Rhonda's Financial Blog

Looking for Ways to Increase your Retirement Cash Flow? Consider Deferring your Property Taxes

Monday, April 2nd, 2012

If you are finding that keeping up with your property tax payments is challenging, you may be able to get some help under a provincial program. The British Columbia Property Tax Deferment Program provides low-interest loans to qualifying homeowners.

Quick Snapshot of the Program

• To qualify, you must be over the age of 55
• You need to reapply each year to defer your taxes
• You will still have to pay interest charges and penalties annually.
• There is a set up fee ($60) and a renewal fee ($10)
• The interest rate is never greater than 2% below the bank prime rate.
• If you choose not to renew, you will be responsible for paying your property taxes in full.
• You may repay all, or part of, the deferred taxes, fees and interest at any time without penalty.
• If you rent out part of your home, or use it for business purposes, you are only eligible to defer taxes on the portion of the property you are living in.

Program Overview

To qualify for the Program, you must be a Canadian citizen or a permanent resident who has been living in the province for at least one year before applying for assistance. In addition, you must be 55 years of age or older (only one spouse must meet the age requirement), a surviving spouse (marriage partner or common law) or a person with a disability.

Person with a Disability

To qualify for property tax deferment help as a disabled person, an applicant must provide one of the following:

• A letter confirming his or her Persons with Disabilities designation
• Release of Information Form from the Ministry of Social Development confirming the designation
• Physician Certification Form signed by your doctor

Minimum Home Equity Required

Applicants for the British Columbia Property Tax Deferment Program must have a minimum equity of 25% of the current BC assessment value in their home after all outstanding mortgages, lines of credit and other charges have been deducted.

Does your Home Qualify?

If you are currently living in your home you may qualify to defer taxes. Unfortunately, your cottage, rental properties or properties registered in your business’s name do not qualify.

How to Apply for a Property Tax Deferment

After you have received your property tax notice, complete an Application and Agreement for Deferment of Property Taxes form (available online or at municipal or Service BC-Government Agent) offices. Return the form to your municipal tax office with your completed home owner grant application before your tax due date.

If you are interested in applying for a deferment, you have until December 31 of the current year to do so. You must pay all previous years’ property taxes, penalties, interest and utility user fees before you apply, as these outstanding amounts cannot be deferred.

It may take several months for you to find out whether you are eligible for the Program. If you are approved, the property tax deferral agreement is registered as a lien against your property and the deferment program pays your property taxes for you.

The property taxes may be deferred as long as you own and live in the home, as long as you qualify for the program. If your house is sold, the amount held in the property tax deferment account must be paid in full.

Application and Renewal Fee

First-time applicants are charged an administrative fee of $60 for a new approved agreement. The fee for approved renewals is $10. Homeowners do not need to pay these fees up front; they are added to the deferment account instead.

Interest Charges

Interest charges commence from the date your property taxes are due or the date you applied to defer. Which ever is later. The interest rate is never greater than 2% below the bank’s prime rate. The current rates are found at www.sbr.gov.bc.ca/individuals/Property_Taxes/Property_Tax_Deferment/interest_rates.htm

To find out more about ways you can defer tax and create a more comfortable retirement lifestyle, please contact me. I would be happy to review your financial situation and offer solutions which fit your needs and goals.

TFSAs: a Flexible Savings Plan for Canadians

Monday, March 26th, 2012

Tax-Free Savings Accounts (TSFAs) offer a number of advantages to Canadians, and an important one is flexibility. While a Registered Retirement Savings Plan (RRSP) is designed to put aside funds for retirement, a TFSA is a vehicle which can be used to put money aside for any purpose. If you are looking for a way to save for a big ticket item like a special vacation, a car, home or a cottage, putting the funds into a TFSA can be a great choice.

The types of things that a person may want to save money for will vary, depending on his or her own personal goals. A taxpayer can contribute up to $5,000 per year into a TFSA. Any unused contribution room is carried forward, which means that someone who has more income in later years can make higher contributions to his or her TFSA without incurring a penalty.

Withdrawing Funds from a TFSA

Another way that TFSAs are flexible is that funds which are withdrawn from the plan can be replaced later without having an impact on a person’s allowable contribution room.

Here’s an example of how this provision works: Julia contributes $5,000 per year for 10 years into a TFSA and earns investment income on the money held in the plan. Over that time, her TFSA grew to $53,000. She decides to withdraw the funds so that she can start a business. She can withdraw the full $53,000 and will pay no tax on any of the $3,000 earnings. Ten years later, Julia decides to sell her business. She can take $50,000 out of the proceeds of the sale and contribute back into her TFSA without reducing her contribution room which is now at $100,000 ($5,000 a year for 20 years).

If Julia had withdrawn funds from her RRSP to fund her business venture, a certain amount would have been deducted for taxes before it got into her hands. For example, is she withdrew the $53,000 from the RRSP she would have had to include the full amount as income when doing her annual taxes and would have had to pay tax at her marginal rate on the full amount. She may have been able to contribute back the $50,000 to her RRSP if she had the contribution room available, but once the funds are withdrawn, she isn’t able to get that past contribution room back.

No TFSA Spousal Plan

Unlike RRSPs, TFSAs don’t have a spousal plan option. A person can give money to a spouse or common-law spouse to invest in his or her own TFSA, though, and the funds can be withdrawn at any time without being attributed back to the person who provided them. Special rules are in place for spousal RRSPs and the funds must be held in the plan for a minimum amount of time or the contributing spouse will have to pay tax on the amount withdrawn.

TFSAs and Turning 71

The funds held in a TFSA don’t have to be converted into a retirement income plan once a person turns 71. There is no minimum withdrawal requirement, and the plan holder can make withdrawals to suit his or her needs instead.

To find out more about the flexibility of TFSAs and how they fit into an overall financial plan, please contact me to set up a personal consultation. I would be happy to outline your options and recommend a solution which will help you reach your goals.

How to Avoid Unnecessary Taxation to my RRSP or RRIF When I Die

Monday, March 12th, 2012

Your registered funds are an important financial asset, and so it’s essential to understand what happens to them when you pass away. With proper estate planning there are ways that you can pass on your assets to your beneficiaries while minimizing any taxes payable on it.

Choosing a Beneficiary for your RRSP or RRIF

When planning for what happens to your RRSP or RRIF when you pass away, the first thing you will need to do is to choose a beneficiary who will receive the money from the plan and unless you name a ‘qualified’ beneficiary the full value of your registered funds will be subject to tax.  In other words, the full value of the registered funds will pass on to the named beneficiary while the estate will be liable for the taxes owed.  Since the estate owes the taxes, other beneficiaries of the estate might receive a reduced and unequal amount. So plan carefully.
So who is considered a ‘qualified’ beneficiary? That would be your spouse or common law spouse, a financially dependent child or grandchild who are under the age of 18 or a financially dependent child or grandchild with a physical or mental infirmity.
In most cases, it makes sense to name your spouse or common-law spouse as the beneficiary. This way, your RRSP or RRIF can transfer to their registered plan on a tax-deferred basis. Your spouse will only then pay tax when he or she makes withdrawals from the plan.
This holds true, if you name your financially dependent child of any age who has a physical or mental infirmity. They too will receive the monies on a tax-deferred basis and again, will only be subject to tax and at their personal tax rate when withdrawals are made.

However, if you are naming as beneficiary your financially dependent child or grandchild (under the age of 18), the assets will still pass on to them on a tax deferred basis but the funds will have to be used to buy an income producing annuity. The child or grandchild will receive annuity payments but will not be able to access the full amount of the funds until he or she is 18. And again, a tax liability will only occur when payments under the annuity are made and will be taxed at the child or grandchild’s personal tax rate.

Unfortunately, there is no tax deferral benefit for naming adult children who do not have a disability (physical or intellectual).  Even if they are still living at home and are financially dependent upon you.

Naming any beneficiary of your registered funds will still avoid probate fees. Unless of course, the beneficiary is your estate in which case the probate fees will be applied.
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Now if you don’t name a beneficiary, the funds in your RRSP will automatically become part of your estate and will be subject to income tax and probate fees (in British Columbia).

There are a number of factors to look at when considering what happens to your registered funds when you die. The decision you make can have a significant impact on your beneficiaries’ financial situation, as well as the amount of tax which will need to be paid out of your estate. Please feel free to contact me to help you find the right solution for your personal situation.

What You Need to Know About RRSP Carry-forwards

Monday, March 5th, 2012

Do you find the term “RRSP carry-forwards” confusing? If so, you’re not alone. A Registered Retirement Savings Plan (RRSP) is a way for taxpayers to put money aside which can provide a source of income later in life, as well as get a tax deduction now. The “carry-forward” part of that term simply means that taxpayers have some flexibility in the amount they contribute to their plan and when they use the tax deduction they are entitled to for making that contribution.

RRSP Carry-forwards for Unused Contribution Room

For each year that you earned income, you have a set maximum which you can contribute to your RRSP. Not everyone contributes the full amount that they are entitled to into their retirement savings plan each year. This is not a situation where if you don’t use it you’ll lose it, though; any unused contribution room is simply carried forward to future tax years indefinitely.

If you have a year where your income is higher than in previous years or your expenses have gone down, you have the option of taking the extra money and putting into your RRSP. One way you can contribute to your RRSP and take advantage of your unused contribution room is to take your income tax refund and contribute it to your plan. That way, you don’t have to try to find a way to make more money to use for retirement savings, and you get a tax deduction for the amount that you deposit into your RRSP.

The amount of your unused RRSP contribution room is listed on the Notice of Assessment you receive from the Canada Revenue Agency each year. You can also find out the amount of your unused RRSP contribution limit by signing up for My Account on the Canada Revenue Agency website. Once your account has been activated, you will be able to view this information online.

RRSP Carry-forward for Undeducted Contributions

The other type of RRSP carry-forward that you can take advantage of is for undeducted contributions. What this means is that if you didn’t take the deduction for your RRSP deduction on your income tax return, you can use it later on.

Why would you choose not to take a tax deduction that you are entitled to right away? If your income will be higher in later years, you can use the deduction to reduce the amount of income tax you are required to pay. Contributing to your RRSP now means that you can get the power of compound interest working for you sooner and end up with more money available to you when it’s time to retire.

Tax matters can be complicated and it can be challenging to figure out how much you should be be contributing to your RRSP each year and when you will get the maximum benefit from the deduction on your contribution. If you have questions about the right strategy for your tax situation, make an appointment with a qualified financial planner for assistance.

What to do with your tax return?

Thursday, April 28th, 2011

Do you remember the good old days when spending our tax refund frivolously wasn’t such a big deal? Our jobs were stable, house values seemed to be on a never-ending climb and the stock market was booming. Things were looking pretty good.  Well, we are all feeling a little less wealthy these days; our portfolios have been beaten up, the wealth in our homes have taken a blow and on top of all that, we are worried about our jobs and the stability of our income.  There is a lot of insecurity or fear out there and so spending our tax refund on a great vacation or a new flat screen TV may not be the most financially savvy thing to do.

So what should we do with this year’s tax refund- spend it or save it, invest it or splurge?

Well, that all depends. In these tough times, it is a good idea to give some thought to your overall financial health with the first and most obvious area being your emergency reserves.  Lets take Karen for example, a 42 year old marketing executive with a small independent firm who wants to know what she should be doing with her estimated $10,000 tax refund. In past years, Karen just reinvested her refund into her RRSP but this year things have changed. Karen’s company has been hit hard by the economic slump and has been hinting that layoffs are eminent. Although Karen is a long time employee with seniority she is not immune to layoffs.

The first thing Karen needs to do is evaluate her existing emergency savings funds to ensure that she has at least 3 to 6 months of living expenses set aside. Knowing that you have some backup money just in case can definitely ease some of your anxiety about what may happen. If Karen has little in the way of savings, a tax refund can give her the means to start building up a reserve. I would also suggest that Karen open up a low rate line of credit to help make up for the shortfall in savings. It is easier to qualify for debt when you have income, keeping in mind that this line of credit is ONLY to be used to help pay bills or pay emergency expenses.  

Let’s assume that Karen does have an adequate emergency savings fund, how then should she best use her tax refund?

Karen should review her overall debt load and either consolidate her loans into one low rate loan or start aggressively paying down any high rate loans.  You would be quite surprised at how many people have no idea how much they owe and what it is actually costing them to borrow it. Most often this is because we have way too much debt and it’s all over the place.  So we need to simplify our debt. We can do this by taking all our loan statements to our banker and ask if they can consolidate them into one, low rate, manageable loan. If you have only one loan payment, it not only makes life much simpler but also makes getting out of debt much more ‘doable’. Now if you have some high interest rate loans that you cannot negotiate into a lower rate loan then I would highly advise you to make it a priority to start aggressively paying them down. Use your tax refund here.

What if you have already paid off your debt and have a sizable emergency fund- then what? 

Lets say that Karen has a healthy savings accounts and no debt with the exception of her 4% mortgage, what then should she do with her refund?  Today’s low interest rates and stock markets make it a good time to invest versus paying down debt. Karen is in a high tax bracket, has a long time horizon and is a moderately aggressive investor who should yield between 7-8% over the long term. With all this in mind, investing versus paying down her 4% mortgage makes more sense for her. And since Karen’s tax refund was earned by making contributions to her RRSP, then why not continue the cycle and invest back into the RRSP creating an ever-growing nest egg. The $10,000 contribution would generate a $4,000 refund at the 40% marginal tax bracket, which she can throw back into the RRSP again next year.

So what should you do with your tax refund?

It’s important that you understand your unique financial circumstances before making any decisions. Use the refund productively and resist the temptation to spend it on frivolous items. In the long run you will be better off having money in the bank, with little to no debt then a big TV or just the memory of a two week vacation……..