Many Canadians rush to file their taxes on time each year and don’t think about it until the next year. One of the most overlooked notices received from the CRA annually is the annual Notice of Assessment. This notice is very important as it summarizes some of the important information from your previous tax filing.
Notices of Assessment
Your Notice of Assessment is divided into three parts:
- The Explanation of Changes and Other important information;
- Your RRSP Deduction Limit Statement; and
- The Summary.
One should always compare the tax calculation and carried forward balances on the Notice of Assessment against the tax return that was filed and the supporting documents. It is important to ensure that all of the numbers, particularly the carried forward amounts, have been picked up properly. Don’t assume that this will be the case; it is best to confirm.
Explanation of Changes and Other Important Information
In addition to providing a brief explanation of any changes that were made to the return during the assessing process this section contains a lot of valuable information about potential planning opportunities.
Losses Being Carried Forward
Where the taxpayer has reported net capital and/or non-capital losses on their tax return, the Notice of Assessment will provide a running total of any unused losses. Unused net capital losses can be carried back three years or forward indefinitely, but can only be used to offset capital gains. Unused non-capital losses can be applied to reduce all sources of income and can be carried back three years or forward up to 20 years. Unused limited partnership losses are also tracked.
Planning Opportunity – Check to see if it would be beneficial to carry back unused capital losses for up to three years to reclaim the tax that was paid on net capital gains in those years. Also, consider realizing capital gains in the current year to absorb whatever is left.
Deferred Security Option Benefits
The balance of deferred security option benefits are tracked on the Notice of Assessment. This income can be deferred until the year that the securities are sold; the taxpayer dies; or becomes a non-resident.
Planning Opportunity – Consider starting to realize some, or all, of the deferred income in years where earning levels are lower. Remember, for public company shares where the value has dropped and they are now worth less than the tax owing on the declared benefit, taxpayers can file a special election for tax relief if the shares were disposed of before 2015.
Repayment of Old Age Security Benefits
Taxpayers who are 65 years or older will receive a notice of the status of their Old Age Security payments for the coming year and whether some or all of them will be subject to repayment, or “clawback.”
Planning Opportunity – The 2014 Net Income threshold for “clawback” is $71,592. To maximize Old Age Security Benefits consider the impact of triggering controllable income amounts like realized capital gains or a spousal pension income -splitting election to avoid triggering the “clawback”.
Elected Split-Pension Income
The Notice of Assessment will confirm the taxpayer’s election to split pension income with their spouse.
Planning Opportunity – The joint election to split spousal pension income is a great income splitting opportunity and care should be taken to maximize the benefit from this election each year.
Tax Free Savings Accounts
The Notice of Assessment will provide a reminder about the taxpayer’s ability to contribute to a Tax Free Savings Account.
Planning Opportunity – A Tax Free Savings Account provides taxpayers who are 18 years and older with the ability to earn tax free investment income throughout their lifetime. The contribution limit for 2015 is $5,500.
Quarterly Income Tax Instalments
Where a taxpayer may have to pay quarterly income tax instalments, this will be noted on the Notice of Assessment.
Planning Opportunity – A taxpayer should take care to ensure that they are paying the appropriate amount of quarterly income tax instalments. A general best practice is to pay the amounts that are suggested on the Instalment Reminder forms that are mailed to taxpayers in late February and August each year. Failure to pay the appropriate amount of quarterly income tax instalments could result in non-deductible instalment interest charges.
CRA will pay compound daily interest on a tax refund and this will be noted on the Notice of Assessment. This interest is taxable income and must be included on the tax return for the year that it was received. Interest charged on an unpaid, or underpaid balance of tax owing is not deductible.
Your RRSP Deduction Limit Statement
This section shows the calculation of the taxpayer’s RRSP deduction limit for the current taxation year and any unused RRSP contributions.
Planning Opportunity – It’s never too early to make your RRSP contribution for the year. The sooner the contribution is made the sooner it starts to earn tax-deferred income. Every taxpayer is allowed to make an over-contribution of up to $2,000 to their RRSP. However, it is important to keep an eye on the amount of unused contributions. If this amount exceeds $2,000 and is greater than the RRSP deduction limit for the year, the taxpayer may be subject to a tax of 1% of the over-contribution for each month that there is an over-contribution. This tax can add up very quickly.
In retirement planning, taking care of basic needs questions come first: will there be enough money for you to stop working; can you maintain your lifestyle when the pay cheques stop; what about the unknown future costs: healthcare, transportation and accommodations?
For most retirees in Canada today, their most basic needs are being met. That isn’t to say that people aren’t living without challenges or having to make compromises so ends meet.
In Abraham Maslow’s 1943 paper “A Theory of Human Motivation,” he identified five stages of human growth. Illustrated as a pyramid most often, the fundamental and basic needs fall to the bottom of the pyramid: safety and physiological needs. His theory suggested that those basic needs must be met before an individual will focus on higher needs. So what if you’ve met the basics, what are the next steps in planning your retirement life?
One conversation needs to be around the lifestyle you want to live in retirement.
What activities do you enjoy, how social a person are you, do you enjoy physical pursuits, do you want to grow intellectually, creatively, spiritually? Will you travel, will you work? These are the questions you need to ask in order to begin to plan for the future. Retirement years for most people will make up almost a third of their lives. These years are not a throw away at the end; they are times to be enjoyed and experienced as much as any of the previous two thirds of your life. It requires thought and planning to make sure the years don’t slip by and the opportunities with them.
We often think of lifestyle goals as frivolous - not worthy of the time or detail that a financial plan gets. This is far from the truth, these are the reasons you did all the planning in the first place – so you could do the things you wanted to do but didn’t have the time or money for earlier in your life. I know, I’m saying it again but it’s time for another list. This time, write down all the things you do today that are lifestyle oriented, what do you do when you’re not working or sleeping? What energizes you, and what activities do you look forward to? What activities do you do that cause you to lose track of time when you’re in the middle of them?
Next, let’s think about the things that you’ve always wanted to do, but for lack of time or money weren’t able to. Is it realistic that you might be able to do some of them once you’re retired? Do you still want to? One of the worst things we can do when we are planning is to see an event or task that we want to accomplish and then tell ourselves we’ll get to it. The best time to start something new is now, and the best first step is to get it in writing. Create a plan for your lifestyle; acknowledge the things you really want to do. When are you going to do them? How much time are you willing to commit? Are you going for performance or just for fun? Don’t put the things you want to do off for later; tomorrow has a funny way of not showing up.
This is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF.
Let’s put aside that myth right away. There is no one out there, whether it’s you, Warren Buffet or George Soros who manage the markets, we simply control our reactions to the changes that happen everyday in the markets. My first manager used to tell me that it wasn’t a stock market, but a market of stocks. How we feel about things has nothing to do with whether stocks will rise or fall. If the direction of things happens to coincide with our intentions, we may consider ourselves good, but more likely we should consider ourselves lucky.
The only discipline you need to get right to be successful in the market is asset allocation – this is the distribution of the assets in your portfolio between the different asset classes.
The asset classes that are available to most investors are cash, stocks and bonds. Within each of those classes are sub classes: cash is considered anything with a maturity of one year or less, that could be treasury bills, short term bonds, money market funds, GICs or cash itself.
Stocks are another term for what we call equities. This class has more sub groups than cash, but the main ones are stocks themselves, equity mutual funds and exchange traded funds. Within each of these sub-classes there are various twists, but for our purposes, these are the main ones.
Bonds, like stocks are a single name used to define a category that is more accurately called fixed income. These securities generally have fixed maturity dates and either a fixed or variable series of payments. They represent a debt owed by the issuer and an obligation to pay held by the purchaser. This is the largest market of all, dwarfing the stock market and made up of a number of different sub-classes: high yield debt, government bonds, corporate bonds, emerging market bonds, mortgage bonds, stripped bonds. Fixed income or bond mutual funds and exchange-traded funds (ETFs) are simply portfolios of these securities.
Each of these classes moves up and down in value independently of the other classes. Of course there is some correlation in the short term, but over the longer term they react independently of one another and that is where the power to manage your investments lies. More importantly, this is the one area of investing that the investor is in complete control of. Close to 90% of the returns experienced by most investors are a reflection of their decision in which asset classes to hold. Only 10% is a result of individual security selection.
As an investor, this is good news. Rather than be baffled by the endless drama that plays out in the news and understanding how the price of your latest stock purchase was impacted by OPECs decision not to support the price of oil, you are much better advised to hold a reasonable amount of energy investments within the context of your overall equity allocation. The best thing ever said about investing in stocks, or anything for that matter, is to not put all your eggs in the same basket.
The term for this in the investment world is diversification. The way to diversify your portfolio is to first determine the amount of risk you are comfortable with. Too often, people think that risk levels are defined by whether you lose all your money or not; what it really is a measure of volatility. So with that in mind, decide how much up and down you are willing to experience with your portfolio in a given year; is it 10%, 20% or is it no volatility at all? Once you have made that decision, then you are able to determine the percentage of each asset class you should invest in.
A balanced portfolio, which is where the majority of investors generally fall, is made up of 45% fixed income, 5% cash holdings and 50% equity. If you do not require income and you are looking for more growth, your balanced portfolio would look more like 30% fixed income, 5% cash and the remaining 65% in equity investments. To put your investment capital in to either of the extremes: 100% fixed income or 100% equity is inefficient and in the long run a higher risk decision than most investors realize.
Once you’ve established the asset allocation that best reflects your objectives and risk tolerances, the next step is to diversify each of these classes themselves. That is a longer conversation than I will tackle in this article, but will expand upon in future articles.
The last component of managing your asset allocation is rebalancing. This is the part where you review your portfolio at fixed intervals and then add or subtract from the different asset classes to return to your original allocation model. This is where the strength is, and where you take the guesswork out of investing.
Next week I will discuss equity investments and the options available to within the equity component of your portfolio.
Questions or comments: http://www.yourlifeyourplan.ca
A vision means different things to different people. To the head of a large corporation, it’s the ability to chart a course that will deliver success (think Steve Jobs and Apple), to a shaman, it’s a dream to be interpreted and the path followed based on that interpretation. In the retirement planning world it’s a personal statement outlining how you want the rest of your life play out.
When you create a vision statement, it’s a marriage of compromise between sometimes competing ends: the things you want for your life and the resources you have available to deliver them with. People sometimes feel that this type of planning tool is only for the wealthy. The truth is it’s an exercise that we should all engage in as we move closer to retirement or even if we are already there. It’s an opportunity to evaluate our lives and look ahead to creating the best future we possibly can.
There are five areas of life that we focus on when helping people to create their visions: financial realities, health, accommodation decisions, lifestyle and social networks.
We all have different financial situations: some of us are wealthy and some of us are not, there are those who have pensions that will help finance their retirement years and then there those whose only pension will be the combination of government benefits and the income they can draw from their savings and investments. Whatever the combination of income sources you have, you need to understand what they are and what you can realistically expect to have in the future. What assets do you own, what are they worth and are you prepared to part with some of them in order to maintain your lifestyle? How important is your current lifestyle? Was it something that made sense when you were working but in retirement seems excessive? Are you planning to do more with all the extra time on your hands? Are you leaving the workforce, planning to switch careers or slowdown in your current role? The answers to these questions will lay the groundwork for the ones to follow.
If one is fortunate enough to be of sound mind and body, the potential limitations might not be a factor for many years. For others, health challenges might dictate travel plans or lifestyle choices be altered or left behind entirely. The cost of certain types of healthcare can drain resources that were expected to provide for a certain lifestyle. If the health issue is critical enough, it may involve care outside of our provincial systems and require large amounts of capital to fund. How long will we be able to care for ourselves; what types of facilities would we be comfortable with; what can we afford? Answers to these questions will have timing, mobility and financial ramifications.
So where will you live once you retire: the family home, a condo, a gated community or a senior’s residence? Will a downsizing free up capital to create a better lifestyle? Will you travel more and therefore have less time to spend keeping a home and yard? Do health challenges dictate your proximity to health care services - either as an outpatient or as somebody who needs a greater level of care permanently? Do you want to stay living where you are or have you always wanted to live in a different country? Would a place where the cost of living was low make your capital go further, and enable you to enjoy a lifestyle that would otherwise be impossible? Would you like to be closer to family or is that not an issue? While these are bigger decisions, they tend to be determined by the other realities in your life.
Retirement can be an opportunity to do things you’ve always wanted to do; with the time constraints of full time jobs and raising children behind you, your options have increased dramatically. Are there interests that you’ve been waiting to have enough time to be explored? Are there activities you’ve not been able to do as much as you would have liked, but can now focus more energy on? Do you leave the active workforce and live a life of leisure, or is this an opportunity to start a new career? Maybe start a small business or work less but still generate a paycheque for the things that you couldn’t finance from your retirement savings? Are you on the same page as your spouse or partner (if you have one), or do you need to find common ground that you will both feel good about? While important to your happiness level, sometimes these decisions are driven by economic and health considerations.
One of the realities of retirement is that our social networks will change. For many, the people in their lives most are determined by their working life. When we retire, many of those relationships will be challenged, or fade away entirely. As we get older, people will pass on or move for their own retirement reasons; either way, the network of friends and family will slowly shrink unless we make a concerted effort to reach out to new people and create new friendships. If we elect to move somewhere else, it may mean starting over entirely; if we move to a gated community or residence there may be an opportunity to make new friends built in. While not as tangible as the other four areas we’ve discussed, strong social networks are known to be a contributing factor to longevity and mental health.
The steps in creating a vision are as follows:
- Think deeply about these five areas, what they mean to you, and what you really want.
- Write down as many of them as you can (don’t worry; we’ll eliminate the silly ones next step).
- Narrow your list down by eliminating all that are impossible due to financial, health and time constraints.
- Narrow it again by choosing only the ones that resonate with you deeply.
- Take the remaining statements; use them to write a paragraph describing your life.
This is your vision. It’s not a plan; it’s the foundation you use to build the plan. It’s the framework that will help you answer the when, what and how questions that arise. Like a great corporate vision statement, your vision statement will bring clarity to you as you go through the retirement planning process.
Read more Navigating Retirement articles
- Retirement: Major transition Feb 19
- Taking advantage of TFSA Feb 5
- Leaving a job: changing careers Jan 29
- Ailing Parents: Tax Issues Jan 22
- When a parent needs full-time care Jan 15
- Small business: retirement planning Jan 8
- Parenthood: Estates, insurance & taxes Dec 18
- Ailing Parents: Home Care Dec 4
- Second marriage issues Nov 27
- Retirement: Health Issues Nov 20
- New Income-splitting measures announced Nov 13
- Dementia and Alzheimer's Disease Nov 6
(Click for RSS instructions.)