It’s official: October 1 marks “year end tax planning season” and if you want to make it count, the best place to start making plans is to assess your personal and family net worth.
This is important because when you better understand how financially stable you are, you’ll be less likely to act irrationally when faced with fluctuations in the financial marketplace. You can also make tax-efficient decisions about tax loss selling, retirement and education savings, when to sell the cottage, or how philanthropic you wish to be in 2013.
Statistics Canada’s Survey of Financial Security uses the following simple definition to describe net worth:
Net worth is the value of all assets less all debt. It’s what you have left if you liquidated all your assets and paid off all your debt.
Canadians are indeed very well off these days—our net worth is over $400,000, according to recent reports (see Wealthscapes, by Environics Analytics, a Toronto-based firm which uses information from Statistics Canada, the Bank of Canada, and other sources to assess financial well-being in Canada.)
Pensions and real estate are a big reason for this according to James Davies of the economics department of the University of Western Ontario, who noted in his 2009 paper entitled “Efficiency and Effectiveness of Savings Instruments Design:”
The most important category is pension and tax-sheltered savings ($174,000 per household) although disposals of these assets are fully subject to taxes. The principal residence category is $152,000 per household but disposals are not taxed. Other financial, business and real estate assets at retirement are $170,000 per household of which the income and capital gains from disposals are taxed. Retired Canadians have relatively low debt ($11,000 per household), about one-sixth of the level when working.
So, to build up your future net worth, it likely makes sense to shore up contributions in your company pension plan and your RRSP and TFSA as a year end tax planning strategy. To increase your tax refund, remember a tax free capital gain may result by contributing qualifying shares to your favorite charity before year end—and that’s in addition to your savings from the donation credit.
Should you buy a big new principal residence instead? While real estate appears to be a great way to strengthen your balance sheet and generate a tax exempt capital gain in the future should your real estate values increase, rising interest rates in the future could dampened your net worth and add some real risk to it if you are overly-indebted.
Knowledge Bureau has a great calculator to help you measure net worth: Financial Assessment Calculator. You may wish to give it free trial to better understand your financial affairs for 2013, or have a professional do this for you.
It’s Your Money. Your Life. Refresh your personal and family net worth statements this month to monitor changes and consider investment options. Can taxes be saved before year end with astute investments? Consult with your tax and financial professional well before year end. You may even be in better shape than you think.
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 “The Wealth of Canadians,” Statistics Canada, 2006
2 James Davies, “Efficiency and Effectiveness of Savings Instruments Design,” prepared for the Research Working Group on Retirement Income Adequacy, Department of Finance Canada, 3 December 2009, found at: http://www.fin.gc.ca/activty/pubs/pension/ref-bib/davies-eng.asp, accessed 3 November 2011.
3 Mintz, Summary Report on Retirement Income Adequacy Research.