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.
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