My Own Advisor

Drawing some inspiration from some other great blogs recently, like Give Me Back My Five Bucks and Million Dollar Journey, I wanted to ask you – what did you do with your tax refund this year?  Did you spend it wisely?

I’m sure I’m no different than you but we’ve got a bunch of priorities around our house in 2013.  Home improvements, paying down mortgage debt, investing for the future and taking some funds to travel and enjoy life are important things to us.  With a busy life and obligations, it’s hard to decide what the priority should be.  Maybe all of these things are worthy candidates?  In no particular order then, here is what I consider some of the best uses for your tax refund this year or any year:

1.      Reinvest in your RRSP

Revisiting a previous post here on my site, if you do not reinvest the tax refund gained from RRSP tax deduction then I believe you are not capitalizing on the true power of this account.  A friend of mine told me recently, he believes RRSPs are misleading to many investors – he is probably right.  While RRSPs are in fact an excellent account for retirement savings, a Registered Retirement Savings Plan could easily be rebranded as a “Registered Reinvestment Savings Plan”.   Meaning, to make the most of this account you should really reinvest the tax deduction as much and as often as you can.  At some point, the tax deduction you get today or what I consider a temporary government loan must be paid back when you withdraw RRSP funds.  Hopefully though, you are withdrawing funds in a lower tax bracket than your contributions of today.  This may or may not be the case for you so you need to use this account wisely.

2.      Invest in your TFSA

Folks who read my blog regularly are probably aware I’m a huge fan of the Tax Free Savings Account (TFSA).  This account is a true gift to Canadians.  You can find out why I adore this account in some previous posts here and here.  My strategy is to use the TFSA to hold Canadian dividend paying stocks that return consistent dividends every month or quarter.  In many cases, the companies I own increase their dividends every year or so:  Bell Canada (BCE) and Fortis (FTS) just to name a few.  My plan over time is to shelter dividends paid as much as possible using TFSAs so in retirement, I can make a few periodic withdrawals from this account to pay for living expenses, tax-free.

3.      Pay down debt

A while back, I offered up a question for readers to consider:  What would you do with $1,000?  In that article, I shared what I’d do with that tidy sum if it found me.  If your tax refund was $1000 (even more or even less) I think a good use for your tax refund is to pay down high interest debt (like credit card debt) or your mortgage.  If you have no consumer debt (good on you) then consider making a lump sum payment on your mortgage.  Paying down your mortgage might be one of the best guaranteed investments you can make – because you and I pay our mortgages with after-tax dollars, so even a cheap mortgage rate of 3% is going to feel closer to a 4.5% return on investment.

Sure, you could definitely build an emergency fund or contribute to your child’s education instead of these options – those are excellent things to do too – but whatever you choose to do with your tax refund, consider spending it wisely delaying at least some gratification today.

In case you are curious, this year we did half-and-half:  half of our tax refund was reinvested in RRSPs and the other half was applied to our mortgage.  As much as I can, I try and eat my own cooking.

What did you do with your tax refund this year?

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We’ve all heard the refrain before – death and taxes – these are two certainties we must all face as part of life.  Believe it or not, you can also be taxed after death.

After your death, even if you are a Canadian citizen your estate may be subject to U.S estate taxes.

What is U.S. Estate Tax?

This is the tax imposed on the estate of a deceased person, such as property transferred under a will and certain other property that flows on death.  This tax can apply to U.S. business assets, U.S. real estate property, U.S. stocks and other assets above a certain market value.  I’ll provide more details on that in a bit.

U.S. estate tax is applied on a scale.  These rates apply whether the individual is a U.S. citizen, a U.S. resident, or a non-resident ― the difference is that for non-residents who are not U.S. citizens only the value of property with a U.S. location or connection is included in calculations.  Canadians investing in the U.S. should be concerned about this and read on to see if this tax might apply to their estate.

But I’m a Canadian citizen!?

Regardless if you’re a Canadian resident, even if you don’t live in the U.S. or you’re not married to a U.S. citizen, upon death your estate may be subject up to 40% U.S. estate tax after January 2013.  (Recall Canada doesn’t have any estate tax.)  As a Canadian citizen, when you die, our tax laws say you dispose of all your capital property and assets at fair market value, unless the assets are transferred to certain people.  You may have some capital gains but you may also be able to take advantage of some tax deferrals.  Let’s quickly use RRSPs as an example.

When Canadians die, RRSPs are deemed “disposed” and depending upon who is the beneficiary, the tax consequences from your RRSP can be deferred to your spouse or other financially dependent individual.  Read an excellent article here for more information on that.

Back to U.S. estate taxes…

When Canadians die, they will be forced to pay U.S. estate taxes depending primarily upon:

1. their worldwide assets, and
2. how much of those worldwide assets are U.S. “situs” assets.

U.S. situs assets is a fancy term that includes the following stuff:

• Real estate property (e.g., condo in Florida) and other tangible property situated in the U.S.,
• U.S. securities, including those held in a discount brokerage account in Canada or outside Canada like:
  • U.S. mutual funds including money market funds,
  • U.S. securities including ETFs and stocks in an RRSP, RRIF, RESP or TFSA,
• Any business-related assets owned by a sole proprietor and used in a U.S. business activity,
• Some U.S. debt obligations.

Fortunately, the Canada-U.S. tax treaty provides Canadians with some exceptions from U.S. estate tax.  Generally speaking, this treaty allows Canadians to avoid U.S. estate tax if after January 2013:

• The worldwide assets of the deceased are less than $5.25 million USD (only in certain circumstances involving spouses can this amount be doubled).

OR

• U.S. situs assets of the deceased are less than $60,000 USD at the time of death regardless of worldwide assets.

In summary, you are exempt from U.S. Estate Taxes if you meet only ONE condition.  If you meet both conditions you must pay up.

In addition, under the Canada-U.S. tax treaty a foreign tax credit may be claimed in Canada with respect to U.S. estate taxes paid.  The credit may only be claimed to offset Canadian income tax otherwise payable to those U.S. situs assets such as:

(a)        capital gains tax triggered in Canada upon the death of the owner of U.S. situs assets, and

(b)        RRSP/RRIF income inclusions where the RRSP/RRIF held U.S. situs assets.

The latter is very important to be aware of (and your lawyer and professional accountant will know what to do) since if this foreign tax credit is not applied for, the credit will not be applied and your estate may be forced to pay both U.S. estate tax and Canadian income tax on the U.S. situs assets. Double-taxation.

Needless to say this is a very complex tax subject and U.S. estate taxes can make investors’ heads spin.  Furthermore, I just scratched the surface with this post today.  So, to wrap up, some considerations for you for a complex but important subject:

• Make sure you have an up to date will with an executor named,
• Make sure you have beneficiaries identified for all your investment accounts which permit beneficiary designations,
• If you have a large worldwide estate, choose an executor who will strategically maximize your estate’s ability to claim a foreign tax credit in Canada for any U.S. estate tax required to be paid.

I want to thank Mark Goodfield and namely his colleague Katy Basi for providing some assistance on this blogpost.  You can follow Mark’s stellar personal finance blog here.  Katy Basi is a barrister and solicitor in the Toronto area, focusing on wills, estate planning and income tax law.  While Katy is not qualified to practice U.S. law, she did review this post based on her current knowledge in this complex area.  Katy’s expertise is available to Canadians here.

Thanks for reading and sharing this article.

With the deadline to file 2012 personal income taxes with the fine folks at the Canada Revenue Agency (CRA)  approaching fast I thought it might be fun to provide a few excuses some procrastinators might have for filing late.

Here are the top-10 excuses for not filing your 2012 taxes…yet…

10. 3-words:  Witness. Protection. Program.

9. Didn’t my spouse take care of all this money stuff?

8. I thought “GST” meant “Good Stalling Tactics”?

7. My son is 39 and lives in my basement.  I’m too busy trying to kick him out of the house to do my taxes dammit.

6. I’m waiting for the Canada Revenue Agency (CRA) to “Like” me on Facebook first.

5. I lost my favourite shoebox with all my receipts.

4. I thought tax filing was for nerds and geeks.

3. I’m waiting for My Own Advisor to write a blogpost about some tax filing tips.

2. I have 1 kid in university and another one graduating high school this year.  I don’t have any income to report.

1. I’m waiting for the Leafs to win the Stanley Cup.

Each year, thousands of Canadians wait until the last possible moment to file their tax returns.  Proud supporters of this site, H&R Block Canada, can help you avoid becoming another statistic this tax season – consider getting some professional help with your tax files or get after it yourself if you’re running late.

Have you ever missed filing your tax return?  If not, good on you, but what is the best excuse you’ve heard for not filing taxes on time?

Thanks for reading and sharing this article.

Thanks to my friends at H&R Block Canada I’ve got one more point of purchase code to giveaway for their online tax program this year.  I’ve already given away one code here and another one here, so this is your last chance to win!

The Overview

The benefits of using this online tax program seem pretty darn good:

• You can start using the online program for FREE.
• You can prepare up to 20 tax returns using the online program.
• The online program is not expensive – it costs about $16 for the first tax return and about $10 for the second family member – unless you win the point of purchase code from me.
• The online program is compatible with PCs and Macs.
• There is free email support.
• The online program is user-friendly – there are pop-up boxes that explain the fields you are selecting throughout the process.
• You can save your return at any time and print a PDF file of your return before or after you file.
• You can use NETFILE to submit your tax return once prepared.

The Summary & Your Chance to Win

Overall, I liked using the online tax program from H&R Block Canada and I hope you enjoy using it as well.

Enter to win below before March 29th.  Good luck to you!

a Rafflecopter giveaway

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There is no shortage of blogposts and media articles about which account is better for retirement purposes:  the Registered Retirement Savings Plan (RRSP) or the Tax Free Savings Account (TFSA).  I’ve got my preference for which account I focus on for retirement purposes but let’s recap some key points about each plan first:

RRSP	TFSA
A tax-deferral plan.	A tax-free plan.
Contributions can be made with “before-tax” dollars as part of an employer-sponsored plan or “after-tax” dollars when a contribution is made with a financial institution.	Contributions are made with “after-tax” dollars.
Contributions are tax deductible; you will get a refund roughly equal to the amount of multiplying your contribution by your tax rate.	Contributions are not tax deductible; there is no refund to be had.
If you don’t contribute your maximum allowable amount in any given year you can carry forward contribution room, up to your limit.
If you make a withdrawal, contribution room is lost.	If you make a withdrawal, amounts withdrawn create an equal amount of contribution room you can re-contribute the following year.
Because contributions weren’t taxed when they were made (you got a refund), contributions and investment earnings inside the plan are taxable upon withdrawal.  They are treated as income and taxed at your current tax rate.	Because contributions were taxed (there was no refund), contributions and investing earnings inside the account are tax exempt upon withdrawal.
Since withdrawals are treated as income, withdrawals could reduce retirement government benefits.	Withdrawals are not considered taxable income.  So, government income-tested benefits and tax credits such as the GST Credit, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) aren’t affected by withdrawals.
You can’t contribute to an RRSP after age of 71. Accounts must be collapsed in the 71st year.	You can contribute to a TFSA after age of 71.
The Summary:  part of your RRSP is borrowed money.	The Summary:  all of your TFSA is your money.

Based on my personal investment plan, I feel the TFSA ultimately trumps the RRSP as a retirement vehicle even though I contribute to both every year.   All the money in the TFSA is mine to keep, grow and manage with no tax consequences.  The RRSP refund is great but it’s actually temporary; you need to give it back at some point.  This makes reinvesting the RRSP refund year after year absolutely critical in my opinion to optimize wealth building – to take major advantage of an essentially long-term but not permanent government loan.

That said about this loan I firmly believe using the RRSP will work out very well for the majority of Canadians, hopefully myself included!  It totally makes sense when your marginal tax rate at the time of contribution is greater than your marginal tax rate at the time of withdrawal.  Jim Yih has written about this point numerous times in many of his great blogposts.  Check out his articles here and here.

If this tax situation applies to you this RRSP season then by all means use the RRSP as much as you can to defer tax now, grow your portfolio and get your refund back to reinvest money back into your RRSP.  If however for whatever reason, you need to use the RRSP refund for other things this spring (like a vacation?) that’s fine.  As part of this tax season just be mindful of the potential consequences of not managing the refund well this and every “RRSP season”.

Are you contributing to your RRSP this year?  If so, what is your strategy?  To max-out the contribution and reinvest the refund?

Thanks for reading and sharing this article.