Understanding Pension Splitting

Understanding Pension Splitting

by FinancialFinancial PlanningInvestment Planning

Since its inception in 2007, pension splitting has enabled taxpayers in a common-law relationship or marriage to split eligible pension income with a spouse, provided they meet all requirements. A useful way of saving on taxes and mitigating credit erosion, pension splitting allows for couples to work together to create a more sound and secure future.

The Basics

Two spouses or common-law partners both residing in Canada at the end of the taxation year are able to jointly elect to split eligible pension income. Each taxpayer files CRA Form T1032 – Joint Election to Split Pension Income with their individual returns. This means that it isn’t split at source, unlike CPP sharing (when possible). One spouse can claim up to 50% of reported income, and their partner can claim a like amount. Pension splitting is subject to proration depending on changes in marital status or death, and unique elections can be made annually.

Qualifying Sources of Income

There are several sources of income eligible for pension splitting. Those aged 65 or older on December 31 of a given tax year can allocate up to 50% of qualifying income to a spouse of any age. Additionally, amounts may be paid out of RCA payments in the form of life annuities (not exceeding $102,005.40 for 2017), as well as RPPs and retroactive lump-sum payments. Taxable RRIF payments to the annuitant and/or a beneficiary also qualify, including those from locked-in plans. However, bear in mind that RRSP withdrawals do not qualify and, as a result, if an amount has rolled over to an RRSP, the RRIF or annuity can’t be split. There are many more qualifying and disqualifying sources of income, and it is recommended to consult the CRA’s list for further information.

The Advantages of Pension Splitting

The biggest benefit is that if the spouse being allocated the income is in a lower tax bracket, overall income tax savings rise dramatically. Additionally, only income qualifying for the $2000 pension credit is eligible for splitting, which means that generating income qualifying for it will save even more tax. Spouses receiving allocated amounts may also be eligible to claim this credit in certain circumstances. Another advantage of pension splitting is that it minimizes or even eliminates the erosion of the age credit, which is normally reduced once a taxpayer’s net income exceeds a threshold amount ($36,430 in 2017). The same rules apply for Old Age Security (OAS), which is also better protected against reduction.

Pension splitting enables for retirees to worry less about scraping to make ends meet, thanks to its ability to reduce taxes and raise credits while protecting against erosion. If you and your spouse or common-law partner are considering pension splitting, The Beacon Group of Assante Financial Management Ltd. can help clarify whether or not it is a viable option, and discuss this and other retirement planning strategies.

Mother reading a book with her daughter

Making Financial Sense Out of Stay-at-Home Parenting

by BusinessFinancialFinancial PlanningInvestment PlanningTax Planning

When you and your spouse decide to start a family together, you have to make an important decision together: will both parents return to work, or will one remain as a stay-at-home parent? While there is no right or wrong answer, it is crucial that you first weigh whether or not it is suitable from an earnings and expenses-related standpoint.

Guaranteeing Sufficient Income

The most important thing to do is work out a budget with your spouse in advance of making such a change. It is important to ensure that the household can remain financially secure with a sole breadwinner. Factor in additional bills, investments, and savings to determine whether opting to be a stay-at-home parent is a viable option. Staying at home will also shift expenses; you’ll save on gas and lunches out, but you’ll have whole new expense categories for diapers and baby clothes.

Taking into consideration the age of your children, hours that they’re home, and amount of attentive care they require (special needs, etc.), the stay-at-home spouse may be able to work part-time or launch a home-based business. This can help to maintain a steady income flow as home office-based expenses and other legitimate costs associated with a home business are tax-deductible.

Saving Opportunities

If you are looking to save on expenses as a household, having one parent remain at home with the children can be a blessing in disguise. The biggest contributor is the lack of daycare costs, which in Calgary top $1000 per month per child. Child care for infants is even more expensive. If the family unit includes an older parent or in-law in need of consistent support, there may be an opportunity to save even more money. Having someone at home helps to reduce for care-related expenses either via facility or home care.

Tax Planning and Maintaining Insurance Coverage

Income-splitting opportunities are ripe for the picking for households with a stay-at-home spouse and the other being the primary source of income. The main breadwinner can contribute towards a spousal Registered Retirement Savings Plan (RRSP). Additionally, they have the option to give funds to the spouse with a lower income to invest in their own Tax-Free Savings Account (TFSA). Combined, expect a considerable deduction on taxes. Clever spousal loan strategies involving higher earning spouses lending money to their lower-earning partner to invest and be taxed at a lower rate are also applicable. In this sense, having a stay-at-home spouse can allow for lower taxes and higher return rates.

These savings may be important in regards to maintaining adequate insurance coverage. With one spouse no longer earning an income, it is more crucial than ever that the appropriate amount of insurance is readily available to cover the cost of replacing their services. Also, you may want to consider critical illness insurance to compensate for whoever remains at home with no income being ineligible for disability insurance.  

By considering your options and weighing the pros and cons appropriate for your income and expenses, becoming a stay-at-home parent may be more of an opportunity than a burden. Making sense of the financial aspects of such a lifestyle change is important to maintain a sound future, and reaching out to The Beacon Group of Assante Financial Management Ltd. to speak with one of our financial advisor will help make sense of it all. Feel free to contact us if you require further assistance with financial planning, investment planning, tax planning, and insurance planning with stay-at-home parenting in mind.

Investing-in-Real-Estate

Investing in Real Estate

by Investment PlanningReal Estate

Real estate can be a very attractive source of income. It can also be a great way to enhance the diversification and return on an investor’s portfolio. To be a savvy real estate investor, it requires good analytical skills and proficiency in raising capital. From a basic investment property to “flipping” or trading property for profit to operating a real estate investment group, there are many approaches. Knowing how to invest and doing the proper research is important. Here we outline some of the basic points you should understand when looking to invest in real estate.

Growth

A location with steady growth in jobs can signify a strong rental market and make for a good investment. Also, look for areas with overall economic growth, as when the economy increases it drives businesses to hire more people and require more space. A smart investor should ensure that a full analysis is undertaken on unemployment rates of the area that you’re looking to invest in, along with market rental rates and overall consumer confidence.

Vacancy Rates

A review of the location’s vacancy rates is also important. A rise in vacancy rates will, in turn, lead to a decline in rent per square foot and can also result in an increase in turnover in the building.

Absorption

Also, take the time to evaluate the location’s absorption rates. The absorption rate tells you the rate of sales for available properties in a given time frame. A high absorption rate indicates strong demand and reflective rental rates.

Income Stream

For investors looking to have an income stream in rental properties, they need to have a clear perspective on comparable buildings in the area and overall market rental rates. You would typically want to see a cash flow demonstrating positive returns over ten years with low volatility.

Land Value

Finding areas with low land supplies can be a good indicator of potentially increasing land values. Also, gateway markets and emerging markets with limited land supply are attractive investment choices.

When to Buy

There are many factors at play when deciding to purchase. But when you find a property with high returns and low volatility set in a location fostering stable economic fundamentals, low vacancy rates, positive absorption, and strong demand for living and working, you should consider buying.

Securing Money

Research all the different types of mortgages that will be available for you at a favourable interest rate. If you don’t have the equity to buy on your own, you can look at partnerships or capital raise projects with private investors.

Investing in a REIT or Fund

You may also prefer to invest into a Real Estate Investment Trust (REIT) or a Real Estate Mutual Fund offered by a professional investment company. These entities purchase and hold a portfolio of properties, and you can purchase shares in the company.  Look for companies that have historical solid returns, strong property management teams, and know-how to make a profit by adding value to undervalued properties. You can also maximize your returns and reduce risk by investing in a variety of real estate mutual funds, to create better diversification in your portfolio.

Real estate can be an excellent investment vehicle if you know how to navigate the system. But it also can be challenging for those who don’t have direct experience in the industry. Working with a financial advisor specializing in investments can help smooth over the process, and ensure you understand all the ins and outs of the complex system of property investment. Speak with your financial advisor from The Beacon Group of Assante Financial Management Ltd. to explore your options.

A Closer Look at Tax Free Saving Accounts

A Closer Look at Tax-Free Savings Accounts

by FinancialInvestment Planning

TFSAs are an excellent investment vehicle to save and grow money. With a sizeable contribution allowance and the ability to hold a wide range of investments, these savings accounts can be an excellent way for Canadians to save for their future. Here we will take a closer look at Tax-Free Savings Accounts and how they can benefit you.

What exactly is a TFSA?

A TFSA is a savings account that can help protect your future growth from income tax. Capital gains and dividends that are earned in a TFSA are not taxed, even when withdrawn.

How much can you contribute?

If you have never contributed before, by starting today you could contribute up to $52,000. The allowable contribution room is calculated per year and is indexed for inflation. Since the TFSA started in 2009, the contribution allowance has continued to grow each year.

Currently, the annual allowance is $5,500, whereas in 2009, when the TFSA was first introduced, it was $5,000. Any unused contributions can be carried forward and withdrawals result in new contribution room. When removing money from your TFSA you can add that amount back in the next year, plus the contribution amount for that year.

What are the conditions to opening a TFSA?

You must be 18 years of age and have a valid social insurance number to open a Tax-Free Savings Account.

What can I hold in a TFSA?

You can hold RRSPs, bonds, stocks, mutual funds, ETFs, GICs, options, and more. One thing to remember is that the financial rules of these instruments will still apply within the TFSA. Take GICs, for instance. If you lock your money into the GIC you cannot remove it even within the TFSA. The advantage of saving in a TFSA is that you won’t have to pay capital gains taxes if you trade within the TFSA.

Where can I find my contribution allowance?

The Canadian Revenue Agency will place the next year’s allowable contribution amount on the notice of the assessment you receive after processing your tax return. Generally, this includes the amount for the year, any amount you removed last year, and any unused contribution amounts from the years before.

Can you transfer between TFSAs?

If you have more than one TFSA you can transfer funds between them without it affecting your TFSA contribution room. You cannot however, withdraw money from one TFSA and contribute it to another TFSA – this would not be considered as a transfer and would come with penalties if you exceed your contribution allowance for that year.

What are the penalties for over-contributing?

If you over-contribute, there will be a penalty subject to 1% per month of the excess amount until the amount is removed. If you are found to be deliberately over-contributing, then you can end up paying a 100% tax on any gains you make on this amount.

Tax-Free Savings Accounts can be an excellent investment tool to help you save for the future and meet your financial goals. Speak with your financial advisor about TFSAs and other tax planning strategies to increase your personal wealth and leave more money in your pocket.

understanding principal residence exemption

Understanding the Principal Residence Exemption

by Financial PlanningInvestment PlanningReal Estate

It’s not uncommon for families to own more than one property at the same time. Additional properties can be used as a source of income, or possibly be a vacation home. Whatever the purpose for your additional properties, there are tax laws that govern what taxes you will owe upon the sale of any property. The Principal Residence Exemption is a tax privilege given to Canadians to protect them from capital gains tax when they sell their principal residence.

What is the Capital Gains Tax?

Capital gains tax is accrued when you sell a property for more than what you bought it for. You will be taxed on the profits of the sale which can be quite a large amount depending on the difference in the purchase and sale price. This becomes problematic when a house that was purchased decades ago for a now nominal amount, sells for considerably higher than the purchase price because over time the property value has increased significantly. The average home price in Calgary in 1996 was $176,305; the average home price in 2016 was $453,936, representing 157% average growth. The CRA offers extensive detail on how to calculate capital gains taxes on all eligible property.

Principal Residence Exemption

Even if you do own multiple properties, whichever house is designated as your principal residence is safe from capital gains taxes upon sale, thanks to the Principal Residence Exemption. The Canada Revenue Agency states that the Principal Residence Exemption can be used by a family unit once per year. The family unit is described as the taxpayer and their spouse and any minor and unmarried dependents. This means that under the principal residence exemption, a family could move once a year and not pay capital gains on any earnings from the sale of their principal residence. Capital gains tax comes into play when additional properties are sold that are not designated as the principal residence of the family unit.

Strategic Planning

If you own multiple properties and are planning to liquidate your real estate in the near future, speak to your financial advisor on how to approach each sale and receive advice on how to possibly avoid paying capital gains taxes.

The principal residence exemption is not designed to protect house flippers who buy and sell a house in the same year with the sole intentions of turning a profit. It is designed to be a tax break for families who may need to buy and sell in the same year for whatever personal or work reasons may arise. Talk with your financial advisor if you are worried about, or would like more information on capital gains taxes, the principal residence exemption, or tax planning and tax optimization.

How to Cope With the Sandwich Generation Squeeze

How to Cope With the Sandwich Generation Squeeze

by AgingEducationFinancial PlanningInheritanceInvestment PlanningTax Planning

 

Picture a sandwich. The top slice of bread is the responsibility of taking care of your elderly parents. The bottom slice is your young adult children who have boomeranged back home or are involved in post-secondary education. You are the meat stuck in the middle, trying to take care of both while working towards your retirement. This, in a nutshell, is the crisis the “sandwich generation” faces today. If you find yourself in this situation, take heart that you aren’t alone and you have people fighting for your best interests. The following are steps you can take to manage being stuck in the middle of caring for two generations:

Eldercare

The health insurance provided by the government leaves many elements of care uncovered or only partially covered, including nursing care at home. If one parent is still independent of you, you may wish to ask this parent to sell their home in order to downsize for extra monthly cash flow. If you are personally assisting your parent with their care, there is community care available in most regions and there is always private caregiving assistance.

Kids’ Education

The cost of post-secondary education is rising every year. Parents with two children that are close in age really feel the squeeze when both kids are enrolled at college or university.

The first step is to plan ahead and start investing early in Registered Education Savings Plan (RESP). You should consider supplementing the RESP with Tax-Free Savings Account (TFSA) investments, family trusts, in-trust accounts, or a combination of these. The Beacon Group of Assante Financial Management Ltd. can help you reach your education savings goals.

Boomerang Kids

25.9%[1] of young adults in Canada between the ages of 25 to 29 live at home with their parents. This boomerang generation can burden their parents with extra cost or prevent them from a planned downsize of their home. The key to handling this situation is communication. Talk openly with your adult children about their plans, responsibilities, and expectations to help maintain a healthy relationship with them.

Contingency fund

Nobody can predict the future. You should consider setting money aside during your prime working years to cover the potential costs of supporting your parents or adult children. The Beacon Group of Assante Financial Management Ltd. can develop a plan to help alleviate the pressures of being in the sandwich generation while setting your family up for future care as well.

 

[1] Statistics Canada, Living Arrangements of Young Adults Aged 20 to 29 (2011 Census)

Time in the Market versus Timing the Market

Time in the Market versus Timing the Market

by Investment Planning

Keeping a watchful eye on your investments can be an emotional rollercoaster. It’s very tempting to react to every little upswing and downswing in the market because it’s your hard-earned money on the line. Markets rise, fall, plateau, bottom out and then rebound time and time again – we just don’t know exactly when or why. You can’t predict the future, no matter how much research you do. This is why time in the market always beats timing the market.

Timing and Luck

If you believe you can time the market successfully by buying and selling at the right moment, you need a lot of luck. Actually, you will need to be lucky three times to really cash in. If the market is on an upswing and you want to cash in, you will have to guess the best time to sell. But what if you sell and your holdings continue to rise? If you did sell at the right time, you need to pick a new place to park your money until you are prepared to invest again. This could involve higher risk or suffering through tiny savings account interest rates. Once you are ready to invest again, you need to get lucky by timing your purchase when the market has actually bottomed out – you risk missing the rebound in this case.

Reaction vs. Patience

When you notice the market is on an upswing, it can be tempting to start investing extra money. The same goes for when the market is dropping – a voice in the back of your mind is probably screaming “sell!” It’s in our nature to react to changes that could affect our well-being, but in this case, it’s not very smart. You are much more likely to have success in the market if you keep your money in for a significant amount of time. Your holdings will survive through peaks and valleys, rebounds and bottom outs, you just need to be patient and trust your financial advisors.

To come out ahead when timing the market, you need to have a lot of luck. You need to guess right three times in a row, which has proven to be very difficult to do. Don’t be tempted to base your investment decisions on timing and predicting the market. For help with your investment decisions, you should talk to a financial advisor at The Beacon Group of Assante Financial Management Ltd. They will help you focus on the long-term by showing you exactly why time in the market is better than timing the market.

3 Common Reactions to the Market Cycle

3 Common Reactions to the Market Cycle

by FinancialFinancial PlanningInvestment Planning

Sometimes in life you find out the hard way that reality doesn’t always meet your expectations. This can be especially true when dealing with investments. You might think that you are comfortable with a temporary drop in your investment value, but when it actually happens, you may not be very comfortable with it. There are three common reactions investors have when dealing with the market cycle.

You become anxious and lose sleep

Your shiny new investment takes a dip in the first week, and dealing with it is way more difficult than you expected. Risky investments aren’t worth it if they cause you enough stress that you can no longer sleep at night. In this case, we recommend that you move your money into more conservative investments. You can talk with your financial advisor about adjusting your portfolio to be better aligned with your actual risk tolerance.

You don’t like it at first, but you get used to it

Your investment takes a dive and you start to worry. You talk to your advisor and they assure you that if you wait it out, you won’t regret it. You just have to be patient while seeing your investments through the market cycle. Once your investment rebounds, you experience the market cycle for yourself. This makes you more comfortable with accepting risk. You may even want to target more aggressive investments, or you may be happy with what you are doing. Talk to your financial advisor either way.

You don’t think twice about it

You keep an eye on your portfolio from time to time, but in general you realize that it’s not a good strategy to time the market and micromanage your investments. You and your financial advisor came up with an investment plan and you are going to stick with it. You don’t need to change your portfolio and you can sleep easy knowing your investments are in good hands.

No matter what your reaction is, every investor needs a good financial advisor to help them with their investments. This is true for investment veterans and for rookies. You should contact a financial advisor at The Beacon Group of Assante Financial Management Ltd. They will help your investment portfolio match your unique needs and personality so you can sleep easy if the market makes you nervous, or you can take some risks if you are more aggressive.

Finding Investment Common Ground with Your Spouse

Finding Investment Common Ground with Your Spouse

by AgingFinancialFinancial PlanningInvestment Planning

It can be hard to find common ground between two unique individuals, even when they are in a relationship. This kind of dilemma can occur when dealing with investments. Just because you love each other doesn’t mean you have the same risk tolerance as investors! You may not be able to sleep at night if the market has taken a hit, while your spouse may be sleeping soundly right next to you, knowing your investments are bound to go back up. If you find yourself in this kind of situation with your loved one, we can help. Here are three approaches that can help you find investment common ground with your spouse.

Agreeing on a goal and timeline

There are three key factors to take into consideration when creating an investment portfolio. They are called investment objective, time horizon and risk tolerance. Even if you and your spouse don’t have the same risk tolerance, you may be able to come to an agreement because of your circumstances. For example, if you want to save for a down payment on the home of your dreams, you may be able to convince the aggressive investor to stay away from high-risk investments knowing that your home purchase may rest in the balance. You both can agree on your objective and time horizon and come to an agreement on your risk tolerance for this investment.

Meeting halfway

You may be able to find common ground with your spouse by creating a diversified portfolio. This means you can adjust the risk level of the investment to please each spouse. You should be able to find a mutual fund with an agreeable mix of equities and fixed income that creates a suitable compromise for each spouse’s risk tolerance. This would eliminate the more aggressive and conservative holding, allowing you both to meet halfway. This strategy can be very beneficial as diversifying your portfolio is a smart investment strategy.

Separate portfolios

You won’t always be able to come to a compromise, so you may just have to agree to disagree. If this is the case, you may have to each keep your own separate portfolio. This actually isn’t a bad investment strategy; it can be considered a well-rounded approach to investing. You may be able to strike a nice balance between the two of you. One portfolio could focus on long-term growth while the other focuses on capital preservation.

If you and your spouse need help with your investments, you should talk to a financial advisor at The Beacon Group of Assante Financial Management Ltd.

retired man and women on boat

What are the Key Risks to Your Retirement Income?

by Investment Planning

Retirement is your reward for working all of your life. Savings have been delegated to your retirement funds over the years to cover you when you are no longer earning a salary, but will it be enough to sustain a retirement lifestyle? Here are five key risks that may affect your retirement income.

Life Expectancy

Modern medicine has made it possible for people to live happy healthy lives well into their senior years. However glorious and rewarding this may be, it also can prove to be financially crippling. In Canada, the general retirement age is around 65 years old, and people continue to live healthy and full lives long after retirement age hits. People can expect to live well into their 80s even 90s, which is a wonderful life expectancy, however is there going to be enough money in your retirement savings to supplement 30+ years of retired living?

Inflation

The value of a dollar is always decreasing due to inflation. Things in life are constantly growing a larger price tag to the point of it being difficult to sustain a household without an increase in salary. How is your retirement income going to stand up next to inflation? With the cost of everything on the rise, there is concern that retirement funds will not be enough.

Poor Investments

Investing your retirement income is not always a guarantee of success. A poor investment will not yield you a return that will keep you afloat in the growing economy. Safer investments, such as GICs, retain their value, but they do not increase in value and do not generate a steady income.

Overspending

If retirement celebrations last a little too long and a few too many vacations are taken, the retirement fund can start to rapidly deplete. It is extremely important to stay on top of your investments and be very aware of how much money you have allotted to spend so as to stay out of an overspending trap. With income not coming in at the same pace it once was, replenishing the retirement fund will not be possible.

Unexpected Expenses

Life is unpredictable. As we age, medical issues and other unexpected complications bring with them more expensive challenges. Medical expenses can quickly eat up portions of a retirement fund.

Retirement is meant to be a time of enjoyment and reward for a lifetime of hard work. Be sure your retirement income is properly managed and that it will be enough to sustain the lifestyle of your choosing upon retirement. Consult your retirement planning advisor from The Beacon Group of Assante Financial Management Ltd.