Here are a couple of current thoughts that you might be having. I actually took this from a letter to clients recently. Enjoy.
Interest Rates
Hopefully we are seeing the world’s major economies emerge from the depths of recession. Some are doing it faster than others but data from all over the world seems fairly positive. Whenever this happens we turn our attention to interest rates, which are still near all-time lows. If our economy strengthens, then it should follow that inflation becomes a concern and hence interest rates will rise. I think this is the case, although I don’t think it will happen as rapidly as some might expect. In my opinion, you might see our central bank raise rates by 1% or so over the next year but that might be about it, for a few reasons:
1) The U.S. dollar. Because our largest trading partner is directly south of us, we do not want to have a dollar that is worth much more than theirs. They will pay for things we make in U.S. dollars, while we make them by paying for the materials in Canadian dollars. I would expect our government to be cautious when considering further rate hikes.
2) Our economy. I don’t think it’s as strong as one might be led to believe by the data. In the U.S., you could look back as far as 10 years before seeing any kind of meaningful economic growth. Before this recession, Americans were refinancing their homes based on higher property values and spending this ‘found money’ on ‘stuff’, like TVs and cars. Any job growth from this housing bubble was unsustainable, as we later found out and now the unemployment rate is at about 9.5% in America. Before then, it was the internet bubble. During this time, it was not uncommon for stocks to trade at enormous premiums, which again tricked the investor into thinking they were worth more than they really were. Prices were based on future promise, rather than current fundamentals. In either case, jobs were created based on unsustainable market conditions. For that reason, I don’t think we will see any meaningful job creation (and hence economic growth) in America until they can find a sustainable source of employment. They have been losing jobs for years to overseas competition and real replacement hasn’t happened. As Canadians, we should prepare ourselves for a decreased demand from the US, and hence a decreased level of job creation as well.
The moral of the story is that we are probably in for an extended period of relatively low interest rates. I wouldn’t be rushing out to lock in your mortgage today; I think you might be safe with that sweet variable rate for the time being. Don’t quote me on it though – my crystal ball has been known to falter, from time to time.
Sovereign Debt
This is the other topic that most of us have heard about in the last few months. Many European nations have been struggling with the recovery, having to implement stimulus packages for their economies that they really couldn’t afford. We need to think about countries the same way we think about companies – they have revenue (taxes) and expenses. If the expenses outnumber the revenues, then they will eventually be in trouble and need external support. This is nothing new, as it has happened all over the world throughout history.
What worries us is something called ‘contagion’. This term suggests that if one country defaults on their debt, then other countries that hold the first country’s debt could also default. This could be the case with Greece, Portugal and others but my thought is that we learn from our mistakes. I would be shocked to see anything meaningful come out of this situation, other than a big bailout from either the other members of the European Union or the International Monetary Fund. Either way, none of my clients are holding Greek bonds, so we really don’t have much to worry about. Even our international equity mutual funds would have zero exposure to Greek debt (although I’m sure a couple of them wouldn’t mind doing a little bargain hunting).
Income Trust Conversion
As you probably have heard, by the end of this year all income trusts must start paying corporate income tax, thanks to Jim Flaherty back in 2006. Because of this, many of us have been wondering what is going to happen to our beloved income generating investments. Here’s a very short answer that many people don’t seem to be considering:
“Income trusts are going to pay corporate income tax at the end of this year”.
That’s it. Nothing else about their business models have changed. Yes, they are going to convert to regular corporations for the most part. All else being equal, they could reduce their distributions by the exact percentage of tax that they now have to pay. In many cases, this could result in a stock that still pays a very handsome dividend, which is much more favourable from our tax perspective. Instead of ignoring the income trust universe, we have actually been trying to look at good examples of trusts that would make great companies, paying handsome dividends. I wrote about this last May, when we first started the process of identifying these trusts. Since April 1st, 2009, the income trust total return index is up more than 60%. I don’t think we’re in for another similar 12-month return but I do think there are great investment opportunities in this space.
That's all I have for now. I hope you enjoyed the column. It was a bit more technical than some others I have written. Have a great week.
Wednesday, April 21, 2010
Tuesday, April 13, 2010
Week 13 - Tax
It must be that time of year. Every day, I am getting at least a couple of emails from local accountants, asking for tax information for our mutual clients. Adjusted Costs of stock that was sold, dividend information on stock or income trust positions. It keeps us (mostly my assistant) busy.
The accountants are working day and night because literally every Canadian investor gets these summaries within at most 60 days of when their return is due at the end of April. I am notorious for collecting all my receipts, tax slips, forms, etc and just putting an elastic band around it and handing it off! I even apologized to my accountant this year because he had to email me; turns out I was missing about 4 things that he needed. Awesome.
It brings me to the point of this article; the importance of an accountant. Yes, I called the post 'tax' because that's a subject that affects us all (along with death, the only two things in life that are certain) so I wanted to make sure people read on. It would be pretty hypocritical of me to do anything other than recommend that everyone uses an accountant. And I understand that some of our tax situations are simpler than others. But I would strongly urge you consider hiring an accountant to do your taxes.
If your return is really that simple, then this will cost you very little. But in the long run, your accountant can likely save you hundreds, if not thousands of dollars. They live and breathe tax. They know all the things that you should be looking out for on your return. They are up to date on the changes that happen every year in our tax system. They wear golf shirts to work, so you know they're not distracted by uncomfortable suits (not that I should talk).Seriously though, consider what you have to lose.
For most of us (unless we own a business), our tax situation will be for ourselves and our spouses. A good accountant can process this type of return for as little as a few hundred dollars. But what if you miss one of the valuable credits by filing your own return? What if you bought your first home in 2009 and didn't know that you could claim the one-time-only first time home buyers credit of $5,000? Or what if you had major losses on your investment portfolio in 2008 (not that I or any of my clients did... yeah RIGHT)? Would you have known that you can carry back those capital losses to the beginning of 2005 and use them to reclaim any capital gains tax you might have paid in those years? These are just a few ways that accountants can make us (or save us) money.
Unfortunately, there is no benchmark for accountants to measure themselves against. I guess that's why the exams to become a Chartered Accountant are some of the most difficult exams there are.
Our tax system in this country is generally fair, as I think I've talked about before. It rewards entrepreneurs and researchers. It is fair to those who do not earn a monster pay cheque. It even allows us to save money tax-free for retirement. There are ways that we can save a lot of tax by being smart. I would urge you to think about using an accountant to make sure you have all your bases covered.
Where can you find one? I think the best way is to ask people you know and trust. Who do they use? Are they happy? If so, are their accountants accepting new clients? To me, a good referral is the best way to go.
With my soapbox speech out of the way, I will leave you with some things to consider when you get your return ready this year (to hopefully drop off to your accountant);
We talked about the first time home buyers credit. Don't forget that freebie.
Home renovation tax credits. I think we can claim up to $10,000 worth of home renovations this year. There is a form to fill out. Your accountant will have it or you can find it on the CRA website.
Capital Losses. This is where we use losses from this year against gains from previous years. This form is called a T1-A form. You can also carry forward capital losses from past years against gains from this year.
RRSP vs. TFSA. Make sure you consider which vehicle makes the most sense to contribute to. Your accountant can offer advice here too.
Professional fees. If you did decide to use an accountant or you pay investment management fees on your stock portfolio (not including mutual fund fees), then you can claim these against your income.
Those are just a few of the ways that our government is fair about us getting our hard-earned tax dollars back. Consult with your accountant to make sure you are doing all you can.
Thanks again for reading. To all you accountants out there, happy tax season. Santa comes on May 1st.
The accountants are working day and night because literally every Canadian investor gets these summaries within at most 60 days of when their return is due at the end of April. I am notorious for collecting all my receipts, tax slips, forms, etc and just putting an elastic band around it and handing it off! I even apologized to my accountant this year because he had to email me; turns out I was missing about 4 things that he needed. Awesome.
It brings me to the point of this article; the importance of an accountant. Yes, I called the post 'tax' because that's a subject that affects us all (along with death, the only two things in life that are certain) so I wanted to make sure people read on. It would be pretty hypocritical of me to do anything other than recommend that everyone uses an accountant. And I understand that some of our tax situations are simpler than others. But I would strongly urge you consider hiring an accountant to do your taxes.
If your return is really that simple, then this will cost you very little. But in the long run, your accountant can likely save you hundreds, if not thousands of dollars. They live and breathe tax. They know all the things that you should be looking out for on your return. They are up to date on the changes that happen every year in our tax system. They wear golf shirts to work, so you know they're not distracted by uncomfortable suits (not that I should talk).Seriously though, consider what you have to lose.
For most of us (unless we own a business), our tax situation will be for ourselves and our spouses. A good accountant can process this type of return for as little as a few hundred dollars. But what if you miss one of the valuable credits by filing your own return? What if you bought your first home in 2009 and didn't know that you could claim the one-time-only first time home buyers credit of $5,000? Or what if you had major losses on your investment portfolio in 2008 (not that I or any of my clients did... yeah RIGHT)? Would you have known that you can carry back those capital losses to the beginning of 2005 and use them to reclaim any capital gains tax you might have paid in those years? These are just a few ways that accountants can make us (or save us) money.
Unfortunately, there is no benchmark for accountants to measure themselves against. I guess that's why the exams to become a Chartered Accountant are some of the most difficult exams there are.
Our tax system in this country is generally fair, as I think I've talked about before. It rewards entrepreneurs and researchers. It is fair to those who do not earn a monster pay cheque. It even allows us to save money tax-free for retirement. There are ways that we can save a lot of tax by being smart. I would urge you to think about using an accountant to make sure you have all your bases covered.
Where can you find one? I think the best way is to ask people you know and trust. Who do they use? Are they happy? If so, are their accountants accepting new clients? To me, a good referral is the best way to go.
With my soapbox speech out of the way, I will leave you with some things to consider when you get your return ready this year (to hopefully drop off to your accountant);
We talked about the first time home buyers credit. Don't forget that freebie.
Home renovation tax credits. I think we can claim up to $10,000 worth of home renovations this year. There is a form to fill out. Your accountant will have it or you can find it on the CRA website.
Capital Losses. This is where we use losses from this year against gains from previous years. This form is called a T1-A form. You can also carry forward capital losses from past years against gains from this year.
RRSP vs. TFSA. Make sure you consider which vehicle makes the most sense to contribute to. Your accountant can offer advice here too.
Professional fees. If you did decide to use an accountant or you pay investment management fees on your stock portfolio (not including mutual fund fees), then you can claim these against your income.
Those are just a few of the ways that our government is fair about us getting our hard-earned tax dollars back. Consult with your accountant to make sure you are doing all you can.
Thanks again for reading. To all you accountants out there, happy tax season. Santa comes on May 1st.
Monday, April 5, 2010
Week 12 - Charity
I have to admit, this post is 50% financial and 50% opinion so bear with me.
As Canadians, if we take the time to step back from our daily grind and think about the rest of the world, we realize how good we have it. We have a stable government, no domestic wars, one of the most stable financial systems in the world and a relatively healthy economy. We don't pay for health care (whether you agree with the system or not) and we have a public pension plan. Overall, I think Canada is one of the greatest places in the world to live.
I think for these reasons, we are spoiled for the most part. We make good money as a nation. What we once considered luxuries are now parts of most people's daily living (computers, cell phones, flat-screen TVs, etc.). We spend tens of thousands of dollars on things that will one day be worthless, such as cars, boats, TVs, cell phones and video games.
With all this in mind, in my opinion, we have to start doing more to consider those around us (or far away from us) that are much less fortunate. If you haven't started already, then start thinking about making donations to one or more charities. Maybe your cause is something to do with people, animals or the environment. Either way, there are many excellent organizations that depend on the private sector (you and I) for funding.
The nice thing about charity is that it is totally voluntary and arbitrary. Maybe you grew up playing a sport that you now love. If you love it that much, maybe you should consider giving to an organization that would assist other kids to play your sport that couldn't otherwise afford it. Maybe a hospital or clinic was helpful during a time of need, or maybe you lost someone to a disease. You could contribute to that clinic or to the foundation that raises money for research into a cure for that disease. Maybe you grew up outside camping or hiking with family and you want to see some part of that nature preserved for future generations to enjoy it the same way. All of these are great reasons to contribute.
Tax Benefits
In Canada, our government has set it up so that we receive receipts for charitable donations that we make. According to Canada Revenue Agency, "In 2007, the first $200 you donate is eligible for a federal tax credit of 15% of the donation amount. After the first $200, the federal tax credit increases to 29% of the amount over $200. Generally, you can claim all or part of this amount up to a limit of 75% of your net income. For gifts of certified cultural property or ecologically sensitive land, you may be able to claim up to 100% of your net income."Also, if we have a capital gain on something, we can donate that thing (stock, bond, etc.) to charity and get a receipt for the entire amount, without having to pay the capital gains tax.
Here is an example: You bought 1,000 shares of Suncor at $10/share. Today, they are worth $35/share ($35,000).
Option 1 - sell them and keep the money. You realize a gain of ($35-$10) $25/share, or $25,000 in total. You have to pay tax on that amount (1/2 your normal tax rate), say $10,000. that leaves you with $25,000 in total, or a $15,000 after-tax profit.
Option 2 - donate the shares to a registered Canadian charity. That would yield us $11,122 in tax back, or a profit on our original investment of $1,122. AND our charity would have a $35,000 donation!
Donor Recognition
Many charities have ways of recognizing donors, or you can make a donation as an anonymous individual. It is totally up to you. You might be tempted to keep your donation anonymous, if you aren't the type to boast about money. While that's okay, I think sometimes by showing others how you contributed to a certain organization, it could spur them on to increase their level of contribution. In the end, donor recognition might be better for the charity itself!
Personal or Family Foundations
In Canada, there is also the option of setting up your own foundation (this probably doesn't make sense unless you have more than $50,000 to donate, as it can be costly) and can then direct a fixed % portion of the funds to charities of your choice each year. That way, your foundation will remain long after you are gone and you can leave someone in charge of naming the charities that will receive your donations. The benefit of doing this is that you get the tax back when you contribute to your foundation, without having to allocate all the funds to specific charities right away.
As I mentioned, I think every Canadian should be making some sort of charitable contribution in some way. It might be only a tiny % of your annual salary that comes right off your paycheque but it is still meaningful. If every Canadian even donated $10 per year to various charities, that would be more than $300 million that would be raised! It all helps.
Give it some thought. I am certain that you can find something worthwhile of a few pennies of your hard-earned dollars.
As Canadians, if we take the time to step back from our daily grind and think about the rest of the world, we realize how good we have it. We have a stable government, no domestic wars, one of the most stable financial systems in the world and a relatively healthy economy. We don't pay for health care (whether you agree with the system or not) and we have a public pension plan. Overall, I think Canada is one of the greatest places in the world to live.
I think for these reasons, we are spoiled for the most part. We make good money as a nation. What we once considered luxuries are now parts of most people's daily living (computers, cell phones, flat-screen TVs, etc.). We spend tens of thousands of dollars on things that will one day be worthless, such as cars, boats, TVs, cell phones and video games.
With all this in mind, in my opinion, we have to start doing more to consider those around us (or far away from us) that are much less fortunate. If you haven't started already, then start thinking about making donations to one or more charities. Maybe your cause is something to do with people, animals or the environment. Either way, there are many excellent organizations that depend on the private sector (you and I) for funding.
The nice thing about charity is that it is totally voluntary and arbitrary. Maybe you grew up playing a sport that you now love. If you love it that much, maybe you should consider giving to an organization that would assist other kids to play your sport that couldn't otherwise afford it. Maybe a hospital or clinic was helpful during a time of need, or maybe you lost someone to a disease. You could contribute to that clinic or to the foundation that raises money for research into a cure for that disease. Maybe you grew up outside camping or hiking with family and you want to see some part of that nature preserved for future generations to enjoy it the same way. All of these are great reasons to contribute.
Tax Benefits
In Canada, our government has set it up so that we receive receipts for charitable donations that we make. According to Canada Revenue Agency, "In 2007, the first $200 you donate is eligible for a federal tax credit of 15% of the donation amount. After the first $200, the federal tax credit increases to 29% of the amount over $200. Generally, you can claim all or part of this amount up to a limit of 75% of your net income. For gifts of certified cultural property or ecologically sensitive land, you may be able to claim up to 100% of your net income."Also, if we have a capital gain on something, we can donate that thing (stock, bond, etc.) to charity and get a receipt for the entire amount, without having to pay the capital gains tax.
Here is an example: You bought 1,000 shares of Suncor at $10/share. Today, they are worth $35/share ($35,000).
Option 1 - sell them and keep the money. You realize a gain of ($35-$10) $25/share, or $25,000 in total. You have to pay tax on that amount (1/2 your normal tax rate), say $10,000. that leaves you with $25,000 in total, or a $15,000 after-tax profit.
Option 2 - donate the shares to a registered Canadian charity. That would yield us $11,122 in tax back, or a profit on our original investment of $1,122. AND our charity would have a $35,000 donation!
Donor Recognition
Many charities have ways of recognizing donors, or you can make a donation as an anonymous individual. It is totally up to you. You might be tempted to keep your donation anonymous, if you aren't the type to boast about money. While that's okay, I think sometimes by showing others how you contributed to a certain organization, it could spur them on to increase their level of contribution. In the end, donor recognition might be better for the charity itself!
Personal or Family Foundations
In Canada, there is also the option of setting up your own foundation (this probably doesn't make sense unless you have more than $50,000 to donate, as it can be costly) and can then direct a fixed % portion of the funds to charities of your choice each year. That way, your foundation will remain long after you are gone and you can leave someone in charge of naming the charities that will receive your donations. The benefit of doing this is that you get the tax back when you contribute to your foundation, without having to allocate all the funds to specific charities right away.
As I mentioned, I think every Canadian should be making some sort of charitable contribution in some way. It might be only a tiny % of your annual salary that comes right off your paycheque but it is still meaningful. If every Canadian even donated $10 per year to various charities, that would be more than $300 million that would be raised! It all helps.
Give it some thought. I am certain that you can find something worthwhile of a few pennies of your hard-earned dollars.
Subscribe to:
Posts (Atom)