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Saturday, May 23, 2015

The Tax Payoff

Posted by Tim Stobbs on April 29, 2015

So I managed to do a very good job of procrastinating on finishing my taxes this year and I only finished up during the weekend (but apparently due to an error by CRA you get until May 5 to get it in).  But now it is all done I’m just waiting for my over sized tax refund which pushed past $6000, which is good because my wife owed over a $1000.

You might be wondering why on earth I got such a big refund when I tend to avoid such things?  Simple a few minor shifts in the status quo of our taxes occurred:

  • The income splitting tax credit kicked in and we took full advantage of it.
  • I made a LOT of spousal RRSP contributions last year and now it is refund time.
  • My small business had a crappy year so I had very low profit to pay taxes on.
  • My wife on the other hand had a great year and so paid a bit more than usual.

Overall I tend to think all these minor tax credits and deductions are a bit of a pain in the butt.  I would much prefer a stripped down tax system which I could file on a double sided piece of paper.  Ironically, I found out I’m not alone in that thought according to a recent study.  We haven’t had a major overhaul in the system since 1987 and with all these minor credits you have to determine which of the 120 of them apply to you.  No wonder we buy software to do taxes now!

Ironically I think my procrastination had less to do with the taxes, but more to do with having to now deal with cleaning up all my files afterwards.  I normally use the end of my taxes as my trigger to do the annual clean up.  I just pull out old records and scan them where possible, shred old files that are no longer required and assess if I can make any improvements to my file system.  It’s not particularly fun work so I, like most people, tend to avoid it.

How are you doing with your taxes?  Are you planning to use the extra time or just get it over with?

The Game Changer – Expanded TFSA

Posted by Tim Stobbs on April 22, 2015

With the cat finally out of the bag we now know a few details of the much rumoured expansion of the TFSA contribution limits from yesterday’s Federal budget (page 232 if you want to read the official text). First off it isn’t a actual doubling of the limit rather it is rising up from the current $5500 per person per year to $10,000.  Still that is a huge increase in room, and it takes effect this year.  The only downside of the announcement was the fact that they stripped out the inflation adjustment on the accounts contribution room.  So enjoy that increase because we are likely not going to see another one for a VERY long time.

Of course a change in Federal government leadership might also trigger this to be a single year event with a roll back in the plan down the road.  But for now it is going to happen this year, so let’s look at the potential implications for this in your retirement plan.

To say this is a game changer for some people is a bit of an understatement.  A couple can now put away $20,000 per year in TFSA and never pay a dime of tax on growth in those accounts.  So the holy grail of retirement planning just got a bit easier: the zero income tax retirement. I’m not sure if you realize this is about your life, but your single biggest bill is likely not your mortgage, but rather your tax bill.  Your income tax portion of it can often be a big chunk of change so if you can reduce that in your retirement years you can often speed up your retirement date.

The trick has often been that while the TFSA’s are great ways to invest they don’t often have enough contribution room to make them your sole retirement investment account.  For example, if you made $75,000/year as a family your RRSP limit is 18% of your previous year’s income or $13,500.  So while the old TFSA limit was close at $11,000 for a couple, now it becomes possible to skip the RRSP entirely for most people and pour everything into a TFSA.  (For those with math inclined minds, if your family makes $111,000 per year you can shelter the same amount in your TFSA as your RRSP now).

But what about the RRSP tax refund?  Well while that is a nice thing to get you do still have to pay tax on your growth of your RRSP at the other end when you take the money out.  While a TFSA you can shelter all the growth from getting taxed.  So imagine you have saved well in your life and have a cool $1 million in retirement savings and a paid off house.  Now imagine never having to pay a dime of tax on that and not having it reduce your Old Age Security benefits.  Cool eh?

So to compare you take our $40,000 a year of income from that in an RRSP you would have to pay tax on that money.  The final amount will vary by province but if only one of you take the money out you would lose anywhere from $5800 to $7700 in income tax for 2015.  Leaving you with a net spending amount of $32,300 to $34,200.  Or you could have put it all in a TFSA and got $40,000 to spend.

In our particular case this means I will likely skip putting money in taxable investing accounts and instead just shelter everything in RRSP and TFSA accounts.  While I might need to keep some contributions aside for the last year or two I can then stuff it all in get caught up in no time (ie: likely two years after retirement).

All in all, there is a fair amount of potential in this announcement for your retirement plans.  Of course, you should still do some numbers for your particular case to ensure it would be worth it to you.  So are you making any changes your plan because of this change?  Or you don’t think it will last?

Dreading Taxes

Posted by Tim Stobbs on March 16, 2015

You look at the form and turn away, but then look again anyway.  Your mind screams for you to stop this madness but your press on away just to finish up this section of the form.  Then it is over for today, you rest and regain your strength to face the beast that is your taxes.

The above paragraph is a bit exaggerated but not by much for some people.  Dreading your taxes is a fairly common event, but what various is the amount of procrastination that goes with it. I should know as I am a bit of expert of avoiding doing my taxes.

I’ll clean the house, fix something, play with the kids, read a book, cook something all to avoid doing my taxes for a few more minutes.  Yet the reality of the situation is my taxes are actually not that difficult anymore.

In the beginning taxes were drop dead easy.  Input T4, add in a few deductions and file it.  Done.  Then we started adding things over the years like kids and all those possible deductions, a home based business and all those fund calculations and eventually taxable investments with all that tracking that goes along with that.  Eventually my taxes expanded from 30 minutes to several hours and finally half a day to prepare.

So for number of years my taxes got progressively more difficult to do by myself, but in the last few years they have turned into something that is fairly stable.  So now I don’t have to learn an entire new section each year, but rather just spend my time double checking everything rather than spending hours on CRA’s website reading tax bulletins trying to understand some detail of if a deduction applies to us.

This stability has allowed my wife and I to do some minor adjustments to our organization to make things a bit easier such as:

  • We track all our house bills (water, heat, power) in a spreadsheet to allow easy roll up at year end when we calculate business use of the house.
  • My wife tracks her business accounting with a little program that allows her to assign tax categories during the course of the year.  So come tax time she prints out a report with the totals for me to review.
  • I created a file folder each year and put any tax related slips I may need in it starting with the notice of assessment from the previous tax year.  That way I don’t have to look around for the various paperwork when I start entering in information.

Each of those are fairly minor items, but they all help to make filing our taxes a bit easier at the end.  I’ve come to realize that I actually don’t dread my taxes…I dread all the organization that I have to do to get ready to file them.  So by spending a bit of time during the year to make things easier eventually pays off to make filing our taxes just a bit easier.  It isn’t perfect by any measure, but I’ve managed to shift a dreaded task into something tolerable.

So do you dread preparing your taxes?  Have you found any tricks to make it easier on yourself (other than the obvious of paying someone else to do it)?