It's Your Money  

Avoid a holiday hangover

The Black Friday shopping spree is often the staring point of the annual over-spending period also known as Christmas.

Each holiday season, warnings of spending too much are issued but the consequences this year are higher than they were in the past.

With numerous interest rate increases in the past 12 months and many Canadians saddled with too much consumer debt, every dollar spent that could have instead gone towards paying down your debt is costing you more than before.

Before you start calling me Scrooge, understand that I’m not saying you shouldn’t enjoy the holidays. But what I am saying instead is that now more than ever you need to have a plan to avoid a holiday hangover.

Planning your holiday spending means not just budgeting for gifts, but also the many other expenses that come with the holiday season. Entertaining, travel, events and a myriad of other expenses also pile up during this time of year.

To start, you need to be realistic with what you can afford and understand that you can’t afford to do everything. Once you’ve settled on an amount, here are a few steps you can take to stay on track:

Make a budget — Decide how much money you want to allocate to gifts, travel, entertainment and meals out. Once this budget has been created, stick to it.

Create a list for gifts — Start by deciding who you are planning to buy a gift for and then spend some time thinking of ideas of what that person would like. It’s not the price of the gift that counts for most people but instead the meaningfulness. Some extra time spent thinking up a great idea could keep you from overspending.

Say no to impulsive buys — If you haven’t planned to buy it on your list, do you really need it? Even if it’s a “great deal,” there is no problem passing on it. If you’re not 100 per cent sure, sleep on it and go back the next day to make the purchase if you still think you should.

Buy less for your kids — This is probably the hardest tip to stick to but it’s important. Many toys purchased each December quickly end up in the back of a closet or the bottom of a toy chest. Plus, many children are going to get gifts from grandparents and other family members on top of what you buy for them. When the excitement of Christmas morning is over, they really won’t notice if they ended up with five new toys or 10.

Don’t cave to peer pressure — Most commonly found at work, peer pressure can cause many to spend far more than they planned. If you have 25 co-workers, there is no reason why you should be buying a gift for each one. If everyone else at the office does and you don’t want to be the sole “cheapskate,” consider making something at home that is personalized with meaning.

Be selective in holiday events — While it’s nice to try to attend every lunch, dinner and party, that may not fit into your budget. Consider if you’ll be seeing the same group of friends at more than one event and pick which one you’d like to attend the most. It’s not just the cost of the food, but also things like babysitters, taxi rides home and gifts for the host that pile up.

Plan now for next year — Once the holiday season is over, consider setting up a holiday fund for next year as one of your New Year’s resolutions. By putting a little bit aside each paycheque throughout the year, your budget won’t have the massive financial hit when the holidays arrive.

The holidays are a celebration, so you should enjoy quality with family and friends. But a little bit of planning can go along way to ensure that you can do all of that without starting next year with a nasty holiday financial hangover.  


Tips to save you tax money

As another year comes to a close, it’s time to look at any last-minute tax planning strategies that you may want to take advantage of before Dec 31.

To start, consider some of the routine year-end strategies such as:

Tax Loss Selling

Selling investments with accrued losses at year end to offset capital gains realized in other parts of your portfolio. For this year, Dec 27 would be the last day to place such a trade to have it settled before year end.

You also need to be careful not to re-purchase the same investments inside of 30 days or you could be offside of the superficial loss rules and have your capital loss denied.

RRSP Conversions

For anyone who turned 71 in 2018, you have until Dec 31 to convert any RRSP accounts you have over to a RRIF or registered annuity. Even though they must be converted in the year you turn 71, you aren’t required to draw any income out until the following year.

Paying Certain Bills

There are several tax credits that you might be able to qualify if you pay outstanding bills before year end.

For example, if you qualify for the Disability Tax Credit and you have done renovations in your home to make it more accessible, it might make sense to pay the remaining costs before Dec 31 to claim up to $1,500 worth of goods and services used.

A similar bill settling strategy might make sense for outstanding or known upcoming medical expenses if those extra amounts put you over the three per cent of net income or $2,302 minimum threshold.   

Open an RDSP Account

Again for those that qualify for the Disability Tax Credit, I would strongly recommend opening a Registered Disability Savings Plan if you qualify and haven’t done so already, especially if you fall into a lower income category.

By doing so before year end, you may qualify for additional government grants that you otherwise will lose out on.

Consider a TFSA Withdrawal

If you have plans to pull some money out of your TFSA account and put it back in at some point next year, it might make sense to do the withdrawal before year end so that you regain the contribution room on Jan 1, 2019 instead of having to wait until Jan 1, 2020.

One end of year strategy that we haven’t discussed in previous year-end columns is the planning surrounding the new rules for tax on split income (TOSI) that will affect many business owners.

I have previously written an entire column on the TOSI rules and won’t repeat all the information here, but it is important to figure out how they might apply to you.

For those affected, there is potentially still time to utilize some strategies including a corporate share structure re-organization. This might allow your spouse to meet the laid-out conditions and receive dividends from the corp if they’re in a lower income category.

Also new for this year, business owners may want to pull some extra income out of their corporations before year end if they’re getting close to the new passive income rule limits and they need to preserve their small business deduction limits moving forward.

Finally, the end of the year is also an excellent time to do a general review of your overall situation and tax efficiency of your investment and financial plans.

While you’re spending a few minutes considering if any year-end tax strategies would help you, also look forward into 2019 and beyond to make sure your overall plans are as tax efficient as they can be.      

Handling market volatility

The past three months have seen a lot of volatility in the stock markets and many are wondering what is to come and what they should do.

For most people, the best thing to do is nothing at all.

Triggers for market volatility can vary wildly, but you need to remember that a five to 10 per cent correction will typically occur three times per year. Yet each time we see volatility creep up, investors start to question their current investment mix and wonder if there’s something they should do.

For this week’s column, I wanted to provide a few tips on how to handle market volatility.

Keep Perspective

As mentioned above, downturns and volatility are normal and typically short lived. In the past three years alone, we’ve seen sharp drops in:

  • Q3 of 2015 (China devalued their currency)
  • Q1 of 2016 (oil prices dropped), Q2 of 2016 (Brexit vote),
  • Q3 of 2016 (runup to U.S. election) and twice so far in 2018.
  • The cumulative return of U.S. markets over this same three-year period is 30 plus per cent.

Panicking every time the market goes down or worse, making changes to your plans or going to cash makes about as much sense as organizing a parade to celebrate every time the market has a period of good growth.

Don’t Time the Market

Nobody has a crystal ball, and nobody can say for sure when the markets will have their next spike or drop. Attempting to time the market by moving in and out can be costly.

Research studies have repeatedly shown that most people who try and buy and sell regularly do far worse than those who simply leave their money invested all along.

Missing even a few of the best market growth days can eat up all the gains in a given year.

For example, if you invested $10,000 into the S&P 500 index in 1980, you would have roughly $780,000 today.

By missing out on only the five best days during that entire 38-year period, your balance would be only $458,000 instead.

And if you missed the best 50 days, you would have a little over $62,000 for all your efforts.

Invest Regularly

By putting regular bi-weekly or monthly contributions into your retirement portfolio, you can actually benefit from these market drops.

Whenever the market dips, your regular contributions are buying more shares/units at a discount which allows you to purchase a larger quantity.

The same strategy works well for many withdrawal plans during the retirement stages as well. I often hear from people wondering when in the coming year is best to pull a large lump sum out of their accounts.

Without that magic crystal ball, there is no way to say for sure when will work best and many are better off taking regular withdrawals spread throughout the full year.

Be Comfortable with Your Plan

If you become nervous or fearful each time the market goes down, you may not be in the right investments.

Typical factors such as time horizon and goals help determine what level of risk your investment mix should hold but you also need to consider your true risk comfort and personality type.

You may think that a certain risk level is necessary to reach your goals, but better self-evaluation is key to making sure you can live with that level of risk.

For some, adjusting your goals may be necessary to make them attainable with a lower risk portfolio.

Spending eight weeks each winter in Hawaii sounds like a nice retirement goal, but so does sleeping soundly each night instead of staying up worrying about the latest market pullback. You need to develop a plan that you can sleep comfortably with…    

A well defined and structured investment plan tailored to your goals and financial situation should easily handle volatile periods.

If in doubt, use the current market volatility as a reminder to review your own investment plans and make sure they’re properly diversified and suitable for your risk tolerance.


Truth about TFSAs

You may want to save up an extra $500 before year end if you plan on contributing the maximum to your Tax Free Savings Account (TFSA) again in 2019.

While still a few weeks away, the Canada Revenue Agency is expected to announce another inflation adjustment for the 2019 limit which would mean $6,000 of new contribution room, up from this year’s $5,500 limit.

If approved, this would bring the total contribution limit to $63,500 for those who were 18 years or older in 2009 when the TFSA program launched.

It’s a little surprising that we’ve already had TFSA accounts around for a decade as they still seem somewhat new. It’s even more surprising that 10 years in, many Canadians still don’t understand how they work.

In anticipation of the next contribution limit increase, I wanted to take a moment to explain the biggest TFSA misconceptions that still exist today:

A TFSA is a high-interest savings account

This could not be farther from the truth. While many providers push TFSA investments in these savings accounts that pay little to no interest, this is not the only option. Stocks, bonds, mutual funds, GICs and many other investment options are all available inside a TFSA account.

A TFSA requires employment income

Unlike an RRSP, there is no employment income necessary to generate contribution room. Any Canadian over the age of 18 automatically gets the allowable contribution room for that year and you carry forward any unused room to future years.

A TFSA is a bank created product

While the big banks have done a great job in creating this illusion with aggressive advertising, the TFSA program is not their creation but is instead a program created by the previous federal government.

As such, the TFSA vehicle is available from any licensed investment provider and not only used for the above-mentioned high interest savings accounts that the big banks promote.

A TFSA doesn’t require tax planning

While the growth of an investment held inside a TFSA is non-taxable, it does not mean that taxes should be ignored.

Depending on the nature of your portfolio, it may make more sense to hold the higher taxed fixed income in your TFSA or you may be better to hold the higher potential growth equity portion.

Proper tax planning is essential to maximizing which assets you choose to hold inside your TFSA account.

You can dip freely into a TFSA

You can in fact pull money out at any time, but you do need to be careful about re-contributing.

If you’ve put in the maximum contribution amount and then make a withdrawal, you don’t regain that contribution room until the following January and putting the money back in before then will result in big penalties from the CRA.

A TFSA is better than an RRSP

Many feel that the TFSA is simply better since you don’t have to pay taxes on the withdrawals you make, but they forget that you also don’t get a tax deduction for deposits like you do with an RRSP.

Each situation is different, but most people’s best bet is to use a combination of RRSP and TFSA contributions.

When first introduced, TFSAs did not have a significant impact on many people’s overall portfolio as the maximum room was only $5,000 per adult.

A decade later, a couple’s $127,000 of combined room can make a significant impact on their overall retirement or savings plans and my hope is that everyone is using this opportunity to their full advantage.

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About the Author

Designated as a chartered investment manager and certified financial planner, Brett holds life insurance and investment licenses in B.C., Alberta and Ontario.

In addition to being the owner of Kelowna-based SPEIR Wealth Management Inc., Brett also serves as the vice-chair of the Financial Planning Standards Council of Canada’s board of directors. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations for the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FPSC board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected].

For more information or to see a database of previous columns, visit www.speirwealth.com.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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