Where did my RRSP contribution room go?

Posted on September 20, 2011 by braunfinancial

You hear a lot about saving for retirement these days. Perhaps it’s a sign of the times, with baby boomers starting the first wave of the mass retirement that will sweep across Canada in the years to come. During the last few years before retirement, people start to take a much closer look at what they’ve got. The bits and pieces of pensions, former pensions from old jobs that became locked in accounts, RRSPs, spousal RRSPs, a few non-registered accounts, and the still relatively new Tax Free Savings Account for good measure.

Among the collection of accounts, having a pension plan is a beautiful thing. But as people approach their retirement, they may try to stuff as much money as possible into their RRSP. It makes sense to do it while their income is high, since their income will be lower when it is taken out during retirement. Plus they’ll get a tax refund, which can further their retirement plans by being used to purchase more investments. But when they decide to start this cash-stashing program, they may be surprise to find out that they have very little RRSP room left. They’ve become subject to the great equalizer known as the pension adjustment.

RRSPs and the Pension Adjustment
RRSPs allow all working individuals to defer paying tax on 18% of their earned income by earmarking it for retirement. Not every Canadian has a pension plan, and those who do know that they provide a great range of benefits, depending on the type of plan. This created the need for the pension adjustment. It was determined that it wouldn’t be fair for a person who had a pension plan to also be able to stock away an additional 18% of their income on a tax deferred basis. So, in the simplest of forms, the amount that you’re allowed to contribute to your RRSP gets reduced in accordance with the amount that has been attributed to your pension plan for retirement purposes. This is subject to an annual maximum that changes every year.

A Tax Free Solution
Having that gold plated pension plan is still a very, very good thing. But you should also take it to mean that a lot of your income will be taxable income during your retirement years. Those additional dollars that you’re looking to save can be put to good use through a Tax Free Savings Account. This strategy will give you greater access to your money without increasing your taxable income during retirement.

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‘Til Death do us Part – Evaluating your Enduring Power of Attorney

Posted on September 15, 2011 by braunfinancial

Your Power of Attorney is the document that allows the person that you name the ability to make decisions on your behalf.  The type and limits of this authority are granted while you are of sound mind and can give authority to make business, medical or financial decisions. 

There have been some changes made to the Power of Attorney Act that took effect in Sept 2011.  Today we’re going to talk specifically about the Enduring Power of Attorney.  This gives the named individual authority to make decisions over legal and business affairs and will stay in effect even after you become incapacitated.

It is very important you recognize the power that is being given before naming an Enduring Power of Attorney, so you can choose an individual that will act with your best interests in mind.

First Step
The first step is going to see a good lawyer.  They will help you take an objective look at all of the assets that you have under your control, and any obligations that you may have to other people.  They’ll explain to you that your named attorney can do anything on your behalf that you would be able to do yourself, unless it’s specifically excluded in the agreement.  This can mean changing beneficiary designations outside of your will.  If the agreement gives permission, they can give money as gifts to others, to charities or even to themselves.  The only document that an Enduring Power of Attorney can’t change is your will.

Who Can be Name Enduring Power of Attorney?
In BC, anyone over the age of 19 can be named, excluding a professional health care worker or provider who is taking care of you.

Accountability of the Attorney 
Attorneys can be held responsible by any other beneficiaries or family members who feel that they are misusing their power.  This can be either as a result of an action that they took or, as an action that they failed to take.  Here’s an example.  An investment decision needed to be made and the delay of the decision led to a loss. The beneficiary can go to court and hold the Attorney personally responsible for the loss that was as a result of an action not being taken.  To mitigate some of this risk, the Power of Attorney is allowed to get help from a qualified investment advisor.

A Triggering Event
Since a lot of responsibility comes along with the Power of Attorney, it is helpful to name an event that will put the POA into effect. For example, a triggering event could be a deemed incapacity by two Doctors.  This keeps the Enduring Power of Attorney from acting on your behalf before you want them to.   Unless a triggering event is specified, the named individual has the ability to act on your behalf immediately after the documents are signed.

Rights of the Attorney
The person that you have named as your Attorney may have a change of heart after they realize all of the personal responsibility that they are taking on.  A named Attorney does have the right to resign from the position, but must take the steps to properly give notice.   Make sure that you’ve had a heart to heart with this person beforehand so they can make the decision fully informed.  This will keep you in control and give you the option to consider someone else if you first choice is not willing.

Finally, if you feel that it is your Attorney’s right to be compensated, you should state this in the agreement.  Unless it is written in, your Attorney may not be able to receive any monetary reward for the service they have provided and liability they have accepted on your behalf.

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It’s Critical

Posted on August 31, 2011 by braunfinancial

The saying goes, the best way to care for others is to care for yourself first.  It’s critical.  Think of all the people that are depending on you at any given point in time.  Spouses, children, friends, bosses, co-workers.   It occasionally feels like a circus act, with the juggling and balance required to keep everything going.

For one reason or another, we can only keep juggling for so long.  Sometimes, it’s life itself taking us down a path that we didn’t expect.  After all the wear and tear of our fast paced society, the body slows down.  Our doctor sits us down and looks us in the eye.   It’s critical.  We’ve seen it happen to others.  Priorities change in an instant and all that matters is getting better and finding a way to take care of the family.

One of the steps in a sound financial plan is opening up the discussion of how you will protect yourself and your loved ones from life’s risks.  If you were no longer able to work at your job or bring in the same level of income, what would happen to your family?  Could all the bills get paid? Would your family fall behind?  Could you deal with additional costs or lifestyle changes that an illness brings?  It’s not an easy thing to talk about.  We’re all filled with the illusion of our own immortality.  It’s uncomfortable to think otherwise.

When looking at options of how to manage the risk of a critical illness, there are really only three choices:

-Look into a temporary or permanent critical illness insurance policy and pay someone to take the risk for you.  This needs to be done when you’re healthy.  Once there are signs or symptoms that there may be trouble brewing,  it reduces your chances of qualifying and you may not be eligible for the insurance.

-Build the savings yourself. Make sure that you have enough put away to take care of a situation like this, and that it wouldn’t be putting your family into debt.  The trouble with this method is that the savings tend to get used for other unexpected expenses as they come up, and it can be hard to keep the savings at a level that will eliminate the risk. 

-Procrastinate.  This one’s the easiest to do.  Or, you can hope that the situation never occurs and that you’re one of the lucky few.   Unfortunately, this can let us down when life hands us the unexpected.

What will you do?

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It’s All in the Family Part 2

Posted on August 23, 2011 by braunfinancial

We’ve talked about how relationships of the past can create ties that last into the future.   Another example of this is spousal support.  In BC, after a legal separation, the party wanting spousal support has 2 years to make their claim.  Our system in Canada also says that payments are to be made regardless of the cause for the divorce.

When dealing with spousal support, the Department of Justice of Canada states that the dissolved marriages are divided into 2 categories: and those with children and those without.

If a couple did not have children, the length of the marriage and the difference in gross income are considered.

If a couple had children, the issue gets more complex.  If the child lives with the former partner who receives child support, part of the spousal support may include a portion to make sure that the conditions and standard of living are appropriate for that child. They look at how old the child is at the time, which helps to determine the length of time the child will be with that parent. The amount of child support being paid is also considered.  

If the partners had been married a long time, the courts will try to provide a standard of living similar to what was shared during the marriage.  Emphasis is placed on encouraging the recipient to do what they can to become self sufficient.  However, if the recipient was unemployed for a long period of time during the marriage, self sufficiency may not be possible.

There were 2 court cases that shaped the way spousal support claims are handled today.  The first was Moge vs. Moge in 1992, followed by Bracklow vs. Brackow in 1999.

In Moge vs. Moge, the husband was the primary income earner for the family. The wife stayed home with their three children and worked evenings cleaning offices. Upon their separation after a 16 year marriage, she received both child support and spousal support.  Once the children were all grown and moved out, the husband appealed to terminate support, and payments were stopped.  However, the wife appealed the court decision, claiming that due to her time given to her family, she would never be able to achieve the same standard of living that she had with her former husband.  The Supreme Court agreed, and she was awarded a continuing spousal support payment.

However, in Bracklow vs. Bracklow, the partners were together for a total of 7 years, and 3 of those were as a married couple.  She suffered from an illness and became disabled though the illness was not related to, or as a result of the marriage.  During the first 2 years of their relationship, she had paid most of the bills. After that, they split the bills until she became unemployed and he became the sole provider for the family.    Due to her illness she was unable to work, and began to receive a disability pension as she was not expected to be able to work again. As a result of the pension, it was determined that she could sustain a very modest existence.  However, she continued to pursue an equalization payment even though she was receiving a small temporary payment amount from him during the court proceedings.  A trial judge decided that larger payment should continue for 2 years after the appeal.  The Court of Appeal upheld the decision. 

This decision has since raised a series of questions with regards to spousal support.  Spousal support had previously been given to keep the spouse out of financial hardship, as a direct result of their contribution to the marriage or family.  If after a short marriage, a partner wants a support payment, how much should they receive and for how long?  If they are no longer able to become self sufficient does that become the responsibility of the previous marriage partner?  This case seems to have opened the door as precedent for more like it.  It is interesting to see how the interpretation of the law develops with the cases that are presented.  However, the harsh reality of lengthy battles around divorce and separation seem to caution us towards the penning of a solid prenuptial agreement.  As they say… if you can’t talk about it when things are going well….

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It’s All in the Family

Posted on August 12, 2011 by braunfinancial

Families come in all difference shapes and sizes these days. It seems now more than ever there is no cookie cutter model with the beautiful home on an acreage, white picket fence and 2.4 adorable children running around in coveralls or a Sunday dress. Over the years Mommy & Daddy may have divorced and re-married. As new families form, ties to the past continue. And out of the old, come new obligations. Child support often needs to be dealt with in today’s family. Is it deductible? What can be claimed?

Child Support
Child support used to be a deductable expense for the parent paying the bill and taxable to the parent receiving it. In order to deduct a child support payment, there had to be a registered written agreement or court order. In May of 1997 the rules changed. Under the new rules, child support payments are neither a deductable expense for the payor or taxable for the recipient. Agreements that were made before that date and are still upheld and subject to the past rules. However, if both the payor and the recipient agree and sign the required form, they can make and receive payments under the new rules without having to re-write their existing agreement.

Child Care Expenses
There is also the issue of Child Care Expenses. This deduction is allowable for the parent with whom the child is living. The CRA says: ‘you can claim child care expenses you incurred while the eligible child was living with you.’ If there are two parents, it must be claimed by the lower income spouse.

An eligible expense includes the cost associated with:
-Caregivers
-Daycare or nursery schools
-Day camps/schools/sports camps/boarding schools that exist mainly to care for the children, and not just as a recreational activity.

Expenses that can’t be deducted under this provision include:
- Hospital or medical expenses
-Clothing costs
-Transportation cost

There is also the Child Fitness Tax Credit program that allows a claim of up to $500 per child (in 2010) for those who participated in a qualifying activity program. It’s pretty easy to find a qualifying program. It has to be 8 consecutive weeks, or 5 consecutive days of building muscular strength, endurance, balance or flexibility. The child has to be under the age of 16 (or 18 if disabled) and the claiming parent has to meet the requirement necessary to claim the Child Care Expense.

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These things have Claws

Posted on July 26, 2011 by braunfinancial

Old Age Security is a taxable pension paid out to Canadians that have lived in Canada for 40 years or more after age 18.  A pro-rated amount is payable for those that have been residents for less than that amount of time.  Old Age Security is a great place to start when we begin layering the sources of income that you will have during your retirement.  The maximum monthly amount that can be received at the time of this writing is $533.70.  But this social benefit has claws.  By that I mean it can be clawed back if your income exceeds a certain amount.

When managing your income during retirement, it becomes important to look at the sources of your income that are taxable.  The claws that will reduce your Old Age Security are based on the taxable amount of income that you report.  In the case of Old Age Security, once your income exceeds $67,668 for 2011, this benefit will begin to be reduced.

What can be done?  If you’re still in the phase of your life before retirement, we can help you determine if you have enough money saved in Tax Free Savings Accounts and other non-registered vehicles that will allow you more control over the amount of taxable income that you’ll receive during retirement.  The best retirement planning starts years before you actually retire.

Some things you may want to know about the Old Age Security include the following:

  • If you leave the country for under 6 months, you will continue to receive your OAS payments.  If you have plans to be outside of Canada for more than 6 months, you have to contact Service Canada.  If you have been a resident in Canada for over 20 years, your payments will continue even if your time outside the country exceeds the 6 months.
  • The Old Age Security pension is designed to increase with the cost of living, as measured by the Consumer Price Index. However, it is good to note that the amount of this payment, the way it is calculated or the benefits attached to it can be changed by the government in the future.
  • Old Age Security payments begin when you turn 65.  It’s good to submit your application about 6 months before then, so that you can start collecting the month after your birthdate.

Here is a link to Service Canada’s website for additional information about the OAS.

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Employment Insurance – It’s about more than losing your job.

Posted on July 8, 2011 by braunfinancial

Most people think about EI when they’re between jobs as a result of being laid off. However Employment Insurance provides other benefits that should not be overlooked – if only because the responsibility is ours to apply for them in the time of need.  

With EI, the benefit you receive is related to your earned income.  This is up to a maximum amount that can change every year.  In 2011, the maximum was $44,200. This provides a weekly benefit amount of $468.  The type of claim determines the length of time for which you can receive it.  Here are the different types of benefits:

Maternity Benefit
The most well known EI benefit beyond the loss of a job is the maternity benefit.  It can be paid for up to 15 weeks for a maximum total of $7,020 in 2011.

Parental Benefit
In addition to the maternity benefit, either parent can claim parental benefit if they have or adopt a child.  The new mother has the option to receive both the maternity and parental amounts.  The father may take time off as well, but the 35 weeks of payment has to be shared between the two of them.   If they were paid the maximum for 35 weeks, this couple would receive an additional $16,380. 

Sickness Benefit
If you find yourself unable to work due to sickness, injury or quarantine, and your doctor is willing to substantiate this, a maximum benefit of $7,020 is payable over 15 weeks.

Compassionate Care Benefit
If you need time off work to take care of a family member who is terminally ill, this benefit can help.  It will provide benefits for up to 6 weeks, to a maximum of $2,808.
 
Multiple types of benefits can be received in the same year.

For an employee who qualifies, taking these benefits is an easy decision since contribution into the program is mandatory.  The qualification period is based on a drop in income of at least 40% and a minimum of 600 hours worked over a period of 52 weeks.  Before you put in a claim, be sure to visit Service Canada’s website to make sure that this requirement hasn’t changed.

Please also remember that EI is taxable, so you can either request to have taxes deducted when you receive the benefit or you can prepare to pay any additional amount owing at tax time.

For the Self Employed
These benefits have also become available for self employed individuals, but thought should be given to the relevance of the benefits and the cost.

The self employed individual will get the same benefit as an employee.  That is: 55% of your average weekly earnings, to the maximum.  On the contribution side, earning the maximum income of $44,200 means an annual premium of $786.76.

To qualify, a self employed individual has to earn a minimum amount of income in the previous year. For 2010, that amount was $6,000.  They also can’t make a claim for their first 12 months in the program.

Here is the caveat – as a self employed individual, if you have not claimed any benefits you can cancel your participation in the program at any time.  However, if you have claimed benefits, you will have to continue to pay into the program for as long as you stay self-employed.

EI definitely has its place.  When it’s needed, it’s good to have.  I hope this post has made you more aware of the benefits that exist.

Here is theEmployment Insurance link to Service Canada’s website

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Gifting a House to Family Members – Don’t get Taxed Twice

Posted on June 29, 2011 by braunfinancial

Getting a gift is always a good thing. Understanding the tax law so that you won’t have to pay more in the future, makes it even better.

By definition, a gift is something that you received for free- at cost to the giver. This also holds true with regards to its taxation. A gift of property will not be taxed to the recipient, but it is taxable to the giver. When gifting property to a family member, the way that the property is valued when it is given may end up costing everyone more money in tax dollars. To make sure this doesn’t happen to you, read on.

Gifts of a home other than a principal residence
Gifts of property are usually from a family member. That beloved cottage that holds so many summer memories or Mom & Dad’s place once they’ve moved on. Family members often want to give these places that have come to mean so much to their children as a gift. But the giver will have to pay taxes on the gift as if it were sold. Depending on their own personal financial situation, this can be a problem when no money was actually received.

How does this affect the taxation?
The giver of the gift may try to lower the transfer price of the property to pay less taxes. However, because of the nature of their relationship with the recipient, they will still be taxed as if they were paid fair market value. For the giver, the gift is not as sweet, because in this case there is no way to avoid paying the full amount of tax.

How long are your arms?
As a measure of relationship, the term “arm’s length” is often used to determine if an existing relationship with the other person would affect the valuation of the property in question. If I were at arm’s length from someone I would not have any bias towards them in a transaction. As such, it is assumed that the fair market value of the item was used. If I have a pre-existing relationship with someone, like a child or other family member, we are not at arm’s length and so a lower price might have been given to them than would have been provided to any other impartial individual.

What does this mean for the recipient?
Since the giver is going to have to make preparations to pay full taxes on the gift regardless, it is in their best interest to transfer the property at fair market value. Here’s why:

While the gift of property is tax free when it is received, it will be sold or given away one day. If you receive the property for a lower amount now, you will be exposed to having to pay more taxes later. This is because the taxable portion is the difference between the price when you sell and the value at which you received the property, minus any deductions. This portion then has the potential to be taxed twice.

So if the giver has to pay all the taxes anyways and the recipient will have to pay them on disposition of the property in the future, fair market value should be used to make sure that as a family, you don’t pay your taxes twice.

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All is not Lost…

Posted on June 24, 2011 by braunfinancial

Have you recently transferred or changed investments in your investment account, given a gift of property or shares, or had something of value stolen or destroyed? Were you thinking of changing your country of residence? All of these actions can lead to the creation of a capital gain or loss. In this post we’ll look at the capital loss, and how it can be used to its fullest potential.

First off, how do I know if I will have a capital gain or loss?
In the simplest terms, you can determine if you will have a capital gain or loss by asking yourself three questions:

1. What price did you sell the item in question for?
2. What price did you originally buy it for?
3. Did you have any expenses that can now be deducted?

The first two questions are easy. The third might lead to a bit of research. The deductions will depend on the type of property that has been sold, given away or exchanged. Once you have all three pieces of information, take the sell price and subtract the original buy price and any deductions. A positive number means that you have a capital gain, while a negative number is a capital loss. This of course is a rough calculation for your personal knowledge, so that you can prepare for the tax consequences. The actual calculation for tax purposes should be left to the professionals.

What do I do with it?
A capital loss has to be declared on your tax return in the year that it’s acquired. It then has to be applied against all the capital gains that you also had during the same tax year. After that, if you have a loss remaining, you have a choice: A loss can be carried back three years or forward indefinitely.

First year aside, when would I want to take the capital loss?
If you had capitals gains in the past three years, it is good to use the capital losses as soon as possible. Here are a few reasons why:

1. You get back the money that you’d paid out in capital gains tax, up to the amount of the loss. A dollar today is worth more than one in the future. This becomes true because of inflation changing the amount of goods we can buy with that dollar. It could also be invested to earn interest or pay down a debt that’s currently costing you money.

2. The inclusion rate might change. We know the inclusion rate as the 50% that we multiply our gain or loss by to get our taxable amount. From 1990-1999 the inclusion rate was 75%. If there is a difference in rates, you’ll have to multiply them together and divide your capital loss by that amount. Sound complicated? If the inclusion rate hasn’t changed (and it hasn’t since 2001), you can skip this step, but it’s good to go the CRA website to check it out anyway.

The Silver Lining
Capital losses are a bit of a blessing in disguise in that they eliminate an equivalent amount of capital gain. And paying less tax is always a good thing!

Do you have a capital gain or loss? A link to the CRA’s website .
How to calculate a capital gain or loss .

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What’s in a Pension Plan?

Posted on June 15, 2011 by braunfinancial

Defined benefit, defined contribution. You’ve likely heard the terms tossed around before.  But what’s in a name?  And more importantly, what’s in your pension plan?

So they’ve offered you a pension plan… what kind did you get? 
While any form of pension is a good thing, they’re not all created equal.  The two basic types are defined benefit and defined contribution.  Simply put, with a defined benefit plan, you know exactly how much you’re going to get during your retirement.  With a defined contribution, you don’t know.  You’ll receive whatever stream of income that your pool of money can purchase when you retire.  This will depend on how well the markets have done, how your money was invested and what the interest rates are doing at the time that you retire. 

When does it become yours?
Look for an area on your latest statement that mentions the term ‘vesting’.  This will let you know how long you have to stay with the company before that money becomes your property.  A vesting period is usually 2 years.  It’s good to know in case you’re planning to leave an employer, for whatever reason, around the vesting period mark.  It works like this:  Say your plan was contributory – meaning you and your employer put money in.  If you leave your employer before the funds are vested, then you will only get a return of the money you put in.  If you leave after the vesting period you will get to keep the employer’s contribution as well as your own.  The catch would be that you can’t just take and spend this money.  It will be put in a locked in account that is designed to limit your access to the money until your retirement.

Will it adjust to the cost of living?
Try to find a reference to indexing on your pension statement.  Indexing means that the amount of benefit paid out to you will increase along with the price of everything else.  To do this, indexed pensions will use a measure, like the Consumer Price Index (CPI) and will also specify the frequency of the indexing (usually annually).  This is a very nice feature to have since people are living longer.  If you retire at 60 and live well into your 80s, price changes could be substantial.  An indexed pension will help you keep up.

Does it adjust for other government benefits that you’ll receive?
If you’re planning to retire before age 65, try to find out if your pension has bridging benefits.  A bridging benefit is like a temporary supplement.  It’s an additional dollar amount designed to mimick government benefits like CPP and OAS until you begin to receive them.  For a visual that’s true to its name, picture  the age that you want to retire at one end of a bridge and normal retirement age, as defined in your plan, on the other side.  As you’re crossing the bridge, at the ages between your retirement and the normal retirement age you’re given additional money.  Once you’ve crossed the bridge, it’s gone.  With all of the changes to CPP, it can be to your advantage to defer taking it until age 65 if you have this pension provision.

From the general  terms that have been described: vesting, indexing and bridging there are many variations on the type of pension plan that you can receive.  Be sure to read definitions in your plan carefully and talk to someone who can explain the implications of their subtleties. Your pension is a foundational part of your retirement plan.  So if you don’t have one – be sure to find out how much you would need save to create a sufficient stream of income during retirement.  Your retirement depends on it!

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