September 1997
the CEN-TAPEDE
david ingram's US/Canadian
Newsletter Sept 30, 97
ARE YOU TURNING 69, 70 OR 71
IN 1997?
SENIORS BENEFITS
MAYBE YOU DO NOT EVEN WANT AN RRSP
IN TRUST ACCOUNTS FOR CHILDREN
SIN'S (SOCIAL INSURANCE NUMBERS) FOR CHILDREN
GOVERNMENT CHILD BENEFITS
GRANDPARENT OR PARENT GIFTS
$100,000 EXEMPTION - LAST CHANCE TO CHANGE IT
"TIME" MOST IMPORTANT ITEM IN INVESTING
WHEN IS INTEREST DEDUCTIBLE (some Canadian cases)
Are You Turning 69,
70 or 71?
Beat the Rush on Your
RRSP!
If you are turning 69, 70 or 71 this year, you must do something about your
RRSP before the end of the year. That something is to convert it to a
retirement income-producing plan such as an annuity, LIF, or RRIF. If you do
nothing, you will lose up to on
e half of your assets to the government in immediate taxes! The maturity age
limit for RRSPs was changed in 1996 to age 69, and 1997 is a transition year
when 69, 70 and 71 year-olds must convert their plans.
It is estimated that about 400,000 Canadians will have to take action by
year-end, but about 30% of RRSP investors do not know about the changes,
even today.
Fred Snyder and david ingram have done their best on their CFUN broadcasts
(Saturdays from 1 PM to 3 PM at 1410 on your AM dial) to keep the world
appraised of this fact and have done more to keep their own clients on top
of things like this, but if you have relatives or friends who might not be
so fortunate, remind them about it immediately! With no action, an affected
RRSP will be de-registered as of the year-end, and the planholder will be
deemed to have taken all the assets into income in one lump sum. This is the
worst of all possible alternatives, since it may mean paying tax on the full
value at the top marginal rate.
As an example, if you had $100,000 in your RRSP and failed to convert it by
Dec 31, 1997, you would owe over $54,000 income tax in the Province of B.C.
In practical terms, to have the paperwork done and complete, this should be
done by Dec 24, 1997.
Excellent
Alternatives
The most popular maturity option today is the RRIF, or Registered Retirement
Income Fund. This works just like an RRSP, except that it pays out income
instead of accepting contributions. All the investments you have in your
plan can usually remain the sa
me. Another alternative would be a LIF or an annuity. LIF's and annuities
have not been as popular as RRIF's recently, given the low interest rate
environment, but annuity firms have come up with interesting new wrinkles,
so check out all the options.
Don't Wait!
This year, there is likely to be quite a rush at year-end for RRSP
conversions. For this reason, you should contact our offices in the next
thirty days or so to discuss your own situation. While the process of
conversion may be relatively simple, you wil
l want to consider all your alternatives carefully, since the decisions you
make may be irreversible. (A RRIF, for example, can be converted to an
annuity, but annuities are usually locked in.)
If you have several RRSPs at different institutions, the situation will be
more complicated and take more time. You should likely consolidate them for
convenience and perhaps better rates.
For instance, I once got quotes from several different companies to roll
over a life insurance policy which was maturing. The quote from the maturing
company which was a "free" annuity with no costs was about $890
per month for life. Other companies ca
me in at up to "just over" $1,200 per month for life with a 3%
cost of acquisition. The "FREE" annuity was the absolute worst
buy. I will not name the company here because several years later, it came
in at the highest rate.
The reason is that if a company needs money for a long term project (maybe a
$100,000,000 mortgage on the Bental Centre for instance), because they have
to "match" funds, they can pay more to get the necessary funds at
different times.
SENIORS BENEFITS
By now, most senior citizens will have at least heard of the changes that
the federal government hopes to implement regarding income support for
senior citizens over the next few years. Basically, the Old Age Security
Pension (OAS) and the Guaranteed Inc
ome Supplement (GIS), as well as the age and pension tax credits for
seniors, will be replaced in 2001 with a new Seniors Benefit Plan. It will
amount to an annual tax-free benefit of $11,420 for a single and $18,440 for
a married couple. Those over 60 i
n 1996 will be able to choose between the old and new systems. Tax-free
income of such a level sounds good, except that it will be reduced quite
quickly by other income that the senior has. For up to $12,000 of other
income, seniors will lose $0.50 of Se
niors Benefit for each $1 of other income. From there to $25,921, the
Seniors Benefit will remain level at $5,160 for singles and $10,320 for
couples. Beyond that point the Seniors Benefit will reduce by $0.20 for each
$1 of other income. At an income le
vel of $52,000 for a single person and $78,000 for a couple, the Seniors
Benefit will disappear entirely.
Shifting The
Benefits
The government points out that the Seniors Benefit will provide a payout
increase at low income levels. We agree, but it is coming at the expense
(again) of middle income Canadians. Consider that OAS clawback today begins
at $53,215 for individuals. Or,
that a couple with a joint income of only $45,000 may be worse off than
under the present system.
New Strategies ARE
Required?
IT MIGHT EVEN MEAN YOU DO NOT WANT AN RRSP!
Because the new plan proposes to take such a high clawback and tax (up to
70%) at certain income levels, it is important to realize that there are
many financial planners suggest that seniors with limited incomes should
rethink the merits of continued RR
SP contributions, or even consider drawing money out of their plans at an
early age to preserve the maximum Seniors Benefit for themselves. And given
that a couple's income will be considered jointly for the Benefit, income
splitting strategies become ac
ademic. There may be merit to these arguments for those with very low
incomes, but most of us must accept that we will get no benefit from these
measures, and will want to maximize personal resources for our own
retirement. That means continuing to save
hard, making maximum RRSP contributions and investing for the most efficient
returns.
Please realize that the Senior's Benefits plan proposal is now two years old
and does not take effect for another three years. Many organizations such as
David Taffler's CARP (Canadian Association of Retired Persons - 1 416
363-8748) are making present
ations to the government to reconsider. The Liberal Government has backed
down two times on its Foreign Asset Reporting Rules and it is quite possible
that the rules could change significantly.
The continuous low interest rates and the strong likelihood of a balanced
budget for the first time in 30 years could make a big change here as well.
SIN Numbers for
Children
"In trust" accounts are a common way that parents and grandparents
put money aside for the future use of their children and grandchildren.
GOVERNMENT CHILD BENEFITS
This is a tax-effective form of income splitting. The tax rules for this
type of account differ depending on the "source" of the money. All
dividends, interest and capital gains are taxable to the child if the source
of investment funds is the Child Tax
Benefit.
IF GRANDPARENTS OR PARENTS GIVE THE CHILD THE MONEY
(i.e., put money in their kids' or grandkids' accounts)
Dividends and interest on accounts that are gifts are taxable to the donor.
The capital gains are taxable to the child. Most of the return on
international equity funds, the preferred choice for this type of account,
consists of capital gains. The result
is little or no tax for these accounts TO A DONOR PARENT OR GRANDPARENT.
EACH CHILD NEEDS A SIN (Social Insurance Number)
In order to keep your records straight, we recommend that you apply for a
Social Insurance Number for any children who have these accounts. This will
minimize the risk of challenge in case Revenue Canada requests more
information.
A S.I.N. can be obtained free-of-charge from your local federal Human
Resources Development office. Let us know when you receive the number.
Much of the foregoing came from Fred Snyder's Fall Newsletter in 1997.
$100,000 EXEMPTION
GOING, GOING, GONE, GONE!
December 31, 1997 is your last day to amend your 1994 T664 to adjust your
$100,000 tax free capital gain. If the original property you elected on has
gone down in value and another one went uP!, you can substitute one for the
other up to Dec 31, 97.
There is a penalty for doing so, but it will be worth it in the future.
PAUL ROCKEL / MARKUS SLADE SEMINAR
REGAL CAPITAL PLANNERS put on a seminar at the Holiday Inn on Broadway on
Sept 15th and I was lucky enough to be there.
I have been in the Financial Planning and Tax business since 1965 which
sounds like 32 years to me and still sat in awe as two speakers made me
rethink a lot of items.
Paul Rockel made the point that TIME is the most important part of planning
and saving and used the example (which I have heard a dozen times before,
but it must make more sense when you hit 55 yourself) of a person saving for
40 years versus 20 years.
For example:
Person one puts $50.00 a month away starting at age twenty-five for a total
of $24,000 out of his or her pocket. Compounded at 12% monthly, this works
out to a total at age 65 of $588,238.63
Person two puts $100.00 a month away starting at age fourty-five for a total
of $24,000 out of his or her pocket. Compounded at 12% monthly, this works
out to a total at age 65 of $98,925.54
Person three puts $200.00 a month away starting at age fifty-five for a
total of $24,000 out of his or her pocket. Compounded at 12% monthly, this
works out to a total at age 65 of $46,007.74
The following 4 pages are
reproduced from david's 1991 ULTIMATE TAX GUIDE which is out of print. They
deal with deducting interest.
You will note that interest IS NOT deductible when money is borrowed to buy
COMMODITIES, GOLD, a personal residence, or for some guarantees. To learn
how to make your mortgage interest deductible, ask for the March, 97
CEN-TAPEDE. If you borrow money on
a "paid for" rental house and use it to buy a personal residence,
the interest is not deductible.
