One of my family members often helps her friends file their income taxes with TurboTax.  For a couple she helped (let’s call them the Greens), she entered their medical expenses the way she thought was best.  Then TurboTax offered to “optimize” the medical expenses.  So, she tried it.  The result was that the Greens owed almost $2000 more in taxes.  So much for optimization. Optimizing medical expenses is surprisingly tricky.  You get to decide which partner in a couple makes the claim.  The Greens have unusually large medical claims this year.  When Mr. Green claims them, the total taxes owing for both of them is nearly $2000 less than when Mrs. Green claims them.  But TurboTax insists that Mrs. Green should claim them.  What went wrong? The answer begins with how medical expenses affect your taxes.  First, your claim is reduced by 3% of your net income, but this reduction is capped at $2397 (in 2020) for higher earners.  So, ...

Canada’s tax system is very complicated.  It takes an army of accountants to help Canadians navigate the tax system and another army of tax collectors at Canada Revenue Agency (CRA) to police all the rules.  Author and CPA Neal Winokur thinks we need to simplify the tax system even if it puts him out of work.  He offers ideas to fix the tax system in his book The Grumpy Accountant .  The book also serves as an easy-to-understand introduction to the Canadian tax system. The book is written in the style of a story, not unlike The Wealthy Barber , which works surprisingly well.  The “story” parts are very brief, so we get to each tax issue quickly, but the story helps to give context as we follow a couple throughout their tax lives.  This presentation, along with the fact that Winokur doesn’t get mired in unnecessary details, helps the reader get a good high-level understanding of the major aspects of Canada’s tax system. Winokur advocates huge simplifications...

We can only buy food with after-tax money, so it might seem obvious that we should take into account taxes in any financial decision. However, Justin Bender, portfolio manager at PWL Capital, has some reasons why you might ignore income taxes when when calculating your portfolio’s asset allocation. Justin has created a series of excellent articles going over a great many issues do-it-yourself (DIY) investors need to understand. The articles are organized as a series of portfolios with decreasing costs, but increasing complexity. The portfolio names are inspired by the comedy movie Spaceballs : Light , Ridiculous , Ludicrous , and Plaid . My focus here is on accounting for taxes in your asset allocation, but this is only a small part of the many useful ideas Justin explains in this series. The main difference between the latter two portfolios in the series is that the Ludicrous portfolio ignores taxes when calculating asset allocation, and the Plaid portfolio takes taxes into ac...

Every so often we see calls for the government to eliminate mandatory minimum RRIF withdrawals. Ted Rechtshaffen writes this “win-win change would be cheered by seniors and likely lead to higher taxes in the long run.” He fails to mention the tax-planning strategies it opens up for wealthy seniors. Under current rules, Canadians have to turn their RRSPs into RRIFs and make minimum withdrawals by age 71. These withdrawals are taxed as regular income. Wealthier Canadians who don’t need this income tend not to like having to make these minimum withdrawals. Here are a few ideas for tax planning if the government eliminates mandatory minimum withdrawals. Marrying a much younger spouse Normally, when you die, all your remaining RRIF/RRSP assets become taxable income. An exception is that you can pass these assets to a spouse’s RRIF without any tax consequences. Currently, this tends to happen after a RRIF has been depleted by mandatory minimum withdrawals. Without these withd...

Long-time reader, AT, asked the following question (edited to remove personal details): I’m a single 67-year old living in Alberta. A CGA friend suggests I start drawing extra lump sums from my RRIF to reduce the amount of tax my estate will pay when I die. I'd like a second opinion before I start the withdrawals. Here are the relevant financial details: RRIF/LIF total assets of about $800,000 with total regular monthly withdrawals of $3780 (before tax) Total of CPP and OAS is $1641 per month (before tax) Part-time work brings in $10,000 to $15,000 annually (assume $12,500 in this analysis) Only $8000 in TFSAs (lots of remaining room) To start with, I’m not a CGA, and I may be missing pertinent details about AT’s situation. So, the following is for information purposes only. It’s not advice. AT’s total income works out to $77,552. Coincidentally, this is just slightly below the 2019 OAS clawback threshold of $77,580. So, any extra RRIF withdrawal larger than $2...

In the nearly two years since I retired, I’ve been asked a few times why I didn’t work longer to build a bigger nest egg so that my wife and I could live a better lifestyle in retirement. After all, I did walk away from a good salary and generous variable pay. The truth is that we’re not very interested in living lavishly, but I decided to take a look at what I passed up. It’s not hard to see how much more money we could have had in our accounts, but this doesn’t tell us directly what kind of lifestyle we could afford. What matters is how working longer would have translated into extra spending per month during retirement. Fortunately, I have a spreadsheet that takes all our account balances and computes the amount we can safely spend per month (after taxes), rising with inflation, until we’re 100 years old. This spreadsheet makes a number of fairly conservative assumptions about investment returns and takes into account CPP, OAS, interest, dividends, capital gains, and income ...

Many investors love Canadian dividends because they come with a tax break called the Dividend Tax Credit (DTC). Others look a little deeper and say that the DTC just prevents double taxation because the companies paying dividends already had to pay tax on their profits. They conclude that dividend income is no better than interest income, at least from a tax perspective. However, comparing the DTC to capital gains taxes gets more complex. Dividend Taxation in Canada The DTC is intended to prevent Canadian company profits paid to Canadian shareholders from getting taxed twice. Here’s an example to illustrate the idea: Suppose a company earns one dollar in profit per share, pays 27 cents in income taxes, and pays the remaining 73 cents in dividends to each shareholder. Canadian shareholders actually declare the full dollar as income (called the dividend gross-up), but they get to deduct the 27 cents from the taxes they owe. The idea is that the total tax paid by the company ...

The raging debate over the federal government’s plan to change certain tax rules for corporations has a glaring contradiction. The government insists that the changes only affect those making more than $150,000 per year. Opponents say it’s hitting middle-class business owners. Who’s right? Consider the example of a professional whose efforts earn $250,000 per year. This professional has a personal corporation. So, it’s actually the corporation that has an income of $250,000. The professional draws a personal income of $100,000 from the corporation, leaving what’s left after taxes within the corporation. He plans to continue drawing an income from the corporation throughout his retirement. So, what is the professional’s income? The government would say the professional’s income is $250,000, and he uses his corporation to spread his income over his lifetime to reduce his total tax bill. Many opponents of the government’s tax plans say the professional’s income is $100,000, a...

What do you think of when you hear “small business?” Maybe you think of a roofer who has enough work to employ three helpers. Or maybe you think of a hair-cutting place. Do you ever think of lawyers who make half a million dollars per year and incorporate themselves to defer and reduce their income taxes? Opponents of the Trudeau government’s planned income tax changes for private corporations have been vocal lately. They have a lot to lose. The “tax planning” opportunities using private corporations are very effective at reducing taxes. There are some good arguments on both sides of this debate, but one part of it irks me: referring to incorporated professionals as “small business.” It’s not that this is technically wrong; it’s that it’s deliberately misleading. The public has sympathy for the types of businesses they think of when they hear “small business.” This sympathy dries up quickly if we talk about highly-paid professionals reducing their income taxes. Getting in...

A while back I wrote about the recognition points system my employer started using to give employees rewards for good work . I had thought the system was simple enough, but now that I have my T4, I see a few interesting (and disturbing) wrinkles. Back in December, I thought the taxable benefit kicked in only when we redeem points. If this were the case, I would control when I got hit with extra taxes. But our finance department has since found out that CRA considers the points themselves to be valuable, so I get hit with extra taxes as soon I’m awarded points. Fortunately, I found something worthwhile for me in the rewards catalog: gift cards for a retailer I use often enough. So, at least I can get some value back to offset my reduced pay due to higher tax withholdings. Some more good news is that my employer has decided to give us all some extra pay to offset the taxes we pay on the recognition points. Unfortunately, they treat us all as though we’re in a 30% marginal tax...

The Fraser Institute recently came out with a study of how the average Canadian family’s total tax bill hs changed from 1961 to 2015. The emotional impact of their conclusions exploits the fact that the “average” family is different from the “typical” family. Before continuing with some criticism of this report, let me explain that I’m not on either extreme end of the often polarized debate on taxes. I’m no fan of government waste. Canada’s public sector does a poor job of removing employees who do their jobs poorly. This leads to an accumulations of poor employees and is demoralizing for strong public sector employees who must work alongside poor employees. All that said, I’m not a cheerleader for reducing all forms of public spending either. When the Fraser Institute examines the “average” family’s income, they are adding up the incomes of all families and dividing by the number of families to get $80,593. If this figure sounds high, it’s likely because you are thinking of...

Recently, Mark Seed at My Own Advisor called on Canadians to turn three personal finance issues into election issues . It certainly makes sense to take personal finance policies into account when you vote. Unfortunately, I mostly disagree with Mark on all three of his points. Here are Mark’s preferences in bold followed by my thoughts. 1. Keep the Tax Free Savings Account (TFSA) contribution limit at $10,000. On the surface, the choice is between a $5500 TFSA limit and a $10,000 limit. But that misses a crucial point. When the government increased the limit, they eliminated inflation indexing. So, the real choice is between $5500 with automatic cost-of-living increases or a fixed $10,000 limit whose value declines each year with inflation. It can be difficult to imagine that $10,000 will become a much less valuable amount of money at some point in the future, but it will happen. Just 5 or 6 decades ago, $10,000 could buy a nice house. Now it’s not much of a used car. F...

Jonathan Chevreau waded into the current debate on TFSAs and made a case in favour of Tax-Free Savings Accounts . While others debate whether TFSAs allow the wealthy to shelter too much income from taxes, Chevreau’s main argument is that “TFSAs merely eliminate double and triple taxation.” This just isn’t true. Chevreau goes on to explain “When you invest in non-registered or taxable accounts, not only does the capital you invest come after being subject to income tax, but all dividends, interest and capital gains generated from that capital will be further taxed each and every year.” This so-called double and triple taxation is actually the first-time taxation of new income in taxable accounts. Your original capital is not taxed again. When your already-taxed money earns interest or dividends, only the new income gets taxed, not the original capital. When you sell an investment, you only pay capital gains taxes on the growth in value, not the original principal. Once again,...

Trying to maximize your after-tax retirement income is a complicated business. Cheerleaders for dividend investing are convinced that the dividend tax credit makes it a no-brainer that a dividend strategy is best to minimize taxes. However, as we’ll see, there are good strategies that use the 50% capital gains exemption as well. Let’s look at two investors in the same situation but using different investment strategies. Dean, the dividend investor, and Carla, the capital gain investor, are both 58 years old, single, and living in Ontario. (No, there will be no romance in this story.) They both have a $500,000 RRSP and $1,232,000 in a non-registered account. (I’ll explain this cooked-up number.) Dean owns dividend stocks that we’ll assume earn a 2% capital gain and 4% dividend each year. Dean’s dividend income is 4% of $1,232,000, or $49,280. This just happens to be the maximum he can earn and pay no taxes other than the $600 health premium. Carla earns the same total retu...

Those who make an early start at contributing to their RRSPs for the year are sometimes confused about how to file their income taxes properly. It’s important to fill out Schedule 7 in the correct year. Although TFSAs have blunted the traditional RRSP rush each year near the end of February, many Canadians still wait until the last minute to make their contributions. These last-minute contributors know that they can make an RRSP contribution in the first 60 days of this year and still take a deduction on last year’s income taxes. However, some early birds have already used up their 2013 RRSP room and got ahead of the game by making a 2014 RRSP contribution during the first 60 days of 2014. Some of these people mistakenly think they should wait until they file their 2014 income taxes to declare this contribution. That’s not how it’s supposed to be done. Even if you don’t intend to take a deduction for an RRSP contribution you made in the first 60 days of this year until you fi...

My wife and I have various assets such as our home and our savings. The question of who owns what can be surprisingly complex. The reason for this complexity is that there are three different points of view on answering this question. Here I look at our assets from each of these points of view. How We See Ownership Our view of ownership is quite simple: 50/50 for everything. I know that some couples choose to have his and hers money, but that’s not how we do it. When it comes to paying for things, we decide who will pay based on convenience. If my wife needs some cash, I hand her some without bothering to do any kind of accounting. I think this works well for us because we are both quite frugal. Control of Assets Just because the ownership of our assets is 50/50 doesn’t mean that we each exercise 50% control of all assets. To pick a trivial example, I don’t touch her toothbrush. It might be 50% mine in an ownership sense, but in terms of control it’s 100% hers. This ...

I’ve had some reader feedback about my recent post on debunking RRSP myths concerning realistic approaches to making RRSP contributions. Here I take a look at different ways to fairly compare RRSPs, TFSAs, and non-registered accounts. In the original post , my hypothetical investor, Ami, only had $6000 available to invest for the long term, but knowing that she was in a 40% marginal tax bracket, she made a $10,000 RRSP contribution and counted on the $4000 tax refund. Some readers think it’s more realistic to assume that Ami would only make a $6000 RRSP contribution, which is fair enough. However, the $2400 tax refund that Ami gets from the $6000 RRSP contribution has to play a role in comparing this RRSP approach to investing the $6000 in either a TFSA or a non-registered account. With one way of handling the income tax refund, we could just assume that Ami puts it into her RRSP as well. But that’s not the end of it. Ami’s $2400 contribution next year generates a $960 refun...

There are persistent myths about the tax-inefficiency of RRSPs. Here I debunk these myths using pictures. Myth 1: It is more tax-efficient to earn capital gains in a non-registered account than it is to earn them in an RRSP. A typical justification for this belief is that in a non-registered account only half of the capital gains are taxed, but all of an RRSP withdrawal gets taxed. To explain why this is a myth, let’s enlist the help of a hypothetical investor Ami. Five years ago Ami bought a house on her own and was somewhat house-poor until a promotion and raise two years ago. Since then she has managed to build $11,000 in a savings account without adding any debt beyond her mortgage. Ami plans to use $5000 of her savings toward a used car this summer, but she wants to invest the remaining $6000 for the long term. She is trying to choose among an RRSP, a TFSA, and a non-registered account. Within the account, Ami intends to invest with a goal of earning capital gains. ...

Many people struggle to understand RRSPs. I’m going to try a different approach to explain how RRSPs affect taxes. This explanation is based on the idea that the Canada Revenue Agency (CRA) becomes a partner in your RRSP investment venture. If you put $10,000 into an account, you think of it as entirely your own money. If it is a regular non-registered account, you’ll have to pay income taxes on any gains, but the original $10,000 is your money. Things aren’t so simple for RRSPs. Let’s suppose that you’re in a 40% marginal tax bracket. This means that each added dollar of income you earn costs you 40 cents in incomes taxes. If you put $10,000 into your RRSP, you get to deduct $10,000 from your income, and your income taxes will go down $4000. But this isn’t free money; CRA just became your partner. With that $4000 refund from CRA, they bought partial ownership of your RRSP. You can think of this as similar to running a business and selling part of it to a partner. Someti...

I’m pleased to announce that every single entry to my UFile activation code giveaway had the correct answer to the skill-testing question. I know it wasn’t at all difficult, but some small fraction of people would get it wrong. Apparently, those people don’t read my blog :-) Congratulations to the winners who I have already contacted by email: Anatoli Cameron Louri Sean Christian Chris Thanks to everyone who entered the draw. Special thanks to reader Jon who was a winner but realized he wouldn’t need the code, and he made it available for another reader. Now on to a few good quotes from Warren Buffett’s latest letter to Berkshire Hathaway shareholders : “When Wall-Streeters tout EBITDA as a valuation guide, button your wallet.” EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Some people shorten this to “Earnings Before Bad Stuff.” “When promised quick profits, respond with a quick ‘no.’” “If you can enjoy Saturdays and Sundays...