Archive for February, 2011

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Inflation and Purchasing Power

It's an interesting time. We hear warnings almost daily of over-indebtedness should interest rates rise—and these are sound warnings indeed. There is nothing worse than walking away from the equity in your home because you no longer can afford your payments—whether that's due to an interest rate differential, a lost job or a new disability.
 
Higher costs—in interest, price of oil, price of food, price of medicine—all fuel increases in inflation.   Just think about the costs of driving a car or heating a home during the long winter we have had this year. When it takes more to live, the dollars we save erode  more quickly. Our future dollars suddenly seem smaller, too, because we'll need more of them.
 
When we have inflationary times, the result is a decrease in future purchasing power. Yet when you think about it, debtors with fixed nominal rates of interest on their loans actually will experience a reduction in their "real" interest rates as inflation rises. 
 
Wikopedia has a great example:
 
         Example 1: interest rate on loan is 6% and the inflation rate is at 3%, the real interest rate is 3%.
 
         Example 2: loan at a fixed interest rate of 6%; inflation rate jumps to 20%: This results in a real interest rate of -14%.
 
Those low interest loans that Canadians took advantage of in the last little while could indeed have some residual purchasing power stored in them, at least for the short term. However, interest rates on lines of credit will rise with the tide. Debtors and their advisors will want to review that indebtedness carefully to time loan repayments and the taking of profits on capital appreciation.
 
That can be tricky too. Increasing asset values help to grow personal net worth in inflationary times. The big risk factor for erosion, however, extends beyond the cost of interest.  That factor is tax risk.
 
Many of you may remember the late 80's when governments fought deficits with 66 2/3% and 75% capital gains inclusion rates; charged largely on gains fuelled by inflation at the time. Could this happen again? I believe it could.
 
So how do you protect your savings, your equity and your purchasing power in these changing times? I think we need to pay off debt, save more and look carefully for both buying and selling opportunities that take these realities into account. What do you think?
 
It's Your Money. Your Life. And it's unprecedented times. A learned dialogue that encompasses the best thoughts from an experienced, if not weather-beaten, investor community, might be a good thing.   Do feel invited!

 
Evelyn Jacks is author of the 6th edition of Essential Tax Facts and President of the Knowledge Bureau, an educational institute focused on Real Wealth Management™.  Our mission is provide professionals and their clients the knowledge and skills they need to make sound financial decisions.

On the Defensive: It’s not Cool; Likely Costly, Too

It takes a lot of energy to let someone know that something they have done or a service they have provided does not please you.  In business, I have always considered that a compliment, as it gives us a chance not only to fix the problem and thereby enhance a relationship,  but also to stand up for what we believe in:  continuous improvement.   For us, it’s about this client, the one with the grievance, and by extension, our future clients, those who very may well be someone referred to us by the complaining party.
 
That may be why most people find it particularly troublesome when they get defensiveness as a response to an issue that requires correction.  Defensiveness is ego-centric.  It makes it about them, instead of you, the client, and the problem that’s been encountered.  When you make it about you, you miss the chance to deepen a caring relationship with your client.    Not everything can be fixed, but going the extra mile to enhance the relationship pays off in spades.
 
It’s Your Money.  Your Life.  When you take the time to fix things, people tell their friends, to your personal and financial benefit.  When you don’t, they tell their friends, too.
 
 
Evelyn Jacks is author of the 6th edition of Essential Tax Facts and President of the Knowledge Bureau, an educational institute focused on Real Wealth Management™.  Our mission is provide professionals and their clients the knowledge and skills they need to make sound financial decisions.

Aging is Not for Faint of Heart

Knowledge, Skills, and Confidence to Make Responsible Financial Decisions.  That is the broadly accepted definition for financial literacy which the Federal Task Force on Financial Literacy provided in releasing its National Strategy last week.  That's exactly what we need, as we meander through financial decisions required at various lifecycles from birth to death to life again. 
 
Over time, it's quite conceivable that one indeed acquires deeper knowledge and skills and even confidence in making repetitive financial decisions day over day.  Yet it is when one adds in the "super-ingredient"–life change–that confidence and indeed accumulated wisdom is challenged.
 
Aging is not for the faint of heart.  Recently, I have seen families painfully lose younger sisters and brother, mothers and fathers, grandpas and grandmas, work colleagues and dear friends as the realities of an "aging demographic" includes cancer, diabetes, Altzheimers and other progressive illnesses in more and more families.  Caring for and accompanying those loved ones on their final journey is a honour, but it is very, very difficult.  And it has lots of financial implications.
 
Raising children is difficult too, of course, but in a different way.  We raise children to go from dependence to independence.  It is exilarating for every parent to share in the heartwarming joy of their children's advancing potential as they bloom and grow.  However, when we care for our sick and dying loved ones, we help them move from a state of independence to one of dependence, and that can be heartbreaking. 
 
Well before illness strikes, we begin to observe our own mortality with amazement, how the deep wrinkles form, despite our best fighting efforts, and when the weather changes, the odd arthritic pain.  We come to understand, too, with our collective years of wisdom, that isolation from our most precious treasures, our children, will come next.  They must move on without us, with knowledge, skills and confidence.
 
While we strive for control of the unknown future for most of our lives, working and saving money as a sure-fire way to move through one obstacle after another as independent adults, the reality is, we end life giving up control of our body, mind and spirit, together with all our possessions. And it seems, we don't have much control over that.
 
It takes courage to move towards death, with knowledge, skills and confidence.  The money can help to provide lifestyle, dignity, and respite.  But, the money can also be an obstacle to both the memories we need to take time to create, and the memories we want to leave.  
 
It's Your Money.  Your Life.  You may think it's too early for exit planning but, depending on how the chips fall, you may not be able to clean up your financial mess.  And it would be a shame, to leave that great burden to someone else when you are suddenly sick, or gone. 
 
Evelyn Jacks is President of the Knowledge Bureau and author of Essential Tax Facts, Make Sure It's Deductible, Master Your Taxes and numerous courses in the DFA-Tax Services Specialist Designation Program.

Women Need to be Particularly Tax Aware

If you are a single mom, a career woman or a pre-retiree, it’s important that you get a handle on the tax preferences available to you and take advantage of them.
 
Are you maximizing, for example, all the refundable tax credits available to your family:  the Child Tax Benefit, The GST/HST Credit, and the Working Income Tax Benefit?  These credits are all subject to  “clawback zones”—that is, as your income level  increases, these credits decrease in value.   Are you prepared to lose those credits, and do you know how RRSP planning can help?
 
Single parents can also claim a non-refundable tax credit  for an “eligible dependant”, which is an “equivalent-to-spouse” amount.  One can even transfer the Universal Child Care Benefit to that child to get a better tax break in some cases, but you’ll have to do the numbers to be sure. 
 
Most working moms know that child care expenses are deductible,  but not that many of these claims are audited.  When it comes to your taxes, retrieval is  always important:  you need to know what’s claimed and where the receipts are once the tax auditor comes knocking.  Are you prepared for this?
 
What about child and spousal support—another frequently audited provision on your tax return?  How should this income be claimed on the tax return?  Spousal support and alimony is taxable; the only way to avoid this is to take a lump sum in settlement of all claims.  Child support is not taxable.  Those families in dispute about those amounts should also look into what legal fees are deductible and which are not.  Professional tax help makes sense in those cases.
 
Know that the biggest eroder of wealth later in life is the potential tax you may pay on the capital you have painstakingly saved throughout your working life.  Fortunately, long term tax planning can help, particularly when you pay attention to tax efficiency of your investment product choices.  Female investors should make it their business to save in tax preferred savings  accounts like  the TFSA, RRSP and RESP and plan to maximize the significant  opportunities to build sustainable wealth over time for their families.  Saving for a tax exempt personal residence can make much sense,  too, especially if one of your goals is a more secure retirement.  All of this begins with a focus on your accurately paid tax return.

It’s Your Money.  Your Life.  There is a lot to learn, and picking up a book like Essential Tax Facts and help immerse the reader into the new terminology.  But women might want to go farther and take a certificate tax preparation or tax efficient retirement income planning course, which they can also do through The Knowledge Bureau as well.

Evelyn Jacks is President of national educational institute, the Knowledge Bureau and author of Essential Tax Facts and Master Your Taxes.  She is also a member of the Federal Task Force on Financial Literacy.

Families That File Returns Together Prosper

It always pays to file family tax returns at the same time, starting with the lowest earner and working your way up to the highest.  This is a great strategy for income splitting, and the transfer and sharing of tax credits, many of which change year over year due to indexing and also to facilitate the social and economic priorities of government.  Combined with your changing life events, it all can get complicated, but it sure can be worth your while to try to sort it out.  
 
You’ll find non-refundable tax credits on Schedule 1 of the T1 General tax return.  That’s the return you complete to compute federal taxes.  You’ll also have a series of provincial forms to review and often the non-refundable tax credits there will vary.  Look for tax credits to be claimed for minor children, adult children with infirmities, the adoption tax credit, the caregiver amount, the disability amount and medical expenses on the federal return.  Know that there is, in fact, a very long list of medical expenses that people miss every year; common items like batteries for hearing aids, glasses and treatments from naturopaths.  Even modifications to the family van required to accommodate a person in a wheelchair may be claimed, on a limited basis.  Be sure you are up to speed.
 
Other credits are not indexed but are also important:  The $2000 pension income amount is claimed to offset qualifying periodic pension benefits your senior family members may be receiving.  This  is the indicator tax advisors look for in adjusting a couple’s tax returns to include pension income splitting–a very lucrative opportunity that will save seniors significant money in many cases.  It can also reduce quarterly instalment payment requirements and even OAS clawbacks,  to increase cash flow all year long.
 
Other important non-indexed credits include the First-time Home Buyer’s Tax Credit, Tuition, Education and Textbook Amounts, and the Children’s Fitness Amounts.  Charitable donation claims can also save big dollars, depending on the amounts and whether they are group for a better result on one return.  Students might watch out for the credit for student loan interest, which can be carried over a five year period.
 
There are some changes to the auto log retention requirements for those who claim auto expenses.  A new policy allows the taxpayer to keep detailed logs of personal/business driving for a representative three month period, but only if a 12-month “base year” has been established previously to demonstrate driving patterns.  
 
In addition, there are new tax breaks for certain recipients of US Social Security.  The requirement to file tax returns in Germany if the taxpayer received certain German pensions here in Canada has also been a worrisome development for some seniors.  Even the self-employed can look forward to change on this return:  they can now choose to contribute to the Employment Insurance to receive “Special Benefits” like maternity or parental leave benefits.  Repeat users of Regular Benefits may be subject to a clawback of their benefits if net income on the return exceeds $54,000. 
 
As you can see lots is new and there is a lot to know. . .the reason why writing Essential Tax Facts every year is such a joy for me.  It becomes clear that with a really good synopsis of the changes, taxpayers are more apt to drill down and seek more answers to help them pay only the least amount of taxes possible.
 
It’s Your Money. Your Life. . .and tax season is a time to be more financially aware to maximize your opportunities to build sustainable wealth over the long run.   
 
Evelyn Jacks is President of national educational institute, the Knowledge Bureau and author of Essential Tax Facts and Master Your Taxes.  She is also a member of the Federal Task Force on Financial Literacy.