Canada’s HST unfairly taxes mutual funds

January 22nd, 2010

As far as financial news goes, one of the top topics for Canadians in the past year, particularly those in Ontario and BC, was the Blended Sales Tax (BST), also referred to as the Harmonized Sales Tax (HST). We’ve discussed the impact of the HST with several Canadian financial planners, and have summarized the consensus opinion here.

While no new taxation ever gets a glowing welcome, the HST has proved particularly irksome for Canadian investors because it will increase the cost of investment fund management fees by 8% (in addition to the GST on investment fees of 5%). When the HST is introduced in July, taxes paid on mutual funds will surge by as much as 160%, according to IFIC. This is particularly concerning since the majority of mutual fund holders are middle class Canadians, and more than 70% of funds are held in retirement savings vehicles.

This is unfair to investors as it is a tax on investment in the economy as well as on their retirement plans. This is viewed by opponents as a new taxation on savings, one that unfairly penalizes middle income Canadians (annual income $50,000 – $100,000), people without company pension plans, those nearing retirement and many who are already retired. The fact is, these are the individuals who are most likely to be invested in mutual funds. The issue here is not that mutual fund services are being taxed, it is that they are going to be more highly taxed than other financial vehicles. While other investments such as GIC’s, Bonds and individual stocks will not be subject to this tax, investors generally lack the interest and time to make prudent decisions on their own. So investors are now being penalized with another tax when accessing professional advice for their retirement savings.

The mutual fund industry has worked hard to try and stop this tax. The only progress has been to get Ontario Finance Minister Dwight Duncan to back the idea of getting the federal government to exempt management fees from the GST thereby eliminating the provincial portion of the HST.

What we need now is for investors to voice their concerns with this unfair tax on savings. The Ontario government has exempted small consumption items like a cup of coffee, newspapers and some foods priced under $4 from the tax, yet it will happily tax Canadians who seek professional advice for their retirement savings.

Investors should not be taxed on the cost of advice and professional management of their investments in the Canadian economy. With the billions of dollars of government waste just reported by the Ontario Auditor General we believe the additional taxation of fund management fees is unnecessary and unfair. If it cannot be eliminated, then the Ontario portion of the tax should at least be reduced. Many Ontarians feel the same – in fact, a recent poll by Ipsos Reid found that 74% of Ontarians oppose the HST.

If you would like to make your concerns known, please contact the following people or organizations:
Federal MPP, Dave Mackenzie
Canadian Taxpayers Federation (They have an online petition)

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Posted in Canadian Mutual Funds, Certified Financial Planner Tips & Advice, Investing, Taxation in Canada | No Comments »

Pension Splitting Gives Canadians a Rare Tax Break

January 22nd, 2010

The Canadian financial advisors we speak with are lamenting the creeping fees and taxes impacting their clients, and admit that it’s hard to find a good news tax story these days (think HST).

But one tax measure that has brought good news to the homes of many retired Canadians is the Pension Splitting rule that was brought into effect in the 2007 tax year. For those households that qualify, the tax savings generated has been significant.

It is especially effective in households where one spouse draws a pension (or draws income from a RRIF) while the other does not. Up to 50% of the pension can be transferred to the tax return of the other spouse, reducing the combined taxes payable.

Trying to calculate the optimum amount to transfer can be a daunting task. Tax preparers and individuals using software programs have no problem. That said, the calculation is not automatically done. In fact, the preparer must elect to split the pension income. Given the potential for significant savings you don’t want to overlook this election.

For more information, visit the Government of Canada’s page on income splitting.

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Posted in Estate Planning, Financial Planning, Income Splitting, Investing, Spousal RRSP, Taxation in Canada | No Comments »

Critical Illness Insurance Revisited

November 21st, 2009

Critical illness insurance is still a huge seller for Canadian financial advisors and financial planners. We’ve written on critical illness insurance in the past, but here’s a recap of some details on these products, as provided to us by the financial planners selling them.

Our society is living longer, and that’s good news for all of us. But that doesn’t mean our longer lives are free from health complications. In fact, you have a greater chance of getting a critical illness before you’re 75 than you do of dying. For example, women have a 1 in 9 chance of developing breast cancer, they only have a 1 in 27 chance of dying from it, and men have a 1 in 7 chance of developing prostate cancer, and only a 1 in 26 chance of dying from it.

The majority of people who are diagnosed with a critical illness before age 75 recover and get on with life. But the challenge for those affected by critical illness are the unexpected costs. These can include medicine the government doesn’t cover, travel to and from medical appointments, and costs for help you may need at home. Eligible costs can also include time off work for yourself or a caregiver (e.g. your spouse).

Introducing critical illness insurance

That’s where critical illness insurance can help. Depending on the plan you choose, critical illness insurance can provide a cash benefit ranging anywhere from $25,000 to $2,000,000. You can spend this cash benefit as you like if you’re diagnosed with any of the covered conditions and you survive the waiting period (30 days in most cases).

Covered Conditions

Plans vary, but commonly covered conditions include:

  • Cancer
  • Coronary Bypass
  • Heart Attack
  • Stroke
  • Alzheimer’s Disease
  • Aortic Surgery
  • Benign Brain Tumour
  • Blindness
  • Coma
  • Deafness
  • Heart Valve Replacement
  • Kidney Failure
  • Loss of Limbs
  • Loss of Speech
  • Major Organ Transplantation
  • Major Organ Failure (on waiting List)
  • Motor Neuron disease
  • Multiple Sclerosis
  • Occupational HIV Infection
  • Paralysis
  • Parkinson’s Disease
  • Severe Burns

A range of options

Insurers have added some interesting options with critical illness insurance policies, including recovery benefits and living care benefits.  Another interesting option is the Return of Premium rider. If you reach age 75 without a claim, you will be reimbursed for all your premiums (up to $25,000).

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Posted in Certified Financial Planner Tips & Advice, Critical Illness Insurance, Estate Planning, Life Insurance | No Comments »

Identity Theft Insurance: Is it for you?

November 21st, 2009

It’s a new product for financial planners to sell, but how do smart Canadian Financial planners and financial advisors really feel about identity theft insurance? Read on as we summarize the comments they’ve shared with us.

With all the media coverage of identity theft – a crime that has affected 10 million victims in the US, according to some estimates – it’s no surprise that some insurance providers have recently launched new products aiming to earn a profit for consumers’ peace of mind over this new threat. New identity theft insurance, credit monitoring plans, and other services, are flooding the market regularly, often with dire warnings of what could happen if we don’t sign up. How do you know whether you should buy identity theft protection?

What is identity theft insurance?

Identity theft protection plans are a new type of “insurance” that claims to protect you from the costs associated with identity theft and the time-consuming process of cleaning up the mess left behind when somebody steals your identity. Credit monitoring, a related service, reviews your credit report at one of the three major credit reporting agencies and notifies you of any changes, such as a change in your address, new credit accounts in your name, or inquiries on your account, that might indicate a problem.

Should you buy identity theft insurance or credit monitoring?

First, keep in mind that many of the identity theft insurance plans and other related services are being offered by the same organizations that you have trusted to protect your personal information, such as banks and credit card companies. If you feel unsafe about how your personal information is handled by these institutions, should you be buying additional products from them? First, learn more about their policies for protecting your data (this information is often posted on their website).

Many consumer experts say that most people don’t need identity theft protection. Why? Identity Theft Insurance doesn’t reimburse you for money that is stolen from you. Some policies pay expenses such as lost wages (often capped at $2,000) and legal fees, but a lawyer is usually not required to resolve an identity theft case. The main requirement is your time in dealing with creditors to provide documentation and work out the issues. Even though some plans claim to cover the costs associated with resolving an identity theft case, the burden of dealing with creditors will still fall on you because most creditors won’t deal with anybody else.

Finally, identity theft is usually committed by someone we know, often family members, but identity theft insurance often doesn’t pay if the crime is committed by a family member, so you’re not protected against the thing that is most likely to happen.

As an alternative to spending your hard-earned money on identity theft protection insurance, take steps to prevent being a victim. Protect your social security number. Pay bills online instead of having them mailed to you. Shred documents that contain personal information. The old adage applies: an ounce of prevention is worth a pound of cure.

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Posted in Certified Financial Planner Tips & Advice, Identity Theft | 2 Comments »

An Identity Theft Checklist

November 21st, 2009

One topic that is increasingly mentioned in our conversations with Canadian Financial Planners and Financial Advisors is identity theft. We used their input to create the identity theft checklist below.

Identity theft is a hot topic in the media. This type of crime cost Canadians over $16 million in losses in 2006 according to government statistics. Here is a list of some ways you can protect your personal information and prevent yourself from falling victim to the common identity theft methods.

Your Mailbox

- When you’re away, ask a neighbour to promptly pick up your mail or instruct Canada Post to hold your mail.

- Take note of when credit card and utility bills are supposed to arrive. If they are late, contact the credit card company.

- Reduce the number of sensitive documents mailed to your home by switching to secure online banking and bill paying.

Personal Papers

- Don’t keep a Social Insurance Number (SIN) card or birth certificate in your wallet.

- Use a shredder to destroy all papers with personal or financial information.

- Use a safe or a safety deposit box to store key identification documents such as SIN cards and birth certificates.

Computers

- Use hard-to-crack passwords with a combination of upper and lower case letters, numbers and symbols. Don’t use automatic login features that save your user name and password.

- When using the Internet, take advantage of technologies that enhance security and privacy, including digital signatures, and data encryption.

- Use a personal firewall, install virus protection software and disable file-sharing software to block unauthorized access to information in your computer. Update these security features regularly.

- When shopping or banking online, only send personal or financial information after ensuring there is a secure transaction system. Signs of a secure link between your computer and a web site include an icon of a lock or unbroken key at the bottom right corner of the screen, or a web site address that begins with https://.

- Disconnect or disable your wireless equipment when not in use.

- Always be suspicious of e-mails from financial institutions asking you to provide personal information online. If you are uncertain, look up their phone number in the telephone directory and call them.

PIN and Password Poachers

- Choose an access code (PIN) that can’t be figured out easily. Do not use a combination that uses your name, telephone number, date of birth, address or Social Insurance Number.

- Make sure no one can see you punch in your PIN at an automated banking machine (ABM) or at a point-of-sale terminal by covering the key pad with your hand.

- Only use ABMs located in financial institutions and businesses you are familiar with. (Criminals have set up real ABMs in order to capture card and PIN information.)

Credit Cards

- Don’t give credit card numbers on the telephone unless you are sure who you are speaking with.

- Review all credit card and bank statements as soon as you receive them so discrepancies can be reported promptly.

Verify Credit Reports

- Ask for a copy of your credit report from major credit bureaus once a year to ensure they are accurate. Reports are available at no cost from each credit bureau once a year.

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Posted in Certified Financial Planner Tips & Advice, Debt Reduction, Identity Theft | No Comments »

Canada’s Tax Free Savings Accounts (TFSAs)

November 21st, 2009

One of the hottest products for Canadian Financial Planners over the past year has been the Tax-Free Savings Accounts (TFSAs). We’ve had some good discussions with Canadian Financial Advisors on TSFAs, and put the following summary together as a result.

Canadians are rapidly gaining awareness of an attractive new savings vehicle: the Tax-Free Savings Account (TFSA). A TFSA is simply a tax-exempt savings account which is available to any individual aged 18 and over. The maximum contribution is $5,000 a year. Unlike RRSPs, TFSA contributions are not tax-deductible, and the investment earnings are not subject to income tax. Any unused TFSA contribution room can be carried forward, and amounts can be withdrawn at any time. So in many ways, TFSAs are RRSPs in reverse. Instead of giving tax deduction for contribution and making all withdrawals taxable, the TFSA offers no deduction for deposits, but no tax of any kind will be imposed on future investment returns.

TFSA Benefits

The magic behind the TFSA is in its versatility. It is not simply a tax measure designed to help low-income Canadians, but rather a vehicle that can benefit almost every Canadian, regardless of income or stage in life.

For seniors, the plan provides an additional savings device free of tax. This will be an attractive channel to continue saving beyond the current cut-off age of 71 for making RRSP contributions. Moreover, upon the death of the TFSA account holder, assets can be transferred to a surviving spouse or child (or in fact anybody), tax-free without affecting the recipient’s contribution room. For high earners who find that their RRSP contributions are restricted by the current limit of $20,000, this is a welcome addition to contribution room. For the nearly 40% of paid workers who are covered by a registered pension plan, TFSA provides a way to compensate for the pension adjustment that limits RRSP contributions. So in many ways the TFSA can be viewed not as a rival but rather a companion to the RRSP in Canada’s financial landscape.

The TFSA’s flexibility also makes it ideal for immediate needs such as emergency funds as well as a tax-effcient way for Canadians to finance consumption. The account can be accessed multiple times during one’s lifetime to serve as emergency funds, and to bridge periods of income volatility. This liquidity feature of the TFSA plan is of great importance as it will probably work to limit or even eliminate uneconomical behaviour such as RRSP withdrawal. In fact, the liquidity feature is viewed by Canadians to be as important as the tax-free feature in the decision to open a TFSA.

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Posted in Certified Financial Planner Tips & Advice, Financial Planning, Investing, RRSP - Registered Retirement Savings Plans, Tax Free Savings Accounts - TSFA | No Comments »

Common Sense Money Management

November 21st, 2009

We’ve culled some tips from Canadian financial advisors and financial planners on our favourite topic: good money management. They shared with us some of these vital skills that aren’t taught in school.

“It’s staggering when you consider how many North Americans are living just a paycheque or two from personal bankruptcy. Our over-reliance on credit and consumerism keep many people in a spin where they’re living well but struggling to make ends meet.”

What can we do? Keep it simple, and follow these three rules:

1. Live Within Your Means

Sounds blindingly obvious, but consider this: For every dollar of disposable income they have, Canadian households owe nearly $1.25, a record-high debt level, and nearly double the 67 cents per dollar of income they owed in the mid-1980s (source: CanWest, Jan, 2007). We’ve read all the news about the sometimes excessive risk that lending institutions have taken, but how about the risk faced by those who’ve borrowed? We seem to have forgotten the old fable about the ant and the grasshopper, with little or nothing stored away to weather a rough spell.

There will always be families that find themselves in dire financial straits, but for the bulk of households, family income is sufficient to support a growing family and a healthy lifestyle. The problem is we have become obsessed with keeping up with the perceived quality of life we see in the media and in our communities. We all want what the others have, and the more that others have it, the more we feel we deserve it. Don’t fall into the trap of believing you deserve more than you’ve earned. Hard work often bestows rewards gradually, and the trick is finding the right pace for rewarding yourself.

2. Know Where Your Money Goes

Ever get the feeling you’ve got a hole in your pocket? You can’t fix a cash flow problem without understanding where the money goes. A very simple form of budget tracking can go a long way toward helping you recognize where your dollars are spent. For some this is a paper ledger, for others an Excel spread sheet, and others prefer personal finance software like Microsoft Money or Intuit’s Quicken. Whatever works for you, do your best to ensure the majority of your income and expenses are accounted for. Tracking these over time will help you see how you can make relatively painless changes to your lifestyle to improve your financial situation.

3. Understand The Financial Reality

If you have a mound of debt beneath your lifestyle, you’re heading for a grim sense of reality. Why not pause now for a gut-check? Are you assuming you’ll get a big raise or bonus to offset your current debt? We tend to extrapolate trends with rose-coloured glasses, assuming things can only improve. Job losses are always a possibility, and so few Canadians have an adequate nest egg to cover an extended period without work.

History suggests that we should always be ready for adversity. As a generation, our grandparents didn’t take savings and debt issues lightly – it was viewed as vital to survival and independence. Let’s take nothing for granted, and benefit from a healthy sense of paranoia when it comes to personal debt.

These rules do require a different approach to money matters, but the end result will be a healthier financial picture and, more importantly, a wealthier perspective on spending and saving.

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Manulife Income Plus: An Insider’s Look at Guaranteed Minimum Withdrawal Plans

July 28th, 2008

Many Canadian financial advisors are being asked about the Manulife Income Plus product, which has received a lot of media attention of late. We asked, and compiled some comments from financial planners in the material below.

Guaranteed minimum withdrawal benefit (GMWB) plans closely resemble the variable annuity contracts available in the U.S., and they also have some features of segregated funds. In general, they are aimed at the conservative investor, those over the age of 55 and nearing retirement. The products combine a guarantee with some growth potential.

Some of the benefits of GMWB plans (in this case the ManuLife Income Plus) include:

Predictable income guaranteed not to decrease no matter how investments perform: You will receive your investment principal back through regular payments over a period of no less than 20 years. In addition, if you delay the commencement of your regular withdrawals you will receive a 5% increase in your guaranteed withdrawal balance each year that you defer withdrawals, to a maximum of 10 years.

Sustainable income that will last for life: your principal is guaranteed.

Potentially increasing guaranteed income to help offset inflation: If your investment portfolio grows, you have the opportunity to reset your guaranteed withdrawal balance every three years.

Benefits that ensure the smooth transition of your estate: Your investment proceeds pass directly to your named beneficiaries without the time delay and expense of probate.

The flexibility to change your investment: You can switch between funds or fund managers at any time. Fund managers include Franklin Templeton, CI Investments, Fidelity Investments, AIM Trimark and Mackenzie Investments.

The Best of Both Worlds?

Can investors really have their cake and eat it too? That is, get a guaranteed investment that will offer strong returns? The short answer is that there are always some trade-offs where investment guarantees are involved.

One drawback that you won’t hear in the marketing pitches for these products is the high management expense ratio (MER). The MER goes toward paying the fund’s operating expenses, including trading fees, salaries and commissions for staff, and promotional costs. The MER is subtracted from the fund’s total return before it is posted.

MERs for Guaranteed minimum withdrawal benefit (GMWB) plans tend to fall in the 3.2% or 3.3% range. Sure, nearly all investment products have some form of MER, but not that high. According to a 2007 article from The Globe & Mail, “The average MER among equity and balanced funds in Canada is estimated at 2.6 per cent.”

This high MER reduces your ability to benefit from strong markets. While it’s always nice to have a guarantee, receiving your principal back after several years is not so comforting when the effects of inflation are taken into account.

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Posted in Canadian Mutual Funds, Certified Financial Planner Tips & Advice, Estate Planning, Financial Planning, Investing, Retirement Planning | 14 Comments »

Your Privacy Rights

July 28th, 2008

The Personal Information Protection and Electronic Documents Act (PIPEDA) has caused some confusion for clients about financial advisors’ right to collect information about them. A 2007 review of the issue by the Privacy Commission clarified that not only were advisors expected to collect information from clients, they were required to collect it. Without access to this information, it is impossible for an advisor to confidently recommend the most suitable products.
Multiple regulations require an advisor to obtain personal information: know your client obligations, product suitability principles, privacy legislation and anti-money laundering rules.

Advisors are obligated to: 1) keep the information strictly confidential; 2) disclose who will be seeing the information; and 3) outline the reason they will see it.

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Make the Most of Our Strong Currency

June 28th, 2008

Our spending power in other countries has rarely been more attractive, particularly in the U.S. Here are some currency tips from Canadian Financial Planners to help you get the most from the mighty Loonie.

Exchange currency locally

It’s usually best to wait until you arrive at your destination before exchanging currency. While most major airports feature a currency exchange desk, you are likely to get a better rate directly from an ATM machine affiliated with a major bank.

Know the service fees

A recent article in The Globe and Mail highlighted some little-known costs of cross-border shopping. Whether you use your credit card, your debit card or you make a withdrawal from a U.S. bank machine, you’re typically subject to conversions done at a wholesale rate and then marked up by 2.5%.

In addition to a high currency conversion rate, there may be additional fees on purchases as well as returns. While Canadian debit cards will work at most retailers, consider that BMO charges 50 cents per debit purchase outside Canada, RBC charges 75 cents and Scotiabank charges $1.50. TD has the best fee structure in this area; they treat U.S. debits the same as Canadian ones.

Typically, your best bet is a credit card. You may earn loyalty points on your purchases, you have zero-liability if your card is stolen, and there are none of the extra fees that debit transactions and bank machine withdrawals usually involve.

You can avoid currency exchange fees by using a U.S.-dollar credit card. These cards rack up charges in U.S. dollars, which you then pay in U.S. dollars (done most easily from a U.S.-dollar bank account.

Cross-border car shopping

If you’re considering a vehicle purchase, you may want to give U.S. car dealers a look. While it’s not true for all makes and models, you can find much cheaper sticker prices south of the border. For example, one Globe & Mail article indicated that a Subaru Tribeca costs about $35,000 from a U.S. dealer, compared to roughly $55,000 in Canada.

As of Nov. 30, 2007, more than 166,000 Canadians had purchased cars in the United States, shattering the record of 112,826 set in 2006. A survey of auto buyers conducted by Maritz Canada Inc. found that 74% of those planning to buy a vehicle in the next 12 months would consider heading south. Those surveyed believed a $20,000 car would cost $3,200 less in the United States, a $30,000 car would be $5,180 cheaper and a $40,000 vehicle would cost $7,500 less at a U.S. dealership.

Be sure that you’re familiar with the requirements for importing a vehicle into Canada. This process is generally straightforward but can get delayed for days if things are done improperly.

Check border crossing volume

Want to know the wait-time before you head out for the border? Canada Border Services Agency provides border crossing wait times, updated hourly, at:

http://www.cbsa-asfc.gc.ca/general/times/menu-e.html

(Online) Shopping in the south

You don’t have to drive miles to get the most of our spending power. Many U.S. retailers have robust e-commerce sites and several shipping options for Canadian customers. Because of the North American Free Trade Agreement (NAFTA), Canadians do not have to pay duty on most American and Mexican manufactured items.

But be careful. Just because you buy an item from a U.S. store does not mean it was made in the United States. It’s quite possible it was imported into the United States first and, if so, you may be charged duty when it comes into Canada.

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Posted in Canadian Currency, Financial Planning | No Comments »

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