Where Does Your Money Go?

The Federal Government has given Canadians a special Christmas gift this year. Starting January 2009 all Canadian residents, age 18 and older, are eligible to open a Tax Free Savings Account (TFSA). The account allows a maximum contribution of $5,000 per year to be saved and sheltered from tax.

Although there are similarities to the Registered Retirement Savings Plan (RRSP) the TFSA differs in many respects. RRSPs are specifically designed as a long-term retirement savings vehicle. RRSPs should not be used for short- to mid-term expenses due to the loss of contribution room and full taxation of withdrawals, whereas the TFSA can be withdrawn at any time without restriction or tax consequences and used for any purpose.

Both RRSPs and the TFSA offer tax advantages with distinct differences. Contributions to a RRSP are tax deductible and reduce your income for tax purposes. In contrast, your TFSA contributions are not tax deductible. Both accounts will grow tax-free.

Withdrawals from your RRSP are added to your income and taxed at current income tax rates. However, your TFSA withdrawals are not subject to tax. The capital and growth of a TFSA are withdrawn tax-free.

The amount you withdraw can be put back into your TFSA without affecting your future contribution room. If you withdraw $5,000 in 2009, then your contribution limit for 2010 will be $10,000. The only restriction is that you cannot re-contribute in the year that you make your withdrawal. You must wait until the following year. Another important note is that neither income earned nor withdrawal of capital from a TFSA will affect your eligibility for federal income-tested benefits and credits such as the Guaranteed Income Supplement, the Canada Child Tax Benefit the GST credit or Old Age Security benefits.

You do not lose your TFSA contribution room if you do not contribute up to the limit in any given year. Your unused contribution room is carried forward to the next year and indefinitely. So if you contribute $3,000 in 2009 then your contribution limit is $7,000 in 2010.

The TFSA is anticipated to be a great new tax-sheltered account to help Canadians achieve their personal goals. With this program the government is encouraging Canadians to save rather than use debt – whether for a car, a vacation, home renovations, or a small business start-up. Talk to your financial advisor about the best strategies and options for you utilize this gift in 2009 and beyond.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.

We have had enough market volatility during 2008 to last a lifetime. As stock markets began a swift decline investors started to make panicked decisions, switching investments, changing advisors and altering their investment objectives. They may have become their own worst enemy. For many, discipline was overcome by fear. Thus, while thinking they were in control, they were actually losing control. These emotionally charged decisions might end up costing a bundle over the long-term.

We know that not everyone was panicking. Warren Buffett, touted as the most successful investor of our time, invested billions into distressed companies during the market set back. Is he crazy? Has he lost his touch? We don’t think so. Mr. Buffett did what he does best. He saw an opportunity and capitalized on it. He will no doubt multiply his investment multi-fold over the next few years.

You’ve heard it before and we’ll say it again. The path to investment success is to buy low and sell high. However, although this concept seems relatively simple to comprehend, putting it into practice can be quite difficult for some investors during a volatile market. Redemption rates are typically at their highest levels when markets are on the extreme negative side. The result is that frightened investors receive a very low price for their shares. Once the market is back on the up swing, money tends to resurface as investors are buying back at higher prices. Does this make sense? You pay $10 a share and sell at $5 a share, and then buy back at $10 a share. As markets improve it becomes clear that the anxious investor may have been better served by inaction alone.

For instance, during 2001 to 2003, the Canadian market fell 43%. Investors who fled during this period missed out on the profits of the market returning at 163% over the next few years. A key factor to consider is that the markets tend to go up more often then they go down.

All this is not to say hang in at any, and all costs. If your time horizon for needing your money is short, less than a year, then you probably should not be in the market at all. Typically you need at least three to four years at a minimum with the ability to buy during times of market weakness in order to have success with your investment strategy.

Investors must accept the reality that markets go down as well as up. You must be prepared for this at all times. This current financial crisis will eventually end and more normal markets will return. The best course of action is to review your investment strategy, time horizon and objectives. Confirm that your current asset allocation is consistent with your investment strategy. If not, then make adjustments. If it is, then stay the course and consider making further investments at these low prices.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of FundEX Investments Inc. to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca.

I want to relate a personal experience that has opened my eyes to the auto insurance industry. Back in 2005 my wife had a slight “fender bender” with a young driver. After exchanging information the other driver made mention that he was going to get a “whole new car” out of this event. Not exactly, but he said he would require the insurance company to give him a complete new paint job. My wife’s car had a minimal scratch that was buffed out in a mater of seconds and his damage was not much more.

Knowing very little about auto insurance and due to the fact that the other driver was adamant that he would make a claim we informed our insurance company about the incident. Our insurance advisor said we did the right thing and notified the insurance company of a pending claim. We never heard anything further but saw our premiums increase for the next three renewal years. We only assumed that the other driver had made a claim, our insurance company had determined my wife to be at fault and they had made a settled the claim with a payment.

As the years went by, our premiums seemed to be getting out of hand so we decided to shop around this year only to discover the “paid claim” notation on our policy was a black eye on our record. No competing insurance company would come even close to our premiums. It was all because of this claim on her record.

I could not believe the other driver had actually made a claim so began to make enquiries. I wanted to have details about the claim and how much was actually paid to the other driver in 2005. Our insurance company was not much help, but then we stumbled upon Autoplus reports. By signing an authorization, Autoplus was able to send a complete record of any and all insurance claims made by my wife. There was no cost to receive the report and it came to us by mail within two weeks. It went back to the mid 1980’s. To our amazement there was never a claim paid, not one.

We confronted our insurance company with this information and demanded an explanation on their justification for charging extra premiums and noting a paid claim on our insurance record. After a number of months we finally had this paid claim notation removed from our 2008-renewal document. We made a request that they reverse the extra premiums charged for the past three years. After almost four months from the beginning of our initial enquiry we received a refund cheque for more than $750. That refund represented a return of the extra premium that was collected in 2006, 2007 and 2008.

I did not take this incident personally. We were caught up in a “systems” problem. We needed human intervention to have the problem resolved. As long as the paid claim was on our record we would continue to have extra premiums charged and competing companies would have a difficult time giving us a competitive quote.

If you have a questionable claim on your insurance record you can go through the same process and determine if indeed the extra premium you are paying is justified. Ask your insurance company for proof that they actually paid a claim. If they cannot, or they will not supply this information, you can contact CGI Insurance Business Services and request your Consumer Autoplus Report. It will show the history of paid insurance claims made against you. You can then confirm if the extra premium you are paying is justified.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 613-798-2421 or E-mail at rick@invested-interest.ca.

As your children return to school you may have wondered about how you will pay for their tuition when it comes time for college or university. There was a time when college was less expensive than university. However the cost of going to college is increasing and the gap is narrowing. The common denominator is that the cost of higher education is ever increasing. One way to save for a child’s education is through a Registered Education Savings Plan (RESP).

The federal government is offering free money to Canadians who make contributions into the RESP program. They will match 20% of all contributions up to a maximum of $2,500 per year until the year the beneficiary child turns 17. No grant is eligible the year the child turns 18 years of age. This means there is $500 per year opportunity to be gained from the Canada Education Savings Grant. Unused grant room can be carried forward to future years however the maximum grant available in any given year is $1,000.

Currently RESP contributions are not tax deductible. However, any growth on the contributions and the CESG is tax deferred until it is withdrawn from the plan. When the child begins to attend a post secondary institution, the funds can be withdrawn and taxed in the hands of the child, who will likely be in a lower tax bracket then the parent, and who will usually pay less tax on the withdrawals. The child may also be able to reduce the amount of tax owing through the use of education, textbook and tuition tax credits.

You can even open a family RESP, and name one or more children as beneficiaries under the same plan. The beneficiaries must be related to the contributor either as your own children, grandchildren or legally adopted.

Should the named beneficiary decide not to attend a post secondary education there are a few options available for the RESP funds. The beneficiary can be changed to the child’s sibling. If there is no alternate beneficiary the earnings may be transferred into the contributor’s RRSP, subject to available RRSP room. The contributor can then withdraw their capital and return the grant money to the government. Another option is to make a donation to an educational institution. It is important to talk to the plan administrator or representative to determine your options in this situation.

There are many more highlights and strategies involved with using a RESP. We recommend speaking with a professional advisor about your own personal circumstance to decide the best education saving strategy for you. Through further knowledge on the subject parents will gain a better perspective in financing their child’s educational needs.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 613-798-2421 or E-mail at rick@invested-interest.ca.

We don’t know what the future holds for investors; no one does. What we can tell you is that the media has once again succeeded in creating significant fear about investing. This is just at the point in time that people should be courageous about investing and their investments.

How many of you sold some, or all of your investments recently? You just couldn’t take the “losses” any longer. How many invested in guaranteed investments with your RRSP contribution? You just couldn’t stand the “volatility” any more. But you committed to move your money back into mutual funds when things settle down. The risk of this action is that you miss the turn-around that inevitably occurs when markets recover.

We’ve all heard it before, “Buy Low and Sell High.” So why do so many people show fear and run away when the market declines. This is precisely the time to have courage. Good quality and profitable companies with sound management and expanding markets have had their share price decline significantly over the past few months. These companies are not going away.

There are those who boast about having some clairvoyant ability to be able to time when to get in and when to get out of the market. The vast majority, professionals included, admit with honesty that they have no idea when it’s the right time to sell or buy into the market.

This emotional roller coaster ride is not new and it’s been seen before. The late sixties saw a rapidly rising market come to an abrupt end in 1974 with the oil embargo and Nixon’s resignation. Then again in the eighties with the 30% one-day drop on October 19, 1987. And once again the markets peaked and fell when the technology bubble burst in 2000. This is the pattern of the past and will continue to be the pattern of the future.

So what is the average Canadian investor to do? Strap yourself in, like on a roller coaster. Know and develop an understanding that markets have ups and downs, just like a roller coaster ride. Don’t un-strap and jump off in the middle of the ride. This could prove be detrimental to your long-term financial health. The best course of action is to stay on the ride, stay invested, and bring new money into the market while its “On Sale.”

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 613-798-2421 or E-mail at rick@invested-interest.ca.

It has been said many times before; “The only certainties in life are death and taxes.” And although it may not be top on our list of financial planning issues, there are tax strategies you can implement for your time of passing. Failure to do so could result in substantially less for your heirs and inviting the government to become one of your beneficiaries. Here are a few ideas to help preserve the value of your estate.

The first step is to ensure that your will is current and beneficiaries are clearly identified. Making a charitable organization one of your beneficiaries is a popular way to reduce taxes, increase the value of your estate and leave a legacy to your favourite charity. Make sure your legal representative has the ability to transfer assets “in kind” as there may be significant tax benefits by donating assets rather than cash. There are also special ways of specifying your gift to ensure that the donation receipt is issued properly and the donation amount receives the maximum tax benefits. This can be a tricky area of estate planning and it is advisable to have your will drafted by a lawyer who specializes in charitable giving.

If you are married or in a common-law relationship, you can rollover most assets left to your spouse or common-law partner. In Ontario, the definition of a common-law couple is two people who have either lived together in a conjugal relationship for at least 3 years or; lived together in a relationship of some permanence and they are the adoptive or natural parents of a child. Unrealized capital gains can be deferred until your spouse sells the asset, or at the time of his or her death. This is a tax deferral idea, not an tax avoidance strategy.

If the deceased had unused RRSP contribution room, and they have a surviving spouse or common-law partner who is under the age of 71, their personal representative may consider making a spousal RRSP contribution. Although an RRSP contribution cannot be made to the deceased’s RRSP after the time of death, a contribution can be made to the RRSP of a spouse or common-law partner within 60 days of the end of the calendar year in which the deceased died.

It is possible that the deceased has unused capital losses from previous years or capital losses that occurred at the time of death. These losses can be used to reduce capital gains. However, capital losses can also be used to reduce any type of income in the year of death and the year prior to death. Utilizing unused capital losses can be quite complicated and it may be best if the personal representative consults with a tax professional to ensure the maximum use of their value.

We have literally scratched the surface of estate planning here. These are just a few examples of many strategies that can be implemented and you should seek the services of a qualified estate-planning professional or lawyer to assist you with preparing your will and making appropriate selections for your individual situation and personal goals.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.

The following article was contributed by Ottawa-based financial planner Rick Sutherland, CLU, CFP, FDS, R.F.P.

The market conditions experienced during the second half of 2007 generated worry and angst among investors. It is important to realize that market dips have two sides and it is not all negative. The first side that causes concern is the “down side”. There is however a second side called a “recovery”. This is when long-term investors reap the benefits of patience.

Let’s first look at 2007 and try to assess what happened. The Canadian market had been surging ahead since 2002. This was largely driven by rising commodity and specifically oil prices. The Canadian dollar tapped $1.10 against the US dollar for a brief moment during 2007. And the sub-prime lending practices in the United States came to an abrupt halt in the summer of 2007.

The sub-prime affair was probably the most worrisome event of 2007. It is now apparent that lenders were loaning money to unqualified borrowers at ridiculous rates, creating a boom in real estate. Many borrowers did not document their income honestly, making it easier to over state their credit worthiness. As long as home prices were rising, borrowers could refinance to solve their credit problems. But eventually home prices stopped rising and borrowers fell behind. The situation became unsustainable. Thus, the value of securities backed by loans started to fall.

The financial service sector became vulnerable due to the sub-prime chain of events. Prices in this sector have fallen dramatically, some as much as 50%, or more. And the pain wasn’t just in the US. The financial sector in Europe and Japan felt the sub-prime effect. The substantial drop is being viewed as a very significant purchasing opportunity by long-term disciplined investors.

So what opportunities are available in Canada? Even though Canada has already seen tremendous growth, there are some who feel this trend will continue. Developing countries are moving from a rural to an urban society. This is creating demand in the oil, agriculture and commodities sectors. Canada has expertise in all three areas. On a note of caution, the high Canadian dollar may not bode well for certain manufacturing sectors that were previously beneficiaries of a low dollar.

Thus, being an astute investor sometimes calls on the demand to be an opportunity seeker. Realize that there are two sides to market movements and have courage to invest when others are running scared. This could be a great time for nerves of steel. Make your investments with conviction and be patient.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.

The following article was contributed by Ottawa-based financial planner Rick Sutherland, CLU, CFP, FDS, R.F.P.

It is that time of the year again. The holiday season and year-end tax planning is upon us. We try to keep our opinions about the holidays to ourselves, but we do promote that tax planning is a year-round activity. Human nature prevails and many choose to make last minute decisions about both. This can lead to procrastination and inaction or hurried decisions and disappointing results. After December 31 there is very little that can be done to reduce your taxes and save money. However, here is a short list of year-end tax-planning ideas that can be implemented before the end of the year.

Make a donation to your favourite charity, but instead of giving cash you can benefit more by donating securities. Let’s assume you want to give $10,000. You don’t have the cash but you own an investment that has increased in value. By donating the investment, stocks or mutual funds for example, you will receive a donation receipt for the full amount of $10,000 and you do not pay capital gains tax on the sale of the investment. You win and the charity wins and the government has assisted in making the transaction attractive from a tax point of view.

Speak to your investment advisor about investing in a tax shelter. Certain tax shelters are sanctioned by the Canada Revenue Agency and may be eligible for deductions and credits for 2007. Others carry the risk of being declared invalid so caution must be exercised. Make sure you are comfortable with the underlying investment first. The investment is always more important then the tax savings.

For money held outside registered investments you may want to consider triggering losses or gains. If you have capital gains to report this year or reported capital gains in the three prior years, consider selling investments that have dropped in value. You can apply the loss against your gains this year or the three previous years. Losses can also be carried forward indefinitely into the future. It also makes sense to trigger capital gains if you will not suffer a tax consequence. You may be carrying forward a loss from previous years that will offset the gain in 2007.

You may want to make a withdrawal from your RRSP or RRIF before the end of the year if your 2007 income is low. You may pay little or no tax on the withdrawal. Remember the financial institution must withhold tax when you withdraw from your RRSP, but you may be eligible for most or all of the tax as a refund when you complete your 2007 tax return.

If you are self-employed you may have the opportunity to split income with family members. Review the services that family members provided in 2007 and decide if you can justify paying tax-deductible compensation in the form of salary or wages to family members before the year-end.

These few ideas only scratch the surface of tax-planning strategies. Speak to your investment advisor and tax specialist for more information. We wish everyone a save and happy holiday season and we look forward to speaking to you in 2008.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.