Archive for June, 2013

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Six Laws of a Long and Happy Life

Wondering if we’ll ever get summer this year? Here’s something to ponder if you’re stuck at the cottage in the rain. . .the six laws of a long and happy life.

This, by default, means the need to avoid life’s sure end for as long as possible.

How and why do people die in Canada? According to a study by Kathryn Wilkins for Statistics Canada entitled, “Predictors of Death in Seniors,”[1] there are some remarkable findings related to education, income and lifestyle:

  • The likelihood of dying at a younger age is greater for those who have not completed post-secondary education compared with those who have.
  • For men, source of income is a predictor of death (those who rely on public sources die sooner than those who rely on other sources).
  • Men and women who are widowed are more likely to die at a younger age than those who are married or living with a partner.
  • Seniors who are active die later than those who are inactive.
  • People who drink alcohol at least once a month are less likely to die at a younger age than those who abstain or drink less frequently.
  • If you smoke regularly, you will die sooner than someone who does not smoke.

It would appear we can extract from this list, six “Laws of a Long and Happy Life,” in Canada at least, and make a point of communicating these principles early to younger generations in the family:

  • Law #1:  Invest in your post-secondary education.
  • Law #2:  Be self-sufficient.
  • Law #3:  Find the right partner and commit to that person for life.
  • Law #4:  Exercise.
  • Law #5:  Drink alcohol moderately.
  • Law #6:  Don’t smoke.

Nonetheless, even if you place a checkmark next to each of these laws, there is no escaping the inevitable: planning for end of life is important, especially from a tax and financial planning point of view.

It’s Your Money. Your Life. Start with Law #1 – Invest in your post-secondary education with Knowledge Bureau’s Tax, Succession and Estate Planning courses. They are online, so you can even do them at the beach, when the sun comes out!  Early bird tuition reductions and summer registration ends June 30.

Evelyn Jacks is President of Knowledge Bureau and author of 50 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of this year’s three day think tank in Ojai, CA Nov 10-13 will be “Back to the Future – Collaborative Wealth Management.”  Follow Evelyn on Twitter at @EvelynJacks.


[1] Wilkins, Kathryn. (2005). “Predictors of Death In Seniors.” Health Reports 16 (Supplement). Ottawa: Statistics Canada. Cat. no. 82-003. http://www.statcan.gc.ca/pub/82-003-s/2005000/pdf/9090-eng.pdf .

 


Living to 100 – Financial Literacy Matters More

I recently ran across an interesting article published in Knowledge@Wharton (December 9, 2009)[1]. It, in turn, references an article in the medical journal The Lancet, which states that children born since the year 2000 in developed countries will most likely live to be 100 and, in fact, that they will be healthier than elderly people in previous generations.

Interestingly, financial literacy enters into the discussion. The real challenge of living to 100 will be to systematically weave financial literacy into elementary, middle, and high school programs, according to Olivia Mitchell, Professor of Insurance and Risk Management at Wharton.

The article contemplates worklife will extend well into age 70 and 80 for many and, if that is indeed so, the many changes that are required to plan for an older generation of employees are interesting. Will there be more outsourcing? Less physical work? More part-time work? More or less supervision? More or less empowerment? How will younger generations adapt?

The phenomenon could, in fact, make for a much better work life balance – even for the younger members of the workforce.

“We need to get people thinking differently about investing in themselves, in their human capital. . . (and to). . .assemble a tool kit that will get them not only a first job. . .but to fashion several different 20 year careers over a lifetime,” says Ms. Mitchell. Her biggest concern is the scant knowledge the average worker has about basic economics and the importance of readiness for longevity risk with a proper retirement plan. That requires knowledge about saving and investing throughout one’s lifetime.

It’s Your Money. Your Life. What would you do differently to plan your finances to live to be 100? Do record your thoughts in the KBR poll this month. Be sure to weigh in, and then think about helping those younger members of society who may need to plan for a full century of living.

Evelyn Jacks is President of Knowledge Bureau and author of 50 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of this year’s three day think tank in Ojai, CA Nov 10-13 will be “Back to the Future – Collaborative Wealth Management.”  Follow Evelyn on Twitter at @EvelynJacks.


[1] “So You Want to Live to 100? More of Us Will, and Here Is What Life Might Look Like.” Knowledge@Wharton December 9, 2009.

 

 


Part 2 – Deducting Interest in Special Circumstances

According to Statistics Canada there were 2.3 million businesses in Canada as of June 2009, with 57% of all business establishments located in Ontario and Quebec.

About 25% produce goods, while 75% provide services. Most of these firms count on financing to grow. When will interest be deductible, particularly during tough times? It’s important for investors to discuss the rules with their tax advisors to be sure. Here are four to be aware of:

  • Limitation on Interest Deduction on Purchase of Undeveloped Land: The deduction for interest and property taxes on land is limited to the net income from the land. These limitations do not apply to land used in the course of business other than land development. Interest and property taxes not deductible may be added to the cost base of the land.
  • Interest Paid on Capital Property that is No Longer Owned: When a taxpayer borrows money to acquire a capital property for the purposes of earning income from that property and subsequently disposes of the property for an amount less than the amount borrowed to acquire the property, it is deemed that the taxpayer continues to use the property for the purpose of earning income from property. In other words, if the proceeds of the sale are used to pay back the money borrowed, then the interest payable on any outstanding balance will continue to be deductible.
  • Borrowing to Honour a Guarantee. Interest costs in these cases are generally not deductible unless it can be shown that the transaction will increase the potential for dividends to be received. If the taxpayer receives consideration of some kind for fair market value, such amounts are a source of income and therefore any interest expense incurred to earn it will be deductible.
  • Leveraged Buy-outs. Interest on money borrowed to acquire common shares will be deductible. CRA comments further in its IT 533 on this subject, by saying there is no arm’s length requirement in this case.

LAST TIME: Evelyn Jacks: Part 1 – When Interest Is Tax Deductible

Evelyn Jacks is President of Knowledge Bureau and author of 50 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of this year’s three day think tank in Ojai, CA Nov 10-13 will be “Back to the Future – Collaborative Wealth Management.”  Follow Evelyn on Twitter at @EvelynJacks.


Part 1 – When Interest Is Tax Deductible

Did you know that small firms in the business sector create proportionately more jobs than large firms, especially in the early years of development?

This pattern, however, disappears once the age of the firm is taken into account – older firms contribute more to employment growth[1]. For these reasons, lending to help firms grow is important to the economy. Tax efficient borrowing reduces the costs.

CRA has set out its current interpretations on interest deductibility in its IT-533. Following are some audit-proofing tips business owners should know and discuss with their financial professionals:

  • Tracing / linking: The onus is on the taxpayer to trace funds to a current and eligible usage. Taxpayers must demonstrate that aggregate eligible expenditures from co-mingled accounts, for example, exceed the amount borrowed and deposited to that account.
  • Income-producing accounts: CRA accepts that the use of borrowed money can be for an ancillary rather than primary income-producing purpose. This will be determined as a question of fact, so make sure you make detailed notes to explain reasons for borrowing.
  • Borrowing to pay dividends. The interest expense amounts will be deductible.
  • Borrowing to contribute capital. Interest may be deductible if the borrowed funds can be linked to an income-producing purpose (i.e. the issuing of dividends).
  • Borrowing to make loans to employees and shareholders. Interest will be deductible if there is a reasonable expectation of income. This comes from the effort of the employee and such loans would be therefore viewed as a form of remuneration.

NEXT TIME: Evelyn Jacks: Part 2 – Deducting Interest in Special Circumstances

Evelyn Jacks is President of Knowledge Bureau and author of 50 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of this year’s three day think tank in Ojai, CA Nov 10-13 will be “Back to the Future – Collaborative Wealth Management.”  Follow Evelyn on Twitter at @EvelynJacks.


[1] Firm Dynamics:  Employment Growth Rates of Small Versus Large Firms in Canada, 1999 to 2008, Statistics Canada, July 5, 2012.