Majec Accounting and Tax Blog

Mortgage Interest Deductability Scenarios

2010-02-28T16:08:00.000-08:00

When filing your annual small business, personal income tax return, expenses incurred to earn income like travel, bank, postage, courier, utility and other charges and expenses are deductions from income. But the item that sometimes has the most impact is deducting a proportion of residential mortgage interest.

Generally speaking, in Canada, interest on residential mortgages is not tax deductible. However, most home businesses can do so because there is a direct link between the borrowed money and earning income.

The mortgage-interest deduction, like other deductions, is based on the square footage of my office divided by the total square footage of the house. Keeping track of all your household expenses is very important. You will then apply the business use percentage to the home office expenses including mortgage interest.

Canadians like to talk about mortgage-interest deductibility because the mortgage on a principal residence is the biggest debt Canadians have. They also like to talk about it because tax laws in the United States have provisions for residential mortgage-interest deductibility. Far fewer realize that Americans must pay a capital gains tax when they sell their home.

Under its most common allowances and interpretations, mortgage-interest deductions can still work as an effective strategy for reducing taxes. In addition to the case of a home business, one can deduct mortgage interest when investing in a residential rental property.

If you are purchasing a property and you take a mortgage to purchase that property and then you rent out that property, then you are getting rental income from it. That interest would be deductible. There always has to be an earning income use of the funds.

A similar mortgage-interest deduction opportunity exists when one is renting out a room in one's principal residence or is earning income from a vacation property for all or part of the year. In both cases, the arrangement must be a legitimate commercial agreement.

If you rented a vacation property out below value to family it would probably be offside. If you rented it out to third parties at a reasonable rate [the Canadian Revenue Agency might] look to see whether there was any commercial reality. At the very least you could deduct it off the rental income for the portion of time it was actually rented.

Mark
http://www.MajecAccounting.com

TFSA or RRSP?

2010-02-18T19:34:00.000-08:00

The Tax Free Savings Account (TFSA) is an important investment vehicle for Canadians looking to save money and minimize their taxes

The following are quick facts about the TFSA:

~ Whatever you are saving for, it will help by saving taxes on the investment income.

~ Eligible Canadians can contribute up to $5,000 every year.

~ You don’t require earned income.

~ Unused TFSA contribution room can be carried forward.

~ Contributions are not deductible for income tax purposes

~ Funds can be withdrawn for any purpose at any time (depending on what you invested in).

~ The amount withdrawn will be added to unused contribution room and can be re-contributed starting the following year.

Differences between an RRSP and a TFSA:
~ While an RRSP is primarily intended for retirement, the TFSA is intended for use as needed. Both plans offer tax advantages, but they have key differences:

~ Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, TFSA contributions will not be tax deductible.

~ Withdrawals from an RRSP are added to your income and taxed at current rates. TFSA withdrawals and growth within the account will not be taxed.

~ TFSA withdrawals will not result in lost contribution room.

~ With a TFSA you don’t need earned income to accumulate contribution room.

~ There is no requirement to convert the TFSA to an income payment option (i.e. RRIF) at any age.

The TFSA is a perfect complement to an RRSP and we recommend both to minimize taxes. For those not able to maximize RRSP and TFSA contributions, consider contributing to an RRSP and using the tax refund to start a TFSA.

Mark Styranka
www.MajecAccounting.com

RRSP, TFSA, or Mortgage Paydown?

2010-02-10T21:20:00.000-08:00

Where to put your extra dollars – RRSP, TFSA, mortgage pay-down?
Gena Katz and Bob Neale, Toronto

The answer is not a simple one. It will vary depending on your personal situation and expectations about rates of return and future tax rates.

There are many issues that will affect your personal choice. Here are some factors to consider and some guidelines to help you with the decision.

RRSP or TFSA?

From a pure "dollar savings" perspective, the choice between RRSP and TFSA depends on your current marginal tax rate compared with the marginal tax rate that will apply when you withdraw amounts in retirement (rates of return should be the same in the TFSA and RRSP).

If you are currently taxed at a high marginal tax rate and expect your marginal tax rate will be lower in retirement, the RRSP is generally preferable. The immediate tax savings will be greater than the tax you’ll pay on withdrawal.

However, if you’re currently in a low or middle tax bracket, and you expect a higher marginal tax rate in retirement (perhaps it’s early in your career or you’re starting a new business), the TFSA contribution may make more sense. But you should consider that, unlike RRSP contributions, TFSA contributions do not reduce current income, which could affect your eligibility for the GST credit and the Canada Child Tax Benefit.

If you expect your personal marginal tax rates to be the same in retirement as they are today, there may still be a benefit in using a TFSA. TFSA withdrawals do not increase taxable income, and therefore they do not erode income-tested credits and benefits such as the age credit, Old Age Security, Guaranteed Income Supplement and the GST credit. In addition, TFSAs have added flexibility in that amounts can be withdrawn at any time and used for any purpose. Even if you intend to use your TFSA for retirement, you can also use it as an emergency fund — for example, in the case of job loss — and you can recontribute all withdrawn funds at a later date. RRSPs generally don’t make a good emergency fund, since withdrawals are fully taxable and contribution room cannot be resurrected.

What about paying down your mortgage?

The RRSP versus mortgage debate has been going on for years, and there is still no consensus.

If you’re taxed at a high marginal tax rate and have a low-rate mortgage, and you can earn significant returns in an RRSP, the RRSP is probably the better approach. This is particularly true if you use any tax refund from the RRSP contribution to pay down your mortgage.

On the other hand, if you’re taxed at a lower marginal tax rate, the decision is more complicated.

Comparing paying down a mortgage with a TFSA contribution is a little simpler than the RRSP/mortgage choice. It largely depends on which investment provides the better return. In this case, the return on the mortgage payment is the interest saved. With current low mortgage rates, many believe they can earn a significantly higher rate of return in a balanced investment fund.

But keep in mind that paying down a mortgage provides a risk-free return. If you hold equities in your TFSA, not only is the return not guaranteed, there is a risk of loss.

Even if the TFSA return is the same as your mortgage rate, you might consider making TFSA contributions for a few years and then withdrawing the funds to pay down the mortgage. The benefit here is that you will have grown your TFSA contribution room by the amount of income that was earned in the plan before the withdrawal. Not only can you recontribute the annual contribution amounts, you will be able to recontribute any withdrawn earnings.

Mark
www.MajecAccounting.com

Claiming the HRTC - Home Renovation Tax Credit

2010-01-30T22:54:00.000-08:00

The HRTC is a non-refundable tax credit equal to 15% of eligible renovation or alteration expenditures you incur in excess of $1,000, but not more than $10,000. For example, if you incur $7,000 in eligible expenditures, you will be entitled to claim a credit of $900 (i.e., 15% x ($7,000 - $1,000)). If you incur more than $10,000 in eligible expenditures, the credit is capped at $1,350 (i.e., 15% x $9,000).

The renovation or alteration work must be performed after 27 January 2009 and before 1 February 2010. Any renovation or alteration expenditures incurred under an agreement entered into before 28 January 2009 are not eligible.

The credit (including January 2010 expenditures) is to be claimed in your 2009 personal income tax return.

This includes any housing unit located in Canada that is eligible to be your principal residence. This may include, for example, any house, cottage or condominium unit that is owned by you and ordinarily inhabited by you, your spouse or common-law partner, or any of your minor children.

If you own a house and a cottage, both of which are used personally, you can split the credit between both properties by claiming eligible renovation and alteration expenses on both, up to a combined maximum of $10,000.

What renovation or alteration expenditures are eligible?
Specifically excluded from eligible expenditures are the following:

~ Property that can be used independently of the qualifying renovation
~ The cost of annual, recurring or routine repair or maintenance
~ Household appliances
~ Electronic home-entertainment devices
~ Financing costs in respect of the qualifying renovation
~ Costs incurred for the purpose of gaining or producing income from a business or property
~ Goods or services provided by a non-arm’s-length person if that person is not a GST/HST registrant

When planning your home improvement (or reviewing the expenses you have incurred), you’ll find that your improvements include clearly eligible expenditures (for example, painting the exterior of your home), those that are not (like a widescreen TV) and those for which clarification is required.

To assist you in completing your HRTC claim, we have prepared the accompanying table of eligible expenditures. This information has been gathered from the numerous related technical interpretations from the Canada Revenue Agency (CRA) and from the HRTC page on the CRA’s website.

Some examples of eligible expenses:
~ Renovating a kitchen, bathroom, or basement
~ Windows, exterior and/or interior doors, garage door
~ New carpet, hardwood floors or linoleum floors
~ New furnace, boiler, heat pump, woodstove, fireplace, water softener, water heater, or oil tank
~ Permanent home-ventilation systems
~ Central air conditioner
~ Permanent reverse osmosis systems
~ Septic systems
~ Wells
~ Electrical wiring in the home (e.g., changing from 100 amp to 200 amp service)
~ Home security system (monthly fees do not qualify)
~ Solar panels and solar panel trackers
~ Painting the interior or exterior of a house
~ Replacement of siding, eaves troughs, soffits, and facia
~ Re-shingling or replacing a roof
~ Building an addition, garage, deck, dock, garden/storage shed, or fence
~ A new driveway or resurfacing a driveway
~ Exterior shutters and awnings
~ Permanent swimming pools (in-ground and above ground)
~ Permanent hot tub and installation costs
~ Permanent sauna and installation costs
~ Pool liners
~ Solar heaters and heat pumps for pools (does not include solar blankets)
~ Landscaping: new sod, perennial shrubs and flowers, trees, large rocks, permanent garden lighting, permanent irrigation systems, permanent water fountain, permanent ponds, large permanent garden ornaments.
~ Retaining wall
~ Associated costs such as installation, permits, professional services, equipment rentals, and incidental expenses
~ Fixtures – blinds, shades, shutters, lights, ceiling fans, etc. Window coverings, such as blinds, shutters and shades, that are directly attached to the window frame and whose removal would alter the nature of the dwelling are generally considered to be fixtures (i.e., has become part of the home) and therefore would qualify for the HRTC.

Some examples of expenses that are NOT eligible:
~ Draperies and curtains in most circumstances. In some circumstances, draperies and curtains may qualify for the HRTC, if they would not keep their value or usefulness if installed in another dwelling. If these qualifying criteria are not met, it is likely that draperies and curtains would not qualify for the HRTC.
~ Furniture, appliances, and audio and visual electronics
~ Portable "plug-in" hot tubs
~ Window or portable air conditioners
~ Purchasing of tools
~ Carpet cleaning
~ House cleaning
~ Maintenance contracts (e.g., furnace cleaning, snow removal, lawn care, and pool cleaning)
~ Financing costs

Contact us if you want any additional information on how to claim the tax credit on your 2009 personal income tax return. Make sure that you have your receipts!

Acceptable supporting documentation
Eligible expenses must be supported by acceptable documentation, such as agreements, invoices, and receipts, and must clearly identify the type and quantity of goods purchased or services provided, including, but not limited to the following information:

•information that clearly identifies the vendor/contractor, their business address and, if applicable, the GST/HST registration number;
•a description of the goods and the date when the goods were purchased;
•the date when the goods were delivered (keep your delivery slip as proof) and/or when the work or services were performed;
•a description of the work performed including the address where the work was performed;
•the amount of the invoice;
•proof of payment (receipts and invoices) - invoices must indicate "paid" or be accompanied by other proof of payment, such as a credit card slip or cancelled cheque; and

Mark
http://www.majecaccounting.com/

TFSA Investments

2010-01-28T13:49:00.000-08:00

Beware 696-year TFSA investments
Without equities, that’s how long a payoff may take
By Jonathan Chevreau, Financial PostJanuary 24, 2010

While the new tax-free savings accounts are proving to be popular, many Canadians are choosing only interest-bearing TFSA plans that pay so little that the accompanying tax savings are equally negligible.

Negligible is an understatement. Consider that in 2009, the median one-year yield for Canadian money-market mutual funds was 0.3%, according to Morningstar Canada. That would mean you’d double your money in 232 years, says Morningstar investment funds editor Rudy Luukko. Or, if you calculate it based on the 0.1% six-month yield, you’d double your investment in 696 years.

This is not quite as bad as in the United States, where the top 100 money-market funds have an average yield of 0.05%, which would take 1,000 years to double.

Three-month federal paper yields 0.20% in Canada, versus 0.05% in the United States, says Dan Hallett, a director with HighView Asset Management Inc. “It would only take just south of 350 years to double your money invested at 0.2% annually, but I’d guess yields would creep up a few years before that time frame is up.”

Now consider the tax savings on these paltry yields. We’ll be generous and juice the yield up to the 0.4% paid by Canada Savings bonds. A $5,000 TFSA investment in a CSB pays a grand total of $20 in interest after a year. Meanwhile, more adventuresome investors who put their TFSA contribution last March in stocks, equity funds or exchange-traded funds could easily be up 50% or more on the year.

Perhaps because the “S” in TFSA stands for “savings,” many TFSA newcomers don’t realize they can also serve as supercharged tax-free investment accounts. A study by BMO Financial in 2009 found a whopping 94% of TFSA accounts are in savings accounts or term deposits. Even by mid-January 2010, TFSAs are still 90% in such accounts, says director of retirement strategies Tina Di Vito.

People seem unaware they can invest their TFSA contributions in stocks, bonds and other financial assets, as well as in short-term deposits and GICs.

In this respect, average investors are repeating the mistake made when they first opened up registered retirement savings plans through bank-offered GIC RRSPs that severely limited their investment options. In either case, it makes more sense to choose self-directed RRSPs or TFSAs that let you invest in stocks, bonds, mutual funds and ETFs, as well as interest-bearing securities.

As of Jan. 1, Canadians could put a second $5,000 contribution into their TFSAs, assuming they put in their first $5,000 in 2009. If they did and later withdrew funds — perhaps to pay for a project to generate the soon-to-expire Home Renovation Tax Credit — they can repay that withdrawal back into their TFSA now that we’re in the new year.

So, for example, if you put in $5,000 early in 2009, then withdrew $3,000 in August, now that it is a new calendar year you can contribute $8,000: $3,000 to replace what you withdrew and $5,000 more in a “new contribution.”

The question remains how to invest it. Most financial advisors make emergency funds a priority, so it’s logical that families with few financial resources might keep at least some of their TFSA in short-term, liquid, interest-bearing vehicles, such as high-interest savings accounts, money-market funds or GICs.

The problem is the gap between short-term and long-term interest rates — the yield curve — has seldom been greater. So, if you want to be paid a decent rate of interest, you must commit the funds for a longer period.

Cashable one-year GICs are one possibility. You lose some yield for the privilege of being able to cash out. A similar dynamic exists between cashable CSBs and locked-in Canada premium bonds. Other alternatives include strip bonds and bond ETFs, which may pay more, but can be cashed out if necessary, possibly sustaining a loss.

The threat of an imminent rise in interest rates is why some investors are buying high-yielding dividend paying stocks, income trusts or preferred shares. These can be sold when you want but, as with bond ETFs, there’s no guarantee you won’t experience a short-term loss.

Since TFSAs are extremely versatile, so should the investments you want to hold in them. Limiting them to interest-bearing investments when rates are so low is unwise. So switch to a self-directed TFSA: It can still own interest-bearing vehicles, but you’ll have the best of all worlds.

Unless, of course, you’re content to double your money every few centuries.

Mark
www.MajecAccounting.com

Home Reno Tax Credit News

2010-01-20T21:14:00.000-08:00

By MARKUS ERMISCH, Calgary Sun
Tuesday Jan 19

With the deadline of the home renovation tax credit approaching in less than two weeks, it’s still unclear whether Ottawa plans to extend the hugely popular program.

Just before Christmas, Premier Stephen Harper had vaguely hinted he’d like to extend the program as part of the government’s plan to stimulate the economy.

But then Harper suspended Parliament. And any added clarity about the fate of the home reno tax credit was suspended along with it.

“We have no word on (the future of the home reno tax credit). As it stands now, it’s running out at the end of the month,” said Finance spokesman David Barnabe when asked about a possible extension, and whether Parliament would be needed to do so.

“It wouldn’t really be proper for me to speculate on something hypothetical.”

Calgary’s city hall, however, would like to see the program continue beyond the Jan. 31 deadline.
“I think it’s a great program,” said David Watson, general manager of planning, development and assessment at city hall. “So sure — I think it would be a great idea if they could extend it,”

The home reno tax credit was introduced last year to infuse Canada’s ailing economy with cash during the recession. Eligible renovation expenses could be deducted from taxes, leading to savings of up to $1,350.

In Calgary, the program has bolstered the residential construction sector during one of the worst recessions in recent memory. City hall issued building permits worth $3.66 billion last year, down 9% from 2008. But the tax credit has helped support the construction sector last year, Watson said, and helped prevent it from dipping further. Watson pointed out that low interest rates were also an important factor.

Linda Duncan, an Edmonton NDP MP, said her party is still discussing whether it would support an extension of the home reno tax credit should Finance Minister Jim Flaherty include it in his next budget. “This is, obviously, not the biggest item on the agenda for the budget,” she said. “The biggest is unemployment. But it’s an aspect of employment. So it will be one of many items that we’ll take a look at, and chances are a lot of people will be supportive of it.”

Mark
www.MajecAccounting.com

Interest Expense and Debt Management

2010-01-16T23:57:00.000-08:00

For financial planning purposes, there are two kinds of debt; good debt, and bad debt. When money is borrowed with the purpose of earning income and the interest is tax deductible this is good debt. Borrowing money to pay for purchases such as vacations, vehicles, recreational items where the interest is not tax deductible is bad debt. Please note that this is a discussion on good debt versus bad debt and not on the appropriateness of any particular investment or purchase.

In our accounting business, I had a client very pleased that the $100,000 debt he incurred to purchase his business was paid off. On the surface, this may be a good thing, but in the background were over $60,000 of outstanding personal loans for recreational vehicles. The $4,200 (at a 7% interest rate) interest that this individual will continue to pay on his personal loans is not tax deductible. If he had paid off his personal loans and had $60,000 remaining on his business debt, the $4,200 would have been tax deductible. Assuming a marginal tax rate is 25%, the tax savings would have been $1,050! This tax savings could then be used in any way the individual sees fit.

A similar situation would exist where a person was investing in real estate, the stock market, or other types of passive income potential. It is a better tax and wealth building strategy to use whatever funds are available to pay off personal debt where the interest is not tax deductible. Then you can borrow money for the investment you were going to make anyway and then be able to use the interest expense as a deduction from your income. The tax savings to you can be substantial.

Your banker should have no problem with what you are doing and many are likely doing this sort of arrangement themselves already. For tax write off purposes, it doesn't matter what the loan collateral is, it does matter what the actual item purchased is. So if you put up your personal debt-free car as collateral, the interest can still be deductible if used for appropriate business or other investments.

As we can see from this example, it is important to consider the tax consequences of our debt related decisions. Simply put, personal debt where the interest is not tax deductible should be paid off first. Then, a decision to pay off business or investment debt must include consideration for alternate uses of the money. This can only be done on an individualized basis and a financial advisor or accountant should be brought into your team.

Debt management for tax purposes is only a portion of what should be examined. Other considerations, not discussed include this like debt servicing abilities, ratios, cash flows, debt vehicles, and perhaps most important is the individuals attitude toward debt.

The benefits of including tax planning with your debt planning is one indication of the importance of paying attention to all aspects of a home business, even the so-called mundane tasks. If you are not an expert yourself or don't have time to become an expert, then hire an advisor to your business team and focus on making the profits.

Mark
www.MajecAccounting.com

Canadian Real Estate Investments - Is now the time?

2010-01-08T20:59:00.000-08:00

Are you thinking of investing in Canadian real estate? If so, this article may be of some interest to you. I don't know if I agree with it but it is quite interesting. We should remember to always do our homework.
Mark

Real Estate Market May Be Too Hot To Handle
John Morrissy, Financial Post Published: Friday, January 08, 2010

As Canada's red-hot real estate market shows no signs of slowing down in 2010, analysts are beginning to caution some buyers that their best move may be to step to the sidelines.
"If you're somebody in a situation that you have only 5% down and you're stretching to get in the market with a 35-year amortization, I think that would be a very precarious situation right now,"said BMO Capital market economist Robert Kavcic.

Conversely, he said, "if you're sitting on a pile of cash and looking to move into the real estate market, it would almost be a no-brainer to just wait for lower prices."

Notes of caution simmered to the surface this week after realtor Royal LePage forecast home prices would continue to "appreciate significantly" during the early months of the year. Already in 2009, they're up 19%, according to the Canadian Real Estate Association.

The trouble is that while prices are rising, incomes are not.

Yet rock-bottom borrowing costs continue to lure buyers, and investors are rushing in - despite a shortage of listings - for fear that if they don't get into the market now, they'll miss their chance.

"It's absolutely not debatable that housing prices cannot rise faster than incomes over the long term," said Will Strange, professor of real estate and urban economics at the Rotman School of Management.

Sooner or later, incomes have to rise, or home prices fall, for balance to be attained.

Many analysts argue that home prices are not yet out of line with the incomes it takes to pay for them, Mr. Strange said. Yet with the job market still weak, and unlikely to drive new employment and higher wages, odds are that if something's got to give, it will be prices.

"If I didn't personally have most of my wealth tied up in housing, this would not be the time that I would choose to jump in," Mr. Strange cautioned.

At the same time, interest rates have nowhere to go but up, which could leave some buyers in a position similar to U.S. homeowners, who had houses worth less than their mortgages after the subprime bubble burst and prices crashed.

"We're certainly urging people to err on the side of caution," said Bruce Cran, president of the Consumers' Association of Canada.

"If you're paying an amount of money, whatever that might be, that you couldn't sustain if interest rates rose by say 25 or 30% - I can see that being a problem for a lot of people."

Canada's not headed for anything similar to the U.S. subprime mess because lending standards here are higher and because people can't just walk away from their homes as they can in the U.S., other than in Alberta.

But there may yet be an economic impact if home prices turn down, as home values relate directly to the economy, fuelling spending as they rise and tightening personal budgets as they fall, Mr. Strange said.

For now, many observers are predicting, as does Royal LePage, that the market will find its balance later this year as rates rise and more listings come on the market.

In the meantime, there are still many good reasons to buy a house, Mr. Strange said, "but don't buy it because you think the price is going to go up."

Mark
http://www.majecaccounting.com/

Employment Insurance Benefits for Self-Employed People

2010-01-05T20:31:00.000-08:00

Beginning in January 2011, self-employed Canadians will be able to access Employment Insurance (EI) special benefits. There are four types of EI special benefits:

~ maternity benefits;
~ parental benefits;
~ sickness benefits; and
~ compassionate care benefits.

Eligibility information
You may be eligible to access EI special benefits beginning in January 2011 if you:

~ are a self-employed person; and
~ are a Canadian citizen or a permanent resident of Canada; and
~ have entered into an agreement with the Canada Employment Insurance Commission through Service Canada.

Dates and deadlines
Self-employed persons will be able to enter into an agreement beginning January 31, 2010.

If you enter into an agreement between January 31, 2010 and April 1, 2010, you will be able to make a claim for EI special benefits as early as January 2011. However, if you enter into an agreement with the Canada Employment Insurance Commission after April 1, 2010, you will have to wait 12 months before you will be able to make a claim for EI special benefits.

Follow this link for Q & A on EI for Self Employed People

Mark
www.MajecAccounting.com

Debt May Drive Taxes

2010-01-04T05:09:00.000-08:00

A rebound in the global economy is set to kick off the beginning of this decade. But this return to growth may be accompanied by a surge of another sort -- in the amount you, the taxpayer, are about to pay to government.

The great global recession exacerbated the state of budget balances in much of the developed world. The debt burden among Group of 20 nations is expected to rise to over 120% of GDP, up from roughly 80% before the onset of the recession.

Legislators have to restore fiscal order or risk credit downgrades, such as Greece has sustained in recent weeks. Spending restraint is an option, but history dictates politicians find this hard to do -- especially with an aging population that's expecting social security and health care.

"Countries like Japan, Britain and the U.S. with large public deficits and growing debt are painting themselves into a corner whereby tax increases will be a necessity in order to stabilize debt burdens," says Jack Mintz, a leading tax expert and a professor at the University of Calgary's school of public policy.

"While governments will look to raise taxes in the most politically acceptable way, which often means imposing higher levies on the rich and corporations, there is little room for manoeuvre."

Source: Paul Vieira, Financial Post

Happy New Year

2010-01-01T01:13:00.000-08:00

I hope that you enjoy the article below, as much as I did. The predictions may or may not come about but at least we are continuing to gather information.

Huge gains of 2009 will give way to modest ones, experts predict
By SHARON SINGLETON, QMI AGENCY

Canadian stock investors are likely to see gains in their portfolios in 2010 though it may be a bumpy ride as markets adjust to the prospect of higher interest rates and government stimulus taps are turned off, investment managers say.

This year proved to be a bonanza year for anyone who got into the markets for the first time, with the main S&P/TSX index gaining about 30% year-to-date. Those who were able to pinpoint the March bottom in the markets more accurately would have seen a bounce of almost 60%.

As the global financial crisis eased, a combination of record-low interest rates, government spending and rock-bottom stock prices triggered a massive rebound in equity markets. Stocks in China have soared 82%, while the U.K.'s main index is up 20%.

Next year's gains are unlikely to be so spectacular, investment managers say.

"The markets will go up, but not as strongly as in 2009," said Gareth Watson, senior equity advisor at ScotiaMcLeod. "Among the G7 countries, it's possible that Canada will outperform based on strength in the resource sector."

Watson said the market could see double-digit gains of between 10% and 20% next year.

Canadian and global markets also are expected to be more volatile as governments stop stimulus spending and focus on reducing massive debt. That will be a key test for the underlying strength of the economies.

Also, while the worst of the crisis has passed, analysts say it will take many years for the credit mess to be fully untangled and there still is scope for some nasty surprises along the way. Take, for example, Dubai World, which sent markets tumbling last month after it asked to delay repayment on some of its $60-billion US debt.

Interest rates also are expected to begin rising from the second half of next year, with RBC predicting a gain of one percentage point by the end of 2010.

"There will be more volatility," said Sadiq Adatia, chief investment officer of Russell Investments Canada. "There will be very careful scrutiny of figures and people are more optimistic now than they were a year ago, so there is a lot more room for disappointment if expectations aren't met."

On the upside, Canada is seen as benefiting from its strong weighting in the resource sector, which is forecast to be one of the best-performing next year.

According to a recent Russell Investment Manager survey, 83% of investment professionals predict stocks will rise in 2010, with the majority seeing double-digit gains. Energy was the favoured sector.

About 71% of managers were bullish towards energy, compared with 14% who were bearish.

"With the shares of Canadian oil producers priced for roughly $65/barrel, the recent trading range in the area of $75-plus implies continued upside potential for the energy sector," Adatia said.

Financial stocks are also forecast for another strong year with 61% of managers bullish and 21% bearish, the survey found, while some of the more defensive sectors such as utilities and consumer staples are expected to fall out of favour as the economic recovery gains pace.

Gold is also forecast to continue to rise after hitting records of above $1,200 in 2009.

"The gold story isn't going away," Watson said. "The U.S. dollar will remain depressed and although things are improving on the economic front, they are not improving as fast as people think."

Be Wise
Mark

Retirement & Taxes

2009-12-30T18:47:00.000-08:00

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

2009-12-28T23:11:00.000-08:00

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)

2009-12-27T14:38:00.000-08:00

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

2009-12-26T15:36:00.000-08:00

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)

2009-12-24T14:13:00.000-08:00

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

2009-12-23T18:51:00.000-08:00

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)

2009-12-22T21:50:00.000-08:00

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

2009-12-21T18:09:00.000-08:00

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

2009-12-20T16:32:00.000-08:00

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

2009-12-19T12:04:00.000-08:00

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

2009-12-17T22:42:00.000-08:00

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

2009-12-16T21:22:00.000-08:00

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

2009-12-15T20:59:00.000-08:00

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