Volume 15, Number 2
2nd Quarter, 2011
Published by
The ECC Group
In This
Issue
TAX DEDUCTIONS AND TAX CREDITS
Vicki Lungu, CFP
TAX DEDUCTIONS
AND TAX CREDITS
....................1
If you are currently doing your tax return, you may have noticed you could be eligible for some
tax deductions on some items and a tax credit for others.
POTPOURRI
..................3
With a tax deduction, you lower your taxable income while a tax credit is a dollar-for-dollar
reduction in the amount of tax payable. The value of a tax deduction depends on your marginal
tax rate while the tax credit is the same for everyone.
ESTATE MATTERS
..................4
FINANCIAL
LITERACY
COMMISSION
..................5
TFSA OR RRSP?
..................7
Many think of tax credits and tax deductions as the same, however, they work quite differently.
Tax Deductions vs. Tax Credits – Which is Better? It depends.
1. If your taxable income is $47,000 and you have a $3,000 tax deduction, your taxable income
would be $44,000. You would save $930 in taxes ($3,000 x 31% marginal tax rate- federal and
provincial for Ontario).
If you have $3,000 in tax credits, you would reduce your tax payable by $602 ($3,000 x 20.05%
combined tax credit rate for 2010 for Ontario).
2. If your taxable income is $80,000 and you have a $3,000 tax deduction, your taxable income
would be $77,000. You would save the tax payable on $3,000, which is $1,182 ($3,000 x 39.4%
marginal tax rate – federal and provincial for Ontario).
If you have $3,000 in tax credits, you would reduce your tax payable by $602 ($3,000 x 20.05%
tax credit rate for 2010).
In effect, the more money you make, the higher your tax bracket, the more tax you pay and the
more a deduction is worth to you.
In short, a deduction saves you exactly the amount of the deduction multiplied by your
marginal tax rate.
Most Common Tax Deductions
• RRSP contributions
• Childcare expenses
• Professional, union dues
• Interest and carrying charges
• Business losses
• Rental losses
• Capital losses
• Employment expenses
continued on page 2
“We Make A Difference”
continued from page 1
TAX DEDUCTIONS AND TAX CREDITS
Non-Refundable Tax Credits
The majority of personal tax credits are considered to be
non-refundable because they can only be used to reduce your
tax payable to zero. If your tax credit exceeds the amount of
tax payable, you will not receive a refund for the difference.
For example, if your basic federal tax is $2,500 and your
total non-refundable personal tax credits total $3,000, your
tax payable would only be reduced to zero and you would
not receive a refund for the $500.00 difference.
With tax credits, your marginal tax rate doesn't come into
play at all. The result is that a tax credit is worth the same
in real dollars to everybody, regardless of their income level
and tax bracket.
Charitable Donations – You receive a combined tax credit
of 20.05% of the first $200 of your charitable donation
and 40.16% on anything above $200. This is most
beneficial if combined and claimed by the higher income
spouse. If you want to know how much you will save, go
to the Charitable Donation Tax Credit Calculator
http://www.cra-arc.gc.ca/chr tsgvng/dnrs/svngs/clmng1b2-eng.html, where you can see
exactly how much tax you will save when donation
amounts are entered.
Public Transit – You receive 15% of the actual amount
spent. Note, this is a federal credit only. It can be claimed
by either spouse.
Children’s Activity Tax Credit – You receive 10% of up to
$500 paid by parents to register a child in an eligible program.
Tax Credit Amount vs. Actual Tax Credit
It should be noted, there is a difference between the actual
tax credit and the tax credit amount. The tax credit is a
percentage of the credit amount (see below).
Tax credits are calculated based on the lowest federal and
provincial tax rates. For 2010, the lowest federal and
provincial rates are 15% (federal) and 5.05% (Ontario).
Therefore, if you have a $1,000 tax credit amount, you will
save $200.50 (15% + 5.05%) regardless of your tax bracket.
There are other credits that do not have a set tax credit
amount but have some other limits. They include:
Medical Expenses – The combined tax credit is 20.05% of
expenses in excess of the lesser of $2,024 (2010 limit) and
3% of net income. This is most beneficial if claimed by the
lower income spouse and can be claimed for any 12-month
period ending in the current tax year (ex: June 1, 2009 to
May 30, 2010) or any other 12 month period.
In Ontario, the Children's Activity Tax Credit is a
REFUNDABLE tax credit regardless of the total tax
payable. This means you could receive a maximum of $50
(10% of up to $500 paid). Because the credit is
refundable, low-income parents who pay little or no
income tax would benefit the most.
In summary, the biggest lifetime expense you will ever
encounter is neither a home nor a university education,
but taxes.
The importance of an effective tax plan cannot be
overstated. Effective tax planning will help you take
advantage of all deductions and credits and structure your
financial affairs so you receive the most for your money.
We also recommend you review your tax situation with a
financial advisor familiar with tax issues.
The chart below illustrates some of the federal and Ontario tax credit amounts and what it means to you. Note also, some
credits can be transferred to your spouse.
2010 Federal Tax credit
Amount
Credit
15%
2010 Ontario Tax credit
Amount
Credit
5.05%
Transferable
to spouse
Basic personal amount
$10,382
$1,557
$8,943
$451
N
Spouse/common-law partner amt*
$10,382
$1,557
$7,594
$383
N
Age amount (65 or older)*
$6,446
$967
$4,366
$220
Y
Disability amount
$7,239
$1,086
$7,255
$366
Y
Pension income amount
$2,000
$300
$1,237
$62
Y
Canada Employment credit
$1,051
$158
0
0
N
*Maximum amounts. The credit is reduced when income exceeds certain limits.
2
POTPOURRI
Chris Snyder, CFP, RFP
Did you know?
According to management and human resources consulting
firm Towers Watson, the pension assets in the world’s 13
biggest markets total $26 billion — 85% of all global
pensions. The Dutch hold assets equal to 134% of their
GDP. Canada and the US are about 60% of GDP and
France is a low 5%. France funds its pensions primarily
from current contributions.
Compound interest: time x rate of return = wealth
Time and the compound rate of return are a powerful
combination.
Take New York. In 1626, the Dutch paid the Indians $32
in miscellaneous trinkets for Manhattan Island. Today, it is
estimated that Manhattan real estate is worth
approximately $7 trillion. What an investment! But some
think the Indians got the best deal, as they did not even
own the land.
three years ago. See below. Now, a few investors are
panicking because of events in North Africa and the
Tsunami. The activity in North Africa is in the long run
positive in relation to human rights and democracy and
probably economically as well. While the tsunami was
horrible, the Japanese have a history of disasters like this
and have built this into their infrastructure and as well their
daily outlook on life. Because of images of Hiroshima,
Nagasaki and Chernobyl, people are spooked by the visions
of nuclear disasters. In fact, nuclear fallout has been
relatively minor over the years and is much better than
fossil fuels for the environment. In the long run, it will
result in better nuclear plants. The loss of life is estimated
to be less than 5% of Haiti, yet the magnitude of the shock
was a thousand times greater.
Markets Do Recover
1 year later
2 years later
1948-49 Berlin blockade
-3.3%
13.2%
1950-53 Korean War
28.8%
39.3%
1962 Stock market break
32.3%
55.1%
October 1962
Cuban missile crisis
33.8%
57.3%
Take your home, for example. If it is worth $400,000 now,
and assuming a 4% increase in value per year, it will be
worth $800,000 by 2029.
November 1963
Kennedy assassination
25.0%
33.0%
August 1964 Gulf of Tonkin
7.2%
3.1%
Real estate
1969-70 Stock market break
43.6%
53.9%
According to Clayton & Associates, between 1963 and
2003, residential real estate in major Canadian cities grew
on average at inflation plus 0.2%. Inflation has gone up by
approximately 3% during that time, thus the increase has
been approximately 3.2%.
1973-74 Stock market break
42.2%
66.5%
1979-80 Oil crisis
27.9%
5.9%
1987 Stock market crash
22.9%
54.3%
1990 Persian Gulf War
23.6%
31.3%
People often forget the 12 years it took for real estate to
recover from the market downturn that lasted from
September 1989 until December 2001. During that time,
housing values in Toronto decreased by as much as 35%.
The reason real estate forms a larger percentage of one’s
wealth is because people stay invested and, because of
mortgage payments and taxes, are in a forced savings plan.
September 11, 2001
Terrorist attack on U.S.
-3.8%
6.0%
March 31, 2003 Invasion
of Iraq by coalition forces
29.6%
31.4%
Average appreciation
23.7%
33.4%
Investments and Crisis
It’s said, “A picture is worth 1,000 words.” Quotations,
too, can make their mark, bringing home some real truths
and causing a few chuckles.
If you think 6% to 7% a year compounded for 485 years is
a good investment, you’re right. To calculate your own
return, you can use the rule of 72. To determine how long
it takes money to double, divide72 by the interest rate.
Thus at 7%, it takes just over 10 years.
Some people have a habit of bailing out of their
investments whenever there is a crisis — and we have lots
of them, 2008 being a recent example. History shows
markets do recover. They are now above their highs of
Appreciation
Home truths and chuckles
continued on page 4
3
continued from page 3
POTPOURRI
Here are a few you might enjoy.
“The safe way to double your money is to fold it over once
and put it in your pocket.” Frank Hubbard
“We can tell our values by looking at our checkbook stubs.”
Gloria Steinem
“Inflation hasn’t ruined everything. A dime can still be used
as a screwdriver.” Quoted in P.S. I love You, compiled by H.
Jackson Brown, Jr.
“October: This is one of the peculiarly dangerous months
to speculate in stocks. The others are July, January,
September, April, November, May, March, June,
December, August and February.” Mark Twain
“The real measure of your wealth is how much you’d be
worth if you lost all your money.” Author Unknown
“Taxes, after all, are dues that we pay for the privileges of
membership in an organized society.” Franklin D. Roosevelt
“The taxpayer — that’s someone who works for the federal
government but doesn’t have to take the civil service
examination.” Ronald Reagan
“Today, it takes more brains and effort to make out the
income-tax form than it does to make the income.” Alfred
E. Neuman
“The income tax has made more liars out of the American
people than golf has”. Will Rogers
“An investor without investment objectives is like a
traveller without a destination.” Ralph Seger
“A bank is a place that will lend you money if you can prove
that you don’t need it.” Bob Hope
“The key to making money in stocks is not to get scared
out of them.” Peter Lynch
“People are living longer than ever before, a phenomenon
undoubtedly made necessary by the 30-year mortgage.”
Doug Larson
“Only buy something that you’d be perfectly happy to hold
if the market shut down for 10 years.” Warren Buffet
“An investment in knowledge always pays the best
interest.” Author unknown, but commonly attributed to
Benjamin Franklin
“I don’t like money, actually, but it quiets my nerves.” Joe
Louis
ESTATE MATTERS
Fabio Ventolini, CFP, CDFA
Duties of an Executor
Compile an inventory of estate assets and liabilities
Most people confronted with the responsibility of
being the executor of an estate do not know what to do.
This checklist will help.
Protect estate assets and business interests
Locate and examine the last will of deceased
Make funeral arrangements
Cancel subscriptions and credit cards
Obtain a grant of letters probate from the Surrogate
Court
Consider the immediate financial needs of the family
Advertise, if necessary, for creditors, and settle claims
for and against the deceased’s estate
Review the deceased’s personal papers to become
familiar with estate assets and liabilities
Prepare and file an income tax return for the year of
death and any previous year, if required
Notify beneficiaries
Apply for Canada Pension Plan benefits, if entitled
Employ a suitable lawyer and/or personal advisor
Settle valuation problems with tax authorities
List contents of the deceased’s safety deposit box
Pay outstanding duties and obtain transfer contents for
assets (Quebec only)
Open an estate account and, if necessary, rent a safety
deposit box
4
Gather assets
continued on page 5
continued from page 4
ESTATE MATTERS
Prepare and file the estate’s income tax return
Obtain a clearance certificate from the income tax
department
Establish any trust funds as directed by the will
Pay legal fees, funeral expenses and debts
Pay cash legacies and distribute bequests of personal
property
Prepare and submit an accounting of administration to
beneficiaries and obtain their releases, or (present?) pass
estate accounts before a judge of the Surrogate Court
Make a final distribution of the remaining assets to the
named beneficiaries
What is Probate?
Probate is the process whereby a personal representative is
verified as the executor and trustee of an estate and is issued
a certificate by the court, granting him or her the judicial
authority to deal with the estate’s assets. If there is no will,
the court will confer this authority on an administrator. If
the estate’s assets can be distributed without probating the
will, no probate fees will be payable. This is a major
objective of effective estate planning.
Probate-Tax or Fee?
The main argument against the schedule of probate fees is
that the amount charged bears little relation to the service
being offered and the costs incurred in offering that service
— hence, a tax, not a fee. Probate fees vary by province.
Quebec is the only one that charges a flat, fair probate fee,
and then only on non-notarial wills. If you have a notarial
will, there is no fee. The other provinces can unilaterally
charge whatever they want. In 1992, for example, the
Ontario government tripled probate fee rates. Currently,
the province charges $5 per $1,000 on the first $50,000
and $250 plus $15 per $1,000 on any estate amount above
the $50,000. That is roughly a 15% tax.
Probate fees are payable on the full value of the deceased’s
estate at the time of death. Exclusions from the estate value
are jointly held assets; life insurance and other insurance
products payable to a named beneficiary; and RRSP and
pension plan proceeds payable to a named beneficiary.
Real estate outside the province may also be exempt.
Personal debts and other liabilities are not deductible,
however encumbrances such as mortgages against real
property can be deducted to reduce the probate value.
With a million dollar estate in Ontario, probate fees could
be as high as $14,500. These can be reduced as outlined
above by proper planning and leaving property directly to
a named beneficiary. While saving tax is normally a good
thing to do, if not done in concert with a proper estate
plan, it could leave you with some unintended results such
as not having enough money for other beneficiaries. As
always, a good advisor can help.
FINANCIAL LITERACY COMMISSION
Chris Snyder, CFP, RFP
Several weeks ago, the federal Commission on Financial
Literacy, chaired by Sun Life chairman Donald Stewart,
released its findings. I thought it an excellent report and
despite having spent almost 45 years in the financial
business, I found some of its conclusions astounding.
•
160,000 Canadians who are eligible to receive Old Age
Security are not doing so and 55,000 who are eligible
to receive CPP payments are in the same boat;
•
only 40% of Canadians are taking advantage of the
Canadian Education Savings Grant for RESPs;
My surprises included finding out that:
•
only 6% of eligible contribution room for RRSPs is
being utilized.
•
•
42% of Canadians struggle with reading to the point
where they have difficulty understanding basic
financial information;
The Stewart report comes up with a number of excellent
recommendations. I’ve included a few of my comments.
50% of Canadians struggle with simple tasks involving
math and numbers to the point where they find it
difficult to understand basic financial information;
continued on page 6
5
continued from page 5
FINANCIAL LITERACY COMMISSION
•
We should look upon financial literacy as an essential
life skill, and learning needs to be ongoing and lifelong.
It should be taught in schools and integrated into the
school curriculum and teachers should be trained to
teach financial information to their students.
If the resources could be found, this would be a major step
forward. But teachers already have a lot to deliver and
putting one more thing on their plates is not realistic.
School boards are pressed to find the money for what they
already are required to deliver. Parents might take on the
responsibility but many feel inadequate themselves.
The concept of learning more and on a continual basis is a
good one. The commission encourages employers and
government to help educate. The bottom line, in my
opinion, is that there is plenty of information and
opportunity for learning available — for example, through
newspapers, books, financial reports, investment
statements and online information — and it is, to a large
degree, up to the individual to take the initiative.
•
The government should establish a central website
where people can go to get information. Already there
is much available, but having a central source with links
is a good suggestion. The question is, will people do it?
•
Only 51% of Canadians have a budget. This is basic
tenet of good financial planning. Developing a budget
and sticking to it can relieve a lot of anxiety and save
you money.
•
The government should put financial resources behind
financial literacy. Other governments have done so,
including Australia, New Zealand and the United
Kingdom. There is much wisdom in this. At the end
of the day, many personal financial inactions and
problems result from a lack of financial knowledge that
leads to foolish mistakes. This was exemplified in the
sub-prime loan debacle in the United States. Common
sense should have dictated that buying an overpriced
home with no money down was a recipe for disaster.
•
People should seek professional help. As one presenter
to the commission said, one of the most essential pieces
of financial knowledge is knowing when to seek
outside help in making financial decisions, and how to
evaluate the quality of that advice.
continued on page 7
6
continued from page 6
FINANCIAL LITERACY COMMISSION
•
Special education should be made available to new
Canadians and the aboriginal community.
•
Efforts should be made to simplify documentation and
provide more default opportunities for people to enrol
in programs. For example, instead of people choosing
to join a pension plan, they should be placed in the
plan with an opportunity to opt out.
government should take the lead role. This may take a long
time to happen. In the meantime, we advocate that each
individual assume responsibility for their own financial
well-being. This does not mean doing it all themselves, but
seeking guidance and help when required.
The
full
Stewart
report
www.financialliteracyincanada.com.
is
available
at
The mission of improving financial literacy is a shared
responsibility, and the commission says the Canadian
TFSA OR RRSP?
Vicki Lungu, CFP
At this time of year, many Canadians are trying to
determine where to invest their savings to obtain their
greatest tax and long-term investment advantage. With the
introduction of Tax Free Savings Accounts (TFSA), that
decision has been complicated. There has been great debate
over which are the best investment vehicles to choose for
your TFSA, and whether RRSPs are a better retirement
savings option.
A lack of understanding and appreciation of how TFSAs
work may have some people missing out on the benefits of
this powerful new retirement savings tool. Since its launch,
only 20 per cent of eligible Canadians have opened an
account, investing some $19 billion tax-free. This suggests
that Canadians are not embracing the TFSA as a means of
funding a comfortable retirement.
There are many who can afford to maximize both RRSP
and TFSA contributions. To help explain the tax mechanics
behind these vehicles, let’s compare the after-tax net cash
over 20 years. Remember, unlike an RRSP, on which tax is
deferred until the funds are withdrawn from the plan, taxes
on assets held within a TFSA are pre-paid.
Scenario 1
Applies to high-income earners and/or people who are
members of a pension plan.
During retirement years, the goal is to keep taxable income
as low as possible because of the clawbacks of seniors
benefits: Old Age Security, Guaranteed Income
Supplement and the Age Amount(on the federal income
tax filing).
It may be a wise tax strategy to contribute to a TFSA before
an RRSP (you may not have that much RRSP contribution
room anyway, because of the pension contributions).
Scenario 2
Applies to high-income earners who do not have a pension
plan.
The strategy would be to contribute to the RRSP first and
use the refund to contribute to the TFSA. In other words,
let the government make your TFSA contribution (or part
of it).
Scenario 3
Which savings vehicle should take priority? It’s only when
your tax rate upon withdrawal is either lower or higher
than your current tax rate that either the TFSA or RRSP
wins out.
Applies mainly to young people just starting out or in a low
tax bracket, individuals with no RRSP contribution room
or seniors who are not eligible to contribute to an RRSP.
You may have no choice, but to invest into a TFSA first.
•
Let’s take a look at three retirement tax scenarios:
•
Same tax rate on contributions and withdrawals
•
High tax rate on contributions and low tax rate on
withdrawals
For the majority of Canadians in most years, a little of each
is probably a good idea. Declaring a winner is less
important than understanding how both vehicles work and
more important, how best to apply them to your own
Low tax rate on contributions and high tax rate on
withdrawals
continued on page 8
7
continued from page 7
TFSA OR RRSP?
Gross Income
Tax rate on contribution
Tax paid
Net contribution
Same tax rate
TFSA
RRSP
$5,000
$5,000
40%
–
($2,000)
–
3,000
$5,000
Growth at 6% over 20 years $9,622
Tax rate on withdrawal
Tax paid
Net withdrawal
$9,622
$16,036
40%
$6,414
$9,622
High
TFSA
$5,000
40%
(2,000)
3,000
$9,622
$9,622
Low
RRSP
$5,000
–
$5,000
$16,036
20%
$5,207
$12,829
Low
TFSA
$5,000
20%
($1,000)
4,000
$12,829
$12,829
High
RRSP
$5,000
–
$5,000
$16,036
40%
$6,414
$9,622
circumstances each year. Which one is better? As in all financial planning matters, “better” is personal. Talk to a financial
advisor.
It’s been said many times, but it’s advice worth repeating: pay yourself first. If you wait every month to
see how much money you can afford to save, you likely won’t contribute anything at all. Monthly contributions can go a
long way toward helping you achieve your financial goals.
The following table gives you an idea of just how much $10,000 a year ($5,000 each for you and your spouse) can grow
in just 20 years.
Table 1 – Couple – TFSA Account Balance Growth Over Time – The Impact of Return
8
Year
Annual
Contribution
Running Total
of Contribution
4%
5%
6%
1
$10,000
$10,000
$10,400
$10,500
$10,600
2
$10,000
$20,000
$21,216
$21,525
$21,836
3
$10,000
$30,000
$32,465
$33,101
$33,746
4
$10,000
$40,000
$44,163
$45,256
$46,371
5
$10,000
$50,000
$56,330
$58,019
$59,753
6
$10,000
$60,000
$68,983
$71,420
$73,938
7
$10,000
$70,000
$82,142
$85,491
$88,975
8
$10,000
$80,000
$95,828
$100,266
$104,913
9
$10,000
$90,000
$110,061
$115,779
$121,808
10
$10,000
$100,000
$124,864
$132,068
$139,716
11
$10,000
$110,000
$140,258
$149,171
$158,699
12
$10,000
$120,000
$156,268
$167,130
$178,821
13
$10,000
$130,000
$172,919
$185,986
$200,151
14
$10,000
$140,000
$190,236
$205,786
$222,760
15
$10,000
$150,000
$208,245
$226,575
$246,725
16
$10,000
$160,000
$226,975
$248,404
$272,129
17
$10,000
$170,000
$246,454
$271,324
$299,057
18
$10,000
$180,000
$266,712
$295,390
$327,600
19
$10,000
$190,000
$287,781
$320,660
$357,856
20
$10,000
$200,000
$309,692
$347,193
$389,927
The Personal Financial Advisor is published by the ECC Group.
The ECC Group are fee-based financial advisors, and have offices and affiliates
in Toronto, Montreal and Vancouver.
The information contained in this letter is obtained from various sources
believed to be reliable, but cannot be guaranteed.
Circulation Enquiries: Julie Dunaiskis
Editorial and Consulting Enquiries: J. Christopher Snyder, CFP, RFP; Ian G.
Johnson, CFP; Fabio Ventolini, CFP, CDFA., Vicki Lungu, CFP
100 Simcoe Street, Suite 100
Toronto, ON M5H 3G2
Tel.: 416-364-0181, Fax: 416-364-5394
Toll Free: 1-800-665-0181
E-mail: [email protected]