Changes Coming to the Canada Pension Plan in 2019

  In 2019, Canadians will start paying higher CPP premiums.  This new change was made in hope that their will be more retirement security for future generations. 

Industry experts argue that this could also have a negative impact as well.  Middle class households could see their disposable income decrease during their working years.  This could effect their ability to save.  For instance, how much they can contribute to the RRSPs each year.

One change that will help low-income households is the expansion of the federal working income tax benefit.  This will help them offset the increase in premiums and lessen any financial pressure this may cause on their savings.

Here are the changes to the CPP that will gradually begin in 2019:

• Increasing the income replacement rate to one-third from one-quarter
• Increasing premiums on employers and employees by 1%
• Increasing the maximum amount of income subject to CPP by 14% to $82,700
• Expanding the federal working income tax benefit, to help low-income households offset the increase in premiums

Why you should choose life insurance instead of mortgage insurance

When purchasing a home, the best decision you can make is saying no to mortgage insurance and purchasing a term-life insurance policy instead.

Purchasing life insurance will guarantee that your beneficiary will actually receive the policy benefits, the premiums you're paying are the best price for your situation, and your beneficiary will be able to use the policy benefits as they see fit.

Two of the most negative aspects of mortgage insurance are:

1) The benefit value declines as you pay down your mortgage.  This means you are continuing to pay the same premiums for a policy that's value is continuing to decrease.  With life insurance, your policy value stays the same throughout its existence as you pay premiums.

2) Most banks that offer mortgage life insurance use"post-claim underwriting".  This means you only find out of if you actually qualify for the policy benefits after a claim is made.  It is possible that they decide you don't qualify and you will receive nothing.  With life insurance, you are underwritten and approved before the policy is active, and therefore can guarantee that you will receive the policy benefits after a claim.

If you would like to read more about why you should choose term-life insurance instead of mortgage insurance, click the link below:

http://www.huffingtonpost.ca/tea-nicola/mortage-insurance-reason-why_b_8113364.html

How to save for your child's education using an RESP

An RESP is a tax-deferred education savings vehicle.  The contributor invests funds for a beneficiary or beneficiaries' post-secondary education.

Deposits to an RESP are not tax-deductible.  However, income and capital gains that accumulate are tax-free until the child begins post-secondary education and starts to receive payments.  Any amount exceeding the original contributions is taxable when withdrawn.  Since most post-secondary students have little to no taxable income, the tax burden will be little to none.

The other positive about using an RESP is the contributions will generate the Canada Educations Savings Grant (CESG).  The beneficiary can receive the maximum annual CESG of $500 by contributing $2500 annually.  The CESG is 20% of every dollar contributed.  There is a lifetime CESG limit of $7200.

The other grant available in an RESP is the Canada Learning Bond (CLB).  The CLB will give $500 in the first year, and $100 each year until the beneficiary turns 15.  To be eligible for the CLB, the beneficiary has to be born after December 31st, 2003 and their family has to be receiving the National Child Benefit Supplement.  This is usually received by lower-income households.

Planning Strategies:

• Maximize contributions in early years.  The sooner the contribution is made, the greater effect of long-term, tax-sheltered compounding.
• Maximize annual RESP contributions to receive the maximum annual CESG.

Note:  There is a lifetime RESP contribution limit of $50,000.

What happens if my child ends up not attending post-secondary education?

• You can move the cash to an RESP held in the name of a sibling.
• Transfer up to $50,000 from the RESP to your own RRSP provided you have sufficient contribution room.

Capitalizing on Investment Losses

When markets are down, it is a great time to use a tax-loss selling strategy to lighten your future tax burden.

You can sell your securities when at a loss to realize any capital losses.  Like capital gains, 50% of net capital losses are eligible as a deduction when filing your tax return.

Capital losses can be used to offset capital gains from the past three years, the current tax year and can be carried forward indefinitely to offset future capital gains.

Before you sell for the purpose of tax-loss harvesting, there are a few things you should consider.

1) If you have a large gain from selling a private company or farm property, $813,600 (as of 2015) qualifies for the lifetime capital gains exemption.

2) Determining if your capital loss is considered 'superficial'.  If you sell your investment to trigger a loss and you or your spouse rebuys the same investment 30 days before or after the investment was sold, this loss will be considered superficial, and be denied as a tax deduction.

3) Is the loss from a business investment?  Determine if the loss on your investment is an allowable business loss.  If it is, it can be used against any source of income in the year claimed.

4) If you are going through a divorce or separation, you can trigger losses when transferring investments to your spouse.

Bank of Canada lowers overnight rate from 1% to 0.75%

The Bank of Canada is lowering its overnight rate to 0.75%.  The rate had been at 1% since September 2010.  This decision is based on the decline of oil prices in the recent months. 

In a statement today, the BoC said, "Outside the energy sector, we are beginning to see the anticipated sequence of increased foreign demand, stronger exports, improved business confidence and investment, and employment growth."

For a full summary on how this will effect the economy, inflation, growth of GDP and what we should be investing in for the future, you can read the article by clicking the link below. 

http://www.advisor.ca/news/economic/bank-of-canada-lowers-overnight-rate-target-173633?print

Year-end tax tips for 2014

There are some great tax tips that can be beneficial for you to use before year-end.  The link below offers 10 tax tips for 2014 provided by Doug Carroll who is the VP of Tax and Estate Planning with Invesco.  He gives great tax tips on  RRSP contributions, TFSA withdrawals, capital gains/loss selling, etc.  Check it out!

 http://www.advisormailout.com/Advisor/Home/1153/23461/images/eFundamentals_November%202014/ISTRTTE(11_14).pdf

The Benefit of having a Spousal RRSP

Having a spousal RRSP is a great way to split income and reduce taxes by contributing to an RRSP in the name of the spouse with a lower marginal tax rate and claiming a tax deduction for the contribution at their higher marginal tax rate.

Example: Joe Smith has a maximum RRSP contribution limit of $15,000.  He decides to contribute $10,000 to his own individual RRSP and $5,000 to a spousal RRSP.  Joe's total RRSP tax deduction would still be $15,000.  Joe's wife could also contribute to her own individual plan up to her allowable limit, and defer even more taxable income for the household.

Spousal RRSPs are a benefit for couples who plan on retiring before age 65 and will be relying on their RRSPS for income. 

To continue from the example used above, Joe Smith has earned more than his wife over the years and has a much larger RRSP.  They plan to retire in 10 years and use their RRSPs as income.  Joe will receive more money in retirement than his wife and therefore, will pay much higher taxes.  To equalize their retirement income, Joe decides to contribute to a spousal RRSP that his wife can withdraw from in retirement.  This will allow the household to pay lower taxes at retirement than if Joe keeps contributing money to his own RRSP.

Bottom line,  a spousal RRSP is a great way to lower the household marginal tax rate to create optimal retirement savings.  Upon retirement, you and your spouse will be able to withdraw from your retirement savings, and be taxed at a lower rate, because of the efficient use of a spousal RRSP in the years before retirement.

Ways You Can Manage and Reduce Your Debt

Having short-term and long-term debt can really cause a strain on your finances.   Finding the most efficient way to pay down your debt can be the most overwhelming and frustrating part of the process.  There are different ways to strategize how to pay down your debt in the most time-efficient manner so you can start working towards growing your assets and having more financial comfort.

1)  PAY DOWN HIGH-INTEREST DEBT FIRST. 

2) Pay down or convert non-tax-deductible debt.  Pay down all non-tax-deductible debt and try to convert the non-tax deductible to tax-deductible debt.  Paying down this type of debt first will save you money in interest costs.  With non-tax-deductible debt, you are using after-tax dollars to pay interest, which makes this type of debt more costly. 

3) Consolidate debt.  Consolidate small high-interest loans (credit card debt)  into one loan at a lower interest rate (personal line of credit).  Refinancing your debt can free up cash so that funds can be redirected to other goals.  A consolidation loan combines all of your debts with varying payment dates and interest rates, into a single debt with a monthly payment date and lower interest rate.

4) Shorten the loan term.  Shorten the term of the loan by increasing the amount of the payment or by increasing the frequency of payment.  Shortening the term minimizes the cost of the loan because you will be paying less total interest.  This option might be difficult depending on your cash flow.

The Importance of Getting your Spouse Insured

When you think about insuring your stay-at-home spouse, your first thought may be that it would be a waste of money because if tragedy struck, he/she wasn't earning a paycheque anyway.  However, if they died, you would be scrambling to cover funeral costs and other expenses during the time of grieving.

Your stay-at-home spouse is accomplishing several different unpaid jobs on a daily basis.  He/she is taking on several key roles such as chef, housekeeper, teacher, and daycare.  In 2011, a survey from salary.com determined the average stay-at-home spouse should earn upwards of $115,000 annually based on the amount of hours and work he/she is performing.

When considering what type of life insurance to go with, this decision may vary based on specific needs. 

A 20 year term would make sure the spouse is insured during those critical years when the kids are still young.  However, a permanent policy would make premiums more predictable.

Life insurance will shield you from the enormous financial impact of the death of a spouse.

Even if your spouse develops a serious illness that prevents him/her from looking after the household, you can prevent this financial burden by purchasing Critical Illness insurance (CI).

Not getting your spouse insured can be risky.  With the right combination of life insurance and CI, you will be financially prepared for the worst.  Its important to make sure that you and your family are financially secured during a time of personal tragedy.

A new secular bull market?

Do past trends indicate that we are emerging into a secular bull market? 

Jurrien Timmer, Director of global macro at Fidelity Investments, looks at past secular bull and bear markets to see if there are trends that give clues.

If we are heading towards a secular bull market, the positive outcome from past secular markets is they both spanned almost two decades in which the market went up a lot more than it went down. 

Check out the link above to read more about what Jurrien Timmer has to say on this topic.