I found this article, “The Coming Collapse of Income Tax” to be an interesting read. Some may find it far-fetched but I think many of the points are well-grounded and logical. The author, Thomas Frey, is a futurist (I had no idea you could make a living out of being a futurist). Personally, I agree with the fact that we spend far too much time every April preparing our tax returns, or paying others to prepare them for us. As many Canadians probably know, “The First World War had mostly been financed by traditional means, but in 1917, a tax on income was introduced as a temporary measure to fund the war.” I believe the US brought in income taxes during the civil war, and then removed them and reinstated them a few times before bringing them in for good around the time of World War I. Can they be removed again in Canada or the US? The article certainly presents some interesting arguments for how this might happen.
Spending less money on food is something I probably should have listed as one of my 2006 goals. I don’t even need to look at my Gnucash (accounting software) reports to know that I spend too much on food.
The first problem is that I eat out for lunch every day at work. Being able to eat out for lunch is sometimes important as it gives me an opportunity to talk to work colleagues about work-related or non-work-related things and gives us a chance to socialize. Sometimes it is necessary (for business meetings with external people, for example). But it is never necessary to eat out for lunch every day of the week. Recently (in November 2005) I started limiting the amount of money available in our chequing account every week (one of my goals for 2006). This has forced me to eat out less often. I started out slowly, and now I bring my lunch to work at least 3 times per week.
The second problem is that we spend too much on groceries. The nearby Safeway has just about everything you would need but the prices are really expensive, especially for produce, something which I didn’t until recently. A few months ago, I discovered the Dan-D Market, also nearby. I began going there for a few unique international products (rice noodles, pot stickers, pad thai ingredients, oriental sauces, etc…) which are either absent from Safeway or just too expensive. Then I started going there to buy produce which I realized was always at least 2-3 times cheaper than Safeway! I then discovered they have lots of canned foods are great prices, an excellent bulk section with every kind of grain you can imagine, and great breads (from a local bakery) as well. They also have a small deli where I have bought cheese and cold cuts on occasion, but I had never actually compared the prices between Dan-D and Safeway until yesterday when I did a comparison. The peppered salami was $1.49/100g at Dan-D and $2.49/100g at Safeway (on sale for $2.29/100g). A block of Parmesan cheese at Dan-D was $16/kg, vs. $30-$40/kg at Safeway (for grated and block). It’s amazing how much I save at Dan-D. I now do my shopping there exclusively and only go to Safeway for things that Dan-D doesn’t have (which is rare).
Another small problem is that we tend to go out for dinner a bit too frequently. But again, the fact that we have limited the amount of available cash in our chequing account every week and stopped using our credit cards has helped in this area as well.
I recently found some other suggestions for spending less on groceries:
Now that we are all done school, we are now at the point where we need to think about paying down our debt. With on the order of six figures of student loan debt, it’s hard to feel like we’re making any progress towards paying it down. Although we have not been forced into an amortization plan yet by the bank, we have been paying the interest and some principal every month. This will ensure that the principal is at least going down a little. If we only paid the interest every month, the principal would never decrease (although it would decrease in real dollars due to inflation).
We could pay more in principal every month to our loan, and this is not a bad idea. Every dollar paid to the principal is sort of like a dollar contributed into a fixed-income investment which pays interest at the same interest rate as the loan. So paying down principal is like a fixed-income investment. Instead of increasing the principal we pay down every month, we have chosen to maximize our RRSPs first and foremost, which is something I discussed in a previous article. Under the assumption that over the long term our RRSP will achieve a rate of return roughly similar to the loan interest rate, this is a great idea because the return of the RRSP will match the return of the loan (again, treat the loan as a fixed-income investment) but we will also get a bonus: a tax rebate will be generated from the RRSP deductions (because income contributed into an RRSP is tax-deferred).
Since we have made our RRSPs our #1 priority (for the reason mentioned above and described here), we maximized our RRSP contribution room last year and will again maximize our RRSP contribution room this year, at the expense of less principal applied to the loan monthly. In April 2006, we plan to receive a hefty tax refund generated from our RRSP contributions. Since we have already maximized our RRSPs, we do not need to use contribute the tax refund into our RRSPs. Instead we are planning on applying the entire amount against the student loan. This is only possible because we already have an automated savings plan for vacations and other short-term goals, and therefore we do not need the tax refund for any other purpose.
It turns out my parents also used this technique for many years while paying down their mortgage on their home and on a second rental home, allowing them to pay it down faster and become debt-free sooner.
That’s sort of a random smattering of data. Would have been nice to see the original data. Wow, I didn’t realize that retirement planning could be harder than raising a child. We should definitely bring in some mandatory “business” in high schools. When I was in high school we had a mandatory “business education” class where we learned about economics, taxes, investments, etc… It was a really great class, but sadly it was removed from the British Columbia school system the year after I took it. Such a class would be really useful in teaching people how to plan for their retirement.
Here’s the rest of the article,
Seventy percent said they would switch to a financial services firm with a reputation for making the financial planning process easier.
Nearly four out of 10 consumers said it is difficult to understand most financial services information. Forty-two percent said they spend more time researching their new car purchases, while 23 percent said they do research on a financial advisor.
A third of consumers say friends, relatives and co-workers are their most reliable sources for financial information.
Today, the Tories announced that they would allow deferral of capital gains taxes. They would
. . . eliminate the capital gains tax for individuals who reinvest profits earned from selling real estate or financial investments within six months
This would be quite a significant change from the way things work right now. These days, if you sell a stock or mutual fund, for example, and buy a new one with your cash, you have to pay taxes on your capital gain when you sold the investment. This proposed policy would effectively allow Canadians to transfer money from one investing into another (with up to 6 months between selling and buying) without paying taxes (hmm, sounds like an RRSP!). You will, however, pay taxes when you eventually sell your investment, when you retire, for example, and cash out:
But he pointed out that the move only defers the payment of capital gains tax. Those taxes will still be paid at the point when the assets are sold without being reinvested. “At some point people need to check out – they need to take out those investments and live off them,” Williamson said. “There’s nothing here that will help individuals who are checking out.”
So it is acting as a tax deferral mechanism just like RRSPs. And some final words from the Canadian Taxpayer’s Federation:
John Williamson, federal director of the Canadian Taxpayers Federation, called the Conservative measure a positive move that would create new pools of capital for businesses. Investors would be able to better manage their portfolios because it will be possible to sell a stock and re-invest without paying capital gains tax, he said. “This is very good, and significant.”
This does not mean that you should vote for the Conservative party. You should of course, look at ALL the issues. This tax cut will have consequences, such as lost revenue for the government which will have to be made up somehow, either through higher taxes somewhere else, decreased spending, or decreased surplus/increased deficit.
Finally started the switch from BMO to PC Financial. Switching banks is hard, especially when you have 2 automatic pay-cheques and 9 automatic bill payments/withdrawals set up per month. But this week we officially got the ball rolling by sending new void cheques to all the appropriate people, by fax, mail, or online. We made sure that there is enough money in both the BMO and PC accounts before switching as I’m sure the timing between our pay-cheques and the bill payments/PADs will be off a bit and we want to avoid those NSF fees. It’s a pain in the ass, but once it’s all over with, I won’t regret making the switch.
This is somewhat old news, but still newsworthy: Bill Miller’s Legg Mason Value Trust Fund has beaten the S&P500 for the 15th consecutive year. Canadian investors can invest in this fund through the CI Value Trust fund.
It is interesting that in the past two and a half years, he hasn’t been able to beat the S&P 500 Equal-Weight Index (^SPXEW) (as tracked by the Rydex Equal-Weight S&P 500 ETF (RSP)). This plot goes back a bit further. You can see that Legg Mason Value Trust has only beaten the S&P 500 Equal-Weight Index (^SPXEW) in the last 6 months. In 2005, 2004, and the portion of 2003 (the index’s year of inception), ^SPXEW has beaten Bill Miller’s Fund.
I found this article on the Canadian Capitalist a while ago, “Asset Allocation Explained” and the part I found most interesting was the link to some comments by Jonathan Clements (from the Wall Street Journal) on Asset Allocation:
I used to agonize over what percentage of a portfolio should be allocated to, say, emerging-market stocks, or high-yield junk bonds, or large U.S. companies. But now, whenever somebody asks me how much to allocate to a particular sector, I usually respond that — within reason — it doesn’t much matter [sic].
Yeah, this takes some explaining. If you tap into a broad market segment using a well-diversified mutual fund, you can be pretty confident that you will make decent money over 30 years. Moreover, over those 30 years, there probably won’t be a radical difference in performance between, say, U.S. stocks and foreign stocks, or between, say, intermediate-term government bonds and intermediate-term corporate bonds.
With that in mind, you shouldn’t fret too much over your precise allocation to large stocks, small stocks, foreign stocks, REITs, corporate bonds, government bonds and other market sectors. Instead, what counts is commitment.
In other words, whether you allocate 15% or 30% of your stock portfolio to foreign markets probably won’t make a whole heap of difference over the next 30 years — provided you stick with your target percentage. The danger: You get greedy or fearful, trade in and out of your foreign funds and end up missing out on the sector’s handsome long-run gains.
As someone who has agonized over my own allocation, as a fan of rebalancing and as someone who has seen the negative effects of too much performance-chasing and trading in my own portfolio, I found these words comforting. Diversify to reduce risk to a level that is appropriate for your situation. Pick an allocation, stick with it, and rebalance when required.
As reported by the Canadian Capitalist, TD ETFs are history. The TD announcement says that “the decision to terminate the Funds is based on a lack of investor interest in the Funds and low trading volumes since their creation.” The TD ETFs (TAG and TAV especially) offered some real choice for semi-passive index investors in Canada. TAV (TD Select Canadian Value Index Fund) tracked the Dow Jones Canada TopCap Value Index and TAG (TD Select Canadian Grows Index Fund) tracked the Dow Jones Canada TopCap Growth Index.
With no foreign limits in RRSPs anymore, it is easy for Canadians to get any US and international ETFs they like. Barclays iUnits, however, is the only provider of ETFs for the domestic market. The selection is mostly limited to the S&P TSX 60 Uncapped Index (XIU) and the S&P TSX Composite Capped Index (XIC), a Canadian Mid-cap Index (XMD), and now, a Canadian Dividend Index Fund (XDV). From this article in the National Post,
Advisors who specialize in creating ETF portfolios don’t view TD’s departure as a serious setback for investors. The TD ETFs “never took off and they never really put much marketing effort into it anyway,” says Fred Kirby, president of Armstrong, B.C.-based Dimensional Fund Advisors. In his permanent portfolios Kirby is substituting BGI’s new iUnits Dividend Index fund (XDV/TSX) for the TD Canadian Value ETF (TAV/TSX).
I was thinking about buying TAV myself, but may have to look at XDV a little more closely as well as a way to invest stocks with higher dividend-yields and slightly lower P/E ratios compared to XIC. I still wish there was more choice in the Canadian ETF and index market and if I had a bit more money I would forget ETFs altogether and just make my own index (0% MER), starting with equal amounts of the top 10 holdings of the large-cap Canadian indexes.
I’ve often heard the suggestion that if you are expecting to get a raise in the near future, make your RRSP contributions now, but wait until you are in that higher tax bracket to make that RRSP deduction. You’ll find this advice in many sources.
Is hoarding the generated deductions until you can make the most use of them, ie. when you are in the highest tax bracket a beneficial strategy? Let’s analyze the two cases:
- If I use the RRSP tax deduction now, I can take the tax refund I receive in April and invest it now, rather than later.
Let’s say my marginal tax rate is T1. So making an RRSP deduction of R now will generate an RT1 tax credit in April. Let’s say that I am planning on getting a raise, or changing to a new, higher-paying career n years from now. Let’s assume I can reinvest my tax rebate and earn an annual rate of return of i. So in n years, my tax rebate will have grown to R(T1)(1+i)n.
- If I instead use the RRSP tax deduction later, when I am in a higher tax bracket of T2, I will get a larger tax refund, but I will have lost out on any earnings my money might have made in 1). My tax refund will be RT2.
So, it makes sense to take that RRSP deduction if T1(1+i)n > T2. It doesn’t look so complicated after all. Let’s plug in some numbers. Let’s say that you’re currently in a 31% tax bracket, and are expecting to move into the 38% tax bracket in the future. Let’s also assume that i=7%. Solving for n, we get n > 3. So if you are expecting a raise more than 3 years in the future, it makes sense to make that RRSP deduction now. And a smaller change from the 31% tax bracket to the 34% tax bracket yields n > 1.4. You can also fix your time n and solve for the new tax bracket T2.
Since raises are hard to predict with certainty, delaying RRSP deductions will most likely only make sense for people who are moving up several tax brackets (ie. those going to school earning summer/co-op income while making RRSP contributions and transitioning to full-time careers). Although even in this case, because it is not possible to predict the future, I would take the tax rebate now rather than later.
It is important to realize the difference between contributions and deductions. There is no reason why you shouldn’t make those contributions as soon as possible. I’ve heard people telling me before, to not put money into RRSPs until you are older and “until you have taxable income are able to make use of them.” This is utter nonsense and comes from the confusion between contributions and deductions. Most working adults make their contributions and deduct the full amount on their next tax return, so contributions, to them, are one and the same. But in general, they aren’t.
Make your contributions as early as you want (as soon as you have the room) so it can grow inside the RRSP without having to pay tax on any dividends or capital gains you might generate when you buy & sell. Use your deductions later on, as soon as you have taxable income, or later, if you plan on getting a raise (check to see if it’s worthwhile using the formula above).