It's Your Money  

Save money, defer taxes

BC Assessment recently sent out their annual assessment notices and your annual property tax bill will be arriving soon.

When your tax notice arrives, take a few minutes to consider deferring your property taxes if you qualify for this program.

A BC resident can qualify for property tax deferment via one of three criteria:

  • Families with Children Program
  • the Persons with Disabilities Program
  • the standard Property Tax Deferment Program for those over age 55.

Full information on how to qualify can be found on the BC government’s website (just search BC property tax deferment).

For the sake of this article, however, I’m focusing solely on the standard program for those over 55.

So why should you consider deferring your property taxes?

Primarily because it’s very cheap.

The set rate for those that qualify is prime -2 per cent, which means the current interest rate is only 1.45 per cent (set using the prime rate of last October). Even better news is that the interest charged is not compounded year over year.

If you chose to invest the money you save and earn interest on those investments, that interest would compound each year and it would put you that much farther ahead.

Let me explain with a basic example.

I’m going to assume that you and your spouse are both age 60 and you have a property tax bill of $1,500 per year. With no plan, you pay the $1,500 each year for 25 years until the second spouse passes away at age 85.

You would have paid a total of $37,500 in taxes during that time.

Let’s see what happens if you decide to defer the taxes instead and invest the $1,500 per year into a TFSA. Assuming an average of a five per cent annual rate of return (and no taxes on the growth since it’s in a TFSA), you would have $74,439 in your investment account at age 85.

You would owe $44,569 to the BC government for all the deferred taxes (the $37,500 plus $7,069 of interest based at 1.45 per cent), and you would have an extra $29,870 leftover to leave behind to your children or grandchildren! If you decide to sell your home, your deferred taxes can be paid back at anytime with no penalty and you could take the money leftover and spend it as you wish.

For those that are still reasonably healthy, there’s an even better option to consider. If the same 60 year old couple bought a “joint last to die” life insurance policy with a $50,000 face value it would cost them approximately $898 per year.

If that couple took $898 from the $1,500 of tax money to pay for this policy, they would have their future tax liability fully covered and be left with an extra $602 per year to spend on whatever they choose.

With a projected total tax bill of $42,375, the $50,000 policy builds in quite a bit of safety net in case interest rates go up higher than expected. If the couple didn’t need the extra $602 for spending money, they could again invest it in a TFSA and have an extra $29,775 in their account at age 85.

Basically, the same amount as the investment only example above but this strategy takes a lot of the risk out of the equation.

So which strategy is best?

In simple terms, you can assume that if the couple passes before age 85 (which is, unfortunately, still more likely), the insurance option becomes even more beneficial as the tax bill is smaller, but the insurance still pays out the full $50,000.

If the couple expects to live to 100, the investment only option may be the better way to go. For some, the best option may be to create a blend of the two strategies to utilize the advantages of both.

Everyone’s financial situation is different, and the pros and cons of any potential plan should be discussed with a certified financial planner. But you owe it to yourself to take some time to consider the property tax deferral program and see how it may benefit you.         


Tips for happy retirement

Hey, retirees – are you maximizing your retirement income and minimizing your taxes?

If you’re like most retired Canadians, you probably aren’t.

While each retiree’s situation is unique and individually tailored advice is always best, I have compiled a list of the top five things to consider to make the most of your retirement income plans:

Spread Income Out

It may make sense to spread your retirement income out over several years instead of having low income in earlier/later years and higher income in the others. This may require starting RRSP withdrawals earlier, spreading out a large capital gain or using TFSA funds to make a large purchase and then replenishing it down the road.

By spreading income out more evenly, you can often keep yourself in lower overall tax brackets, qualify for additional government credits/benefits and even lower your estate’s tax bill on death.

Split Your Income

When the current federal government got rid of income splitting rules formerly known as the Family Tax Cut, many retirees thought that the pension income splitting rules were cancelled as well. Fortunately, this has not yet been cut and you should take advantage while you can.

Any qualifying income can be split as long as you meet the requirements, and this allows you and your spouse to have similar net income amounts instead of one of you being much higher and paying more tax.

If you are 65 or over, you can split income received from RRIF, LIF, annuities and other qualifying pensions. Those under 65 have more restricted qualifying income options. CPP and OAS payments can not be split but there are other options to split the CPP amounts through a different program.   

Claim Your Credits

’ve broken this down to highlight a few key ones:

  • Retirees at least 65 years of age can often claim the non-refundable age tax credit though it is reduced when your net income is above $37,790 and eliminated once you pass the $87,750 threshold. Combined with provincial savings, this could be worth up to $1,600.
  • Those still working may continue to claim the “Canada Employment Amount” of up to $1,222 – at a 15 per cent non-refundable rate, this may yield tax savings of up to $180
  • For those over 65 with eligible pension income, another non-refundable credit of 15 per cent is available on the first $2,000 of eligible income including RPP, RRIF, LIF or some GIC sources.

Create Pension Income

I mentioned the pension income tax credit above. Those over 65 with no eligible income should consider moving at least a portion of their RRSP account over to a RRIF, even if they don’t need or want income yet, to a RRIF to claim this credit.

Convert Your RRSP Early

Many retirees are often proud to say that they stopped working at age 60 or 65 but don’t need to start pulling money from their RRSPs until the mandatory age of 71. This may not be the best option though.

To qualify for many of the above-mentioned credits and tax rules, as well as to spread your income out evenly, it may make a lot more sense to convert at least some of your RRSP to a RRIF and take some income now.

You don’t necessarily need to spend that income now, it can always be reinvested in a TFSA or non-registered account. But the idea is to trigger some income now instead of a whole lot more at 71.

You’ve worked hard to build up your life savings, make sure that your retirement income plans are as efficient as possible so that you can properly enjoy the retirement you deserve.

RRSPs still misunderstood

Every year, when RRSP season rolls around I question whether I should dedicate another column to this same topic.

Surely by now, everyone knows how RRSPs work, right?

Surprisingly, after more than 60 years of existence, the RRSP program is still widely misunderstood and many common myths persist.

In the past few years, we’ve seen an increase in commentary surrounding the lack of benefits of RRSPs and we’re seeing more Canadians eschew RRSP contributions in favour of TFSAs.

For some people, the TFSA program may make more sense, but many others should not be avoiding RRSP accounts simply because they don’t understand them or get bad advice.

Let’s look at some of these common myths and the reasons why Canadians are avoiding RRSP plans.

Myth No. 1 

A recent poll showed 39 per cent of Canadians believe that RRSPs are pointless because you’ll pay back all of the savings in taxes anyway. Although you do pay taxes on RRSP withdrawals, most investors will pay less tax and end up farther ahead by putting this money into an RRSP since their income in retirement will be less than while they’re working.

Even if you pay the same tax rate during retirement as you do while working, your “worst case” is getting the same net amount as you would with a TFSA so you’d get a similar tax free rate of return.

All other things being equal, an RRSP contribution is typically better than a TFSA one (better equals you’ll have more money net in your pocket in retirement) if you’re income will be lower during retirement. RRSP vs TFSA will be a wash if you expect to be in the same tax bracket during retirement and the TFSA option will generally win out if your income is expected to be higher.

One big catch is what you do with the tax refund you receive after making the RRSP contribution – if you re-invest the refund into the RRSP you end up taking full advantage of the program’s features but if you use the refund to go on a trip or go shopping, you’re really missing the point.

Myth No. 2 

Many people feel that they don’t have enough money left at the end of the year to put some aside in an RRSP. While balancing a budget is certainly challenging, you really can’t afford to not put money away.

A Certified Financial Planner (CFP) professional can help analyze your budget and find out what areas can be trimmed or cut to make space for retirement savings.

While paying off debt is often at the top of the priority list for many Canadians, doing so in place of saving for retirement doesn’t always make sense. High interest debt such as credit cards should take priority, but neglecting your retirement savings in favour of paying extra onto a mortgage is often the wrong move.

Likewise, money being allocated to items like RESPs (education funds) for your kids might seem like the right thing to do but those funds should often be diverted to RRSP accounts instead if you’re unable to do both.

Myth No. 3

There is an un-warranted concern by many of saving too much money in an RRSP since they fear a large tax bill when they die. While the market value of your RRSP or RRIF does in fact need to be included as income on your terminal tax return, there are numerous exceptions.

Your RRSP value can potentially be rolled over to a surviving spouse, a financially dependent child or grandchild or an RDSP (disability) savings plan. More likely, you will draw down on your RRSP values over many years of retirement.

Many (most?) Canadians still don’t fully understand the tax consequences and planning opportunities that exist with the RRSP program. Don’t let unfounded RRSP myths or advice from un-informed people keep you from maximizing your RRSP savings opportunities.

And don’t allow missing this year’s “deadline” keep you from getting your retirement savings plans in order. March 2 is a good of day as any to start yourself on the right track.                 


Steps to financial freedom

With Canadian debt loads out of control and many more people closer than ever to insolvency, it’s time to start taking your finances more seriously.

So many people feel overwhelmed and don’t know where to start, but that is no excuse to not act!

The good news is that anyone can take control of their finances in 2019 and the following 10 steps will go a long way to putting you back on track:

Create a plan – The most important thing you can do, and the best way to start, is to commit to creating a written financial plan that will outline your goals and create a roadmap to reach them.

Build a budget – The earlier you can maintain a firm understanding of your cash flow, the earlier you can start taking control of your finances and get yourself on track to achieve your goals. Much like your financial plan, your budget should be a living document and updated regularly.

Tackle your debt first – Your financial plan should put initial focus on paying down debts, starting with those that accrue the highest interest rates. For those debts that will take time to pay off, look at available options to reduce the interest rates charged.

Start an emergency fund – A well laid-out financial plan can be destroyed by an unexpected emergency. Enough to cover three months of expenses is a good starting point.

Review your risks – What would happen to your finances if you were injured or sick and off work for six months? How would your family get by if you were to pass away tomorrow? A risk assessment should be a top priority and appropriate insurance should be attained.

Begin the estate planning process – Do you have a will, power of attorney and a health representative agreement in place? Are they up to date? These vital documents help ensure you and your loved ones are protected and can give you a lot of piece of mind once in place.

Ensure your investments match your needs – An investment portfolio review should be conducted to make sure that your investments are suitable for your current situation and risk tolerance.

Open a separate savings account – Are you planning a big vacation or have some other kind of one-time expense coming up? If your trip is nine months away, setup a separate savings account and put one-ninth of the total amount you’ll require in each month to have enough to pay in full and not end up putting the trip onto a credit card and adding to your debt.

Be philanthropic – But do so strategically. Your budget will help you understand how much you can afford to give and how to maximize the tax planning opportunities.

Communicate your wishes – Create a summary of your full finances including every account, asset and debt that you have and include information about your financial planner, lawyer and any other professionals that you use. Share this information with your loved ones.

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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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