Real Estate - Investments / Retirement
Bank of Canada cuts rates again
OTTAWA (Reuters) - The Bank of Canada cut its benchmark interest rate by 25
basis points to 0.5 percent on Wednesday, saying an unexpected economic
contraction in the first half of the year had added to excess capacity and put
downward pressure on inflation.
"Additional monetary stimulus is required at this time to help return
the economy to full capacity and inflation sustainably to target," the
central bank said in the interest rate decision that accompanied its quarterly
Monetary Policy Report.
Bank of Canada Governor Stephen Poloz had expected a recovery by now from
the oil price crash that hit Canada's oil-exporting economy in the first
quarter, but that projection proved far too optimistic.
The bank now expects the economy to have shrunk at an annualized 0.5 percent
in the second quarter instead of growing by 1.8 percent as Poloz had projected
in April. It contracted 0.6 percent in the first quarter.
The bank did not use the word "recession" but the projection of
negative growth in both the first and second quarters meets a widely accepted
definition of a recession.
The market had been split on whether the bank would cut rates for the second
time this year after holding them steady for about four years. The bank had
delivered a surprise cut in January that was designed to counter the dive in
oil prices, and markets had reacted sharply to that move.
They did so again on Wednesday with the Canadian dollar dropping to a
six-year low, and Canadian government bond prices rising sharply and
outperforming U.S. Treasuries. [CAD/]
The Canadian dollar tumbled to its weakest level - C$1.2929, or 77.35 U.S.
cents - since March 2009 against its U.S. counterpart, hurt also by predictions
that the U.S. Federal Reserve will raise rates this year.
"The currency is in uncharted waters here," said Derek Holt, vice
president of economics at Bank of Nova Scotia, citing a risk that the Canadian
dollar weakens to as low as C$1.30 against the greenback, then diving to
"If the Fed is hiking, we think by September, and the Bank of Canada
appears to be leaving the door open to additional rate stimulus, all bets are
The bank said excess capacity in the economy grew significantly in the first
half and would continue to do so in the third quarter, even with expected
economic growth of 1.5 percent.
It therefore pushed back to the first half of 2017 its projection of when
full capacity will be reached and inflation return to the bank's 2 percent
target. Its previous projection had been for the end of 2016.
The bank acknowledged elevated vulnerabilities from a hot housing market in
Toronto and Vancouver and from rising household debt, a key factor that had
spurred some economists to advise against a rate cut. It said, however, that
the economy was undergoing "a significant and complex adjustment" and
required additional stimulus. It continued to see a soft landing in housing.
Perhaps the biggest disappointment for Poloz, former head of the federal
export agency, has been what the bank said was a "puzzling" weakness
in non-energy exports. He had hoped such exports would help overwhelm the
negative effects of lower oil prices on business investment and incomes.
But the bank said its base-case projection assumes "that this
unexplained weakness is temporary and that the relationship between exports and
foreign activity will reassert itself in the coming quarter".
The bank said the main dangers to its
inflation outlook were a larger-than-expected decline in oil and gas
investment, weaker non-energy exports, imbalances in the Canadian household
sector and stronger U.S. private demand.
OAS to Increase by $1.13
Seniors will see
an increase in their monthly OAS cheques in July, but they’ll have to resort to
the 99-cent menu to buy anything with the extra pension.
Old Age Security is indexed quarterly and seniors have seen no increases since
October of 2014.
The maximum OAS (for those who have been in Canada at least 20 years and
started on their 65th birthday) increases from $563.74 to $564.87 – an increase
of $1.13 per month or 0.2%. Seniors who qualify for the Guaranteed Income
Supplement or Allowance will also receive the 0.2% increase beginning in July.
the US Vacation Property
With real estate prices
soaring in the US and the Canadian dollar falling in value against the greenback,
Canadians who invested in a vacation property in the US may be tempted to sell
their US cottage and purchase a Canadian cottage instead.
important to understand the tax consequences on both sides of the border before
an example to illustrate: Sarah and George purchased a home in
Phoenix in 2011 for $190,000US ($191,000CAN), including costs. Today, the home
is worth $290,000US (about $358,000CAN). This represents an accrued gain of
$167,000CAN (a $100,000 US gain in the States). The value of the couple’s home
in Canada, meanwhile, has increased only $20,000 over the same time
period. What are the tax consequences if the couple sells the US property and
uses the proceeds to purchase a cottage closer to home?
of the US property will create a taxable capital gain to be reported on a US
return ($100,000 US). In Canada, the capital gain could be minimized by
designating the US property as the couple’s principal residence for all but one
year from 2011 to 2015. However, the elimination of the capital gains tax on
the Canadian return comes at a price. If the gain is taxable in Canada, the US
taxes paid could be claimed as a foreign tax credit.
the gain is tax-free in Canada, the foreign tax credit cannot be claimed. At
the same time, claiming the US property as a principal residence means the gain
on their Canadian home becomes taxable.
the US tax cannot be eliminated, the only way to ensure that the same gain is
not taxed in both jurisdictions is to make sure that at least $100,000US of the
capital gain is taxed in Canada in the year of sale. That’s about $123,000CAN,
depending on the exchange rate at the time of the sale.
$167,000CAN gain, 26% of the gain could be exempted and the couple could still
claim the foreign tax credit. By choosing to designate the US property as their
principal residence for one year, 33% ([1+1]/6) of the gain would be exempt in
Canada, limiting the foreign tax credit claim.
choosing not to designate the US property as their principal residence, 1/6 of
the gain would be exempt, allowing the full foreign tax credit.
course, in this or any other case, the actual amount of taxes payable in the US
and Canada would have to be determined to ensure that choosing not to claim the
principal residence exemption for any of the years owned results in the lowest
overall taxes payable.
type of transaction, therefore, should be reviewed well in advance by a Tax
Services Specialist to get the best tax results over time for the sale or
deemed disposition of both residences.
Everything You Need to Know
Written by Jim Yih
Most Canadians choose a
Registered Retirement Income Fund (RRIF) as their retirement income option
. A RRIF is a
comfortable transition because of its similarity to an RRSP. A RRIF provides a
high level of control over the investments in your retirement plan, the
advantage of tax-free growth of assets within the plan, as well as maximum
flexibility in establishing an income stream. RRIFs come in a number of shapes and sizes
The first decision is
The first thing you will
need to determine is how much income you need
or want. This
decision will have the greatest impact on the longevity of your money. If you
spend too much too fast, you will run out of money. Even if you don’t need or
want the extra income, you have the minimum income rules to contend with.
You can tailor your income
to your needs, subject to minimums imposed by the federal government. If you
need steady monthly, quarterly, or annual income, it’s available. If you
require a large lump sum for a major purchase, travel, or some other purpose,
that’s available too.
RRIF withdrawal rules
This table outlines the minimum withdrawals
RRIFs established after 1992, as set by the government. Before age 71, the
minimum percentage payout is worked out in the following way: 1÷(90 – your
RRIF minimums were once again changed in 2015
So if you’re 65, your minimum withdrawal would be
1÷(90-65)=4%. With a $100,000 RRIF, that amounts to $4,000. Once you reach age
69, the following schedule applies:
2015 and later
1992 to 2015
The second decision is what
to invest in
offer plans that can hold Guaranteed Investment Certificates (GICs), mutual
funds, cash, or other financial instruments. Alternatively, you can establish a
self-directed RRIF to include a combination of individual securities in your
plan, such as stocks, bonds or Treasury bills (in addition to the investments
RRIFs offer investment
flexibility. You can hold the same investments that are eligible for an
RRSP. Shares of Canadian corporations, corporate and government bonds, Canada
Savings Bonds, Treasury bills, mortgages, GICs, term deposits, covered call
options, warrants, rights, and mutual funds that invest in eligible securities
are all qualifying investments. You can also hold a limited percentage of your
RRIF in foreign investments. Just like an RRSP, a RRIF lets you retain control
over your investments, rather than handing over your money to a third party.
The longevity of your RRIF
is simply based on how much money you make in investment return and how much
you take out for income. It does not take a lot of mathematical know how to
figure out that if you earn more money than you withdraw in income, the RRIF
For example, if you invest
in a GIC RRIF at 6% and you take out the minimum (4.76%) at age 69, your RRIF
should grow by 1.24%. At age 72 given the same investment return, the minimum
is now 7.48%. This means your RRIF will deplete in value by 1.48%
What will happen to your
RRIF when you die?
You can leave your
remaining RRIF assets to your heirs upon your death by designating the proper beneficiary
Not all other retirement income options provide for this. Naturally, your
desire to provide an estate for your spouse, beneficiaries or charities may
have an impact on how you set up your RRIF. While this may or may not be an
issue, income and investments should remain the priorities.
RRIFs are flexible
One of the benefits of the
RRIF is the flexibility you have in dictating income. These are some common
types of RRIFs.
- Minimum income RRIF – This RRIF provides the
minimum level of income. Typically, people who choose the minimum income RRIF
are those who do not need the money and want to defer taxable income for as
long as possible. Remember, if this is the case, you can base the RRIF on the
age of your younger spouse.Furthermore, remember the RRIF minimum income is
based on the value of the RRIF on December 31 of the previous year. Sometimes
this can make income planning difficult because you really don’t know what your
income will be until the last minute.
- Capital preservation RRIF – Preserving capital and
paying out a fixed level of income are the goals of this RRIF type. In this
case, you will withdraw your investment returns each year (subject to
minimums). If you are using mutual funds, you might elect a reasonable target
return like 8%, for example, with the hopes and intentions of earning 8% to
maintain the capital.
- Level income RRIF – If you want to provide
income for a specific period of time such as to age 90, this RRIF would be the
right choice. In this instance, you would determine the amount of income you
could derive so that the entire asset would be depleted by the time you reach
90 years of age. You can use age or time frame.Have as many RRIFs as you
wantYou can have as many RRIFs
as you want. You can have one that pays a level income for the next 5 years to
bridge income until government benefits. You can have another that is a capital
preservation RRIF for a more stable long term level of income.Generally, many people
consider consolidating into one RRIF. With a single RRIF, you can easily manage
your investments and you’ll only have to worry about one minimum withdrawal.
Several RRIFs require more time and energy, and you’ll have to arrange to
withdraw at least the minimum from each one.Withholding tax detailsRRIF income is subject to
government withholding tax rates. Just like your employer withholds
taxes and remits them directly to the government, your RRIF administrator is
required to do the same. Minimum income RRIFs are not subject to withholding
tax, but you can request any level of withholding tax desired. In all other
circumstances, there is a 10% withholding rate on withdrawals less than $5000,
20% on withdrawals between $5000 and $15,000 and 30% tax on withdrawals over
$15,000.As you can see, there are a
lot of issues to deal with when it comes to planning your RRIF income. Take the
time to plan wisely.
What mistakes are made when
Written by Wayne Rothe
In two decades of helping
people with their money, I’ve learned that most people – left to their own
devices – make mistake after mistake. They do precisely the wrong thing at the
worst time – zigging when they should be zagging. These errors crush
people’s finances and scuttle their retirement dreams. A good financial planner
can help but it doesn’t guarantee success either. Planners can only advise; our
best advice sometimes goes unheeded.
Some people don’t like
financial “guru” Suze Orman. She shoots from the hip and tells people the raw
truth, which often hurts. I must say that I do like her common-sense
advice. In her book The Money Class: How to Stand in
Your Truth and Create the Future You Deserve
, Orman admits that no
one knows what the stock market will do this year, or next. Not Warren Buffett,
not the best fund manager and not the smartest investment advisor.
Predicting markets is a
During good markets I’ve
had clients tell me I’m brilliant. I’m sure some also think I’m an idiot when
markets are lousy and their investments are doing poorly. I’m neither a genius
nor an idiot. I’m just a guy who knows how to build good portfolios, how to
create a financial plan, how to stay on track, how to minimize taxes and –
perhaps most importantly – and how to avoid the colossal investing mistakes
that destroy retirement dreams. the truth is I have no idea where
the markets are going in the next year or two. I do think I have a pretty good
idea where they’ll be in the next 10 years, which is the period you should be
concerned about. That is, unless you’re within a few years of needing your
money for retirement, or for some other purpose.
“Don’t worry if the market
goes up or down,” Orman says. “Focus on building a diversified portfolio with a
mix of stocks and bonds that will grow in value over the long term. Think
decades, not quarters.”
Investing is important but
Orman says that there are
more important factors to your success than an investment’s rate of return.
“A financial planner can
help you figure out an allocation strategy,” Orman contends, in other words the
proper mix of stocks, bonds and cash to fit your goals. “That said, how much
money you set aside is more important than how you invest it. You need to be
putting away at least 10 to 15 per cent of your salary every year – around 25
per cent if you started saving in your 30s or 40s.”
That requires people to –
wait for it – spend less and take on less debt. Orman writes. “I am going to
challenge you not merely to live within your means, but to live below your
Orman says that income from
your savings plus government benefits
should replace 70 to 80
per cent of your pre-retirement income. If you get a raise, invest half of it.
Actually, I think that some people can manage fine on 50 to 60 per cent of
their pre-retirement income.
The last thing I’ll
highlight from Orman’s fine book is that if you’re not retiring or otherwise
don’t your money in the next 10 years, a stock market decline is actually good
news. You should be cheering for bad markets.
Orman invites you to
imagine that there is a jacket you’ve had your eye and it’s discounted by 25
per cent. “Wouldn’t you be thrilled?” she asks. “You should feel the same way
about stocks. When the price of an investment drops, your dollar buys more
shares—and more shares will earn more money when the markets inevitably go back
She’s saying what I have said many time – that a
market downturn is an opportunity to buy into a rising tide at reduced prices.
Learning this important fact should help you avoid investing mistakes and make
you a more successful investor.
The Rule of 72
Written by Sarah Milton
“Compound Interest is the
eighth wonder of the world.” – Albert Einstein
Einstein described compound
interest as the eighth wonder of the world because he felt that those who
understood it, earned it and those who didn’t, paid it. Compounding is what
makes saving early and saving regularly such a powerful part of building wealth
and it’s also what makes it so hard to get out from under the mountain of
consumer debt that so many of us accumulate. In an nutshell, compound interest
is earning (or paying) interest on interest. When you earn interest at a
compounded rate, your money grows faster because you are earning interest on
your total balance (principle + interest) rather than on the principle alone.
Similarly, when you pay interest at a compounded rate (as you do with credit
cards) your interest charges grow much faster and your debt load gets larger.
We can see the power of compounding in
the table below, which shows how $1000 earning 5% annual interest grows
over time. The first column shows how the $1000 would grow earning 5% simple
interest (earned on just the $1000 principle) and the second column shows
how it would grow earning 5% interest compounded annually (earned on the
principle + interest).
5% SIMPLE INTEREST
5% COMPOUND INTEREST
The Rule of 72
The rule of 72 is a simple
way to estimate how long it will take your money to double in value at a given
interest rate. If you divide 72 by the annual interest rate, the answer is the
number of years it will take to double. For example, 72 divided by 5 is 14.4.
This means that, as you can see in the table above, it takes just under 15
years for $1,000 to become $2,000. 15 years later (in year 30) the money has
doubled again to be just over $4,000 and, 15 years after that (in year 45) it
has doubled again to become more than $8,000. In year 60, it will have doubled
yet again and become $16,000. Using this rule, it’s clear to see that both time
and interest rate are two key factors in building wealth. At 8% interest, your
money will double in 9 years (72 divided by 8 = 9) but it will take 36 years to
double earning 2% interest. For a 20 year old, $100 invested at 7% is worth
$2,100 at age 65. For a 30 year old, that same $100 invested at the same rate
is only worth $1,068 at age 65 and for a 40 year old, $100 invested at 7% is
worth just $543 at age 65. This means that, at 40 years old, even though I’m
only twice the age of the 20 year old, I have to save four times as much each
year in order to achieve the same level of wealth at age 65. It’s a concept
that I wish I had understood as a teenager because I’m pretty sure it would
have motivated me to manage my money differently!
At the end of the day,
saving is always a very personal decision: the choices we make about whether to
save, where to save and how much to save, vary enormously from person to
person. However, all too often, I hear people in their twenties saying that
they’ll wait to save until they’re older because then they’ll be earning more.
When you consider how powerful a factor time is in the wealth building
equation, it just doesn’t make sense (especially when you consider that just
because you’re earning more doesn’t mean you have more discretionary income).
If you can do as much with $25 at 20 as you can do with $50 at 30 or with $100
at 40, it makes sense to start the saving habit early.
Even if you feel like you’ve “missed the boat”
because you should have started saving years ago, remember that whatever you
save today has a greater power to grow than money you save next month, next
year or 3 years from now. We can’t change our past choices but we always have
the power to choose to change our financial future by making different choices
Timeless investment wisdom from The Intelligent Investor
“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” –The Intelligent Investor, Benjamin Graham
If you only read one investing book in your lifetime, it should be Benjamin Graham’s The Intelligent Investor. Perhaps the greatest investing book ever written, the book will make you a better investor, whether you’re a do-it-yourselfer or you use an advisor.
Graham was a mentor for none other than Warren Buffett, the greatest investor of all time, and his book is filled with the kind of folksy wisdom that Buffett has become known for. Here are some of my favourite quotes from The Intelligent Investor.
“The sillier the market’s behavior, the greater the opportunity for the business-like investor. The intelligent investor is a realist who sells to optimists and buys from pessimists.”
Most people are financially inept, making mistake after mistake, and it has dire consequences to their financial and retirement planning. When making investment decisions, they zig when they should zag. Buy low, sell high? If you can set your emotions aside and buy when things look bad, your returns should improve measurably. Good investors see opportunity amid the carnage. Buy low, not high as many do.
“How your investments behave is much less important than how you behave….The investor’s chief problem – and even his worst enemy – is likely to be himself. “
Our own behavior is, indeed, our greatest threat as investors. Investment markets don’t determine our success, but it’s how we react to them does. Make rational decisions, not emotional ones. Buy good companies and keep them as long as they remain good investments. Trade rarely, unless it’s to buy more of those good companies when their shares tumble. Buy and hold, the Warren Buffett way.
“It should be remembered that a decline of 50% fully offsets an advance of 100%.”
“Never buy a stock because it has gone up or sell one because it has gone down.”
I love good (emphasis on good) investments when they suck. The more they suck the more I like them. If Company A or ABC Growth Fund is a good opportunity at $10 a share, surely it’s a great opportunity at $5 a share as long as nothing has changed to its fundamentals.
Market declines are your greatest opportunity to buy into a rising tide at reduced prices.
“Even the intelligent investor is likely to need considerable will power to keep from following the crowd.”
The crowd is generally wrong. You’ll be more successful being a contrarian than a follower.
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”
It’s not the specific investments you buy that determine your financial success. Do you have a written, goal-based financial plan? Do you buy more of your good investments when times are bleak and your investments are under siege? These things will put you ahead of the guy who chases returns.
“Before you place your financial future in the hands of an adviser, it’s imperative that you find someone who not only makes you comfortable but whose honesty is beyond reproach.”
Do-it-yourself investors believe that they will be more successful by saving a little on their fees but having a pro guide your decisions can be far more important. I believe that most investors have neither the ability nor the interest in managing their own investments, and the mistakes they invariably make scuttle their retirement dreams.
“A defensive investor can always prosper by looking patiently and calmly through the wreckage of a bear market.”
As Sir John Templeton said, the best time to buy is when blood is running in the streets. We can’t predict the exact market bottom, but when markets are down 30 or 40 per cent, maybe it’s time to start buying. Or set up a systematic investment where money is directed monthly from your chequing account to your investment portfolio so you’re buying at all times – in up and down markets.
“Successful investing is about managing risk, not avoiding it.”
Market volatility is the friend of the intelligent, patient investor because it provides great opportunities to buy into a rising tide at sale prices.
Wishing you financial success.
How to Convert Your RRSP to Income
Registered Retirement Savings Plans
represent one of the most significant retirement planning
tools for Canadians. There are a number of ways to put your RRSP money to work during retirement, but they all boil down to a simple concept. The money you accumulated during your years of saving and investing is converted to a vehicle that provides you with retirement income
. Instead of making contributions, you will rely on withdrawals from your nest egg to subsidize your retirement expenses. Instead of saving money
it’s time to spend it!
When is the best time to convert your RRSP into income?
The best time to convert your RRSP into income is when you need to. Typically, this occurs when you retire and have no paycheques from work. The ideal situation
is to contribute to an RRSP in your ‘earning years’ when you are paying taxes in a higher marginal tax rate
and then withdrawing the money later when you have no other sources of income (like in retirement). Taking income from the RRSP while you are still working can be very costly and will negate the benefits you derived from contributing in the first place.
That being said, you could convert RRSPs to income as early as age 18, but should wait until later in your life.
How long can you defer the RRSPs?
Many pundits will advise that you should defer your RRSPs for as long as you possibly can. While this may be true in most circumstances, it is a rule of thumb and does not apply in all circumstances. Most people defer the decision to convert RRSP into income so they can defer the tax. Canadians hate to pay taxes so much that they avoid any withdrawals from the RRSP until they are forced to do so. Sometimes deferral can be the costly alternative
. Government rules stipulate that you must wind up your RRSP by the end of the year in which you turn 71.
Basically, you must convert your RRSP into a Registered Retirement Income Fund (RRIF) or life annuity in the year you turn 71, but you do not have to start that income in the year you turn 71. It must start in the following year.
If you turn 71 this year and you have not converted your RRSP into an income vehicle, you need to see your financial advisor or financial institution before December 31.
What are my income options?
Today, most people will convert the RRSP into a RRIF, but this is not the only option you have available to you. In fact you, have four alternatives:
1. Cash out the RRSP
. While this may be an option, it is not usually a good one. Cashing out means that the full value of your RRSP is added to your income and taxed accordingly. Unless you have a very small amount, this can mean a significant part of your wealth will go to the government. Remember that when you cash out the RRSPs withholding tax
is applied but the total tax owed is based on your marginal tax rate.
3. Life Annuity
. Think about a pension plan and that will help you to understand what an annuity is. Just like a pension plan, an annuity is simply a tool that provides you with a fixed stream of income that is guaranteed for the rest of your life. Regardless of markets, interest rates, inflation or the economy, your cashflow remains stable and fixed for your lifetime. There are also reasons why annuities make sense
4. Fixed Term Annuity. Unlike the life annuity, the fixed term annuity does not pay you an income for a lifetime. Instead, you choose a fixed term like 5, 10, 20 years, etc. The only stipulation is the term cannot extend past the age of 90.
How do you know which option is best for you?
The easiest answer is good planning. Different people will have unique circumstances and needs. These issues will determine which option(s) is best suited for you.
Remember that it is not an all or nothing situation where picking one of the options means you cannot choose other options. Sometimes a combination may be the ideal solution.
I can offer some important considerations when comparing RRIFs to annuities.
· Flexibility of income or investment choice – If you are looking for flexibility to set up the income the way you want, with the option of making changes in the future, the RRIF winds hands down. On the other hand, flexibility and choice can be a curse for some who prefer to keep it simple and secure. In these cases, an annuity might make more sense.
· Control – Some people want control, while other just want to be able to set something up and let it run on autopilot. Annuities have the distinct advantage of being easy to set up and understand. RRIFs require more decisions and more management.
· Estate preservation – Generally, the best alternative to provide an estate benefit is usually through the RRIF. You can provide an estate with life annuities if it is set up with proper guarantee periods, but these options can reduce your level of income.
· Spousal protection – Providing survivorship options for your spouse can be facilitated under any route you choose (RRIFs or annuities). However, in the case of annuities, you must make sure they are set up properly.
Rent or own vacation property
Every year, I meet more and more people that have bought vacation property or are thinking about buying vacation property. The question I get is whether this is a good idea or not.
It’s in the numbers
I’ve always said there are two influences to every decision we make – the logical influence
and the emotional influence
. From a logical perspective, the answer often lies in the number so let’s look at an example that is near and dear to my brain.
Previously, we took a family vacation to the Okanagan where we spent a week in Kelowna and a week in Vernon. We loved both places but we really fell in love with the resort we stayed at in Vernon called the Outback Resort
. In fact we loved it so much we fell in love with the idea of spending longer summer vacations there and if that was the case, we should explore the option to buy a place there. We called up a realtor and looked at a 2-bedroom option and a 3-bedroom option. Let’s look at the math.
The math of the BUY
The 2-bedroom unit was selling for $300,000. If I put $50,000 down, the $250,000 mortgage would cost me $1315 per month (roughly $9300 of that payment would be interest and the rest would go towards principle).
Along with the mortgage payments
is the strata fee of $350 per month and the property taxes at $2500 per year.
Total annual cost to purchase the condo is $16,000 per year. I can take some pretty nice holidays for $16,000 per year not including the $50,000 down payment.
Rent or buy?
Next, let’s look at renting. If I was to rent this unit for a vacation, it would rent for $339 per night. That means I could rent that place for 47 nights a year or 7 weeks to reach a total cost of $16,000.
With four young boys, there is no way I am going to be able to spend 7 weeks of every year in Vernon.
In my opinion, the math is pretty clear . . . rent the place for a week or two and I will be out of pocket a lot less than buying.
But what about an investment?
My response was “Yes but only if the numbers justify a return”.
If I look at the annual cost of $16,000 on a $300,000 property, I need that property to increase by 5.3% per year just to recover my costs. I don’t know if Vernon vacation real estate will increase by 5.3% per year but I know there are a lot of properties for sale and the prices have come down (not up) in the past few years. I also know that prices in Vernon are very much dependent on buyers from Alberta and Vancouver.
I know lots of people who bought property in the US and have not experience positive growth. I’m sure there are others who have made money as well.
Flip a coin on the investment argument. I say 50% chance it will beat 5.3% growth and 50% it won’t. What do you think?
What about renting it out on the days we are not there?
Here’s another argument from my lovely wife who really wants this place in Vernon. Here’s the problem. Let’s say we want the place for 2 or 3 weeks of every year. We are going to pick the summer months when the kids are on summer holidays, which is peak rental season. To recoup our $16,000 annual cost, we will need to rent the place for 60 to 80 nights in the year. Now this sounds like a part time job to me for a lot less money than my real job makes me.
My five cents
I’m not trying to discourage anyone from buying vacation property but I do think it requires careful thought and analysis of the numbers. The math on the $400,000 3-bedroom option was not appealing but every property has it’s own set of numbers. Run the math, think logically and put emotions aside when making this big decision.
This is a simplistic analysis but a real one. Any thoughts on what I have missed? Do you have an experience (positive or negative) you want to share with others about buying vacation property?
What do you think of the new Ontario Retirement Pension Plan (ORPP)
The Ontario Liberals’ recent majority victory means the Ontario Retirement Pension Plan (ORPP) will soon be a reality. The labour market in Ontario isn’t any different from the rest of Canada – there are the pension have’s and the pension have not’s.
Targeting The Pension Have Not’s
With each passing year, the number of workers covered by a workplace pension plan dwindles. Today only one-third of workers have a workplace pension plan, leaving two-thirds of workers on their own when it comes to retirement savings. The ORPP is designed to level the playing field, providing retirement income to those without a workplace pension plan.
What is the Ontario Retirement Pension Plan (ORPP)?
The ORPP is targeted at workers in the province of Ontario earnings up to $90,000 a year, who are not covered by a workplace pension plan. The ORPP would be a forced savings vehicle designed to help those struggling to keep up with the rising cost of living save for retirement. Similar to RRSPs
, the ORPP would provide employees with a tax efficient way to save for their golden years.
Not everyone is a fan of the ORPP. The Canadian Federation of Independent Business has been especially critical of the pension plan, calling it a tax on small business. In fact, the ORPP could lead to job loss, as employers may choose to set up shop in different provinces to avoid joining the mandatory plan. When introduced, employers without a workplace pension plan will have to contribute to the ORPP, on top of Canada Pension Plan (CPP) contributions.
How Costly Will the ORPP Be for Employers?
Under the ORPP, an employer would have to match an employee’s contributions of 1.9 per cent per year in earnings up to $90,000. Similar to CPP, the maximum earnings of $90,000 covered by the ORPP will increase each year based on the CPI.
For a worker earning $45,000 annually, the employer would have to match contributions of $66 per month ($788 annually). For a worker earning double that amount annually, $90,000, the employer and employee would each have to contribute $137 per month ($1,643 annually).
Similar to CPP, the ORPP isn’t designed to fund a worker’s entire lifestyle in retirement. Much like CPP, it’s aimed at replacing 15 per cent of an employee’s working income in retirement. The middle-class and Millennials without the benefit of a pension plan would benefit most under the plan.
Workplace Pension Plans as an Employee Retention Strategy
A job for life may no longer be a thing of the past. Job stability is near a record high – about 50 per cent of Canadian workers have been with a single employer for five years or more, according to a new report from CIBC World Markets
. In fact, the likelihood of workers remaining with their employer rises with each year of seniority, starting at 60 per cent for those on the job for a single year, rising to 95 per cent for those on the job for five years or more. This flies in the face of reports that say job hopping is the new norm.
Why are employees remaining with their employer longer than ever before? Although a mediocre job market might have something to do with it, group benefits like workplace pension plans clearly matter to workers. Over three-quarters of new hires at employers offering traditional defined benefit (DB) pension plans said the retirement program gives them a compelling reason to stay on the job, according to the Towers Watson Retirement Attitudes Survey
. This doesn’t just hold true for older workers – 63 per cent of workers under age 40 said their retirement program was an important factor in accepting their job.
The ORPP will help level the playing field by forcing employers to join if they currently don’t offer a workplace pension plan. However, there’s nothing to stop employers from going above and beyond the bare minimum by offering workplace pension plans. From traditional defined benefit plans to newer Target Benefit Plans (TBPs)
, there is no shortage of choices. Although offering these plans may be an expensive right now, they’re likely to pay off in the long-run, as employers will have a better chance of retaining their most talented employees.
Employers Have Plenty of Time to Prepare
Although the ORPP will be an added expense for employers in Ontario, the good news is employers have plenty of time to prepare. The Liberals don’t plan to introduce the ORPP until 2017, when federal Employment Insurance premiums are expected to be reduced. The ORPP won’t be introduced in one fell swoop – contribution rates will be phased in over two years. Enrollment will be staggered, with the largest employers enrolling first, allowing small businesses plenty of time to budget. The ORPP will be mandatory for any employer who does not offer a registered pension plan.
Are You Considered to Be In the Business of Buying and Selling Real Estate?
Lots of people like to
dabble in real estate when markets are hot. The issue for tax filing purposes
is whether you held the property for personal use, as a passive investment or
whether you are in fact in the business of buying and selling real estate.
When real estate is held
for investment purposes, any income it earns will be “income from property,” generally
in the form of rent.
Upon disposition of the property, any increase in value will usually be taxed
as a capital gain. However, if you are continuously flipping your properties,
it’s possible you’re in business.
taxpayer’s intention with respect to the real estate at the time of its
location and zoned use of the real estate acquired;
the taxpayer’s intention changed after purchase of the real estate;
the extent to
which borrowed money was used to finance the real estate acquisition and the
terms of the financing, if any, arranged;
of persons other than the taxpayer who share interests in the real estate;
motivated the sale of the real estate; and
The more closely a
taxpayer’s business or occupation is related to real estate transactions, the
more likely it is that any gain realized by the taxpayer from such a
transaction will be considered to be business income (report on a business statement—100%
income inclusion) rather than a capital gain (report on Schedule 3 as a capital
gain—50% income inclusion).