Over Insurance on Record Keeping

At what point is keeping a record of something holding you back? Is it really useful to keep your bank statements for the last seven years? If so what for? Are we getting too much insurance for ourselves with our paperwork which will likely never use again. Ever.

I thought of those questions a while ago and I've started a program to reduce the amount of paperwork in my house that requires me to do anything. First most of my bills now come automatically out of my account. Then I signed up for electronic bank account statements and Visa bill statements.

So far I would estimate I have eliminated about 1/3 of the paperwork I used to deal with at home. The more interesting fact is I have yet to need one single piece of paper that I am no longer keeping a hard copy of.

Now I've been thinking of taking it to the next level and stop keeping Visa slips and bank slips for longer than one month. One month should give me enough time to check that the slip in question did show up in the account. After that they will be shredded and tossed out. The only exception to this rule will be any slip that could be used in taxes. Those slips will stay on file regardless until seven years have passed.

I aware I might run into a situation where I would wish I did not get rid of some of this paperwork, but in the end I feel the risk is well worth getting my time back.

Once this phase is done I'm not sure what is left to reduce. Does any one have any ideas on how to further reduce paperwork at home? If so please share.

Taxes Done and Waiting

As I previously mentioned I was expecting a big tax refund this year. Initially I estimated I would be over $5000. Since then I have filed both my wife's and my returns and now I'm waiting for my over $7000 tax refund. Yes it got that high. I'm not really happy about it and now I'm getting impatient for that money so I can pay off my furnace I installed last month.

I thought it might be useful to review where all these deductions came from and how I paid so much tax in the first place.

First off I paid too much tax due to a large bonus at my previous work place. Then with moving just after paying my CPP/EI for the year (basically I paid CPP/EI twice for the year, once at each job).

This is a few deductions I used:

-I moved over 1400 km which produced a $11,000 moving deduction
- I claimed partial northern living allowance for half the year to get another couple of thousand deducted
-My wife's business income was low enough she paid no tax and transfered the remained of her basic deduction to me
-Then the RRSP's also deducted another few thousand dollars

Overall I broke over $15,000 in deductions before I even used any tax credits to finish dropping my tax bill. Yet my biggest disappointment about filing my taxes this year was waiting for my T3 slips for my wife. I honestly got the last one on April 17th. To say I was a bit mad over the wait was a bit of an understatement. I just can't understand why they can produce T4's by the end of Feb, but I can't get a T3 until mid April!

Investment/Savings Styles by Income Level

Part of the complex issues around saving for retirement is people trying to give advice that works for everyone. The problem with this is there is no advice that always works for everyone. There always seems to be an exception.

So today I'm going to take a crack on suggestions on what do with your money at various income levels. For simplification purposes I'm going to use a person in Saskatchewan as an example.

Income Level 1 ($0 to Basic Personal Deduction)

Well down here at the bottom rung of the ladder it often appears bad at first glance. Despite this weird belief otherwise, having some one in this situation is actually useful for tax purposes and cost savings in a family. If you can claim your spouse as a dependent you can save tax on the working partner's income. Also a person at this level can provide additional tax saving by running a small business out of the home (deduct house bills and expenses for the business). Additionally a person at this level can assist in cost saving to the house by having more time to comparative shop and saving on child care expenses. Also depending on your overall family income you might qualify for extra RESP funding and other helpful government programs like the GST rebate. Obviously a RRSP contribution is useless at this point (no tax savings), but a spousal RRSP might be useful.

Income Level 2 (Basic Personal Deduction up to $37,178)

Now in this income level you will most likely want to avoid RRSP's as you likely to be in the same tax bracket in retirement. So an approach of investing in dividend paying stocks might be more useful since you won't be paying any tax on the dividend income. The other good idea at this level is to try to save something every month. It can be hard, but if you stay out of credit debt and start getting into the habit of saving you will be light years ahead of most people. Also you might want to avoid interest income as if you don't have an RRSP you will be getting taxed at you full marginal rate.

(Note: There is technically another bracket of $37,178 to 38,405, but I'm going to skip this one.)

Income Level 3 ($38,405 to $74,357)

At this stage an RRSP contribution is starting to look useful, especially is you can use it to drop yourself back to Level 2 for income tax purposes. You are also now typically earning enough money to manage a comfortable lifestyle for a family, so if your near the middle to top of this range you can start to practice that old strategy of living below your means. Basically if you earn $50,000 a year, live like you earn $45,000 and you will always have some savings. If you can live like you earn $40,000, better yet for your savings. The trick here is to find that balance point where you are happy with your savings without feeling deprived in the rest of your life.

Income Level 4 ($74,357 to $109,729)

Obviously at this income level you are doing well by most peoples standards, but don't let that go to your head. Any interest/employment income you get marginal tax rate is getting eaten alive at 39%, so you might as well plow money into your RRSP's and spousal RRSP's (if your spouse is in a lower tax bracket) to get you back to Level 3 if possible.

Income Level 5 ($109,729 and higher)

Once you hit this level of income your marginal tax rate on employment/interest income jumps to 41%. At this stage if you can't drop yourself down to income level 4 or lower, you might want to consider discussing your situation with a tax professional to see if any others options like a family trust might be useful. The other thing at this level is to earn as much income as possible from capital gains and dividends which are taxed less than interest income. If it seems like I'm focusing a lot on taxes at this level, it is because it is your worst enemy to your income.

Well that's my suggestions by income level. Obviously I can't cover everything, so if you have a great idea for any of the levels please leave a comment.

Please note I have disabled Anonymous comments on this blog after a steady increase in spam. I apologize to those who do not have a blogger account, but if you take a few minutes to sign up you can continue to leave comments. CD

Hot Economy + More Money = Trouble?

I was reading Larry MacDonald's blog post yesterday and I just had to comment on it. In summary Larry was talking about what happens when you inject $20 billion dollars into a economy that is already showing signs of overheating. You are almost guaranteed to force the Bank of Canada to raise interest rates to try to keep inflation in check. Which would result in higher mortgage payments, car payments and line of credit payments. So we only get tax breaks to pay more interest in the end.

Larry makes a very good point here, we don't need more economic stimulation at this point. The oil sands are sucking up labour like a vacuum, while the utility industry is starting to enter another construction phase and then our finance minister goes and gives the manufacturing sector a shot of adrenaline. This is not looking very good.

So what can the average person do to protect him/herself? I suggest paying down any non-locked in debt now such as a line of credit and then go buy some bank stock. After all they are the ones who will be collecting the higher interest rates. Just a few ideas, as per usual do your own research.

Pension Splitting: How it changes your retirement plan

I'm not sure I would consider pension splitting the holy grail of retirement, but it is going to be a very useful tool to have. Yet what exactly is 'pension income' according to the government? Basically any income that you can enter on line 115 of your tax return, but you will have to be careful what you claim on this line for example OAS and CPP don't qualify (but you can already split your CPP pensions). See this section at Taxtips.ca for more information.

The great thing about pension splitting is if you read all the fine print on line 314 you might be able claim the pension deduction for both of you then. So with the basic deduction, increased pension deduction and increased age deduction (age 65+) you could deduct up to $15,995 each or $31,990 total for a couple. No wonder people want to retire with tax breaks like this I can save over $2000/year in federal tax for my wife and I.

Does this mean the spousal RRSP is now useless? No, they are still very useful for your early retirement years. Since you can still split your savings between you for a lower tax rate when you withdrawal them. If you try to convert your RRSP to a RRIF and expect it to be pension income you might be in a bit of shock. From what I've been reading that doesn't qualify as pension income if your under age 65.

Therefore my savings plan for my early retirement years is unaffected by pension income splitting, but it will save me some tax after I turn 65.

Things You Didn't Know about the Canadian Fedral Budget 2007

It was a interesting day yesterday for Canada and the budget (The full document is 478 pages). I personally got a bunch of goodies which I liked, such as:

- Child Tax Credit of $2000 per kid (P.226 - Bottom)
- Increased funding the RESP matching program and raising the maximum total contributions to $50,000 (P.22- Bottom)

Seniors also did well with the previously promised pension splitting, increased age deduction (up $1000) (P.25 for both), and two extra years on the age limit to convert RRSP's (P.231). All of these measures should make retirement a lot happier for a lot a baby boomers entering their golden years soon.

Yet the three things I find the most interesting in the budget was barely mention if at all in the media. The first one I won't blame people if they forgot about it, but now that the Bloc has promised to support the budget bill the income trust lobby is now officially dead. Tucked WAY back in the end of the budget document (P.442) is the statement that the government will proceed with the previously announced 'Tax Fairness Plan" which will see income trusts taxed in four years. So for anyone with the faint hope that things would change. Sorry the free ride is over in a few years.

The second very interesting piece of news that again isn't getting a lot of media attention is the fact the government is going to form a national security commission (P.179). Basically the federal government got tired of waiting for the individual commissions to do anything and is going to force them to merge. So Canada is finally getting off of a very short list of countries that lack a national security commission, which should hopefully reduce red tape for investors who get ripped off and also provide a clearer set of national rules on investment information.

Then there is the third piece of news that I read in an obscure part of the budget document was the reduction of red tape for small business owners by up to 20%(P.183). My wife's business manages to be small enough to avoid much of the red tape, but it is nice to know that she can grow it a bit more before hitting paying tax in installments.

Despite the length of the document it's a fairly organized, so I suggest you download a copy and skim the introductions to each section where they highlight the changes. You might find some minor but useful things that will help you personally.

My Tax Refund is WHAT?!?

During the last week I have been filling in some of my tax information into QuickTax 2006 to get an idea of what my tax refund will look like. I am still missing one of my T4 slips from my previously employer, but I used my last pay stub to build a fairly accurate estimate. Then I entered in some of my basic deductions like RRSP's and a few T5 and T3 forms I already have.

So far I'm almost at a refund of $5000 and I still have deductions for my move and partial northern living allowance that I can claim for last year to enter in. So I'm currently looking at the single biggest tax refund I have ever gotten.

How did this happen? Well a combination of weird events. First off in Jan 2006 I got a BIG bonus cheque which got taxed to hell. Then I maxed out my CPP contributions for the year at my old job just before moving to my current job. So my CPP contributions started all over again and I ended up almost maxing out again.

Then the icing on the cake is I forgot my wife still had some carry forward credits from last year which should easily drop her under the basic deduction and result in no tax payable.

So the government ripped me off and took far to much of my money. So now I'm waiting for my tax forms to roll and and Netfile to come back up so I can get money back. To summarize today's lesson is don't let the government hang on to your money and if you can fill out any form you can find to legally reduce your tax bill at the source.

Tax Time in Canada

Most likely by now you have your paper work for your taxes or your access code if you e-file, so it is time to think about doing your paperwork for your taxes. I was thinking about mine and I thought perhaps I should share a few ideas on dropping that tax load.

1) Know your deductions that you could claim. Some of the often overlooked ones are:
- moving expenses if you move to a new job more than 40 km
- medical expenses which can be claimed in the name of the lower income earner of your household
- keeping taxable investments in the lower income earners name (see a few great articles on the types of investment income over at Million Dollar Journey - Part I, Part II)
-if you live in anywhere fairly far north check if you can claim northern living allowance (they have two zones which qualify, and you would be surprised how far south it goes)
-Using Spousal RRSP's to get the biggest tax break possible if you and your spouse are in different tax brackets
-donations to a political party offer a better break than a charity

2) Consider doing the bookkeeping on anything you do to earn money beyond your day job. If you claim it as a small business ( sole proprietorship) you can write off reasonable expenses from the income you earned and don't have to register the business (check you local Provincial law to make sure). This takes a bit of setup work, but can often be a big saver if you do the work up front.

3) Learn which tax credits can be transferred between you and your spouse and run both sets of numbers to ensure the biggest return.

4) Pay attention to those Federal/Provincial budgets and find out which tax breaks start in the current tax year if your not sure check out taxtips.ca(they often update everything at least once a month).

That's just a few simple tips. If you have your own favorite, please share with a comment.

Taxation Rates In/Out of RRSP

Well after thinking about it for a few days I think I have worked out my plan to not invest an additional funds in my wife's RRSP other than my current $100/month.

It comes down to taxes.

Situation #1 - In the RRSP (Spousal)
Let's say I put in $1000/year additional to my wife's RRSP. That would generate a $350 refund on my taxes which I would roll over to the RRSP. So I keep doing that I would average $112/month at 5% for 15 years I would get about $32,050. I would get tax free growth until I hit 45 but then we would start paying tax on all the gains and the original investment to the tune of about 26%, or about $8333 of that. So her nest egg after tax would be $23,717.

Situation #2 - Outside the RRSP in my spouses investment account.
In this case the wife invests $1000 in a Canadian Blue Chip stock. Dividends would be taxed at a -5% rate, so better than tax free growth and then once she sells she would only pay capital gains at a rate of about 13%. So we kept putting in $1000/year or $83/month and she got dividends to a tune of 1% for a 6% rate of return she would have $26,592 in 15 years. Now tax in this case is only on the capital gain, so drop off $15,000 for monthly investment to $11,592. Then drop the reinvest dividends for another $115 to $11,477 at a 13% tax rate, she would owe $1492. So the nest egg after tax would be $25,099.

So outside the RRSP beats inside by $1382 and I did not include any bonus for getting that -5% tax on the dividends outside the RRSP.

I should point out those numbers were made with a lot of assumptions (like all numbers are in current dollars, that the wife doesn't sell the stock early and trigger a capital gain, and that any RRSP withdrawals would be fully taxed), but with numbers like these you have to make some assumptions otherwise you can't come up with anything. I still feel that having an RRSP is a great idea for those investments which are tax equal to income like interest or holding non- Canadian stocks.

Maxing the RRSP's or Investing outside the RRSP

I recently had a comment left on another post wondering if I max out my RRSP's every year. Up to now the answer has always been no. I was focused on debt reduction for a number of years and with what I was putting in to my RRSP's and my pension adjustment I don't have much extra room built up. But now I'm not sure if I should max the RRSP's or have my wife invest in dividend paying stocks and hold them for the long term.

Option 1: I buy spousal RRSP's and max out each year for the next 16 years or so. I would get back about $35 per $100 invested and then I would get tax free growth for a number of years. The problem would be I would get taxed at my new lower marginal rate when I pull them out in retirement.

Option 2: I have my wife buy quality dividend paying stocks and hold them for the next 15 years. She would have a negative tax rate on her dividends, so no tax on that growth. If I don't sell for that long I would only trigger capital gains at the end, which would be a lower tax rate than my marginal rate at that time.

Has anyone seen a good calculator that is updated with the latest tax rates? I have yet to find one during the weekend and I'm still working out how to simulate the buying stock option well. Once I get some good results I will be sure to post them.

Federal Economic Update

Well after all the news stories on income splitting and other great things we expected from the fed's on Thursday. We got: nothing. You can read an article on it, but I'll give you a summary.

Pay down the debt. Ok this is a good idea, but at $3 billion a year this will take a while.

Use interest savings on the debt to reduce income tax. Again a good idea, but really this will amount to something like $20/person in Canada next year. Oh yes, I can finally retire an entire minute sooner than I planned.

Reduce the GST to 5%. Hell SK managed to reduce their PST to that already. Besides your already told us about reducing the GST to 5% when you dropped it to 6%.

The rest of it was, well, hazy and vague. Here's hoping the new budget is better.

Tax Changes for the Better in SK

Well it happened and I didn't even notice until I was reading on taxtips.ca that SK finally changed their tax laws to account for the federal enhanced dividend tax credit.

What does it mean? Well if your like my wife who collects all the dividends (taxable accounts) it means she actually gets a reduction on her other income by getting dividends. I love the government! If your happen to have a low income, you get all the breaks. Which is partly how I plan on retiring at 45. If you get most of your income from capital gains and dividends you are paying way less tax for the same net income.