Category: Cash Flow Planning

Shrinkflation

Posted on by Chantel Gibbs

Dishwashing soap bought in 2021 vs same dishwashing soap bought in 2022 on right. A decrease of almost 60 mL for the same price.

If you feel like the stuff you are buying is just not going as far as it used to go, I’m here to tell you that you are not imagining things. I started noticing it in small ways around the grocery store and it is quite subtle. The packaging looks basically the same to the naked eye, but there is less in it than there used to be. This is a phenomenon known as “shrinkflation” and is a way to make people feel like prices are still similar when they are not.

You’ve probably noticed the increase in food prices, particularly staples like meat, eggs, and milk. There have certainly been complaints made about those, but those items aren’t the ones usually subject to shrinkflation because they have standard quantities. It is the shelf items that you will need to watch out for. I suspect that, as a result, prices have increased even more than the inflation numbers the government is currently putting out.

How did we end up with such large inflation? Contrary to popular belief, the government does not create value – it merely redistributes it. Granted, the government has some public utility companies and transportation services that do produce value, but very inefficiently (just ask my brother who worked for BC Hydro). The government has recently been touting it’s success at creating jobs after the pandemic, but upon closer examination, we discover those jobs are mostly government jobs – in other words, those jobs do not create value but just leech money from the sectors of the economy that are actually creating goods and resources. Worse, most government jobs are created to expand some sort of compliance requirement, meaning more paperwork and lost time for the sectors of the economy that are trying to produce value.

Inflation historically has often occurred in countries where the government attempted to print money to buy their way out of a crisis. Germany in the 1920s, Zimbabwe, Brazil, and Argentina to name a few. The inflation sometimes got so bad that the money wasn’t even worth the paper it was printed on and people would go after work and spend their whole paycheque on goods because otherwise their money would lose value overnight. During the recent pandemic, many countries including Canada started printing money to distribute to needy people and sectors of the economy. Problem is, that money was still chasing the same amount of goods produced. Divide the money over the goods available and it means the goods suddenly cost more. Economics 101. Now, the consequences of the government spending are hitting the country and the people will pay for it one way or the other – either through more taxes or higher costs of living. Value cannot simply be summoned out of thin air by government.

The next time a politician promises you a bunch of new programs and spending that are supposed to help you out, remember that they are bribing you with your own money.

Welcome to a Time of Inflation, Uncertainty, and Higher Interest Rates

Posted on by Chantel Gibbs

TIPS FOR STRETCHING YOUR DOLLAR

  • Make more meals at home and buy things in season and freeze or can it for later.
  • Use the food you buy instead of throwing out a bunch.
  • Teach your children the value of money and actually make them work for their allowance.
  • Get to know your community so you can trade favours with those around you.

WELCOME TO A TIME OF INFLATION, UNCERTAINTY, AND RISING INTEREST RATES

It has been a long time since we have had this much inflation – in fact, the last time was when we had Trudeau Senior in power. History has a funny way of repeating itself, doesn’t it? The Bank of Canada is increasing interest rates to slow the inflation and housing market down and it is beginning to work, but it also means that the massive amount of debt the federal government has taken out lately is about to become very expensive to maintain. People who took out a big mortgage to buy in to the recent housing frenzy are going to be hit with a double whammy as the price of houses fall again and interest rates rise. Supply chain issues still plague the world and now there is talk of potential famine. Things are about to get rough.

What should you do with your savings in this kind of an environment? Let me give you an example of diversifying wealth in a time of inflation and uncertainty. My grandparents moved to Canada in the late 1970’s. They were lucky in that they brought quite a lot of wealth with them, but when the inflation came, they were also trying to figure out where to put it so that it wouldn’t lose value. Here is a list of what they invested in and what worked out 40 years later and what didn’t.

 

 

As you can see, the home was a good investment because the land was a reasonable price and it was a good time to find builders, but our current market isn’t there yet. The vacant land was a mixed bag. The huge sacks of wheat was a panic buy that didn’t end up being needed and the gold was also a panic buy because everyone else was doing it. This time, people aren’t yet fleeing to precious metals and the prices are more reasonable, so it may work out better. Taking up farming was a decent move since it was both a hobby and a source of food and clothing security, but it only really worked because there was the land at a good price to do it. Starting a business was great, but only because they already had the seed money and didn’t need to get a 25% interest rate loan from the bank. In our current environment, interest is still fairly low, so starting a business could be good if you can lock in a longer term loan at the lower interest rates and if you are in an industry where demand will still be high in a recession.

Should you invest in something like cryptocurrency? Probably not. While it is a secure medium of exchange (unless the end user on either side is hacked), it has no asset backing and is only valuable because a bunch of people agree it has value. If you decide to invest in it, please only invest about 5% of your total savings, not 50%. Diversification across different industries, different countries, and different kinds of assets are key. If it is a decision between paying down your mortgage quicker or investing in risky assets with your extra cash, it is wiser to pay down your mortgage as housing will always be essential.

What can you do in your daily life to reduce your living expense and make your money go further? Growing your own food is an option, but there are many other ways to reduce what you spend on food. How much food do you end up throwing out? Do you eat out often or do you make meals at home? Have you learned the art of cooking big meals and freezing portions for a later day when you don’t feel like cooking? Do you buy things in season and on sale and have you learned things like canning and drying fruits? If you buy food in bulk, do you actually use it all or does a large portion get thrown out? Managing your food expense can go a long way. Pets are another potential money pit. Your dog really does not need all that pampering. If you have children, teach them the value of money and pay them according to the money and time they save you; ie. when they do their household chores, walk the dog, and make meals. They shouldn’t get an allowance simply because they live under your roof (heck, after 18, I had to pay my parents rent and there was no allowance).

And finally, let me stress the importance of community. The next few years could be rough, but let’s get out of our COVID isolation mentality and start helping each other out. Practice your bartering skills and learn how to exchange favours with your neighbours. We can get through the rough times by working together.

If you need help managing your cash flow and trimming expenses, feel free to reach out to me for a no-obligation introductory meeting to discuss your situation.

 

 

What is the Craze around Cryptocurrency all about?

Posted on by Chantel Gibbs

What is the Craze around Cryptocurrency all about?

You’ve probably heard of Bitcoin and how it has gone up a ton in value over the last few years and made some young geeks into multi-millionaires. You may have also heard of other cryptocurrencies like Dogecoin or Ethereum. You may be wondering whether you should invest in some yourself and what the best way is to do that. I did some research on the topic and here is what I learned:

 

  1. What is a cryptocurrency?

Cryptocurrency is built on the blockchain technology that has been around for almost two decades. Think of it like a Google Doc. There is a starting document or piece of information, call it a block, that is shared with many others over a network and everyone who has access to that block can add information to it. The information in the starting block is summarized into a hash ID and encrypted. Any change to that block would change the hash ID and show that it has been tampered with. If someone adds information or a transaction to that starting block, it is another block with another hash that is linked to that other one. Hence the “blockchain” name. If you’ve used a Google Doc, you will note that it tells you who has made changes to it and you can go back and look at each version over time and even restore a previous version if someone added bad data or messed up the file. Blockchain gives the same sort of audit trail because it is possible to view every block of information that has been added to the chain. Blockchain goes a step further than a Google Doc, however, because the encrypted hash information is kept by servers all over the internet and any time anyone wants to add a block to the blockchain, they first must prove they have all the data from the rest of the blocks and that they have permission to add to it by verifying the data with all the other servers. For someone to alter a blockchain, they must tamper with the data held by all the different servers at the same time. That’s pretty much impossible.

A cryptocurrency like Bitcoin starts with that hashed block of information that then has blocks added to it as transactions happen. In the case of Bitcoin, there are 21 million possible coins and creating a coin means solving a very complex set of mathematical functions. Think calculus on steroids. “Miners” use super computers to solve the mathematical functions to create possible blocks and are rewarded with Bitcoins for their efforts. So far, about 18 million of the 21 possible Bitcoins have been solved and created. Other computers and servers work as nodes that verify the information in the blocks and process transactions using Bitcoin and are also rewarded with some Bitcoin. The whole thing is completely decentralized and works because it rewards those who participate in enabling the network and disincentivizes those who would try to hack it because it would take far more computing power to reverse engineer the hashed info than it would take to just solve the mathematical functions and create another Bitcoin.

Not all cryptocurrencies are created equal. Bitcoin is one of the first and most secure in terms of being unable to decode. There are now over 4000 cryptocurrencies in existence and most of them are garbage. Some of them were created for fun and there is at least one out now that is a bit of a game where you can have your smartphone “mine” the coins in the background while you go about your day. Are those coins going to be worth anything? Probably not.

A cryptocurrency has no asset backing, unlike the currency of a country which is backed by the economic strength of the country. The value of a cryptocurrency is in its ability to be bought and sold easily on exchanges, its ability to be transferred worldwide to anyone with a receiving address for hardly any transaction cost, and the security of the blockchain underlying it. It is still mostly a perceived value and speculation that drives the cost up.

 

2. How do you transact with a cryptocurrency?

Cryptocurrencies have sender and receiver addresses that differ based on the coin. You can’t send Ethereum to a Bitcoin address, for instance. You hold your cryptocurrencies in a “wallet” which can be either a software program on your computer or smartphone or a hardware wallet that looks like a USB drive. The hardware wallet is the most secure since it is only accessible to the internet when you actually plug it in and use it, but otherwise it is sitting offline. Most hacks regarding cryptocurrencies happen with the user at the end point, not with the blockchain itself. If someone gets a hold of your private keys or password to your wallet, they control your cryptocurrency. Some of the more common software wallets include Jaxx and Bitcoin Core and hardware wallets can be purchased from Trezor, Ledger, or Keepkey.

Cryptocurrency can be bought or sold on an exchange much like a stock exchange. Most exchanges like Coinbase and Kraken are centralized and allow you to exchange country money like USD$ into any common cryptocurrency. You will need to set up an account and most of those exchanges will allow you to leave your currency in your account, much like PayPal allows you to keep a balance. However, exchanges have been hacked in the past, so it is not best practice to leave your currency there. Move it into your software or hardware wallet instead.

Whatever you do, don’t lose your password to get in to your wallet! Some guy in Ontario put a few thousand into Bitcoin years ago to try it, forgot about it and forgot his password, then realized he had millions of dollars worth of Bitcoin, but couldn’t access it. Since Bitcoin is decentralized, there was no central authority to help him recover his access. Tough luck.

 

3. What is the future of cryptocurrency?

Good question. There seems to be a move by certain governments, particularly China, to shut down the decentralized cryptocurrency like Bitcoin and introduce their own. They express concern with how much electricity super computers are using to mine Bitcoin and other cryptocurrencies and the environmental impact, but it is likely more of an excuse to try and control this craze. You may have read that Tesla was accepting Bitcoin for a while, but then Elon Musk changed his mind and cited environmental concerns as a reason. The real reason is probably the volatility of Bitcoin and the difficulty in setting a value on it for ongoing financial reporting to shareholders.

You should also be aware that any gains made on trading cryptocurrency needs to be reported on your taxes. You might think the government can’t track your trades, but remember that you have an address that is yours alone that you can send and receive trades from. An auditor can go to blockchain.com and look up your address to see all the transactions that have been done with that address. That is because that transaction history is embedded in the blocks that make up the coin itself and that is being verified through all the different servers. It is public knowledge.

In conclusion, I think cryptocurrency is quite revolutionary, but I also think government is going to try to take over that space to better control and tax it. This will mean that more businesses will be willing to accept cryptocurrency once government validates it, but it might be new cryptocurrencies that government introduces, not Bitcoin and other decentralized ones. If you are going to invest in cryptocurrency, only invest what you are willing to lose.

Giving Your Kids Money Now vs Later

Posted on by Chantel Gibbs

Giving Your Kids Money Now vs Later

Many elderly parents are downsizing their homes, simplifying their affairs, and getting their estate planning done. Often they end up with extra cash from liquidating property that they feel they likely won’t require for their lifetime and the question arises whether they should give some of it to their heirs now instead of later. There isn’t really a right or wrong answer to this question. As long as the parent isn’t giving away property with unrealized gains and is just giving cash, there are no tax consequences in Canada. In fact, it may even help save future tax and administrative costs. However, there are non-financial reasons why giving away money now may not be the best idea. The below is a chart of some of the pros and cons of giving an advance on the inheritance.

 

If parents do want to go ahead and gift some of their money while living, how do they make sure that each child is treated fairly? Some children might be begging for money now while others are doing just fine financially.

Let me give you some suggestions for how to give an advance while keeping things equal and fair between all the children.

 

#1 – Make it a Loan Instead of a Gift

Instead of making it an outright gift of money, give a loan to those children who are in need of money now and make it official. That’s right – get a lawyer to put it on paper and have it properly signed with interest and repayment terms. If no repayment is required or if there is a balance still outstanding when the parents die, then it must be deducted against that child’s share of the inheritance in order to keep things fair for the other children. Loan balances should be carefully maintained and kept with the will documents. There have been many estate disputes in the courts where one child claims there was a loan to another child and that child claims it was a gift. Without documentation, it is basically one person’s word against the other.

I would also recommend setting an interest rate at least equal to inflation on the loan, even though this ends up creating some income for the parents. This ensures there isn’t a benefit for the children who got money immediately compared to the children who waited.

 

#2 – Set Money Aside for Children Who Did Not Receive an Advance

In BC, if the will does not distribute the estate equally to all children, the children can use the wills variation act to try and get a better result. It is highly recommended to treat all children equally in the will. So how can parents make sure that children who did not receive an advance on the inheritance get extra in the estate to make up for not receiving any earlier?

A simple solution would be to put that money aside in segregated funds for the children who did not receive any money up front. A segregated fund is available through insurance companies in Canada and allows beneficiaries to be named on an account so that the money goes straight to them instead of passing through the will. While usually beneficiaries can only be named on retirement accounts like a RRIF or on a TFSA account, segregated funds can have beneficiaries named even on non-registered accounts, making it ideal for proceeds arising from the sale of a home. Because it does not pass through the will, it is not subject to probate and the wills variation act and it is entirely confidential. The segregated fund will earn an investment return on the money in it, making up for the time value of money that the children who received the money up front got. Money is not locked in to a segregated fund (unlike annuities) and the parents can still withdraw money if they need it.

For instance, let’s say an elderly couple sells a home for $1 million. They keep $500,000 for themselves, but feel that they can afford to give the rest of the proceeds to their four children. Of the four children, two are quite eager to have the money now, but the other two are financially stable and don’t need it immediately. If they give $125,000 to each child that needs it now, then they should put $125,000 for each of the other children into a segregated fund where that child will be the beneficiary upon the parents’ passing. If the investments in the segregated fund do particularly well, the parents can withdraw some of the funds for themselves while they are still living and leave the rest for the children. This is because segregated funds can hold mutual funds much like regular investing, so it is likely that it will return more than is needed to make up for inflation.

 

At the end of the day, estate and inheritance planning is not simply about having a will in place. The will only deals with the assets that actually need to go through the legal process of probate, but anything that is in joint title or has beneficiaries named will bypass the will and the legal estate and must be planned for separately. This is why it is important to have advice both on the legal side for the will itself, but also on the financial side for the accounts and insurance products that can bypass the will. Speak with me for a free consultation to discuss estate planning and the issues that are relevant to your family situation.

Reassessing your Finances for 2021

Posted on by Chantel Gibbs

Reassessing your Finances for 2021

The year 2020 was a strange one for all of us. Our usual patterns of life were overturned, businesses floundered and shut down, other businesses had to change to a whole new way of working, and social activities were largely shut down. Many people lost their jobs and found themselves having to cut back in order to make ends meet. The year 2020 taught us a lot about the uncertainty of life and the need for saving in the good times (though it doesn’t seem to have taught our government).

In light of 2020, I wanted to leave a number of tips and thoughts for improving your financial and personal well-being in 2021.

  1.  Revisit Your Budget

We aren’t past the virus yet, even though there is a vaccine. Now is the time to revisit your monthly budget to see what things can be cut back. If you have two cars but hardly go out, consider putting one in storage or changing the usage to pleasure use to save on insurance costs. Are you paying for a gym membership or other membership that you aren’t using?

For any money you free up, either pay down debt or set up a monthly automatic savings into a TFSA or savings account that you can draw from without a tax penalty. The uncertainty of 2020 has demonstrated the need for an emergency fund that can be used to help bridge the gap when there is a drop in monthly income. If that emergency fund is a line of credit, then during better times, that line of credit should be repaid or the debt can easily spiral out of control.

2.  Avoid Credit Card Debt

Credit card debt is among the worst kind of debt out there. The interest rates on unpaid balances are typically between 15% and 20%, even though prime interest rates are at a historic low. If you find yourself in credit card debt, try to consolidate it under your mortgage payments or under a line of credit secured against your assets in order to get the lowest interest rates available. Do not fall for those easy loans or payday loans since the interest rates on those are just as bad as credit cards. Instead, talk to your bank or credit union directly and shop around for the best offer.

3.  Beware the “Add to Cart” Button

Global online sales grew astronomically in 2020 as people stayed at home to isolate from Covid 19. Buying online is very simple and the selection is huge. It is quite easy to instantly satisfy a want and have the package arrive within hours or days without getting off the couch. Unfortunately, this easy access has encouraged a spending spree on everything from takeout food to pet toys. Instead of scanning Facebook or Amazon when bored at home, consider going for a walk or calling a friend. Trade “retail therapy” for a better kind of therapy that is less damaging to personal finances. See tip 5 for some ideas.

4.  Track Your Spending

Your monthly spending won’t always be consistent, but there should be a typical average for base needs like food, housing, telephone/internet, and transportation. It is the extras that need watching. There are apps available like Mint developed by Intuit (the makers of Quickbooks) that will link to your credit card and bank transactions and automatically categorize them for you so you can see how much you spent in each category a month. Apps like this make monthly tracking and budgeting far less manual and time consuming. Consider using one of these apps if you are constantly wondering where your money is going.

5.  Invest in Yourself and Your Skills

If, like many other people, you found yourself with lots of extra time in 2020, consider developing new skills, learning something new, and meeting your exercise targets. Not only will it help with the depression that tends to come with too much free time and social isolation, but it can open up future possibilities that you hadn’t considered. There are courses offered virtually for free or for low prices all over the place. Join a networking group or Toastmasters for some social interaction and to develop skills and contacts. Seize the opportunities available to you and take this time to consider what you want your life to look like.

If you would like help in getting sorted for 2021 and into a saving rhythm, reach out to me for a free initial consultation and put your goals into action!

Being incorporated vs self-employed

Posted on by Chantel Gibbs

Being Incorporated vs Self-Employed

Let’s say you start a small business. One of the first questions people often have is whether to incorporate their business because they have heard that incorporation can defer taxes and shield the owner from creditors who might sue the business. While this is true in most cases, the benefits of incorporation depend largely on the profits made by the business and being incorporated won’t necessarily shield the owner from liability if a lawsuit is due to the owner’s personal negligence. So when should you consider incorporation?

First, you need to consider the type of business you are in. A lot of larger businesses like to hire contractors because it is much simpler than having an employee and the contract can be easily terminated after the project is finished. If your business is mainly sub-contracting your skills out to larger companies, then you need to be working for multiple companies in a year, otherwise CRA will consider you to be a glorified employee. They may also chase the business who sub-contracted to you for employee remittances because they should have just hired you as an employee. To be properly sub-contracted, you need to have your own tools for the work, show that your hours are based more on deadlines for the project than the business’ usual office hours, show that there is an expected end date to the contract, and that you are available and taking contracts from other businesses.

An incorporated small business is a separate legal entity from its owner and that means that it files a separate tax return and separate financials from the owner every year. This is a significant additional cost, so the amount of deferred profit in the company and resulting tax savings must be worth that cost. Also, the incorporated small business must not be treated as the owner’s personal bank. Anything that the company pays for that is used personally must be declared as either salary or a dividend to the owner and taxed in the owner’s hands. This is an area that CRA particularly likes to audit and the penalties are steep.

The following table is a comparison of some differences between being incorporated and being self-employed.

There are many things to weigh in the decision whether to incorporate or not and much of it depends on personal circumstances. Please reach out for an appointment if you would like to discuss your own business.

A Brief Summary of Registered Accounts

Posted on by Chantel Gibbs

A Brief Summary of Registered Accounts

In Canada, there are two categories of accounts for saving money in: registered accounts and non-registered accounts. Registered accounts like a RRSP, TFSA, and RESP are registered with the government and need to follow certain rules in exchange for specific tax breaks or government grants. Non-registered accounts include basic savings and checking accounts and investment accounts. Below is a summary of the main kinds of registered accounts and how they work.

Tax Free Savings Account (TFSA)

A TFSA account allows a person to make investment income tax free. Contributions are made with after-tax money (unlike the RRSP) and the maximum contribution room increases yearly for everyone over age 18. If money is withdrawn one year, the contribution room comes back the next year so they can put the money back in again. It is a great tool for saving for a big purchase or even for retirement. To find your TFSA contribution room, log in to your CRA My Account. If you are a US citizen, you should not open a TFSA because the US does not recognize it and will still tax you on any income made in it.

Registered Retirement Savings Plan (RRSP)

RRSP and Locked-In Retirement Accounts (LIRA) are a way to defer some of your income from your working years to your retirement years. The maximum you can contribute to these accounts is 18% of your earnings up to an amount that the government sets yearly. Contributions are a deduction from taxable income and withdrawals are an addition to taxable income. The difference between the two accounts is that a LIRA or LIF account is a locked-in fund meaning that only a set maximum can be withdrawn every year based on age. An RRSP, on the other hand, has no maximum withdrawal cap and can be drawn from at any time, even before retirement. A RRSP must be converted into a RRIF at the end of the year the person turns 71. After that, a minimum amount must be drawn yearly based on age. Your personal RRSP contribution limit can be found on your notice of assessment or your CRA My Account. If your employer is contributing to a pension plan for you, your RRSP contribution limit will be reduced by those amounts.

 

Registered Education Savings Plan (RESP)

A RESP account allows someone to save for the future education of a family member or even themselves. Government grants are available if the RESP is set up for someone under 18 with a valid SIN number living in Canada. The province of BC also offers a one time grant for children between 6 and 9 years of age. There is a lifetime maximum of $50,000 per child that can be contributed to an RESP. If the child doesn’t attend post-secondary education and there is no sibling to transfer the money to, the plan can be wound up and the money given back to the contributor, but the government grants will need to be repaid.

Registered Disability Savings Plan (RDSP)

A RDSP account is particularly for individuals who qualify for the disability tax credit and have long-term disabilities. The government provides grants to help match what is contributed to the individual’s plan up to a certain amount a year. A lifetime maximum of $200,000 can be contributed to a RDSP. Contributions can be made up until the beneficiary turns 60. Family members’ RRSP accounts can be rolled in to an RDSP account without the usual tax consequences at death, but RRSP rollovers are not eligible for matching government grants.

 

Government Support and Helping Yourself

Posted on by Chantel Gibbs

Government Support and Helping Yourself

If the 2020 coronavirus pandemic has taught us something, it is that many of our jobs are fragile and the government will only offer limited support. Businesses need to be prepared to deal with a sudden loss of revenue and adapt quickly.

If tragedy befell you in your personal life, what kind of support could you expect the government to give? The simple answer is that the government will give you just enough money to sustain basic living. The rest you would need to source from your own assets, your own insurance, or from friends and family.

The CPP Disability benefit is a taxable benefit available up to the age of 65 for severe and long-term disabilities. The benefit is based on how many years contributions have been made to the CPP and how much. There is also a benefit available for the children of a person who qualifies for the CPP Disability benefit.

Employment Insurance (EI) provides a sickness benefit for up to 15 weeks if unable to work due to sickness. To qualify, the person must have 600 hours of work at the job and apply within a short time of stopping work. It is a taxable benefit that only covers part of the salary. Insurance is also available, of course, in the event of a lay-off or loss of work for reasons other than being terminated for just cause. During the Covid 19 crisis, there are EI benefits available for anyone who has been unable to work for 14 days or more.

The Workers Compensation Board (WCB)  pays short term or long term benefits to people who are injured on the job. The payments are intended to cover up to 90% of a person’s after-tax income. Payments are reduced for any other insurance coverage or government benefits you may receive.

On death, CPP Canada will pay a one-time benefit of $2500 to the estate of the deceased. If the person was a CPP contributor, the surviving spouse and children could qualify for monthly support payments from the CPP.

Individual provinces also have their own long-term disability programs that are often asset tested. For instance, BC’s program only allows a person to have a primary residence, one vehicle, and up to $100,000 of savings apart from an RDSP or RESP account to be eligible.

In conclusion, it is best to combine reliance on government programs with your own insurance. This may be partly provided by your employer’s benefit plan, but it may also require buying your own. Most insurers, however, still require you to fund the first few months of loss of income, so you should have an emergency fund in any event.

  • The government will only give you enough in the long term to sustain basic living
  • Short term benefits for sickness are more generous, but still only cover part of prior income level.
  • There is nothing available to businesses to weather an economic storm unless the government specifically sets up bailouts.

 

 

 

 

 

 

Managing Your Taxable Income

Posted on by Chantel Gibbs

Managing Your Taxable Income

 

“Managing your taxable income is important for social benefits like the Old Age Security and to reduce your overall tax expense.”

 

 

 

Many people have the misconception that once you cross into another tax bracket, all your income is taxed at that higher rate. In reality, it is only the income portion that crossed the threshold that is taxed higher. Part of cash flow planning is keeping your taxable income at a consistent level.

Things that could increase your taxable income for the year include draws from your RRSP and the realization of gains on the sale of an investment property or company share.

Earnings that make up ordinary income include employment income, business income, net rental income, interest, pension, RRSP / RRIF withdrawals, CPP, and Old Age Security. Ordinary income is subject to the highest rate of tax.

Dividends received from Canadian companies are taxed lower because the company has already paid some tax on the earnings. For eligible dividends, the company already paid 27% tax, so if the person has taxable income below $48,535, he/she can actually receive a tax refund by earning some eligible dividends.

If you know you will have a large income inclusion in one year, plan ahead to use available tax deductions. For instance, if selling a rental property with a large increase in value, it may be a good idea to keep some RRSP contribution room for that year since RRSP contributions are a deduction from taxable income and can be used to offset the capital gain income inclusion.

Tax credits do not reduce your taxable income, but help to reduce the tax you have to pay. Tax credits include donations, medical expenses, disability, basic personal credits, and many others. Be warned that social benefits like the Old Age Security are based on taxable income, regardless of how much credits you may have.