May 132015
 

Not in my Backyard 

I recently read an article about a lower mainland couple who doesn’t like how a neighbouring $2 million house sits empty all the time. The yard is unkempt, there are no cars in the driveway and the lack of human presence is “driving [the couple] slightly bananas.”

Sacré bleu! You mean to tell me that there are people who buy property only for investment purposes? How dare they offer above market price to purchase a house here, so that Canadians can unlock the full value of their real estate. What can we do with cash anyway? Buy a diversified portfolio of liquid assets like stocks and bonds to provide passive income for retirement? No thanks. I’d much rather put all my nest eggs into a single illiquid asset that produces no income, and lies on a major fault zone. 😛 Those pesky foreign investors who don’t even live here think they can just not contribute any waste to our sewage system, and not use the city’s garbage services, but somehow think they still have the right to pay the full brunt of utility tax and property tax. Some nerve! How dare those foreigners help fund our police, fire, and public education system when they don’t even have kids here to overcrowd our classrooms. It’s also unfortunate how quiet their house is all the time. Who would want to live beside quiet neighbours anyway? Not me. 🙄

Sarcasm aside, foreign ownership of real estate is a hot button issue around here. Should non-residents or non-citizens be allowed to purchase Canadian residential property?

There’s actually a petition to restrict foreign investment in Canada’s most expensive real estate market, which I’ve signed and shared on social media. To be frank I don’t believe this petition will bring about any meaningful change, but I think it’s an important discussion for fellow Vancouverites to have. 🙂

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click on image to sign the petition

There will also be a rally outside the Vancouver Art Gallery on May 24th, to focus on the problem of affordable housing for young people in a city where the average house costs more than $1 million. Feel free to attend and take a stand if you believe in the cause. 🙂

Foreign Real Estate Ownership

Some believe foreign ownership drives up the cost of housing which makes it less affordable to live in the city. But I think that’s largely a myth. The amount of foreign owned property is just a fraction of the overall market. Foreign investment laws haven’t changed much in Canada over the last decade. However mortgage interest rates have been cut in half over the same period. Raise the interest rate and watch as prices correct overnight.

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Apr 282015
 

Across the United States, tens of thousands of low income workers have lobbied to raise the minimum wage to $15/hr. This is one of the largest wage protest in American history, and it appears to be working. 🙂 Seattle, WA is the first to begin a multi-year transition to $15/hr minimum wage starting this month. The people of San Francisco, CA have voted to raise its minimum wage to $15 by 2018.

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In the state of Connecticut the government is trying something a little different to implement a higher wage standard. The current minimum wage there is $9.15/hr, but a new proposed bill seeks to fine large companies that underpay their employees. If the bill passes it would fine businesses $1/hr per employee who doesn’t earn the $15 minimum.

Some people believe this legislation would reduce income inequality and make low-wage workers better off. 🙂 But others retort that this is just a tax grab for the government, dressed up to look like a bill that would help the lower class. The reality is that if a company is currently paying $10/hr to a worker, then simply coughing up an extra $1 to the government is more economical for itself than raising the wage of that worker by $5/hr. In fact, that worker may actually see his/her real wage and purchasing power reduced. The extra $1/hr is an expense for businesses making them more costly to run, which often trickles down to higher prices for consumers. It’s kind of ironic that a bill that’s designed to help the most vulnerable working class would actually make life harder for them. Employees who are already making over $15/hr would not be affected. So this new bill would only benefit workers who earn between $14/hr to $15/hr.

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Apr 222015
 

Finance Minister, Joe Oliver introduced the government’s 2015 Federal Budget yesterday. The big takeaway is that there will be tax breaks for everyone. Yay! 😀 The proposed budget is expected to get passed as the Tories hold a majority government.

It’s nice to finally see some welcomed changes in fiscal policy to address the economy rather than rely on monetary policy alone. 🙂 Federal budgets are important because it shapes the way we plan our personal finances.

Increased TFSA Contribution Room

The annual contribution limit for the Tax Free Savings Account rises to $10,000 effective immediately. This means Canadians who have already maxed out their TFSA for 2015 will now have another $4,500 of contribution room to use. The TFSA is a holding account where we can buy investments and not pay taxes on the gains.

Some people believe this change will only benefit the upper class who are already wealthy. Here’s my poor attempt at humour on Twitter from yesterday.

However, Ottawa says that individuals with annual incomes of less than $80,000 accounted for more than 80% of all TFSA holders at the end of 2013. And about half of TFSA holders had annual incomes less than $42,000, meaning the TFSA is mostly being used by the middle class. Personally I think the new TFSA policy benefits serious savers, not necessarily the wealthy.

RRSP delays taxation to a future date when we’ll likely be in a lower income tax bracket than today. Gains in a TFSA are made from after tax contributions and are not taxed, for the most part. So between the RRSP and TFSA average Canadians now have a lot more freedom and room to save and invest with preferential tax treatments.

Here’s a table showing how much someone would need to save to max out both accounts. The maximum RRSP contribution limit assumes the person earned the same income in the previous year.

Combined Tax Sheltered Savings Table 2015

Annual Gross IncomeMax TFSA RoomMax RRSP RoomCombined TFSA/RRSP Limit% of Income
$20,000$10,000$3,600$13,60068%
$30,000$10,000$5,400$15,40051%
$40,000$10,000$7,200$17,20043%
$50,000$10,000$9,000$19,00038%
$60,000$10,000$10,800$20,80035%
$70,000$10,000$12,600$22,60032%
$80,000$10,000$14,400$24,40031%
$90,000$10,000$16,200$26,20029%
$100,000$10,000$18,000$28,00028%

 

As we can see people who make $50,000 a year will have to save more than 38% of their incomes before running out of space in tax advantaged accounts. There is no point in buying GICs, bonds, stocks, mutual funds, and other investments in a regular cash account anymore, unless you’re like me and trade derivatives or buy securities on margin. 😉

Decreased Minimum RIF Withdrawal Rate

The new federal budget also gives seniors more options. When an RRSP is converted into a Registered Retirement Income Fund (RRIF) retirees will be able to leave more money in their tax sheltered account each year to help their savings last longer and can also lower their overall tax burden. The proposed new RIF minimum withdrawal rate will decrease from the current 7.38% at the age of 71, to 5.28% starting at the age of 71, and gradually increase to 20% by age 95. 😄

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In general lower income, and younger folks should prioritize saving in a TFSA before considering RRSP, and vice-versa for high income earners. I like to put bonds in my RRSP, and the more volatile, higher potential investments in my TFSA. For most Canadians I believe the TFSA has a more important role in our financial lives than the RRSP. However, both are important as the RRSP can save us money today by delaying the tax liability to future years, while the TFSA can save us money in the future. Holding the right amount of each can minimize the overall taxes we pay over time.

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May 182014
 

I recently read an article written by the affable David Carrigg, a prolific Canadian columnist 🙂 The article is about how a public insurance company (ICBC) made a botch of things and overcharged its customers by $39 million! Furthermore ICBC not only overcharged some of its clients, but it also undercharged other customers to the tune of $71 million total. Many B.C. residents became upset. When a Crown corporation mismanages money tax payers may be on the hook. And governments will often feel the pressure to raise taxes on the public to maintain fiscal order.

During this past year the Feds raised EI premiums. Quebec raised personal income taxes. B.C. increased its health care (MSP) premiums. Manitoba raised its provincial sales tax from 7% to 8%. And many Canadian cities like Toronto, Edmonton, and Vancouver (where I live) have raised local taxes 🙁 According to the Fraser Institute, a public policy think thank, the average family earned $97,254 in 2013 and paid $42,400 in total taxes. In other words, 44% of what the average Canadian family makes is spent on various taxes. 14-05-tax-dollar-goes-Summary

Many people go out of their way to find discounts on stuff they want to buy. They shop wholesale to save on bulk items. They feel disappointed when they miss a sale on their favourite toothpaste. Yet they don’t even think twice about paying the full retail price for their taxes 😐 They can try to outperform the stock markets. They can cut coupons everyday. They can even work extra long hours for overtime pay. But they could probably save more money than all those strategies combined by simply lowering their total tax rate by ten percentage points or so.

This is why I operate my rental farm as a business instead of a personal property, invest inside tax sheltered accounts, and have debts with deductible interest so the more taxes I pay, the more I get back. It’s all for the purpose of saving taxes. Each year I calculate how much tax I pay as a percentage of my total income. I track this ratio and try to reduce it every year 🙂 Like any other personal finance metric, once we start to track something regularly it will start to become something real to us that we can monitor, so that we can then set appropriate goals for it. But if we don’t track it, then we won’t know where to start or how low we should aim for. Last year my total taxes (income tax, sales tax, payroll tax, property tax, etc) represented about 30% of my total income. So I’m fourteen percentage points lower than average, but I think I can do better 😀 Who says doing taxes can’t be fun? 😉

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Random Useless Fact: 

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Mar 032014
 

I hope the Canada Revenue Agency doesn’t come after me for writing this post 😛 If too many people read this article then our government will never have a balanced budget lol. Since it’s that time of year again the topic I’d like to discuss today is income tax, and how rich people are able to dramatically reduce their taxable incomes because they understand that tax brackets are a moving target, and we all have the ability to manipulate our income tax rates as we see fit 😎

Let’s look at an example below. The following chart shows the income tax rates for B.C. Canada. There are only 6 cells we need to be aware of for the purpose of this article, which I’ve highlighted in yellow.

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Let’s say a hypothetical person named Tyler works full time at a retail bank branch and makes $43K a year there. Tyler also bartends a few nights a week. He has a small rental property, and some dividend paying stocks in a margin account. And finally Tyler has a small pasture of alfalfa in the boonies that he operates as a small business and is generating revenue via renting it to cattle ranchers.

Here’s a summary of all his annual incomes.

  • Bank employment T4: $43K
  • Bartending T4: $10K
  • Rental unit: $12K
  • Dividends T5: $5K
  • Small business income: $10K

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Total income = $80K

At first glance it appears Tyler is in the $75,213 to $86,354 income range, which should put him in the 32.50% marginal tax bracket according to the tax chart above. But not so fast. Sometimes we need to take a closer look at a situation before we can make an educated assessment.

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The more money we make the higher percentage of our incomes should go to the government right? But if that was true, why do some people who earn six-figures have lower tax rates than most middle class people? The answer is because those particular high-income earners are masters at manipulating their tax brackets! #likeaboss

Tyler believes he can use the same tools as the rich and reduce his taxable income in the eyes of the government. Let’s see how he does this.

Bartending $10K: Tyler contributes $10K to his RRSP to buy new investments. Since contributions are deducted from earned income this action essentially nullifies any income tax he owes from bartending 😉

-Rental unit $12K: Tyler’s insurance, mortgage interest, property taxes, and other expenses for the property work out to $12K a year which he can deduct from his rental income and break even. Who knew rental units that are cash flow negative have positive tax benefits? 😉

-Dividends $5K: Since most of Tyler’s dividend income comes from Eligible Dividends, he can claim the federal dividend tax credit. His final tax payable on his dividend income is only a small amount, which is easily neutralized by Tyler’s investment expense tax credit, since he bought some of his stocks on margin.

-Alfalfa business $10K: Tyler was smart enough to run his alfalfa pasture as a small business because businesses pay expenses first, and then pay taxes on any profit left over. After deducting all his expenses, like home office usage, traveling costs, and even interest charges on a business loan, his company will end the year with only a small profit, which will have an insignificant impact when added to his personal income 😉

So by using some clever financial maneuvers 4 out of his 5 income streams are no longer tax liabilities. Tyler is able to effectively lower his $80K of total income to just $43K of taxable income  which is a huge win because only taxable income is used to calculate how much taxes we actually pay, not gross income.

This effectively drops his marginal rate by TWO entire tax brackets from 32.50% to just 22.70%! #winning

So how much savings does a lower tax bracket translate to? Well by using a tax calculator we discover that at $43K of taxable income, Tyler only pays $6,600 in income tax. Which translates into a ridiculously low AVERAGE income tax rate of just 8.25% on the $80,000 gross he makes. Now compare that to Tyler’s boss, a senior manager who works in the same office as Tyler. He also makes $80,000 a year. But since his only income comes from his salary, his taxable income is the entire $80,000 amount, which means his marginal tax bracket STAYS at 32.50% and he has to pay about $17,700 in income tax before RRSP contributions/deductions. Wowzers 😯 #bigdifference!

Both Tyler and his boss are making the exact same upper-middle class income, yet look at the difference between the the 2 green numbers above 😕

Now that’s some SERIOUS tax savings!

really_surprised_shock lower income tax bracket

Doesn’t seem fair does it 😕 In fact some of you readers may be inclined to accuse Tyler of not paying his fair share of taxes 😡 But unfortunately life isn’t always fair 😐 This is the reality of our tax system. This is how some people can earn over $100K, and still only pay an AVERAGE tax rate of 10% or less.

So we can either adapt to make the tax system work FOR us like Tyler is doing, or we can accept the status quo like Tyler’s boss and complain about how life is unfair, taxes are too high, can’t seem to catch a break, blah blah blah 😛

Two roads diverged in a wood, and I— I took the one less traveled by, And that has made all the difference.” ~Robert Frost

The good news is we can all be like Tyler and take the less traveled path. Every single one of us has the power to choose how much taxes we pay to some extent 😀 The first step is to understand the difference between taxable income and gross income. The next step is to apply that knowledge.

Using tax deferred vehicles, leveraging to buy real estate, owning investments that pay eligible dividends, using effective tax credits, sheltering viable income generating operations in a small business, and diversifying our income streams in general, are all topics I’ve covered on this blog. These are just some of the many ways we can tip the tax scale in our favor (^_-) #SorryCRA

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Random Useless Fact:

14-02-supergluemerkel

Be careful with super glue. If you accidentally get some on your hands you can remove it with acetone (fingernail polish remover.)