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It's Your Money  

Monetary reasons to vote

Election Day is upon us. By now, many of you have already voted or at least made up your minds on who to vote for.

But for those who are still unsure, I wanted to take a few minutes to provide you with some additional clarity on how each party’s victory might affect your wallet.

Your vote will likely be influenced by multiple issues, including social programs, the economy and the environment, but don’t forget to think about the financial impacts that each party’s platform will have on your own family’s bottom line.

While the “other” parties have all come out with a variety of financial promises, I’ve chosen to limit this breakdown to the three main parties and their plans for the following areas:

Housing:

The Liberals have proposed a federal vacant property tax on top of the one we already have here in B.C. They have also promised $15 million in funding for homeless veterans as well as possible spending on housing and infrastructure for Indigenous communities.

The NDP has proposed to building 500,000 housing units over the next decade to increase affordable rental options and committed to starting this program with a $5 billion injection in the first 18 months.

The Conservatives have proposed increasing the maximum amortization for first time homebuyers to 30 years and ease the mortgage stress test in order to make home-buying more accessible.

They also committed to using surplus federal real estate for affordable housing developments.  In addition, they would introduce a $20,000 federal tax credit for energy-saving renovations.

Income Tax:

The NDP have proposed a “super wealth tax” for Canadians whose wealth is $20 million or more. Each year, these taxpayers would owe an additional one per cent of the total value of their assets on top of all of the other taxes that they pay. They have also committed to increasing the capital gains inclusion rate from 50-75%.

The top federal tax rate would be increased by two per cent as well. Some of these additional taxes would be used to fund their universal pharmacare plan.

The Conservatives have proposed decreasing the federal tax rate on income under $47,630 by 1.25% and they would introduce or bring back a number of tax credits including the green public transit tax credit, the children’s fitness tax credit and the children’s arts and learning tax credit. They would also roll back some of the small business tax increases introduced by the Liberals.

The Liberals have proposed an increase in the basic (tax free) income amount from the current $12,069 up to $15,000. They have also pledged additional increases to incorporated business owners including small and medium sized businesses.

Retirees:

The Conservatives have proposed an increase to the Age Tax Credit by $1,000 for any senior earning less than $87,750 per year.

The Liberals have proposed to increase Old Age Security benefits by 10% (an increase of up to $61 per month) once seniors turn 75 and to also boost the CPP survivor benefit for spouses.

The NDP has proposed making the federal Caregiver Tax Credit refundable to all taxpayers instead of just those with tax payable like it is now.

Children:

The Liberals have proposed making maternity and parental benefits tax-free and would increase the Canada Child Benefit by 15% for parents of children in their first year only. They have also promised a 10% decrease in before and after school care costs by creating more childcare spaces.

They would also make student loans interest-free for two years after a student graduates and payments would not begin until their income exceeds $35,000 per year.

The NDP has proposed a $1-billion increase in funding to create affordable childcare. They are also suggesting free post-secondary education for all in the future but have not yet confirmed how this would be paid for. In the shorter term, they hope to make student loans interest free for life.

The Conservatives would also make maternity and parental benefits tax-free. They would provide additional support to parents saving for a child’s education by increasing the Canada Education Savings Grant program by 50 per cent up to $250 per year. They would also provide 15 weeks of paid leave for adoptive parents.

Their proposed universal tax cut would save the average family over $850, which could be used for childcare expenses if required or other expenses if it’s not.

Each party’s platform carries far more details and promises than what is summarized above and I’d urge you to do your research on all of these details to help make your decision. You should also consider who will actually live up to their proposed plans and who might abandon them once elected.

Generations before us laid down their lives to ensure your freedom and ability to vote. You owe it to them and the generations to come to do your research and then get out and vote.



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It pays to be segregated

A recent judgment from the Tax Court of Canada reaffirmed the strong case to be made for creditor proofing your investments with segregated funds.

Earlier this year, the Canada Revenue Agency (CRA) attempted to seize the death benefit of a segregated fund account that was paid to the two daughters of an individual who had passed away.

The two daughters were named beneficiaries of their father’s account that was invested entirely in segregated funds.

While this account was used solely for investment purposes, being a segregated fund meant that it falls under the Insurance Act of Canada and not the Bank Act. Therefore, when it comes to taxation and estate matters, it is treated as a life insurance policy for tax purposes.

In its submissions, the CRA relied upon subsection 160 of the Income Tax Act which states, among other things, that when someone transfers property to a non-arm’s length person (such as a child) without proper consideration, the recipient may be on the hook for income taxes owing by the transferor.

When assets pass outside the estate of a deceased person, the CRA will often use section 160 to attempt to pursue the funds to pay taxes otherwise owing.

However, in this case, the investment assets were held in segregated funds and, as mentioned above, they are treated in the same manner as the proceeds from a life insurance policy.

With that in mind, the court found that the money paid out to the two daughters constituted life insurance proceeds payable to named beneficiaries and they did not form part of the father’s estate nor were they subject to pursuit through the section 160 clause.

The decision proved as a great reminder of the benefits of segregated funds and helped reaffirm the legal status of segregated funds and the features that they possess.

In addition to providing creditor protection (whether from the CRA or an outside party), they also bypass the estate as a whole which can greatly reduce estate and probate costs.

For non-registered investments, they can also provide some additional tax savings and reduced accounting costs as well.

Like most other investment options, segregated funds can be purchased in a wide variety of options and properly understanding the type of investments and fees involved is important.

While some segregated funds carry substantially higher fees, others can have the exact same fee structure as comparable mutual funds, which means you get the added benefits of creditor protection and tax savings for free.

Make sure you speak to a qualified financial advisor before investing in something new and don’t be afraid to ask a lot of questions and do your research.          



Choose right adviser

Investment advisers who provide advice to Canadians are typically registered through one of two bodies.

The Mutual Fund Dealers Association (MFDA) and the Investment Industry Regulatory Organization (IIROC) are both self-regulatory organizations that follow the rules set out by the various provincial securities regulators.

There is, however, a third option and it’s not always being used for legitimate reasons.

In addition to insurance, life insurance companies offer investment products often called “segregated funds” that any insurance licensed salesperson can sell to their clients without holding a license with either investment body.

While segregated funds are good niche products that are a great option for some situations, they certainly aren’t meant for everyone.

No doubt there are some who sell only these types of investments who still try to have their client’s best interests in mind, but they are not meant for everyone and many investors should not be using them.

Worse still though, is that some are using this loophole for one of two far more sinister motives.   

The first motive involves a simple unwillingness to adhere to regulations that are put in place to protect consumers. Licensing by the MFDA or IIROC involves significant disclosure and compliance requirements that are strictly enforced.

I have met far too many “advisers” who either used to be investment licensed or chose not to get licensed as they felt that the regulations were simply too challenging or annoying.

They’ve stated that they would rather just sell segregated funds and avoid dealing with all these “rules.” And yes, they know by doing this, they may not be offering the best options to their clients and may be forcing their clients to pay higher fees than necessary.

A couple of years ago, when the Canadian Securities Administrator’s Client Relationship Model (better known as CRM2) rolled out, we saw an even bigger shift of assets into these segregated funds to avoid transparency.

CRM2 requires securities dealers to provide greater fee transparency and disclosure and segregated funds are again exempt from these rules. Some saw this loophole as a way to avoid telling their clients how much they charge in fees.

The second and even more disturbing motive in selling investments solely through the insurance platform is due to being permanently banned from the securities industry.

Yes, you read that right – there are advisers who have been permanently banned from selling securities for wrongdoings that simply move all of their client’s money over to segregated funds and keep on working.

While most regulators (both securities and insurance) realize that this is a problem that needs to be fixed, the framework needed to make this happen is not yet properly established.

There is still limited information sharing about enforcement decisions between many of the provincial and federal regulatory bodies and even if the appropriate insurance authorities are made aware, they still have to conduct their own investigation into the incident(s) in question which all takes time.

Since most bodies don’t have formal information sharing arrangements, the insurance regulators rely on reporting of the disciplinary actions by the licensees themselves, something they may not be willing to disclose.    

What can you do to protect yourself? Take the time to find out what types of licensing and designations your current or prospective advisor holds. The investment advice marketplace is confusing and it’s up to you to ensure that you are receiving advice from someone who’s fully qualified and bound to the highest standards of regulatory oversight.

If your adviser has placed all of your investments with an insurance company, ask if they also hold an MFDA or IIROC licence. If they don’t, it may be time for a second opinion.



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Pick out your Ferrari

Do you want to drive a new Ferrari when you retire?

What if I were to tell you that you can afford to and all you have to do is quit smoking.

This week I wanted to demonstrate the power of compounding and I’ve decided to take a slightly different approach to illustrating it to you.

Deciding not to smoke cigarettes has been clearly demonstrated to provide significant health benefits and will likely add many years to your life.

But what about the financial benefits of this decision?

Many smokers start fairly young and for this example, let’s assume that you start smoking at age 16 which happens to be the same age that many people get their driver’s licence. 

Starting smoking at age 16 and burning through (literally) half a pack a day will cost you approximately $2,256 a year. Now let’s instead of putting that $6 a day toward cigarettes, let’s say you decide to invest the money instead. 

Without adjusting for the price of cigarettes going up over time (inflation), you would have $652,743 in your investment account at age 65 when you are ready to retire if you averaged a six per cent per year rate of return.

If, once you turn 18, you invest all of this money inside of a TFSA, the full $652,743 would be tax free money as well.   

I decided to take inflation out of this example for simplicity’s sake.

The price of cigarettes will no doubt rise over time, but so will the price of cars. If we assume that the inflation on both purchase prices are somewhat equal, we can remove this from the example and talk in today’s dollars for both the cigarettes and the car.   

Now comes your reward. Depending on how many options you choose, you can buy a new Ferrari for around $300,000.

If you decide not to take up smoking and put the equivalent money away from the time you get your driver’s licence until the time that you retire, you have enough money on the side for not one but two new Ferraris.

You’ll even have enough money left over to take a trip around the world for two. Not a bad way to kick off your retirement and since you didn’t smoke, you will likely have a longer and healthier retirement as well.   

The above example may seem a little extreme, but it really isn’t. How many people can carve $6 a day out of their expenses?

How much do you spend each day at Starbucks on that fancy coffee?

How much could you save per day if you packed a lunch for work instead of buying your lunch each day? 

The power of compounding is enormous and the above example just goes to show how much you can put away if you start early. 

Of course, the main benefit to not smoking is certainly still your health. For those who don’t think a healthy retirement is enough, maybe the dream of a shiny new Ferrari waiting for you can provide that little bit of extra motivation... 

Parents and grandparents, copy this article (maybe attach a picture of a new Ferrari) and pass it on to any teenagers you have in your lives.

Who knows, this could be the extra motivation they need to make the right decision and never pick up the habit. 



More It's Your Money articles

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and will take over as board chairman in June. 

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 FP Canada 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].



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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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