Make your financial world a better place

Our experts share their top planning strategies for improving personal finances in 2014. 
Be sure to pass them on to your family and friends.

Make an investment loan to your spouse

Harjeet Sachar, Calgary
Looking for ways to lower your household’s income tax bill? One strategy that I have found to be effective is having the spouse with the lower income (and the lower marginal tax rate) earn the investment income to save income tax. By having the higher earning spouse pay all household expenses, you can dedicate the lower earning spouse’s income for investing. Once you’ve invested all of the lower earning spouse’s income, or if he or she has no income for tax purposes, consider making an investment loan to your spouse.

Lending instead of giving the money ensures that any investment income will be attributed to your spouse, at his or her lower tax rate. You will need a sufficient return on the investment to make this worth your while but Canada Revenue Agency is giving you a helping hand in the form of their prescribed interest rate. Currently at 1.0%*, this is the interest rate you must charge your spouse for the loan. Although you will have to claim the interest on the loan as income, in my experience, couples almost always come out ahead.

* CRA prescribed interest rates are set quarterly.

Be strategic about charitable gifts

Michael Giacomodonato, Montreal
Do your charitable gifts lack direction? Would you like to see the money you give to charity do more? By being more tax efficient and focusing your giving with a strategic approach, you may be able to give more to the causes that you really care about. To get started, I recommend setting specific goals – identify what you would like to accomplish and the charities you want to support. Then establish a budget for annual giving, setting aside a smaller amount for donation requests that come from family and friends. Next, consider how you may want to further your charitable giving goals through gifts of cultural and personal property, and through your estate plan. Finally, arrange your charitable gifts to be the most tax-efficient. You can maximize the Charitable Gift Tax Credit (up to 15% on the first $200 donated and 29% on the excess) by accumulating donations for up to five years and pooling donations with your spouse or common-law partner. And if you have stocks with associated capital gains, giving them in-kind to the charity will eliminate your tax liability on the capital gains.

Draft or update your Will

Maryse Ouellette, Montreal
If you think you don’t need a Will, consider what will happen if you die without one. In Canada, without a valid Will you are deemed to have died intestate and the province where you reside will step in to settle your estate. This means that they select an executor, decide who will be guardians of any minor children and determine who, usually based on a predetermined formula, will receive your assets. In other words, without a Will in place, you lose your say. The fact is that anyone who has assets or dependents needs a Will. A properly drafted Will simply documents your wishes for your estate, setting out how your assets will be distributed and who will look after your dependents. While we don’t draft Wills at T.E. Wealth, we are happy to work with your lawyer or notary to ensure your Will accurately reflects your estate plan. And once you have a Will, remember to review and update it every three years and when circumstances dictate, such as a change in your marital status.

Max out your TFSA limits

Warren Baldwin, Toronto
Tax Free Savings Accounts (TFSAs) were first introduced in 2009 to provide every Canadian resident over the age of 18 with the opportunity to save and invest without paying tax on the investment earnings. As of 2014, you can save as much as $31,000 in a TFSA (that’s $62,000 for a couple!) and not pay any tax on the investment earnings. And each calendar year, you can invest another $5,500 tax-free (annual contribution limits were increased to $5,500 in 2013 from $5,000). What’s more, you can give money to your spouse for his or her TFSA and not worry about having the investment earnings attributed to you. But to make the most of the TFSA opportunity, don’t be misled by the term “savings.” This is the place to hold your highest returning, non-registered investments for the long term – you’ll keep 100% of your investment return, allowing you to build greater wealth, faster.

Pay down debt before rates rise

Brent Soucie, Toronto
The general feeling amongst prominent economists is that interest rates will rise. While it is difficult to predict exactly when this might occur, it is prudent to assume mortgage rates will continue their upward trend – especially as the effects of the highly publicized U.S. stimulus program work their way through the system. For anyone carrying debt, particularly those heading into retirement, the current trend in interest rates presents an opportunity to pay down balances, reducing one’s overall exposure to rising rates. With rates at historically low levels, it won’t take much of an increase for corresponding mortgage payments to rise substantially. We regularly help our clients examine their cash flow to see if there are opportunities to make lump-sum payments on mortgages or lines of credit. Year-end bonuses, tax refunds, and other periodic windfalls can all be used to pay down debt. Once the liability side of a personal balance sheet is reduced or eliminated, we are happy to assist in allocating any additional disposable income towards an individual’s growing asset base.

Make sure your insurance is “just right”

Karen Hennessy, Montreal
Insurance is always a delicate balancing act. Have too much and you are paying unnecessary premiums. Have too little and you are leaving yourself and your family exposed. As part of our financial planning service, we always review insurance needs, taking into account what your employer may provide and what you need to have on your own. Once we’ve determined the amount of coverage you need in terms of life and disability insurance as well as critical illness and long-term care coverage, we can help you evaluate your options to make sure that your insurance is not only “just right” but also good value. And, at pivotal life events, we’ll help you assess whether you need to adjust your coverage.

Another area that is important to review is the personal liability coverage offered through property and casualty insurance on your principal residence, vacation property, cars and recreational vehicles. Often an umbrella policy can be the most cost-effective means of addressing personal liability across multiple properties and vehicles.

Invest in a child’s education

Jane Cheong, Montreal
If you want to see a young person prosper, one of the best investments you can make is in their education. Post-secondary education continues to be a good indicator of later life success but the time for post-secondary study is getting longer and pricier, especially when graduate and professional degrees are factored in. At the same time, most tuition fees have been rising faster than the rate of inflation. When setting up an education savings strategy, I begin with the Registered Education Savings Plan (RESP), which offers tax-deferred growth and the opportunity to earn the Canada Education Savings Grant, worth up to $7,200 per child.** If more savings are required, I will recommend Tax Free Savings Accounts (TFSAs), both in the parents’ name and the child’s (if age 18 or over) for tax-free growth of $5,500 in annual contributions per person. In addition, I will draw up a contribution and withdrawal schedule to maximize available government grants and overall tax-efficiency.

** Residents of Alberta, British Columbia and Quebec may be eligible for additional grants from their provincial governments.

Let us prepare your tax returns

Marcy Ages, Toronto
As part of our financial planning program, one of the services we offer is the preparation and filing of annual income tax returns for clients and their immediate family members. It is a fairly unique practice in our industry but we see it as providing our clients with key advantages. Tax touches all aspects of wealth management, from saving and investments to retirement income and estate planning. Preparing annual tax returns gives us greater insight into your overall tax position. As a result, we are in a better position to organize your financial plan for maximum tax efficiency and recommend strategies to minimize the income tax your family has to pay. With a clear understanding of your tax situation, we can take steps to minimize the tax consequences when adjusting or rebalancing investment portfolios and when taking retirement income. In addition, we are able to arrange for the required cash flow to pay tax installments on time, avoiding unnecessary and costly penalties.

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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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