Written By Ariane Denis, B.Com., C.Adm, F.Pl.
February 8, 2016

Make budgeting your new winter sport!

Winter has finally caught up with us, and here’s a perfect activity for you when you decide to take a break from cocooning: make a budget!

Have we gone mad?

Though you may hate the word, and find working on one depressing, a budget is above all a tool to help you achieve your financial goals, or at least to prevent you from falling into a debt trap. In plain language: a budget is a plan that determines how your money will be spent. There’s nothing depressing about that!

But why is it so difficult to set up a budget and stick to it? Here are some of the excuses we tend to make for ourselves:

Excuse #1: Doing a budget is boring…

A budget may not seem exciting at first, but it helps you keep track of your income, expenses, debts and savings. And it’s the latter that adds pizzazz to the exercise! Seeing your savings grow allows you to dream and set goals: why not aim to repay your mortgage faster, or retire at 60, or go on vacation during spring break, or just spoil yourself. A budget gives you the freedom to choose. So start dreaming and make a budget!

Excuse #2: I don’t need a budget

Everyone needs a budget, even high-income earners. Life is not linear and significant changes such as marriage, divorce, the birth of a child, retirement or disability all have an impact on your personal finances. A budget helps to plan for the short term and for the long term; it helps you navigate through important changes and helps you stay afloat, without sinking into a debt spiral. How can you max out your retirement savings if you don’t know your monthly savings potential?

Excuse #3: It’s too much work

Sticking to a budget can be cumbersome at first, but after a few months it will become second nature. Give it some time – a month is probably not long enough. You should plan your budget for the whole year ahead so you’ll need to be really motivated. And as there are many ways to make a budget, you’ll need to find the tool that best suits your lifestyle. There are a host of easy-to-use spreadsheets and applications for smartphones and tablets out there. Alternatively, the good old envelope system also does the trick. And many other tools are available to make budgeting a breeze: pre-authorized payments, automatic savings, online bank statements. If you use these tools, you may only need to look at your budget once a month to make sure that everything runs like clockwork.

Allow me to introduce you to Reality

A budget should work on paper, but it should also be able to face the test of reality. Don’t underestimate your expenses, and track fixed expenses such as rent or mortgage payments, car payments, gasoline, public transit, insurance, groceries, cable and Internet, and hydro. Keep a close eye on your discretionary expenses such as vacations, clothes, birthday gifts, entertainment and dining out. Also budget ahead for expenses that occur once a year: Christmas gifts, registration fees, driving licenses, and city and school taxes, to name a few. If you keep an eye on your expenses, you’ll have a pretty comprehensive picture of your financial situation.

Does your budget show that you’re spending too much? Identify what you can cut but don’t go overboard: to stop dining out altogether may not be realistic. Make sure you budget for the occasional treat, otherwise you’ll feel like your missing out on life and that will cause your budget to derail.
If you happen to have a surplus, use it to add to your savings or to reduce your debts. Max out your RRSP, top up your RESP, use available contribution room in your TFSA, or make a double payment on your mortgage: all of the above will brighten your financial picture.

Plan for the unexpected

What do you do when your car breaks down or your roof starts leaking…? Unplanned-for expenses such as these are infuriating, because most of the time you don’t have the money available for the repairs. That’s where your emergency fund comes in, also called a cushion. If you budget for contingencies, you won’t need to resort to your line of credit in case of an emergency expense. As a rule of thumb, put aside an amount equivalent to three months’ worth of expenses. That may sound like a lot, but imagine losing your job…

Sometimes the opposite happens and you receive a windfall: an unexpected inheritance, a bigger than expected bonus, a winning lottery ticket. Instead of embarking on a spending spree and squandering your money, use your budget to assess how to allocate the money. Give yourself some time to think about it.

So how about it?

In this age of immediate gratification and getting what you want, when you want, doing a budget puts both your feet firmly back on the ground. There is something very rewarding in seeing your debts melt, your savings grow, and your goals getting closer.

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When MoneySense magazine first launched their Great TFSA Race in 2013, they wanted to see what Canadians had been able to do with the Tax Free Savings Account (TFSA) opportunity. Plenty, apparently, especially if you were willing to make a big bet when investing your contributions. By the time the 2014 Great TFSA Race rolled around, the magazine found a couple who had turned their combined $62,000 in contribution room into more than $1-million by putting it all in a single penny stock.* We certainly wouldn’t recommend taking this kind of risk, but the key with your TFSA is to emphasize growth. And thanks to an increase in the annual TFSA contribution limits to $10,000 starting this year, the TFSA has become a serious wealth creator – and completely tax-free!

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Media & Press

via Globe & Mail | February 4, 2016

Many folks obsess about saving and investing for their retirement but turn a blind eye to what happens when they die.

Thoughts about the end of life are unsettling, but owners of registered retirement savings plans (RRSPs) need to think ahead about how their cash will be doled out, or their beneficiaries could wind up with a big headache or a fat tax bill, financial advisers say.

“Estate planning isn’t just for seniors,” says Wilmot George, vice-president of tax, retirement and estate planning at Toronto-based CI Investments Inc. “Young people die, too. Death does not discriminate. If you know how registered retirement savings plans and registered retirement income funds [RRIFs] are taxed, you can plan around potential problems.”

Naming a beneficiary from the get-go on an application form for tax-sheltered retirement savings plans is useful, especially if the owner has no will. Upon death, it keeps these assets free of probate fees and potentially complex estate settlements. If an RRSP or RRIF becomes tied up in an estate that can take months or years to settle, the proceeds won’t be readily available to be distributed or to pay for funeral costs, said Mr. George.

Avoiding probate fees, however, should not be the priority at the expense of larger objectives, he cautioned.

“The beneficiary could be a spendthrift, or mentally or physically infirm, and can’t manage money. It might make sense to name your estate the beneficiary, and leave detailed instructions in your will with respect to the distribution of those monies.”

When naming a beneficiary for your plan and in a will, “you want to make sure they are consistent,” he said. “If you have a conflict, very often what happens is that the later designation prevails. Sometimes that is what you want to do, but sometimes it is not.”

Because RRSPs and RRIFs are deemed to be sold when someone dies, these assets could be taxed at the top marginal rates in the year of death, Mr. George said. A person’s taxable income could include assets such as stocks and bonds held outside the retirement plan that will be deemed to be sold at death.

If a spouse or common-law partner is named the beneficiary, plan proceeds can be rolled over tax-free into their retirement plans, or in the case of a RRIF, the spouse can opt to continue receiving the RRIF payments. The tax-free rollover would also apply if the funds were bequeathed to a financially dependent infirm child or grandchild for their RRSP or their registered disability savings plan (RDSP).

Assets from an RRSP or RRIF can also be rolled over tax-free to financially dependent children or grandchildren who are minors, said Matthew Ardrey, vice-president of T.E. Wealth in Toronto. “I am divorced, so my children [ages 10 and under] are the beneficiaries,” said the fee-only financial planner. “My RRSP would be split among them.”

To reduce taxes, the proceeds from an RRSP could be used to purchase an annuity for each child with payments made to each until age 18. The money then would be split over a number of years and be taxable to each child instead of distributed as a lump sum that would be taxed heavily, Mr. Ardrey said. “They [children] could have little to no taxes payable at all on that RRSP money.”

It is also possible for a charity to be named as the beneficiary of an RRSP or RRIF, except in Quebec where it must be a person.

For instance, a single adult with no children might want to give more money to a charity than the tax man, Mr. Ardrey said. The charitable tax credit, which can be claimed to offset the tax burden on the estate, rises to 100 per cent of net income in the year of death, compared with 75 per cent while the donor is alive.

RRSP or RRIF holders need to remember to update beneficiary designations when they experience a life-changing event such as a marriage or divorce, says Jim Yih, an Edmonton-based fee-only financial planner. Group RRSPs at the workplace are often neglected, said Mr. Yih, who also runs a personal finance blog called

“We have seen situations where people, when they first sign up for a group RRSP plan, weren’t married so they listed their parents [as beneficiaries]. Then, they got married and never changed it.”

He recounted a similar situation in which a male employee, who had listed his wife as his beneficiary on his group RRSP, later divorced and was living common law with another woman. When he died, “because he had never changed his beneficiary for that RRSP [and he did not have a will], it was actually the ex-wife who got the money,” said Mr. Yih. “He had been with the company for 10 years, so [the assets] were substantial.”

The common-law partner said “it wasn’t fair,” but the only thing the insurance company could do was to pay the proper beneficiary, he said.

Many retirees don’t want to withdraw from their RRSPs right away to avoid government withholding and income taxes, or because they have cash coming in from other sources such as a company pension, Mr. Yih said. But they should consider a strategy to withdraw [some cash from the RRSP as soon as they retire] or convert it to a RRIF earlier than the mandatory age of 71, he suggested.

For retirees, who typically are in a lower marginal tax bracket, “it makes sense to take little bits and pieces out to spread the tax liability over a longer period of time,” he said. “Spend it. Enjoy it. Use it for a holiday.

“It actually may be a more advantageous tax strategy than not taking money out, and leaving a big chunk at the end when you die,” he said. “The tax [hit] can be pretty significant if you haven’t spent your RRSPs.”

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