Finally got the tax return all done. We will get a refund of $4,772.46 total for my wife and me combined thanks to RRSP deductions and tuition credits. It would have been even more had we not reduced the amount of tax deducted on my wife’s paycheques for part of last year. We are planning on applying the entire tax refund to the student line of credit. It is a good investment as it will save us not only over $200 in interest over the coming year, but over $200 every year going forward until the line of credit is completely paid off.
We have actually decided that rather than keep our payments to our line of credit constant (ie. after paying down $4,772 having less go towards interest and more towards principal, hence paying off the loan sooner) we will only pay just the interest every month (which is what we have been doing up until now) and allow the interest payments to decrease. This will be a motivating factor, motivating us to apply the entire tax refund to it. If, after applying the entire refund to the line of credit, there were no change in our monthly payments (only a change in the length of time until it is paid off), I think we would be less motivated to apply the refund to it. I think the bank is going to force us into an amortization schedule eventually but even then we’ll still apply our tax refund to it every year (assuming we have maximized our RRSP contributions, which we have so far).
According to this article in the Globe & Mail,
“Capital gains tax to stay?” it doesn’t look like the capital gains tax will be gone any time soon, as the Conservatives promised while on the campaign trail early this year. They had promised specifically for “the elimination of the tax on capital gains reinvested within six months.”
Cutting the capital gains tax is such a complex undertaking that it may not be finalized in time for the federal budget expected next month, Finance Minister Jim Flaherty suggested yesterday.
The elimination of the tax on capital gains reinvested within six months was a key Conservative Party election promise, aimed at driving economic growth by rewarding Canadians who reinvest their money to create jobs.
After a speech to the Surrey Chamber of Commerce yesterday, Mr. Flaherty would not confirm that the capital gains proposal would not be in the budget. But he admitted that the government is still holding consultations on how to make the changes.
“I would be less than candid with you if I said that that was not quite challenging to accomplish in the short term,” he said.
Hints of a delay follows recent speculation that the capital gains tax program needs to be reworked or narrowed in scope, otherwise it could end up costing Ottawa between $1-billion and $2-billion annually.
Still, Mr. Flaherty said the Conservatives are committed to keeping all of their election promises on taxes, which included reductions in the good and services tax.
There were a couple of blog articles recently about investing inside an RRSP vs. investing outside an RRSP. Frugal Focus discusses a report by Phillips, Hagar & North called “The Retirement Savings Debate: Inside or outside the RRSP structure.” He makes note of the fact that
the publication of this report preceeds two potentially important events – the November 2005 announcment by the former Liberal government regarding changes to taxation for dividend income and the yet-unrealized election promise by the new Conservative government to allow capital gains to be eliminated for individuals on the sale of assets when the proceeds are reinvested within six months
The Canadian Capitalist orginally blogged about this and focused on an article by Derek Foster (author of “Stop Working”) in Canadian MoneySaver magazine that discussed ways of investing outside your RRSP. Foster has some interesting ideas, like this one:
Suppose you were planning to put $6,000/year into an RRSP to save for your retirement. You would be contributing to your RRSP and getting a portion of that back because you could use the RRSP contribution as a deduction. Thus, your out-of-pocket annual expense would be $6,000, less the amount of tax money you have refunded.
Another method of achieving the same result is to take out a secured line of credit (let’s say $100,000 @6%) and invest it in good quality, blue chip, dividend-paying equities. Now you’ll be paying the $6,000 towards interest instead of putting it into an RRSP, but you will still get the same deduction as your out-of-pocket expenses are exactly the same! Money borrowed to invest is tax deductible. The only difference is that now you have $100,000 invested in a non-registered account that holds dividend-paying stocks rather than a contribution of $6,000 every year in your RRSP. You get the benefit of the dividend tax credit, while still getting a full deduction on the $6,000 interest payment (exactly the same effect as contributing to an RRSP).
The Canadian Capitalist has a good argument for why leveraging may not work. The Phillips, Hager & North report mentions leveraging as one of the purported advantages of investing outside of an RRSP, although they mention that “borrowing money to invest in a non-registered accoutn has risks that are not addressed. . . ”
I strongly recommend reading the Phillips, Hager & North article. It is only 7 pages of easy-to-read material. Here is the conclusion though, for those with little time on their hands:
Our analysis shows that saving for retirement using a registered plan (RRSP) is more beneficial than saving in a non-registered, taxable account. There are a few exceptions to this, but for the most part, this conclusion will hold true for the majority of middle- and upperincome earners.
I never thought I would write a blog post with the words “special offer.” I hate gimmicks. Anyways, I just wanted to let my fellow Canadian taxpayers know that you can you save $4 at Ufile.ca (regular price $14.99) by going to this special offer page and filling in your name and email address. I used Ufile.ca last year for the first time and it was great. The previous years I used a free trial version of TaxWiz and then printed out the information and mailed it my return but I got tired of doing that. Ufile.ca is free for anyone with less than $25,000 income as it was for me last year when I was a student. I liked it so much that I think I will use Ufile.ca again this year. I think it’s definitely worth the $10.99 price after the discount. A filed return for a second family member such as a spouse is an extra $5 and extra dependants are free.
The other big online tax service, TurboTax Canada (formerly QuickTaxWeb) is $19.99 for the first return and $10.00 for each additional return. So for a family of 2, you are looking at $30 vs. $15.99 for Ufile.ca after the discount. QuickTaxWeb’s website is also filled with promotional crap for Norton products.
Update: to the Ufile.ca deal, you actually have to pay by February 28. This means you will have to fill in some basic data then go to the payment tab and pay by credit card. Then you can return to Ufile.ca as much as you want to get your return all ready to file.
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.
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.
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.
The CBC reports that Ottawa has announced new policy on popular income trusts:
On the eve of an anticipated federal election, the governing Liberals announced new tax guidelines Wednesday that make dividends more attractive for investors but leave tax policy on income trusts unchanged. . . . The federal changes . . . would reduce personal income taxes on dividends, which the Finance Department says will help level the playing field between corporations and income trusts.
Note that it says they are only reducing personal income taxes on dividends, which was made more clear later in the article where Monte Solberg, Conservative finance critic is quoted as saying “pension plans will not benefit by this tax break that will go to individual investors.” The article continues:
The tax reduction will take the form of an enhanced dividend “gross-up” and tax credit to make the total tax on dividends received from large Canadian corporations more comparable to the tax paid on distributions of income trusts, and to eliminate the “double taxation” of dividends at the federal level.
The article also provides some important warnings about income trust that should be heeded:
A study released Wednesday says that despite the recent bloodbath in income trusts, the sector may still be overvalued by 28 per cent, or $20 billion. ‘Much of the overvaluation stems from abuses in the financial reporting, valuation and marketing of business trusts,’ concludes Accountability Research Corp., an affiliate of Rosen and Associates forensic accountants. . . . The study says the tax advantage of the trust structure has been overstated as the motivation for the mass conversion into trusts of corporations outside the energy and real estate sectors. ‘Rather, it has been the opportunity for selling owners to receive inflated prices well above what strategic industry buyers and professional investors alone would be willing to pay. Investment bankers have been motivated by the $1.4 billion of inflated underwriting fees that they have received since Jan. 1, 2001. Many have taken advantage of ill-informed investors seeking higher cash-yielding investments.’
This came as no surprise to me, as it was something my advisor told me about a while back. And one further blow to the non-energy, non-real-estate trusts:
Accountability Research said its examination of the 50 biggest income trusts outside the energy and real estate industries found that less than two-thirds of their cash distributions are actual income. The rest is a return of investors’ own capital.