Archive for May, 2018

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Staying Prosperous: Market Performance Outstrips Government Transfers

Significant gains in transfer payments combined with good market income growth translated into an increase in median income for Canadian households, to $57,000 in the period 2000 to 2016. There is a message in the numbers for pre-retirees, and in particular women: be proactive about tax-efficient investing now or risk poverty in retirement.

According to Statistics Canada’s Canadian Income Survey 2016, an increase of 8.7 percent in income from market sources—which includes employment, investment and retirement income—added more to retirement income than government transfers did. While Canadians are lucky to live in a country with many generous social safety nets, particularly the Canada Child Benefit, it’s critical to prioritize retirement planning early if you want to manage risk and at least beat inflation and taxes in your future.

Here are the numbers: median income after tax for all families was $57,000 in Canada in 2016. But that was also the year that top marginal tax rates increased significantly for some. Broken down in profile groups, you’ll see some critical trends:

PROFILE After Tax-Income in 2016
Couples with kids $94,500
Couples no kids $76,400
Unattached with kids $44,600
Unattached no kids $30,400
Seniors, highest earner is over 65 $57,800
Seniors, unattached $26,100

Noteworthy: we now know that unattached senior (often women) are the poorest of Canadians. These numbers don’t measure assets held, however, only income. That means there is an important opportunity for tax and financial advisors to work harder with families, and in particular with younger women, to set up sound financial plans to avoid poverty in retirement.

The first and most powerful step in doing so is with TFSA planning, which begins when a Canadian resident turns 18. A TFSA deposit of $5,500 a year for 40 years between the ages of 25 and 65, for example, will provide a very significant retirement nest egg. At an average rate of return of 5 percent, it can generate capital totalling $697,619. Parents and grandparents can help: there are no income splitting or attribution rules to be concerned about with this investment.

Assuming an average retirement of 20 years from age 65 to 85, a tax-free annual income of $34,880 is created, just from the TFSA investment in the example above. Add to this taxable public pensions like the universal Old Age Security (OAS) and the contributory Canada Pension Plan (both employer and employee must make contributions), employer-sponsored savings plans and the RRSP (Registered Retirement Savings Plan)—all can help significantly increase those median income numbers for seniors in the future.

However, the financial terms above, and the optimal order of investing (which comes first?) are a mystery to many Canadians. For professionals in financial services, there is much good work to do with clients to educate them and position them for financial success, both in retirement and before. It can be truly rewarding, but it’s important to get started now before taxes, inflation or interest rates rise to contribute to the significant changes Canadians face in the economy moving forward.

Next Time: Maximizing the Canada Child Benefit

Additional educational resources: Brush up on your skills to better help your clients prepare for retirement. Become a Master Financial Advisor by taking Knowledge Bureau’s comprehensive Retirement and Estate Services Specialist designation. Register before the June 15 session deadline for tuition savings. A free trial is available for Tax-Efficient Retirement Income Planning, a certificate course that earns you credits for the full designation. Completion of a free trial also gives you 2 CE/CPD credits! Also pick up your copy of Essential Tax Facts, by Evelyn Jacks, for tips on tax-efficient wealth management during all life stages. It’s written in easy-to-understand language and is perfect for sharing with your clients.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading national financial education institute and author of a new book in 2018: Essential Tax Facts – How to Make the Right Tax Moves and Be Audit-Proof, Too. Follow her on twitter @evelynjacks

COPYRIGHT OWNED BY KNOWLEDGE BUREAU INC. 2018.   UNAUTHORIZED REPRODUCTION, IN WHOLE OR IN PART, IS PROHIBITED.


Canadian Debt Solutions Demanded: Personal Debt Hits $2 Trillion

Canadian personal debt levels are now at such an alarming level, that most Canadians can’t even comprehend the size of the rising figure: $2 Trillion, as of last week. As part of their best interest duties to clients, financial advisors need to broach this uncomfortable subject, as things could get worse, soon.

According to the Bank of Canada, increasing interest rates, anticipated in the second half of 2018, could impact the financial security of many Canadians. On May 1, Bank of Canada Governor Steven Poloz shed light on why a cautious approach has been taken with interest rate hikes in recent months – and the $2 Trillion personal debt owed by Canadian taxpayers is among the primary concerns.

It’s not a new issue, as it continues a trend that has been witnessed over the past three decades. Canadian debt levels just keep rising due to low interest rates designed to stimulate the economy, and a hot housing market, according to Poloz. The numbers support this, as $1.5 Trillion of the current debt can be accounted for in mortgages.

After a lengthy period of maintaining lower interest rates, the central bank’s concern is that Canadians will become increasingly unable to meet their financial obligations or pay down their debt when interest rates do start to climb. As the Bank of Canada notes, there is potential for detrimental effects on the economy.

It is an issue of particular concern for those who have access to lots of credit; and, contrary to perception, that’s often higher net worth individuals. This is where the “Know Your Client” process is of utmost value; in fact, financial advisors must be sure to explore the entire financial environment and this includes the amount of debt being carried by the investor.

A professional strategy and process is therefore required. Knowledge Bureau’s Debt and Cash Flow Management course can assist advisors in developing knowledge and key skills in this field and provide credentials after a rigorous process of true-to-life practical applications that can enable more confident discussions, too. This course will help you lead your clients through a discovery and empowerment process to maintain a healthy balance sheet and use debt more responsibly and deliberately to build family wealth.

Tax efficiency in managing debt is explained as well. This certificate course will help you help your clients plan to pay down debt, maintain ideal debt-to-income ratios and make smart debt consolidation choices. It includes access to EverGreen Explanatory Notes and the following calculators to help you work out scenarios and what-if examples:

  •  Take Home Pay Calculator
  • Financial Assessment Calculator
  • Cash Flow Calculator
  • Income Tax Estimator
  • Debt Reductions Solution Calculator

Take advantage of our spring early-bird deadline by June 15 and save on tuition fees. A free trial of this course is available, and once you’ve brushed up on your debt management skills, credits from this course can be applied towards a Designation – either DFA – Bookkeeeping Services Specialist, or MFA – Retirement and Estate Services Specialist.

 Additional educational resources:

  1. Pick up a copy of Essential Tax Facts, by Evelyn Jacks. Written in easy-to-understand language, it’s great for sharing with your clients so they, too, can learn more about tax-efficient income planning.
  2. Sign up for our free trials, which offer a preview of EverGreen Explanatory Notes and important tax calculators, as well as a glimpse at course content, including Debt and Cash Flow Management.
  3. Earn CE credits efficiently while you enhance your education by attending a live event with Knowledge Bureau. Spring CE Summits are quickly approaching, and this fall the Distinguished Advisor Conference heads to Quebec City!
 COPYRIGHT OWNED BY KNOWLEDGE BUREAU INC. 2018.
UNAUTHORIZED REPRODUCTION, IN WHOLE OR IN PART, IS PROHIBITED.

Guaranteed Basic Income in Canada: Taxpayers Beware

A nationwide initiative that would provide Canadians with a base guaranteed income is under consideration. It’s a move with polarizing opinions, with many citing an increased burden upon taxpayers to fund the program.

With a pilot project already underway in Ontario, the Parliamentary Budget Officer (PBO) released a report outlining the financial impact of introducing a nationwide program. The program proposes Canadians are never forced to live on an income that isn’t sustainable, regardless of their employment status. The estimated cost to taxpayers is $43 Billion per year. However, the program itself would come at a cost of $76 to $79.5 Billion, as it would replace other support programs already offered to some low-income Canadians that are already accounted for in the budget.

The PBO estimates that the Guaranteed Basic Income program would benefit 7.5 million low-income Canadians and would model Ontario’s pilot program. Currently, the maximum amount for participants in Ontario has been set at $16,989 for singles and $24,027 for couples. Disabled Canadians receive an additional $500 in support. The amount received is reduced when income is acquired from other sources, like employment. These numbers were established taking low-income tax credits and benefits into consideration

Ontario’s Basic Income program requires that participants be between the ages of 18 and 64. Seniors are not eligible due to the availability of other income supplement and benefit programs. Employment Insurance and income from CPP can still be collected, but reduce the guaranteed basic income dollar-for-dollar. The test group of eligible Ontarians is being monitored to determine if a universal income supplement improves quality of life, food security, and improved physical and mental health.

It’s a controversial consideration, particularly in light of the fact that Finland just pulled the plug on their universal income experiment. With fewer strings attached than in Ontario’s model, the nation provided 560 Euros to 2,000 unemployed individuals for more than a year. Since revealing that their experiment would end in 2018, they’ve put legislation in place to revoke other benefits and income supplementation from unemployed individuals who are unable to prove that they’re actively seeking job opportunities.

Additional educational resources:

Looking to gain further understanding about tax provisions outlined in the 2018 federal budget? The Spring CE Summits are focused on post-budget action strategies for tax and financial advisors. Evelyn Jacks will be joined by cross-order tax expert Dean Smith and several regional business leaders in the tax and financial services in a peer-to-peer educational experience in these comprehensive workshops. The early registration deadline is May 15; for the best rates, reserve your seat today!

COPYRIGHT OWNED BY KNOWLEDGE BUREAU INC. 2018.
UNAUTHORIZED REPRODUCTION, IN WHOLE OR IN PART, IS PROHIBITED.