doubt that this past decade will leave a bad taste in most people's mouths for a long time to come, that many Americans and Canadians will be thinking it can only get better from here because it couldn't really get any worse.

Those in retirement and facing retirement had taken the hardest hit financially in the past decade. The stock market is essentially where it was prior to the peak hit in March 2000. So for many folks, these have been 10 lost years that have perhaps made the coming decade a tougher one.

Certainly, it has been a sobering time for millions of people, if nothing else. Those looking to take something away from the decade can reflect upon it as a harsh learning experience that may serve to reinforce the notion of twice bitten three times shy.

You will have learned that self-interest is paramount when it comes to Wall Street and business generally. The events of the past 10 years have taught you that you are at the very bottom of the investing food chain. Despite all the high-blown talk of responsibility, obligation and ethical conduct, the Street is going to take care of itself first, and it always will despite all the talk of tougher regulation.

The trick, I think, is to have an appreciation of what transpired but use that knowledge in a positive way: Be careful but not overcautious. The Enrons, Nortels and Madoffs will always be with us. But so will opportunity.

Lifelong Learning Plan (LLP)

You are able to withdraw funds from your Registered Retirement Savings Plan (RRSP) to finance your or your spouse's education.

Under the Lifelong Learning Plan (LLP), taxpayers may withdraw up to $10,000 in a calendar year, to a maximum of $20,000 over a period of up to four calendar years. At the time of the withdrawal, the person receiving the funds from the LLP withdrawal must be enrolled as a full-time student in a qualifying educational program of at least three months duration.

The funds do not have to be paid directly to the educational institution, nor do the funds have to be used specifically for school expenses. However, if the student does not complete their program or attends only part-time, the funds must be repaid sooner rather than over a 10 year period. Therefore, it is important to ensure the program qualifies before withdrawing the funds.

Mark
www.MajecAccounting.com

RRSP investing

People will soon be looking at their RRSPs as the end of Febrary contrubution deadline gets closer. Robert Kiyosaki wrote the Rich Dad series of books (among other things) to help people become financially literate. Below is some information that I gleaned from an article of his that may help you with your decisions.

As the current crisis demonstrates, our schools teach very little about money management. Millions of people are living in fear because they followed conventional wisdom: Go to school, get a job, work hard, save money, buy a house, get out of debt, and invest for the long term in a well-diversified portfolio of mutual funds. Many people who followed this financial prescription are not sleeping at night. They need a new plan. Had they sought out a little financial education, they might not be entangled in this mess.

Some of his suggestions:

1. Most people don'y know the difference between advice from rich people and advice from sales people. Most people get their financial advice from the latter -- people who profit even if you lose. One reason why financial education is so important is because it helps you know the difference between good and bad advice.

2. Choosing to remain financially uneducated has caused most people to miss out on the greatest bull and bear markets in history. "What you don't know keeps you poor." So it is important to become financially literate. But we must do so from the correct sources and not investment sales people.

3. In the world of money and investing, you must learn to control your emotions. When you think about it, three of our biggest financial decisions in life are made at times of peak emotional excitement: deciding to get married, buying a home, and having kids. To be rich, you need to see the good and the bad, the short- and long-term consequences of your decisions. Obviously, this is easier said than done, but it's key to building wealth.

Learn Wisely
Mark
www.MajecAccounting.com

Registered Education Savings Plan (RESP)

Give your kids the gift of no student debt
By Garry Marr, Financial PostDecember 12, 2009

There is no end to the selection of presents you can give your child this holiday season, but how about the gift of no student debt?

Though it may lack the fanfare of RRSP season, the end of year should be considered Registered Education Savings Plan (RESP) time. The deadline for contributing to an RESP, and getting the grant for the year, is Dec. 31, possibly the worst time of the year for those who are already strapped for cash.

"The deadline for RESPs is a little different because you can actually contribute in one year and get two years worth of grants," explains David Sharone, product manager of registered plans at the Bank of Montreal.

Basically, for every $2,500 you contribute per child you can get a $500 grant. You are allowed to contribute two years at a time, but the grants stop at the child's age 17. So there is a time limit to get the maximum $7,200 in lifetime grants.

"If you are starting at age 14, you'll never catch up on time. If they're nine or younger, you can catch up," says Mr. Sharone.

The question is, where to get the cash? Anybody who has a disabled child also must be thinking carefully about a Registered Disability Savings Plan, which can result in $3,500 in grants for a minimal $1,500 in contributions, based on income.

It's still too early to say whether the one-year-old Tax-Free Savings Account (TFSA) has had a significant impact on parents contributing to their children's RESP. Adults (18 and over) can put up to $5,000 per year into a TFSA and thus shield any capital gains or interest from the tax-man, even after the funds are withdrawn from the account.

Statistics from the federal department show RESP contribution rose to $3.05-billion in 2008 from $2.97-billion the year before. There are no numbers for 2009, the first year the TFSA was offered.

"TFSA could work for planning for your child's education but it does not come with the grants," says Mr. Sharone.

"People are lost and they don't know what to do," says Kurt Rosentreter, a financial advisor with Manulife Securities Inc., commenting on the various options available today. "I was just on a call with a couple who just bought a house and they wanted to know whether they should accelerate their payments, put more in an RRSP, buy more life insurance or put it in an RESP."

Mr. Rosentreter says you need to look at the returns. If your mortgage rate is 5% on an after-tax basis, that's more like 7% or 8%. "Putting money into an RRSP and buying a 1% GIC is probably not the right thing to do this year," he says.

If you use the same logic with an RESP, you are getting a 20% grant and there is really no investment that can compete with that type of return.

He says Canadians have become more conservative in their approach to investing in an RESP and that makes little or no sense if your child is under age five -- an age where you should have 100% exposure to equities, because there is a long time horizon.

"No matter what happens in the stock market, how else are you going to beat that 20% return? The RESP is the thing to do above everything else," says Mr. Rosentreter.
---
Dusty wallet It's been 10 years since RESPs took off in popularity thanks to government grants. Canadians are now starting to access the cash. How you withdraw the money can affect your tax hit. An educational assistance payment (EAP) withdrawal, made up of the growth in the plan plus any grants and bonds, is taxable in the hands of the beneficiary. A post-secondary education withdrawal (PSE), made up of contributions already taxed, are not hit a second time when withdrawn. Most of the time you want to get the EAP money out first, especially if your child has no income. Plus, if you use up all the grants and your child quits school, the grants and bonds don't have to be paid back. The PSE withdrawal strategy would make sense if your child has high income, perhaps from a summer job

More Tax Free Savings Account Info

The mechanics of the TFSA are relatively simple. All Canadian residents aged 18 and older can contribute up to $5,000 annually. The contribution amount, which is not tax deductible, will be indexed annually to inflation rounded to the nearest $500.

If you contribute less than the maximum amount in any year, like RRSPs you can use that unused contribution room in any subsequent year. And, as with other registered plans, interest on money you borrow to contribute to TFSAs is not tax deductible.

Permitted investments for TFSAs are the same as those eligible for RRSPs and other registered plans. And, like registered retirement savings plans (RRSPs), contributions in kind are permitted. But be aware that any accrued gains on the property transferred to a TFSA will be realized and taxable, while losses are specifically denied.

Similar to RRSPs, income and capital gains earned in the TFSA are free of tax. But unlike RRSPs, that income is not taxed on withdrawal. You can make withdrawals at any time and use them for any purpose without attracting any tax. And what’s more, any funds you withdraw from the TFSA — both the income and capital portions — are added to your contribution room in the next year. This means you can effectively recontribute all withdrawals in any subsequent year without affecting the annual contributions permitted. As a result, you can use the TFSA over and over again to save for various expenditures over your lifetime.

An example
Let’s say you begin contributing at age 18 and deposit $5,000 a year for seven years. Assuming a 5% annual return, you’ll have about $42,700 in the plan at age 25. If you use $40,000 to buy a new car, you’ll be left with $2,700 in the plan and now have an additional $40,000 contribution room. Over the next five years, you contribute $13,000 annually, using all your contribution room. At age 30, you have approximately $79,000 in the plan.

That year, you get married. Your spouse, who is 28 years old, has also contributed $5,000 each year since turning 18. Together you have about $145,000 that you withdraw for a generous down payment on a home. Over the next 10 years, while you pay off your mortgage, you each manage to contribute $7,500 annually, using some of your carryforward contribution room.

After paying off the mortgage, together you have approximately $95,000 in TFSA contribution room. Over the next 10 years, you together contribute $19,500 per year, using all your combined contribution room. Combined with accumulated earnings, at ages 50 and 48, respectively, together you have about $581,000 in your TFSAs. That year, you each withdraw $150,000 to purchase a family cottage. Over the five subsequent years, you each withdraw $25,000 annually to supplement the high cost of your children’s post-secondary education outside of Canada (you have RESPs as well). You continue to contribute for another 10 years at $35,500 each per year, resulting in a sum of approximately $1.1 million on your retirement.

Mark
www.MajecAccounting.com

Tax-Free Savings Accounts (TSFAs)

As the new TFSAs approach their first anniversary, Canadians are still not getting the most out of them, according to BMO Financial Group.

"While there are numerous advantages to opening a TFSA, we're finding that the majority of people remain unclear about the options available to them on how to invest the funds in their accounts and how TFSAs fit into their overall financial strategy," says BMO director of Retirement Strategies Tina Di Vito.

Here, slightly modified, are her general tips for maximizing their use:

1. Know how TFSA fits in overall financial picture
While TFSAs are solid investment options, they may not be a top priority depending on competing demands for your limited dollars. Di Vito mentions such alternatives as outstanding credit card debt, the need to make RRSP contributions and paying down a mortgage. "It is always a good idea to discuss your overall situation with a financial advisor before adopting an investment strategy."

2. Understand how investment income is taxed
Interest is taxed at a higher rate than dividends and capital gains. Since growth on an initial investment in a TFSA is tax-free, it may be more advantageous to use the TFSA for interest-earning investments, Di Vito suggests. Keep in mind that capital losses incurred in TFSAs are not tax deductable, which is relevant for those who plan more speculative investments [small-cap stocks, for example.]

3. Maximize contributions to maximize tax-free compounding effect
Just like RRSPs, the earlier the money is placed in a tax shelter the longer the magic of compounding can grow your nestegg: whether interest income or dividends. Therefore, Di Vito urges us to "take advantage of tax-free compounding interest by making sure you contribute the maximum amount to your TFSA every year as early in the year as possible."

4. Married or Common-Law? Both partners should open TFSAs
Although you cannot contribute directly to a spouse's or common-law partner's TFSA [as you can with spousal RRSPs], you can give spouses or partners money that they can then put into their own TFSAs. Income earned on those TFSA assets will not be attributed back to you.

5. TFSAs won't trigger clawback in many government benefits in old age
Income generated in TFSAs does not impact government benefits so they may be an excellent choice for retired Canadians and low-income households who are trying to save. Opening a TFSA will allow you to generate investment income and remain eligible for government income-based benefits.

Mark
www.MajecAccounting.com

Year-end Tax Tips

Make Tax-Free Savings Account withdrawals now If you are planning a withdrawal from your TFSA, do so before the end of this year rather than early 2010, because amounts withdrawn are not added to your contribution room until the following year.

For example, if you contributed $5,000 in January 2009 and you withdraw $4,000 this month, you cannot recontribute the $4,000 until 2010. It does not affect your $5,000 contribution for 2010. On the other hand, if you make your withdrawal in January 2010, you will have to wait until 2011 to recontribute the amount.

Make payments on time The following payments must be made by Dec. 31 to be eligible for 2009 tax savings:
- Charitable gifts;
- Medical expenses;
- Investment costs including counsel fees and interest;
- Certain child and spousal support payments;
- Political contributions;
- Deductible legal fees;
- RRSP contributions if you turned 71 in 2009 (otherwise the deadline is March 1). You also must wind up RRSPs by Dec. 31.
- Payments eligible for the children's fitness tax credit;

While some of these steps may save on tax for 2009, your New Year's resolution should be finding out what you can do throughout the year to reduce your income taxes.

Mark
www.MajecAccounting.com

Tuition Tax Credit

One the most frequent questions we receive is from parents paying post-secondary tuition for their children. Basically, parents want to know if they can claim the tuition credit if they paid the tuition, not the student.

All post-secondary institutions issue a tax receipt called the T2202A which outlines the amount of eligible tuition. The T2202A is always in the student's name no matter who paid the tuition. Students must claim the tuition receipt on their tax return, whether they have income or not.
The tuition credit is used to reduce the student's tax owing to zero. For a student without taxable income, they do not have to use any of the tuition credit amounts on their tax return.

The good news is the credit is not lost - there are a couple of options. If any of the tuition is remaining, the student can carry it forward to use in later years when they are earning more income. Or the student may transfer up to $5,000 to a parent, spouse or grandparent so they can use the tuition credit to lower their tax payable.

Ultimately, the decision is up to the student since they are issued the T2202A. If a parent, spouse or grandparent does use the transfer, the student must sign the back of the T2202A for it to be valid. And the tuition transfer is one of the most reviewed credits by the Canada Revenue Agency (CRA) so if you E-file, be prepared to send in the paperwork if the CRA asks.

For more detailed information you can go to:
http://www.cra-arc.gc.ca/E/pub/tp/it516r2/it516r2-e.html

Mark
www.MajecAccounting.com

Environment Friendly Business

Whether a person is conservative or liberal, young or old, male or female the message is the same. No matter where they live, how much money they have, education, social status, you name it, most people agree. Albeit for different reasons, people are becoming more environmentally aware. "Reduce, Reuse, Recycle" is becoming a common household and business phrase. These three "R"s will help to save the planet but there is an added benefit to your home business.

When we started applying these to our home business we achieve amazing results.

With regard to paper, we print or copy only what is absolutely necessary and then we use both sides of the paper. We provide our customers electronic information and only supply paper copies when requested (and may even charge a fee for this). We reuse paper that we receive that is only printed on one side, for notes or message taking. When we do buy paper, it is 100% recycled for only about one dollar more per ream. We recycle our paper and printer cartridges as well. Because of all these things, we contribute less to landfills and to destruction of forests and very importantly, our costs for paper and printer ink is way down. We have seen no negative consequences by taking all these steps.

To save electricity, we have replaced our light bulbs with florescent ones. They cost more initially, but our electricity costs are reduced and they last six times longer. We have a power bar on all of our electronic equipment and we turn the power bar off at night or when they otherwise won't be used for an extended period of time. This saves electric costs and I personally like the idea of having my internet modem and wireless network unavailable to hackers when I'm not using the equipment.

To save on heating and cooling, we have accepted that the temperature may not be ideal and that we can change what we are wearing (great benefit of a home business!) to become more comfortable. So the temperature range set on our thermostat is set a bit higher or lower than we used to depending on the season.

Our utilities bills continually show that we use less power or natural gas than in the same month of the preceding year and this is our goal. There is more that can be done but these simple steps described here will:
1. Help you save money on paper, ink, electricity and natural gas,
2. Impress your customers if you advertise that you are environmentally friendly,
3. Contribute less to landfills, and
4. Help to preserve the environment for future generations.

Efficient and effective use of resources should be a goal of every business. It does not cost more money to be environmentally friendly, contrary to popular belief. If we focus on efficient and effective use of nature's resources then the result has to be a positive one. One person and one business can make a difference, one person and one business at a time.

Mark & Carrie

Financial and Business Education for Success

Take a moment, if you would, to remember high school. While some remember that time period fondly, others are still saddled with therapy bills from time spent trying to cope with their high school experiences. For those who went to college, take a moment and reflect on that time period. How do you remember it? Those who have succeeded in life without a college education may take this moment to mock all of us college graduates.

Our memory often reflects upon the past as a series of time periods. High school, college, and the honeymoon years are just a few examples of time periods in which we look back, judge how we felt, and categorize the entire time period with a generalized statement. Typically these experiences are personalized; occasionally there are larger events that create the same effect ona larger scale. World War II and the Great Depression are examples of this.

While the longevity of the current economic crisis will determine whether or not this time period will serve as a collective recall point, there can be no doubt that for some individuals, its impact already has created events of such magnitude that they will never forget the event. With mass unemployment, scandals, and dwindling retirement accounts, the effect has been severe for many. Yet some will look on this time period, no matter how severe the current economic crisis becomes, with something akin to fondness, as they achieved high levels of prosperity through the opportunities afforded them by the crisis. As Robert Kiyosaki said, far more eloquently, "The difference between those that find these to be the best of times and those that find these to be the worst of times is simply knowledge and financial IQ."

So what are you doing to increase your knowledge? Have you outlined your evolutionary path this year? Is there information on specific topics that you think can aid you? You have the desire or you would not have read this far. Now find the dedication to absorb as much knowledge as possible, and watch your success IQ grow.

Mark

Pay Less Tax with a PHSP

A Private Health Services Plan (PHSP) is a uniquely Canadian product which combines affordable comprehensive health benefitcoverage with tax relief for small and medium sized businesses.

As a business owner you want to:

- Make your family medical expenses 100% deductible
- Reduce your corporate taxes
- Control costs for your employee health benefits
- Provide health benefits as an incentive to retain your employees
- Pay less than you do today for insurance while making the coverage more comprehensive

With a PHSP your company can pay for all your medical expenses tax-free. Your company can claim a full 100% tax deduction (not just a tax credit) for:

- Dental care, including orthodontics
- Vision care, including contact lenses and laser eye surgery
- All prescription drugs
- Physiotherapy, chiropractic and massage therapy
- And most health expenses in Canada.

Save Taxes, Save Money

For more information, check out the Brock Health Website

Mark

Time's Running Out for the Home Reno Tax Credit

If you were planning to do any renovations on your home or condo, there are less than 45 days before the January 31, 2010 deadline. The credit allows Canadian home and condo owners to get up to $1,350 back on lasting or integral renovations. If you are going to do it yourself, make sure you buy your materials before the deadline. If you hire a contractor be sure the work is completed and paid for before the deadline.

For more information on the Home Renovation Tax Credit

Mark